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RULE NO. 424(b)(3)
REGISTRATION NO. 333-62989
P R O S P E C T U S
Jafra Cosmetics International
Offer To Exchange
11 3/4% Senior Subordinated Notes Due 2008,
For Any And All Existing Notes (As Defined Below)
Payment of principal and interest by Jafra Cosmetics International, Inc.
(the "U.S. Issuer") and Jafra Cosmetics International, S.A. de C.V. ("Jafra
S.A." and collectively, the "Issuers" ) will be fully and unconditionally
guaranteed by CDRJ Investments (Lux) S.A. Payment of principal and interest by
each Issuer will be fully and unconditionally guaranteed by the other Issuer,
subject to a 30-day standstill prior to enforcement. Payment of principal and
interest by Jafra S.A. will be fully and unconditionally guaranteed by the
following wholly-owned subsidiaries of Jafra S.A.: Consultoria Jafra, S.A. de
C.V., Dirsamex, S.A. de C.V., Distribuidora Venus, S.A. de C.V., Jafra
Cosmetics S. de R.L. de C.V., Qualifax, S.A. de C.V. and Reday, S.A. de C.V.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM, NEW YORK CITY TIME, ON FEBRUARY
26, 1999, UNLESS EXTENDED.
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Jafra Cosmetics International, Inc., a Delaware corporation ("U.S. Issuer"),
and Jafra Cosmetics International, S.A. de C.V., a sociedad anonima de capital
variable organized under the laws of the United Mexican States ("Jafra S.A."
and, together with the U.S. Issuer, the "Issuers"), hereby offer (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus (this "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal") to exchange up to $100,000,000 aggregate
principal amount of the 11 3/4% Senior Subordinated Notes due 2008 (the "New
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
this Prospectus is a part, for a like principal amount of the issued and
outstanding 11 3/4% Senior Subordinated Notes due 2008 of the Issuers (the
"Existing Notes"). The New Notes and the Existing Notes, as the case may be,
are referred to herein as the "Notes." The Existing Notes were originally
issued and sold in a transaction that was exempt from registration under the
Securities Act (the "Offering") and resold to certain qualified institutional
buyers in reliance on, and subject to the restrictions imposed pursuant to,
Rule 144A under the Securities Act ("Rule 144A"). The terms of the New Notes
are identical in all material respects to the terms of the Existing Notes for
which they may be exchanged pursuant to the Exchange Offer, except that (i)
the New Notes will have been registered under the Securities Act, and thus
will not bear restrictive legends restricting their transfer pursuant to the
Securities Act and will not contain certain provisions providing for an
increase in the interest rate on the Existing Notes under certain
circumstances described in the Registration Rights Agreement (as defined),
which provisions will terminate upon the consummation of the Exchange Offer,
and (ii) holders of New Notes will not be entitled to certain registration
rights that holders of Existing Notes have under the Registration Rights
Agreement, except under limited circumstances.
Interest on each New Note issued pursuant to the Exchange Offer will accrue
from the last interest payment date on which interest was paid on the Existing
Notes surrendered in exchange therefor or, if no interest has been paid, from
the original date of issuance of the Existing Notes.
The Exchange Offer is not conditioned upon any minimum number of Existing
Notes being tendered for exchange. The Exchange Offer will expire at 5:00
p.m., New York City time, on February 26, 1999, unless extended by the Issuers
(such date as it may be so extended, the "Expiration Date"). The date of
acceptance for exchange of the Existing Notes (the "Exchange Date") will be
the first business day following the Expiration Date, upon surrender of the
Existing Notes. Existing Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable. New Notes to be issued in exchange for properly tendered Existing
Notes will be delivered through the facilities of The Depository Trust Company
by the Exchange Agent (as defined) promptly after the acceptance thereof.
(continued on next page)
See "Risk Factors" beginning on page 16 for a discussion of certain factors
that should be considered in connection with an investment in the Notes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 27, 1999.
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(Continued from front cover)
Each Note will represent the several obligations of the Issuers. The U.S.
Issuer will be severally liable with respect to the payment of $600 of each
$1,000 principal amount of the Notes, together with interest on such amount
(the "U.S. Issuer's Obligations"), and Jafra S.A. will be severally liable
with respect to the payment of $400 of each $1,000 principal amount of the
Notes, together with interest on such amount ("Jafra S.A.'s Obligations" and,
together with the U.S. Issuer's Obligations, the "Obligations").
Parent Guarantee. Each Issuer is an indirect, wholly owned subsidiary of
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme ("Parent"), which
will fully and unconditionally guarantee the Notes on a senior subordinated
basis on the terms provided in the Indenture (as defined) governing the Notes
(the "Parent Guarantee"). Parent is a holding company that conducts all of its
operations through its subsidiaries.
Cross Guarantees. Each Issuer's Obligations will also be fully and
unconditionally guaranteed by the other Issuer on a senior subordinated basis
on the terms provided in the Indenture, including a 30-day standstill period
prior to enforcement of such guarantee (such guarantee by Jafra S.A., the
"Jafra S.A. Cross Guarantee," and such guarantee by the U.S. Issuer, the "U.S.
Issuer Cross Guarantee;" such guarantees collectively, the "Cross
Guarantees").
U.S. Issuer Subsidiary Guarantee. The U.S. Issuer's Obligations, including
the U.S. Issuer Cross Guarantee, will also be fully and unconditionally
guaranteed by each subsequently acquired or organized U.S. subsidiary of the
U.S. Issuer (together with the Parent Guarantee and the Jafra S.A. Cross
Guarantee, the "U.S. Guarantees"), subject to certain exceptions. The U.S.
Issuer is an operating company in the United States that conducts its non-U.S.
operations through non-U.S. subsidiaries and that, at present, has no U.S.
subsidiaries. Accordingly, at present, there are no subsidiary guarantors of
the U.S. Issuer's Obligations.
Jafra S.A. Subsidiary Guarantee. Jafra S.A.'s Obligations, including the
Jafra S.A. Cross Guarantee, will also be fully and unconditionally guaranteed
by each existing and subsequently acquired or organized subsidiary of Jafra
S.A. (the "Jafra S.A. Subsidiary Guarantees" and, together with the Parent
Guarantee and the U.S. Issuer Cross Guarantee, the "Jafra S.A. Guarantees,"
and together with the U.S. Guarantees, the "Guarantees;" each guarantor
thereunder being a "Note Guarantor"). Jafra S.A. is a holding company that
conducts all of its operations through subsidiaries. At present, Jafra S.A.
has six operating subsidiaries, Consultoria Jafra, S.A. de C.V., Dirsamex,
S.A. de C.V., Distribuidora Venus, S.A. de C.V., Jafra Cosmetics S. de R.L. de
C.V., Qualifax, S.A. de C.V. and Reday, S.A. de C.V., each of which is
organized under the laws of the United Mexican States. Jafra S.A.'s six
operating subsidiaries are jointly and severally liable under the Jafra S.A.
Subsidiary Guarantee. Because the Jafra S.A. Subsidiary Guarantee constitutes
a full and unconditional guarantee of Jafra S.A.'s Obligations, including the
Jafra S.A. Cross Guarantee of the U.S. Issuer's Obligations, Jafra S.A.'s
subsidiaries indirectly support the U.S. Issuer's Obligations, subject to the
30-day standstill period prior to enforcement of the Jafra S.A. Cross
Guarantee.
Except as described below, the Notes will not be redeemable at the option of
the Issuers prior to May 1, 2003. On or after such date, the Issuers may
concurrently redeem the Notes in whole or in part on a pro rata basis (based
on the relative proportions of the JCI Portion (as defined) and the Jafra S.A.
Portion (as defined)) at any time at the redemption prices set forth herein
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time and from time to time on or prior to May 1, 2001, the
Issuers may concurrently redeem the Notes on a pro rata basis (based on the
relative proportions of the JCI Portion and the Jafra S.A. Portion) in an
aggregate principal amount equal to up to 35% of the original principal amount
of the Notes with the proceeds of one or more Equity Offerings (as defined),
at a redemption price set forth herein, provided that an aggregate principal
amount of Notes equal to at least 65% of the original aggregate principal
amount of the Notes remains outstanding immediately after each such
redemption. The Notes will not be subject to any sinking fund requirement.
Upon the occurrence of a Change of Control (as defined), if the Issuers do not
redeem the Notes, the holders of the Notes will have the right, subject to
certain exceptions, to require the Issuers to make an offer to repurchase the
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase. There can be
no assurance that, in the event of a Change of Control, the Issuers will have
available sufficient funds to repurchase the Notes. See "Risk Factors--
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Risk of Insufficient Funds Upon Change of Control." The Jafra S.A. Portion may
be redeemed, at the option of Jafra S.A., at any time at a redemption price
equal to 100% of the principal amount thereof, together with accrued and
unpaid interest to the date fixed for redemption, if any, if, as a result of
any change in, or amendment to applicable treaties or laws of Mexico, Jafra
S.A., any successor of Jafra S.A. or any Note Guarantor of such Jafra S.A.
Portion would be obligated to pay Additional Amounts (as defined) in excess of
the Additional Amounts that Jafra S.A., any successor to Jafra S.A. or such
Note Guarantor would be required to pay if payments by Jafra S.A., any
successor to Jafra S.A. or such Note Guarantor were subject to a 15% Mexican
withholding tax. See "Description of Notes."
The Notes and the Guarantees will be unsecured Senior Subordinated
Indebtedness (as defined) of the Issuers or the relevant Note Guarantor. The
Notes and the Guarantees will be subordinated in right of payment to all
existing and future Senior Indebtedness (as defined) of the Issuers or the
relevant Note Guarantor including such Person's (as defined) obligations under
the Senior Credit Agreement (as defined). The Notes will rank pari passu in
right of payment with all existing and future Senior Subordinated Indebtedness
of the Issuers or the relevant Note Guarantor, and will be senior in right of
payment to all existing and future Subordinated Obligations (as defined) of
the Issuers or the relevant Note Guarantor. The Notes and the Guarantees will
also be effectively subordinated to any Secured Indebtedness (as defined) of
the Issuers or the relevant Note Guarantor to the extent of the value of the
assets securing such Indebtedness. The Indenture permits the Company to incur
additional indebtedness, including Senior Indebtedness, subject to certain
limitations. As of November 30, 1998, the Issuers had approximately $50.0
million in Senior Indebtedness, all of which was guaranteed by, and
constitutes Senior Indebtedness of, the Note Guarantors, which in each case is
senior in right of payment to the Notes. As of September 30, 1998, the Issuers
and the Note Guarantors had $100 million in Senior Subordinated Indebtedness.
As of September 30, 1998, none of the Issuers and the Note Guarantors had
incurred any Subordinated Indebtedness, and, as such, none has any
Indebtedness that ranks subordinate in right of payment to the Notes. See
"Description of Notes--Ranking." All liabilities and obligations (other than
Senior Indebtedness, Secured Indebtedness and Subordinated Obligations) of the
Issuers and the Note Guarantors are pari passu with the Notes and the
Guarantees.
The Existing Notes were originally issued and sold in a transaction not
registered under the Securities Act (the "Offering") in reliance upon an
exemption from the registration requirements thereof. In general, the Existing
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The New Notes are being offered hereby in order to satisfy
certain obligations of the Issuers contained in the Registration Rights
Agreement. Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") as set forth in no-action letters
issued to third parties, the Issuers believe that New Notes issued pursuant to
the Exchange Offer in exchange for the Existing Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
such holder that is a broker-dealer or an "affiliate" of the Issuers within
the meaning of Rule 405 of the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such holder represents to the Company that (i) any New Notes
received by such holder will be acquired in the ordinary course of business,
(ii) such holder will have no arrangements or understanding with any person to
participate in the distribution of the Existing Notes or the New Notes within
the meaning of the Securities Act, (iii) such holder is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the Issuers or if it is an
affiliate, such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (iv) if
such holder is not a broker-dealer, that it is not engaged in, and does not
intend to engage in the distribution of the New Notes, (v) if such holder is a
broker-dealer, that it will receive New Notes for its own account in exchange
for Existing Notes that were acquired as a result of market-making activities
or other trading activities and that it will deliver a prospectus in
connection with any resale of such New Notes, and (vi) that it is not acting
on behalf of any person who could not truthfully make the foregoing
representations. If a holder of Existing Notes is unable to make the foregoing
representations, such holder may not rely on the applicable interpretation of
the staff of the Commission as set forth in such no-action letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Broker-
dealers that acquired the Existing Notes directly
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from the Issuers may not rely on such interpretations of the staff of the
Commission, must comply with the registration and prospectus delivery
requirements of the Securities Act (including being named as selling security
holders) in order to resell the Existing Notes and may not participate in the
Exchange Offer. In addition, since the Issuers have not sought, and do not
intend to seek, a no-action letter, there can be no assurance that the staff
of the Commission would make a similar determination with respect to the
Exchange Offer.
Notwithstanding the foregoing, each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer in exchange for Existing
Notes, where such Existing Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act and that it has not entered into any arrangement or
understanding with the Issuers or an affiliate of the Issuers to distribute
the New Notes in connection with any resale of such New Notes. A broker-dealer
that acquired Existing Notes in a transaction other than as part of its
market-making activities or other trading activities will not be able to
participate in the Exchange Offer. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Existing Notes where such Existing Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Issuers and the Note Guarantors have agreed
that, for a period of 90 days after the Expiration Date (as defined herein),
they will make this Prospectus available to any broker-dealer for use in
connection with any such resale. Any holder that cannot rely upon such
interpretations by the staff of the Commission as set forth in such no-action
letters must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. See
"The Exchange Offer" and "Plan of Distribution."
The New Notes will be represented by one or more Global Securities (as
defined) registered in the name of a nominee of The Depository Trust Company,
as Depositary. Beneficial interest in the Global Securities will be shown on,
and transfers will be effected only through, records maintained by the
Depositary and its participants. See "Description of New Notes--Book-Entry,
Delivery and Form."
There has not previously been any public market for the New Notes. The
Issuers do not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the New Notes will develop.
Moreover, to the extent that Existing Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered, and tendered but
unaccepted, Existing Notes could be adversely affected. See "Risk Factors--
Lack of Established Market for the Existing Notes."
The Issuers will not receive any proceeds from the Exchange Offer. The
Issuers have agreed to pay the expenses of the Exchange Offer. No dealer
manager is being utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE ISSUERS ACCEPT SURRENDER
FOR EXCHANGE FROM HOLDERS OF EXISTING NOTES, IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
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AVAILABLE INFORMATION
The Issuers and the Note Guarantors have filed with the Commission a
Registration Statement (which term includes any amendments thereto, the
"Registration Statement") on Form S-4 under the Securities Act, with respect
to the New Notes offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all of the information
included in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein or therein and filed as an exhibit to the
Registration Statement are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Issuers and the Note Guarantors and the New Notes, reference is hereby made to
the Registration Statement and the exhibits and schedules thereto.
The Issuers and the Note Guarantors are not currently subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Pursuant to the
Indenture, Parent will file with the Commission and provide to the holders of
the Notes annual reports and the information, documents and other reports that
are specified in Sections 13 and 15 (d) of the Exchange Act on behalf of
itself, the Issuers and the Note Guarantors. Such reports and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549 and such material is contained on
the World Wide Web site maintained by the Commission at http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
Statements in this Prospectus that are forward looking are based on current
expectations; actual results may differ materially. Forward looking statements
involve numerous risks and uncertainties that could cause actual results to
differ materially, including, but not limited to: the timely development and
market acceptance of new products; the impact of competitive products and
pricing; the effect of changing general and industry specific economic
conditions; the Company's ability to access external sources of capital; and
such risks and uncertainties detailed under "Risk Factors," "Management's
Discussion and Analysis," "Business," and elsewhere in this Prospectus.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto appearing elsewhere in this Prospectus. Unless the
context otherwise requires, prior to the consummation of the Acquisition (as
defined), the terms "Jafra" and the "Company" refer to the various subsidiaries
and divisions of The Gillette Company ("Gillette") conducting the worldwide
Jafra cosmetics business (the "Jafra Business"), and, following the
consummation of the acquisition of the Jafra Business from Gillette (the
"Acquisition"), to Parent and its subsidiaries. The market share and
competitive position data contained in this Prospectus are approximations
derived from industry sources, which the Company has not independently
verified, or from Company estimates which the Company believes to be
reasonable. Adorisse, Advanced Time Protector, Always Color, Aromascape, Daily
Essentials, Eau D'Aromes, Fm Force Magnetique, Jafra, JF9, Legend for Men, Le
Moire, Optimascara, Optimeyes, Precious Protein, Rediscover, Royal Almond,
Royal Jelly Body Complex, Royal Jelly Milk Balm Moisture Lotion, Skin Firming
Complex Time Corrector and Time Protector are trademarks or registered
trademarks of the Company.
The Company
Jafra is a direct seller of premium skin and body care products, color
cosmetics, fragrances, nutritional supplements and other personal care
products. Jafra currently operates in ten countries directly and in a number of
additional countries through distributors, although approximately 86% of the
Company's sales in 1997 were in the United States, Mexico and Germany. Jafra
markets its products through a direct selling, multi-level distribution system
comprised of approximately 237,800 self-employed salespersons (known as "sales
representatives"). The Company seeks to provide its sales representatives
attractive and flexible career opportunities selling quality products at
affordable prices. Jafra's sales representatives have the opportunity to earn
significant income and to receive non-financial awards designed to motivate and
recognize individual achievement.
The Parent's principal executive offices are located at 10, rue Antione Jans,
L-1820 Luxembourg, Luxembourg and its telephone number is (352) 476-867-1. The
U.S. Issuer's principal executive offices are located at 2451 Townsgate Road,
Westlake Village, California, U.S.A. and its telephone number is (805)
449-3000. Jafra S.A.'s principal executive offices are located at Blvd. Adolfo
Lopez Mateos #515, Colonia Tlacopac, 01040, Mexico, D.F. and its telephone
number is (525) 490-1800.
Operating Strengths
Jafra believes that, as a result of the strong infrastructure created to
date, it is well-positioned to increase sales and profitability under the
Company's new, focused ownership and management. The Company's operating
strengths include the following:
Motivated and Loyal Sales Representative Base. Jafra has built a motivated,
well-trained and loyal direct sales force of approximately 237,800 self-
employed independent sales representatives. The average Jafra sales
representative has been affiliated with the Company for approximately four
years, which the Company believes is among the highest average tenure in the
direct selling industry. The Company offers its sales representatives
attractive opportunities for career development and significant potential for
financial rewards. Jafra sales representatives earn income on their own sales
and can also earn commissions on sales made by the sales representatives they
recruit. The Company's worldwide sales representative base grew 5.9% to
approximately 220,800 at the end of 1997 from approximately 208,500 at the end
of 1996. As of September 30, 1998, the Company's worldwide sales representative
base had increased to 237,800, an increase of 7.7% over December 31, 1997.
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Prestige Quality Product Offerings. The Company offers diverse, prestige
quality product lines that it believes appeal to a wide customer base, build
brand equity and product loyalty, and lead to repeat purchases. The Company
positions its products to appeal to middle income, value oriented consumers,
generally pricing below the prestige level.
Significant Investment in Operating Infrastructure. Over the last three
years, Jafra has invested approximately $30 million in new infrastructure,
including a customer service and office facility in Mexico, new machinery and
equipment, and upgraded data processing capabilities. The Company's
manufacturing facilities in Westlake Village, California, which produces skin
care products, and in Naucalpan, Mexico, which produces color cosmetics, are
equipped with some of the latest manufacturing technologies.
Geographic Diversification. The Company currently operates in ten countries
directly and through distributors in a number of additional countries. The
Company's most important markets to date have been the United States, Mexico
and Germany, which represented approximately 31%, 43% and 13%, respectively, of
total 1997 sales and 31%, 47% and 10%, respectively, of 1998 sales as of
September 30, 1998. With significant revenue coming from each of the United
States, Latin America and Europe, the Company believes that it is less
vulnerable to adverse economic developments in any particular market. The
Company expects that future growth in the United States and in new markets will
lead to greater diversification of the sources of revenue.
Strategy
The Company's new owners and management intend to build on Jafra's strong
existing infrastructure and to increase the Company's sales and profitability
by pursuing the following strategy:
Deploy New Senior Management Team with Significant Direct Selling
Experience. In connection with the Acquisition, Ronald B. Clark joined the
Company as its Chairman and Chief Executive Officer, Gonzalo R. Rubio joined as
its President and Chief Operating Officer, Michael DiGregorio joined as its
President of United States Operations, Eugenio Lopez Barrios joined as its
President of Mexican Operations, Jose Luis Peco joined as its President of
European Operations, Jaime Lopez Guirao joined as its President of Global
Operations and Alan Fearnley joined as its Senior Vice President of Global
Marketing. Management has an average of over 20 years of direct selling
industry experience, including various senior management positions with Jafra
competitors Avon and Mary Kay. Jafra believes that this new team will provide
the dynamic leadership required to attract new sales representatives and
management talent, inspire new and existing sales representatives to greater
productivity and execute the Company's new market development strategy. See
"Management."
Grow Sales Representative Base in Existing Markets. Jafra plans to expand its
sales representative base in existing markets by (i) targeting U.S. expansion
into new geographic areas and demographic groups, (ii) streamlining the
commission structure to provide more rewards to those sales representatives who
actively recruit other sales representatives, (iii) providing more training in
business skills and recruiting techniques to sales representative managers, and
(iv) initiating programs to reactivate former or inactive sales
representatives.
Increase Sales Representative Productivity. The Company plans to focus on
increasing the productivity, as measured by sales per sales representative, of
its existing sales representatives by (i) expanding the Company's product
lines, (ii) initiating better-targeted marketing activities and (iii)
decreasing lead time on new product introductions.
Develop New Markets. The Company expects that it will be able to implement
its new market development strategy with limited additional capital
expenditures and without diverting focus from the Company's core markets due to
its existing distribution and manufacturing capabilities. The Company's new
senior management team has extensive experience and a proven track record in
developing new markets in Latin
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America and Central and Eastern Europe. The Company intends to focus its
expansion efforts on markets that the Company believes (i) do not require high
start-up costs, such as markets contiguous to the Company's existing markets,
(ii) have proven receptive to direct selling techniques, (iii) demonstrate
promising economic demographics, including population size, growth of gross
domestic product and an expanding middle class, and (iv) evidence demand for
quality cosmetic products.
Improve Operating Efficiency. The Company's new management team believes that
opportunities exist to improve operating efficiency through cost-cutting,
better inventory management, and streamlining of marketing efforts and product
lines.
The Sponsor
Clayton, Dubilier & Rice, Inc. ("CD&R") is a private investment firm
specializing in acquisitions that involve management participation. The firm
currently manages a pool of equity capital of approximately $1.5 billion. Since
its founding in 1978, CD&R has sponsored the acquisition of 29 businesses,
primarily divisions of large corporations, with combined annual sales in excess
of $17 billion. The firm has successfully worked with the management teams of
acquired companies to substantially improve their operations and profitability.
Like Jafra, several of these companies were owned by large corporations and did
not represent core strategic businesses for their respective owners. Examples
of such CD&R acquisitions include: Allison Engine Company Inc. (formerly owned
by General Motors), Lexmark International, Inc. (formerly owned by IBM), WESCO
Distribution, Inc. (formerly owned by Westinghouse Corp.) and Alliant
Foodservice, Inc. (formerly owned by Kraft General Foods). CD&R has worked
successfully with these companies to refocus core operations, which has led to
significant gains in productivity and profitability, although there can be no
assurance that CD&R will realize similar success with the Company.
The Transactions
On April 30, 1998, Parent completed the Acquisition of the Jafra Business
pursuant to an Acquisition Agreement, dated January 26, 1998, as amended (the
"Acquisition Agreement") between Parent, an affiliate of Parent and Gillette.
Parent was organized to effect the Acquisition. Parent and certain of its
subsidiaries were formed by Clayton, Dubilier & Rice Fund V Limited
Partnership, a Cayman Islands exempted limited partnership ("CD&R Fund V")
managed by CD&R. See "The Sponsor."
As part of the financing for the Acquisition, (i) CD&R Fund V, certain
members of new management, certain new directors and other persons made an
equity investment in Parent of approximately $82.9 million in cash, (ii) the
Issuers issued the Existing Notes pursuant to the Offering and (iii) Parent and
the Issuers entered into a credit agreement (the "Senior Credit Agreement")
with certain lenders providing for senior secured credit facilities, including
a $25.0 million term loan facility (the "Term Loan Facility") (all of which was
drawn at the Closing) and a $65.0 million revolving credit facility (the
"Revolving Credit Facility," and, together with the Term Loan Facility, the
"Credit Facilities") (approximately $18.6 million of which has been drawn in
connection with the Transactions). See "Description of the Senior Credit
Agreement." The Offering and the initial borrowings under the Senior Credit
Agreement are referred to collectively as the "Financings." The Acquisition,
the Financings, the equity contribution by CD&R Fund V and certain members of
new management and the payment of related transaction fees and expenses are
referred to collectively as the "Transactions." See "Management" for a
description of equity investments in Parent by members of management.
3
<PAGE>
The following table illustrates the sources and uses of funds to consummate
the Transactions (dollars in millions):
<TABLE>
<CAPTION>
Sources
-------
<S> <C>
Revolving Credit Facility.. $ 18.6(a)
Term Loan Facility......... 25.0
Senior Subordinated Notes.. 100.0
------
Total Debt............... 143.6
Common Equity.............. 82.9
------
Total Sources............ $226.5
</TABLE>
<TABLE>
<CAPTION>
Uses
----
<S> <C>
Purchase Price to Gillette.......................................... $202.5
Transaction Fees and Expenses....................................... 24.0
------
Total Uses.......................................................... $226.5
</TABLE>
- --------
(a) Represents the Acquisition-related drawdown of $18.6 under the $65.0
Revolving Credit Facility.
The following chart depicts the organizational structure of Parent and its
subsidiaries (omitting certain intermediate holding companies). At present, the
U.S. Issuer has no U.S. subsidiaries.
CDRJ
Investments
(Lux) S.A.
(Parent)
(Guarantor)
[LINE DOWN] [LINE DOWN]
Jafra Cosmetics
International, Inc. Jafra Cosmetics
(U.S. Issuer) International, S.A. de C.V.
U.S. Operations (Jafra S.A.)
(Guarantor) (Guarantor)
[LINE DOWN] [LINE DOWN] [LINE DOWN]
Western European Mexican
Subsidiaries Subsidiaries Other Subsidiaries
(Nonguarantor) (Guarantor) (Nonguarantor)
Use of Proceeds of Offering
The Company will not receive any proceeds from the Exchange Offer. As
described under "The Transactions," the $202.5 million purchase price of the
Acquisition and approximately $24 million of transaction-related fees and
expenses were funded with (i) the gross proceeds of $100 million of the
Offering; (ii) an equity investment of approximately $82.9 million by CD&R Fund
V, certain directors, certain members of management and other persons; and
(iii) the borrowing of $25 million under the Term Loan Facility and $18.6
million under the Revolving Credit Facility.
4
<PAGE>
The Exchange Offer
Registration Agreement...... The Existing Notes were issued on April 30, 1998
to Credit Suisse First Boston and Chase
Securities Inc. (together, the "Initial
Purchasers"). The Initial Purchasers resold the
Existing Notes to certain qualified institutional
buyers in reliance on, and subject to the
restrictions imposed pursuant to, Rule 144A of
the Securities Act. In connection therewith, the
Company and the Initial Purchasers entered into
the Registration Rights Agreement, dated as of
April 30, 1998 (the "Registration Rights
Agreement"), providing, among other things, for
the Exchange Offer. See "The Exchange Offer."
The Exchange Offer.......... New Notes are being offered in exchange for an
equal principal amount of Existing Notes. As of
the date hereof, $100,000,000 aggregate principal
amount of Existing Notes is outstanding. Existing
Notes may be tendered only in integral multiples
of $1,000.
Resale of New Notes......... Based on interpretations by the staff of the
Securities and Exchange Commission (the
"Commission") as set forth in no-action letters
issued to third parties, the Issuers believe that
New Notes issued pursuant to the Exchange Offer
in exchange for the Existing Notes may be offered
for resale, resold and otherwise transferred by
holders thereof (other than any such holder that
is a broker-dealer or an "affiliate" of the
Issuers within the meaning of Rule 405 of the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such holder
represents to the Company that (i) any New Notes
received by such holder will be acquired in the
ordinary course of business, (ii) such holder
will have no arrangements or understanding with
any person to participate in the distribution of
the Existing Notes or the New Notes within the
meaning of the Securities Act, (iii) such holder
is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Issuers or if it is an
affiliate, such holder will comply with the
registration and prospectus delivery requirements
of the Securities Act to the extent applicable,
(iv) if such holder is not a broker-dealer, that
it is not engaged in, and does not intend to
engage in the distribution of the New Notes, (v)
if such holder is a broker-dealer, that it will
receive New Notes for its own account in exchange
for Existing Notes that were acquired as a result
of market-making activities or other trading
activities and that it will deliver a prospectus
in connection with any resale of such New Notes,
and (vi) that it is not acting on behalf of any
person who could not truthfully make the
foregoing representations. If a holder of
Existing Notes is unable to make the foregoing
representations, such holder may not rely on the
applicable interpretation of the staff of the
Commission as set forth in such no-action letters
and must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection
5
<PAGE>
with any secondary resale transaction. Broker-
dealers that acquired the Existing Notes directly
from the Issuers may not rely on such
interpretations of the staff of the Commission,
must comply with the registration and prospectus
delivery requirements of the Securities Act
(including being named as selling security
holders) in order to resell the Existing Notes
and may not participate in the Exchange Offer. In
addition, since the Issuers have not sought, and
do not intend to seek, their own no-action
letter, there can be no assurance that the staff
of the Commission would make a similar
determination with respect to the Exchange Offer.
Notwithstanding the foregoing, each broker-dealer
that receives New Notes for its own account
pursuant to the Exchange Offer in exchange for
Existing Notes, where such Existing Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities must acknowledge that it will deliver
a prospectus meeting the requirements of the
Securities Act and that it has not entered into
any arrangement or understanding with the Issuers
or an affiliate of the Issuers to distribute the
New Notes in connection with any resale of such
New Notes. A broker- dealer that acquired
Existing Notes in a transaction other than as
part of its market-making activities or other
trading activities will not be able to
participate in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of New Notes received in exchange for
Existing Notes where such Existing Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities. The Issuers and the Note Guarantors
have agreed that, for a period of 90 days after
the Expiration Date (as defined herein), it will
make this Prospectus available to any broker-
dealer for use in connection with any such
resale. Any holder that cannot rely upon such
interpretations by the Staff of the Commission as
set forth in such no-action letters must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with a secondary resale transaction. See "The
Exchange Offer" and "Plan of Distribution."
Consequences of Failure to
Exchange Existing Notes.... Upon consummation of the Exchange Offer, subject
to certain limited exceptions, holders of
Existing Notes who do not exchange their Existing
Notes for New Notes in the Exchange Offer will no
longer be entitled to registration rights and
will not be able to offer or sell their Existing
Notes, unless such Existing Notes are
subsequently registered under the Securities Act
(which, subject to certain limited exceptions,
the Issuers and the Note Guarantors will have no
obligation to do), except pursuant to an
exemption from, or in a transaction not subject
to, the Securities Act and applicable state
6
<PAGE>
securities laws. See "The Exchange Offer--Terms
of the Exchange Offer" and "--Consequences of
Failure to Exchange."
Expiration Date.............
The Exchange Offer will expire at 5:00 p.m., New
York City time, on February 26, 1999 (21 business
days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Interest on the New Notes... The New Notes will accrue interest at a rate of
11 3/4% per annum from April 30, 1998, the issue
date of the Existing Notes. Interest on the New
Notes is payable on May 1 and November 1 of each
year, commencing on November 1, 1998. See
"Registration Rights" and "Description of Notes--
Terms of the Notes."
Conditions to the Exchange
Offer....................... The Exchange Offer is not conditioned upon any
minimum principal amount of Existing Notes being
tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions,
which may be waived by the Issuers. See "The
Exchange Offer--Conditions." Except for the
requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by the Issuers in connection with the
Exchange Offer.
Procedures for Tendering
Existing Notes............. Each holder of Existing Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with any other required
documentation to the Exchange Agent (as defined
herein) at the address set forth herein and
effect a tender of Existing Notes pursuant to the
procedures for book entry transfer as provided
for herein. See "The Exchange Offer Procedures
for Tendering" and "--Book Entry Transfer."
Guaranteed Delivery Holders of Existing Notes who wish to tender
Procedures.................. their Existing Notes and who cannot deliver their
Existing Notes and a properly completed Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date may tender their
Existing Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights...........
Tenders of Existing Notes may be withdrawn to any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. To withdraw a tender of
Existing Notes, a written or facsimile
transmission notice of withdrawal must be
received by the Exchange Agent at its address set
forth herein under "The Exchange Offer-- Exchange
Agent" prior to 5:00 p.m., New York City time, on
the Expiration Date.
7
<PAGE>
Acceptance of Existing
Notes and Delivery of New Subject to certain conditions, any and all
Notes...................... Existing Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date will be accepted for
exchange. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Tax Consequences............ The exchange of Existing Notes for New Notes will
not constitute a taxable exchange for U.S.
federal income tax purposes. See "Taxation."
Exchange Agent/Trustee...... The State Street Bank and Trust Company is
serving as exchange agent (the "Exchange Agent"
and the "Trustee") in connection with the
Exchange Offer.
Fees and Expenses........... All expenses incident to the Issuers'
consummation of the Exchange Offer and compliance
with the Registration Agreement will be borne by
the Issuers. See "The Exchange Offer--Fees and
Expenses."
Use of Proceeds............. The Issuers will not receive any proceeds from
the Exchange Offer. The proceeds from the
Offering, together with other sources of
financing, were used to fund the purchase price
of the Acquisition and pay transaction-related
fees and expenses. See "The Transactions."
Summary of Terms of New Notes
The Exchange Offer relates to the exchange of up to $100,000,000 aggregate
principal amount of Existing Notes for an equal aggregate principal amount of
New Notes. New Notes will be entitled to the benefits of the same Indenture (as
defined therein) that governs the Existing Notes and will govern the New Notes.
The form and terms of the New Notes are identical in all material respects to
the form and terms of the Existing Notes, except that (i) the New Notes will
have been registered under the Securities Act, and thus will not bear
restrictive legends restricting their transfer pursuant to the Securities Act
and will not contain certain provisions providing for an increase in the
interest rate on the Existing Notes under certain circumstances described in
the Registration Rights Agreement (as defined), which provisions will terminate
upon the consummation of the Exchange Offer and (ii) holders of New Notes will
not be entitled to certain registration rights that holders of Existing Notes
have under the Registration Rights Agreement, except under limited
circumstances . See "Description of Notes."
Issuers..................... The U.S. Issuer and Jafra S.A., on a several
basis.
Maturity.................... May 1, 2008.
Interest Payment Dates...... May 1 and November 1 of each year, commencing
November 1, 1998.
U.S. Issuer's Obligations
under the Notes............ The U.S. Issuer will be severally liable with
respect to the payment of $600 of each $1,000
principal amount of the Notes, together with
interest on such amount.
8
<PAGE>
Jafra S.A.'s Obligations
under the Notes............ Jafra S.A. will be severally liable with respect
to the payment of $400 of each $1,000 principal
amount of the Notes, together with interest on
such amount.
Parent Guarantee............ The Notes will be fully and unconditionally
guaranteed on a senior subordinated basis by
Parent on the terms provided in the Indenture.
Cross Guarantees............ Each Issuer will fully and unconditionally
guarantee the other Issuer's payment obligations
under the Notes on a senior subordinated basis on
the terms provided in the Indenture, including a
30-day standstill period prior to enforcement of
its Cross Guarantee.
Subsidiary Guarantees....... The U.S. Issuer's obligations under the Notes,
including the U.S. Issuer Cross Guarantee, will
be fully and unconditionally guaranteed on a
senior subordinated basis by each subsequently
acquired or organized U.S. subsidiary of the U.S.
Issuer on the terms provided in the Indenture,
subject to certain exceptions. At present, the
U.S. Issuer does not have any U.S. subsidiaries.
Jafra S.A.'s obligations under the Notes,
including the Jafra S.A. Cross Guarantee, will be
fully and unconditionally guaranteed by each
existing and subsequently acquired or organized
subsidiary of Jafra S.A. on the terms provided in
the Indenture. See "Description of Notes--Note
Guarantees."
Optional Redemption......... The Notes will be concurrently redeemable at the
option of the Issuers (i) at any time and from
time to time prior to May 1, 2001, on a pro rata
basis (based on the relative proportions of the
JCI Portion and the Jafra S.A. Portion) in an
aggregate principal amount equal to up to 35% of
the original principal amount of the Notes with
the proceeds of one or more Equity Offerings, at
a redemption price set forth herein, provided
that an aggregate principal amount of Notes equal
to at least 65% of the original aggregate
principal amount of the Notes remains outstanding
immediately after each such redemption, and (ii)
in whole or in part at any time on or after May
1, 2003, at the redemption prices set forth
herein, in each case plus accrued and unpaid
interest, if any, to the date of redemption
(subject to the right of holders of record on the
relevant record date to receive interest due on
the relevant payment date). Any such partial
redemption will be made by both Issuers
concurrently on a pro rata basis (based on the
relative proportions of the JCI Portion and the
Jafra S.A. Portion). See "Description of Notes--
Optional Redemption."
Redemption for Tax Reasons.. Jafra S.A.'s Obligations may be redeemed, at the
option of Jafra S.A., at any time at a redemption
price equal to 100% of the principal amount
thereof, together with accrued interest to the
date fixed for redemption, if any, if, as a
result of any change in, or amendment to
applicable treaties or laws of Mexico, Jafra
S.A., any successor to Jafra S.A. or any Note
Guarantor of the Jafra S.A. Portion would be
obligated to pay Additional Amounts in excess of
9
<PAGE>
the Additional Amounts that Jafra S.A., any
successor to Jafra S.A. or such Note Guarantor
would be required to pay if payments by Jafra
S.A., any successor to Jafra S.A. or such Note
Guarantor were subject to a 15% Mexican
withholding tax. See "Description of Notes--
Redemption for Changes in Withholding Taxes."
Change of Control........... In the event of a Change of Control, if the
Issuers do not redeem the Notes, the holders of
the Notes will have the right, subject to certain
exceptions, to require the Issuers to repurchase
such holder's Notes at a purchase price equal to
101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date
of redemption (subject to the right of holders of
record on the relevant record date to receive
interest due on the relevant payment date). There
can be no assurance that, in the event of a
Change of Control, the Issuers will have
available sufficient funds to repurchase the
Notes. See "Description of Notes--Change of
Control" and "Risk Factors--Risk of Insufficient
Funds Upon Change of Control."
Ranking..................... The Notes will be unsecured Senior Subordinated
Indebtedness of the Issuers or the relevant Note
Guarantor. The Notes will be subordinated in
right of payment to the payment when due of all
existing and future Senior Indebtedness of the
Issuers or the relevant Note Guarantor, including
such Person's obligations under the Senior Credit
Agreement. The Notes will rank pari passu in
right of payment with all existing and future
Senior Subordinated Indebtedness of the Issuers,
and will be senior in right of payment to all
existing and future Subordinated Obligations of
the Issuers or the relevant Note Guarantor. The
Notes will also be effectively subordinated to
any Secured Indebtedness of the Issuers or the
relevant Note Guarantor, to the extent of the
value of the assets securing such Indebtedness.
As of November 30, 1998, the Issuers had
approximately $50.0 million in Senior
Indebtedness, all of which was guaranteed by, and
constitutes Senior Indebtedness of, the Note
Guarantors, which in each case is senior in right
of payment to the Notes. As of September 30,
1998, the Issuers and the Note Guarantors had
$100 million in Senior Subordinated Indebtedness.
As of September 30, 1998, none of the Issuers and
the Note Guarantors had incurred any Subordinated
Indebtedness, and, as such, none has any
Indebtedness that ranks subordinate in right of
payment to the Notes. In addition, as of November
30, 1998 the Issuers had additional availability
of $40.0 million for borrowings under the Senior
Credit Agreement, all of which would have been
Senior Indebtedness and none of which would have
been Senior Subordinated Indebtedness (other than
the indebtedness represented by the Notes). See
"Description of Notes--Ranking."
Restrictive Covenants....... The Indenture includes certain covenants that,
among other things, will limit: (i) the
incurrence of additional indebtedness by Parent
and its Restricted Subsidiaries (as defined);
(ii) the layering of indebtedness; (iii) the
payment of dividends on, and redemption of,
capital stock of Parent and its Restricted
Subsidiaries and the redemption of certain
subordinated obligations of Parent and its
10
<PAGE>
Restricted Subsidiaries; (iv) investments; (v)
creation of restrictions on distributions from
Restricted Subsidiaries; (vi) sale of assets and
subsidiary stock; (vii) certain transactions with
affiliates; (viii) incurrence of liens and (ix)
mergers and consolidations. See "Description of
Notes--Certain Covenants" and "Description of
Notes--Merger and Consolidation."
Additional Amounts..........
Subject to certain exceptions, if Mexican taxes
are deducted or withheld from payments on the
Notes or the Guarantees, the Payor (as defined)
will pay Additional Amounts to the extent
necessary so that, after such deduction or
withholding, the holders of the Notes receive the
amount such holders would have received if such
taxes had not been deducted or withheld. See
"Description of Notes--Additional Amounts" and
"Taxation--Taxation of Interest and Principal."
Risk Factors
Prospective investors in the Notes should carefully consider the matters set
forth in this Prospectus under "Risk Factors."
11
<PAGE>
Summary Historical and Pro Forma Combined Financial and Operating Data
The following table sets forth summary historical combined financial data
with respect to the Company for the periods ended and as of the dates
indicated. The summary historical combined statement of operations data for the
years ended December 31, 1995, 1996 and 1997 and the historical combined
balance sheet data as of December 31, 1996 and 1997 are derived from the
audited combined financial statements of the Company. The historical combined
statement of operations data for the nine months ended September 30, 1997, four
months ended April 30, 1998 and the five months ended September 30, 1998 and
the historical combined balance sheet data as of September 30, 1997 and
September 30, 1998 are derived from the unaudited combined financial statements
of the Company included elsewhere in this Prospectus. The summary historical
combined balance sheet data as of December 31, 1995 are derived from unaudited
combined financial statements of the Company that are not included in this
Prospectus. The unaudited financial statements include, in the opinion of
management, all adjustments consisting of normal recurring adjustments
necessary to present fairly the data for such periods. Prior to 1998, accounts
of subsidiaries and operations outside the United States are included in the
summary historical and pro forma combined financial data on the basis of fiscal
years generally ending November 30.
The following table also sets forth certain unaudited summary pro forma
combined financial data of the Company for the periods indicated. The unaudited
summary pro forma combined statement of operations data for the year ended
December 31, 1997 gives effect to the Transactions as if they had occurred as
of January 1, 1997. The unaudited summary pro forma statement of operations
data for the nine months ended September 30, 1998 gives effect to the
Transactions as if they had occurred on January 1, 1997. See "The
Transactions." The unaudited summary pro forma combined financial data do not
purport to represent what the Company's results of operations would actually
have been had the Transactions in fact occurred as of such dates or to project
the Company's results of operations for any future period. The unaudited
summary pro forma combined financial data should be read in conjunction with
the Unaudited Pro Forma Combined Statements of Operations and the notes thereto
appearing elsewhere in this Prospectus.
12
<PAGE>
<TABLE>
<CAPTION>
Predecessor
-----------------------------------------------------------------------------
Year Ended December 31,
------------------------------ Pro Four Months
Actual Forma(a) Nine Months Ended Ended Five Months Ended
1995 1996 1997 1997 September 30, 1997 April 30, 1998 September 30, 1998
-------- -------- -------- -------- ------------------ -------------- ------------------
(in millions, except sales representative data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Op-
erations Data:
Net sales....... $ 218.4 $ 224.5 $ 229.5 $ 229.5 $ 162.6 $ 77.3 $ 98.6
Cost of sales... 54.3 58.2 59.1 59.1 41.1 20.3 29.5
Gross profit.... 164.1 166.3 170.4 170.4 121.5 57.0 69.1
Selling, general
and
administrative expenses (b). 154.0 155.8 149.4 155.0 107.1 51.6 65.7
Income from
operations..... 10.1 10.5 21.0 15.4 14.4 5.4 3.4
Interest income (expense), net. 4.3 0.9 0.3 (17.7) 0.8 0.1 (7.2)
Other income
(expense), net. 24.5(c) (1.4) (1.0) (1.0) (0.6) 1.5 (1.4)
Income (loss)
before income
taxes ......... 38.9 10.0 20.3 (3.3) 14.6 7.0 (5.2)
Net income
(loss)......... 32.8 7.4 15.5 (2.5) 11.2 4.1 (6.0)
Balance Sheet Data (at end
of period):
Cash and cash
equivalents.... $ 7.5 $ 8.7 $ 10.2 $ 6.3 $ 1.9 $ 10.4
Total working
capital (d).... 49.4 24.4 31.1 34.3 41.0 34.7
Property, plant
and equipment,
net............ 43.7 41.8 43.7 42.5 39.6 55.8
Total assets.... 203.1 164.5 175.2 196.5 141.9 295.0
Total debt...... -- -- 8.5 145.9
Equity.......... 108.7 78.6 77.3 87.7 90.1 76.7
Other Data:
EBITDA (e)...... $ 37.4 $ 12.4 $ 24.4 $ 21.8 $ 16.6 $ 8.3 $ 5.0
Net cash
provided by
(used in)
operating
activities..... 27.5 2.8 26.7 18.0 (8.0) (0.4)
Net cash
provided by
(used in)
investing
activities..... (13.9) (4.5) (5.8) (3.1) 2.6 (204.7)
Net cash
provided by
(used in)
financing
activities..... (13.4) 5.0 (19.0) (17.1) (8.8) 216.8
Depreciation and amortization. 2.8 3.3 4.4 7.4 2.8 1.4 3.0
Capital
expenditures... 20.3 10.3 8.9 8.9 3.7 3.2 4.6
Sales
representatives. 216,700 208,500 220,800 220,800 214,400 220,000 237,800
Sales
representative
productivity (f). $ 1,008 $ 1,056 $ 1,070 $ 1,070 $ 1,025 $ 1,052 $ 1,032
Pro Forma Data:
Adjusted EBITDA
(g)............ $ 30.4
Ratio of
adjusted EBITDA
to cash
interest
expense (h).... 1.9x
Ratio of total
debt to
adjusted
EBITDA......... 4.8x
Ratio of total
debt to total
capitalization. 0.6x
Ratio of
earnings to
fixed charges
(i)............ 22.6 5.8 12.9 -- (i) 17.2 18.5 -- (i)
<CAPTION>
Pro Forma (a)
------------------
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Statement of Op-
erations Data:
Net sales....... $ 175.9
Cost of sales... 49.8
Gross profit.... 126.1
Selling, general
and
administrative expenses (b). 119.2
Income from
operations..... 6.9
Interest income (expense), net. (13.0)
Other income
(expense), net. 0.1
Income (loss)
before income
taxes ......... (6.0)
Net income
(loss)......... (6.5)
Balance Sheet Data (at end
of period):
Cash and cash
equivalents....
Total working
capital (d)....
Property, plant
and equipment,
net............
Total assets....
Total debt......
Equity..........
Other Data:
EBITDA (e)...... $ 12.4
Net cash
provided by
(used in)
operating
activities.....
Net cash
provided by
(used in)
investing
activities.....
Net cash
provided by
(used in)
financing
activities.....
Depreciation and amortization. 5.4
Capital
expenditures... 7.8
Sales
representatives. 237,800
Sales
representative
productivity (f). $ 1,023
Pro Forma Data:
Adjusted EBITDA
(g)............ $ 18.0
Ratio of
adjusted EBITDA
to cash
interest
expense (h).... 1.5x
Ratio of total
debt to
adjusted
EBITDA......... 8.1x
Ratio of total
debt to total
capitalization. 0.7x
Ratio of
earnings to
fixed charges
(i)............ -- (i)
</TABLE>
- -------
(a) For a discussion of the transactions reflected in the pro forma
information set forth in the table, see "Unaudited Pro Forma Combined
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "The Transactions."
(b) Selling, general and administrative expenses include the following non-
recurring items: for 1995, net reorganization charges of $9.6; for 1996, a
$5.4 non-cash charge for the write-off of certain computer systems and
related costs, and net reorganization charges of $0.7; and for 1997, net
reorganization charges of $3.5 that were partially offset by a cash
13
<PAGE>
recovery of $2.3 relating to the $5.4 charge taken in 1996, resulting from
the settlement of a legal action brought by the Company against a computer
systems contractor, and a gain of $0.8 relating to the sale of a facility
that had previously been written-off.
(c) Other income (expense), net for 1995 includes a $25.5 foreign exchange
gain in Jafra S.A. resulting from having had U.S. dollar denominated
intercompany receivables from affiliates at the time of the December 1994
peso devaluation.
(d) Total working capital is defined as current assets less current
liabilities excluding short term debt with third parties.
(e) EBITDA is defined as net income before net interest expense, income tax
expense, depreciation and amortization. EBITDA for 1995 includes a $25.5
foreign exchange gain in Jafra S.A. resulting from having had U.S. dollar
denominated intercompany receivables from affiliates at the time of the
December 1994 peso devaluation, which was partially offset by $9.6 of non-
recurring charges relating to the reorganization and restructuring of
certain foreign operations. EBITDA for 1996 includes a non-recurring
charge in Jafra S.A. of $5.4 relating to the write-off of certain computer
systems and related costs, and net reorganization charges of $0.7. EBITDA
for 1997 includes $3.5 of cash severance costs relating to realignment of
certain foreign operations, which was partially offset by a cash gain of
$2.3 relating to a recovery under a legal settlement and a $0.8 cash gain
relating to the sale of a facility that was previously written-off. EBITDA
for the nine months ended September 30, 1997 includes $2.3 of cash
severance costs relating to realignment of certain foreign operations,
which was offset by a cash gain of $2.3 relating to a recovery under a
legal settlement. The Company believes that EBITDA provides useful
information regarding the Company's ability to service debt but should not
be considered in isolation or as a substitute for the combined statement
of operations or cash flow data prepared in accordance with the generally
accepted accounting principles and included elsewhere in this Prospectus
or as a measure of the Company's operating performance, profitability or
liquidity. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
differences and methods of calculation.
(f) Sales representative productivity in any calendar year represents (i)
sales for such calendar year divided by (ii) the average of the number of
sales representatives at the commencement and the end of such calendar
year.
(g)Pro forma adjusted EBITDA reflects (i) the elimination of certain non-
recurring items that affected 1997 historical amounts and (ii) certain
changes in the cost structure of the Company that are expected to occur
following the consummation of the Transactions, as set forth below:
<TABLE>
<CAPTION>
Nine months ended
Year ended September 30,
December 31, 1997 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Historical EBITDA:
Predecessor.......................... $24.4 $8.3
Successor............................ 5.0
Pro forma adjustments.................. (2.6) (0.9)
Non-recurring items:
Reorganization expenses(1)........... 3.5 --
Gain from legal settlement(2)........ (2.3) --
Gain on sale of divested facility(3). (0.8) --
--------
Total non-recurring items............ 0.4 --
--------- ---------
Cost savings:
Adjustment of existing employee bene-
fit plans(4)........................ 1.4 0.5
Restructuring/rationalization(5)..... 5.7 4.3
Elimination of expatriate bene-
fits(6)............................. 1.1 0.8
--------
Total cost savings(7)................ 8.2 5.6
--------- ---------
Pro forma adjusted EBITDA............ $ 30.4 $ 18.0
========= =========
</TABLE>
- -------
(1) In 1997, the Company incurred approximately $3.5 of cash severance
costs relating to the realignment of certain foreign operations. The
Company believes that such realignment has been completed and that such
severance costs are non-recurring.
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<PAGE>
(2) In 1997, the Company recorded a gain of approximately $2.3 relating to
a cash recovery under a legal settlement brought by the Company against
a software vendor.
(3) In 1997, the Company recorded a cash gain of approximately $0.8
relating to the sale of a facility that had been previously written-
off.
(4) The Company replaced certain U.S. employee benefit plans on May 1, 1998
that had previously been provided by Gillette, including defined
benefit pension, retirement savings, retiree medical, and health and
welfare plans that have resulted in an estimated annual savings of
$1.4. As a result, the pro forma adjusted EBITDA has been adjusted by
$1.4 for the year ended December 31, 1997 and by $0.5 for the nine
months ended September 30, 1998 to reflect the savings for the four
month period ended April 30, 1998 of the predecessor.
(5) The Company plans to rationalize certain distribution, manufacturing
and administrative functions of the predecessor, which the Company
believes will reduce annual expenses by $5.7. As a result, the pro
forma adjusted EBITDA has been adjusted by $5.7 for the year ended
December 31, 1997 to reflect the estimated annual cost savings. The
Company has not yet rationalized these functions and as a result has
adjusted the nine months ended September 30, 1998 by $4.3, which
represents the pro rata portion of the estimated annual savings. In
addition, estimated non-recurring charges of approximately $4.0
corresponding to the restructuring/rationalization which were accrued
as part of the purchase price allocation have not been reflected in the
Unaudited Pro Forma Combined Statement of Operations.
(6) Gillette utilized expatriate executives in various management positions
throughout the organization. The Company, however, plans to convert to
local status or replace certain individuals currently employed on an
expatriate basis under the Gillette organizational structure of the
predecessor. As a result, the Company estimates that the annual cost
savings compared to Gillette's expatriate policy will be approximately
$1.1. The pro forma adjusted EBITDA has been adjusted by $1.1 for the
year ended December 31,1997 and by $0.8 for the nine months ended
September 30, 1998, to reflect such anticipated cost savings.
(7) The anticipated cost savings included in pro forma adjusted EBITDA are
based on estimates and assumptions made by the Company that are
inherently uncertain, although considered reasonable by the Company,
and are subject to significant business, economic and competitive
uncertainties and contingencies, all of which are difficult to predict
and many of which are beyond the control of the Company. As a result,
there can be no assurance that such savings will be achieved.
(h) Cash interest expense represents interest expense less amortization of
debt issuance costs.
(i) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization
of deferred financing fees, and one-third of rental expense on operating
leases representing that portion of rental expense deemed to be
attributable to interest. On a pro forma basis, earnings before income
taxes and fixed charges were insufficient to cover fixed charges by $3.3
and $6.0 for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. For the five months ended September 30,
1998, earnings before income taxes and fixed charges were insufficient to
cover fixed charges by $5.2. The calculation of pro forma earnings to
fixed charges includes non-cash depreciation and amortization expense of
$7.4 and $5.4 and non-cash amortization expense of deferred financing
costs of $1.9 and $1.4 for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively.
15
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, before tendering
their Existing Notes for New Notes, holders of Existing Notes should carefully
consider the following factors, which are generally applicable to the Existing
Notes and the New Notes.
Substantial Leverage; Ability to Service Indebtedness
As a result of the Transactions, the Company is highly leveraged. As of
November 30, 1998, the Company had approximately $150.0 million of
consolidated indebtedness, plus additional borrowing availability under the
Senior Credit Agreement of approximately $40.0 million. As of November 30,
1998, the Issuers had approximately $50.0 million in Senior Indebtedness, all
of which was guaranteed by, and constititues Senior Indebtedness of, the Note
Guarantors, which in each case is senior in right of payment to the Notes. As
of November 30, 1998, the Issuers and the Note Guarantors had $100 million
Senior Subordinated Indebtedness. As of November 30, 1998, none of the Issuers
and the Note Guarantors had incurred any Subordinated Indebtedness, and, as
such, none has any Indebtedness that ranks subordinate in right of payment to
the Notes. The Senior Credit Agreement and the Indenture permit the Company to
incur or guarantee certain additional indebtedness (subject to the limitations
set forth therein). The Issuers are required to repay the $25 million in term
loans under the Senior Credit Agreement over the six-year period following the
Closing. All outstanding revolving credit borrowings under the Senior Credit
Agreement will become due on the sixth anniversary of Closing. In addition,
because the Issuers' obligations under the Senior Credit Agreement bear
interest at floating rates, an increase in interest rates could adversely
affect the Company's ability to meet its debt service obligations, although
the Company may enter into certain interest rate protection arrangements
following the Closing with respect to a portion of its indebtedness under the
Senior Credit Agreement. See "Unaudited Pro Forma Combined Financial
Statements," "Description of the Senior Credit Agreement" and "Description of
Notes."
The Company's high degree of leverage could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and is not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, capital expenditures or
acquisitions may be limited; (iii) the Company's leveraged position and the
covenants that are contained in the Indenture and the Senior Credit Agreement
could limit the Company's ability to compete, as well as its ability to expand
(including through acquisitions) and to make capital improvements, and (iv)
the Company's ability to refinance the Notes in order to pay the principal of
the Notes at maturity or upon a Change of Control may be adversely affected.
See "Description of the Senior Credit Agreement" and "Description of Notes."
The Company's ability to pay principal and interest on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control. The Company anticipates that its operating cash flow, together with
borrowings under the Senior Credit Agreement, will be sufficient to meet its
operating expenses and to service its debt requirements as they become due. If
the Company is unable to service its indebtedness, it will be forced to take
actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness (which could include the Notes),
or seeking additional equity capital. There is no assurance that any of these
remedies can be effected on satisfactory terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of the Senior Credit
Agreement."
Subordination of the Notes and the Guarantees
Each Issuer's Obligations under the Notes will be subordinated in right of
payment to all existing and future Senior Indebtedness of such Issuer,
including its obligations under the Senior Credit Agreement. Each Guarantee
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the relevant Note Guarantor, including such Guarantor's
obligations with respect to the Senior Credit Agreement.
16
<PAGE>
The Issuers and the Note Guarantors may not pay principal of, or premium or
interest on, the Notes, make any payment in respect of a Guarantee, make any
deposit pursuant to defeasance provisions, or repurchase, redeem or otherwise
retire the Notes if any Senior Indebtedness is not paid when due or any other
default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, and until such default has been cured or waived or has ceased to exist,
any such acceleration has been rescinded or such Senior Indebtedness has been
discharged or paid in full. In addition, if a default exists with respect to
certain Senior Indebtedness and certain other conditions are satisfied, the
Issuers and the Note Guarantors may not make any payments on the Notes or on
the Guarantees until the earliest to occur of certain specified events or the
passage of 179 days from the receipt of a notice blocking such payment. In the
event of bankruptcy, liquidation, reorganization or any similar proceedings
against either Issuer or a Note Guarantor, or any default in payment or
acceleration of any debt thereof, the assets of such Issuer or Note Guarantor
will be available to pay obligations under the Notes or the Guarantees, as the
case may be, only after the Senior Indebtedness of such Issuer or Note
Guarantor has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on all or any of Notes. See "Description of
Notes-- Ranking."
Several (Not Joint) Obligations of the Issuers under the Notes
Each Note will represent the several obligations of the Issuers. The U.S.
Issuer will be severally liable with respect to the payment of $600 of each
$1,000 principal amount of the Notes, together with interest on such amount,
and Jafra S.A. will be severally liable with respect to the payment of $400 of
each $1,000 principal amount of the Notes, together with interest on such
amount. Accordingly, the holders of the Notes will have a direct claim against
the U.S. Issuer only to the extent of the U.S. Issuer's Obligations and
against Jafra S.A. only to the extent of Jafra S.A.'s Obligations. Each of the
Obligations will be guaranteed by Parent and the other Issuer. However, each
Cross Guarantee is subject to certain limitations, in particular a 30-day
standstill period prior to its enforcement. See "Description of Notes--Note
Guarantees."
Holding Company Structure Makes Issuers and Parent Dependent on Subsidiaries
The U.S. Issuer conducts the non-U.S. part of its operations, and Jafra S.A.
and Parent conduct all of their operations, through various direct and
indirect subsidiaries. The Issuers and Parent are therefore dependent on
dividends or other distributions of funds from their respective subsidiaries
to meet their respective obligations, including obligations under the Senior
Credit Agreement, the Notes and the Guarantees. Such subsidiaries are separate
and distinct legal entities and, except for the subsidiaries of Jafra S.A. and
subsequently acquired or organized domestic subsidiaries of the U.S. Issuer
(which have guaranteed or will in the future guarantee the obligations of
Jafra S.A. or the U.S. Issuer, as the case may be), have no obligations under
the Notes or the Guarantees. The rights of the U.S. Issuer, Parent and their
respective creditors, including holders of the Notes, to participate in the
distribution of the assets of any subsidiary (other than the Note Guarantors)
upon such subsidiary's liquidation or reorganization will be subject to the
prior claims of such subsidiary's creditors, including trade creditors, except
to the extent that the U.S. Issuer or Parent itself may be a creditor with
enforceable claims against such subsidiary.
Unsecured Status of Notes; Encumbrances to Secure Senior Credit Agreement
In addition to being subordinated to all existing and future Senior
Indebtedness of the Issuers and of the relevant Note Guarantors, the Notes and
the Guarantees will not be secured by any of the Issuers' or the Guarantors'
assets. The Issuers' obligations under the Senior Credit Agreement and the
Guarantors' obligations under the related guarantees are secured as fully as
is permitted by applicable law (with certain exceptions) by substantially all
of the assets of Parent, the U.S. Issuer, Jafra S.A., each existing and
subsequently acquired or organized subsidiary of Jafra S.A., and each
subsequently acquired or organized U.S. subsidiary of the U.S. Issuer,
including, but not limited to, (a) a pledge of all the capital stock of the
Issuers, certain intermediate holding companies and each existing and each
subsequently acquired or organized direct subsidiary of each of the Issuers
(which pledge, in the case of any foreign subsidiary of the U.S. Issuer, shall
be limited to 65% of the capital stock of such foreign subsidiary) and (b)
security interests in, and mortgages on, substantially all tangible
17
<PAGE>
and intangible assets of the Issuers and each existing and each subsequently
acquired or organized subsidiary of Jafra S.A. and each subsequently acquired
or organized domestic subsidiary of the U.S. Issuer. If an Issuer or a Note
Guarantor becomes insolvent or is liquidated, or if payment of the
indebtedness under the Senior Credit Agreement is accelerated, the lenders
thereof will be entitled to exercise the remedies available to a secured
lender under applicable law and the instruments and agreements governing such
indebtedness. Accordingly, such lenders will have a prior claim over claims of
the holders of the Notes with respect to the assets securing such
indebtedness. In any such event, because the Notes and the Guarantees will not
be secured by such assets, it is possible that no assets would remain from
which claims of holders of the Notes could be satisfied or that, if any such
assets remained, such assets would be insufficient to satisfy such claims
fully. See "Description of the Senior Credit Agreement" and "Description of
Notes."
Restrictive Financing Covenants
The Senior Credit Agreement contains a number of significant covenants that,
among other things, restrict the ability of the Company to incur additional
indebtedness, pay dividends and other distributions, prepay other indebtedness
(including a specific restriction on prepayment of the Notes), create liens,
make capital expenditures, dispose of assets, make certain investments or
acquisitions, engage in certain transactions with affiliates and otherwise
restrict corporate activities. In addition, under the Senior Credit Agreement
the Company is required to satisfy specified financial covenants, including a
minimum EBITDA to cash interest expense coverage ratio and a maximum debt to
EBITDA ratio.
The Company's ability to comply with the covenants and restrictions
contained in the Senior Credit Agreement may be affected by events beyond its
control, including prevailing economic, financial and industry conditions, and
there can be no assurance that the Company will be able to comply with such
covenants or restrictions in the future. The breach of any such covenants and
restrictions as well as certain other events (including the occurrence of a
"Change in Control," as defined in the Senior Credit Agreement), could result
in an event of default under the Senior Credit Agreement which would permit
the lenders thereunder to declare all amounts outstanding thereunder to be
immediately due and payable, together with accrued and unpaid interest, and to
terminate their commitments to make further extensions of credit under the
Senior Credit Agreement. In addition, if the Issuers were unable to repay
their indebtedness to the lenders under the Senior Credit Agreement, such
lenders could proceed against the collateral securing such indebtedness, and
the Company could be prohibited from making any payments on the Notes. See
"Description of the Senior Credit Agreement." In addition, the Indenture
contains a number of restrictive covenants relating to the Company. See
"Description of Notes--Certain Covenants."
Risk of Insufficient Funds Upon Change of Control
The Indenture provides that upon a Change of Control, subject to certain
exceptions, each holder of the Notes may require the Company to repurchase all
or any part of such holder's Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date
of repurchase. The Senior Credit Agreement provides that in the event of a
Change of Control, the Issuers may not repurchase any Notes unless and until
such time as all amounts outstanding under the Senior Credit Agreement are
repaid in full. There can be no assurance that, in the event of a Change of
Control, the Issuers will have available sufficient funds to repay all amounts
outstanding under the Senior Credit Agreement or to repurchase the Notes. See
"Description of the Senior Credit Agreement" and "Description of Notes--Change
of Control."
Highly Competitive Market
The direct selling cosmetic and personal care products business is highly
competitive. The Company competes with other direct sellers and other channels
of distribution for such products based on numerous factors, including the
quality and strength of the Company's marketing efforts, its geographic
penetration, its sales representative incentive system, brand recognition,
product quality, performance and price. The Company's sales representative
incentive system and party plan sales method influence consumers' choices
among competing products and brands and competing direct sellers. Promotion,
merchandising and packaging, and the timing and
18
<PAGE>
frequency of new product introductions and line extensions, also influence
buying decisions, and the structure and quality of the sales representative
sales force affect product reception. A number of the Company's competitors,
including Avon and Mary Kay, are significantly larger and have substantially
greater resources and less leverage than the Company, which may provide them
greater flexibility to respond to changing business and economic conditions
than the Company. An increase in the amount of competition faced by the
Company, or the inability of the Company to compete successfully, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
Dependence on Consumer Spending
The sale of cosmetics and other personal care products correlates strongly
to the level of consumer spending generally, and thus is significantly
affected by the general state of the economy and the ability and willingness
of consumers to spend on discretionary items. Reduced consumer confidence and
spending generally may result in reduced demand for the Company's products and
limitations on the ability of the Company to maintain or increase prices. A
decline in economic conditions or general consumer spending in any of the
Company's major markets could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Inherent in International Operations
General Risks
The Company's ability to conduct and expand its business outside the United
States and the amount of its revenues derived from foreign markets are subject
to the risks inherent in international operations. The Company's international
operations may be adversely affected by import duties or other legal
restrictions on imports, currency exchange control regulations, transfer
pricing regulations, the possibility of hyperinflationary conditions and
potentially adverse tax consequences, among other things. In addition, the
governments of many developing nations have exercised and continue to exercise
significant influence over many aspects of their domestic economies. Given the
balance of payment deficits and shortages in foreign exchange reserves that
many such economies, including the Mexican economy, have suffered in recent
years, there can be no assurance that the governments of nations in which the
Company operates, or intends to expand, will not take actions that materially
adversely affect the Company and its business.
At present, foreign investment in Mexico is not restricted except in respect
of certain industries, such as petroleum, air transportation and banking. The
Jafra Business is not subject to such foreign investment controls. There can
be no assurance that investment controls will not be instituted in the future.
Similarly, at present, there are no foreign currency exchange controls in
place in Mexico. Except for the period from September to December 1982, during
a liquidity crisis, Banco de Mexico has consistently made foreign currency
available to Mexican private sector entities (such as Jafra S.A.) to meet
their foreign currency obligations (such as the Notes). Nevertheless, in the
event of renewed shortages of foreign currency, there can be no assurance that
foreign currency would continue to be available to private sector companies or
that foreign currency needed by Jafra S.A. to service foreign currency
obligations could be purchased in the open market without substantial
additional cost.
As a result of recent elections, for the first time in seven decades, the
Partido Revolucionario Institucional (PRI) does not hold a majority of the
seats in the Mexican Chamber of Deputies or the office of mayor of Mexico
City. The Company cannot predict the impact these elections will have on
Mexican economic, regulatory and social policy or the consequences thereof on
the business, financial condition, results of operations and prospects of the
Company. The Mexican economy, like other developing economies, has been
adversely affected by turmoil in foreign economies and international financial
markets. In addition, declining petroleum prices have increased pressure upon
the Mexican economy and resulted in a reduction of public expenditures by the
Mexican government. Despite such adverse developments, the Company has not
experienced a material adverse effect on its business, financial condition and
results of operations in Mexico or its other foreign markets for the first
nine months of 1998. There can be no assurance, however, that future economic,
political or diplomatic developments
19
<PAGE>
in or affecting the Company's overseas markets, over which the Company has no
control, will not impair the Company's business, financial condition and
results of operations or the ability of the Issuers or the Guarantors to meet
their respective obligations under the Notes and the Guarantees.
The Company believes that it operates in compliance with all applicable
customs, currency exchange control and transfer pricing laws. However, there
can be no assurance that the Company will continue to be found to be operating
in compliance with such laws or that such laws will not be modified, the
result of which may be to require changes in the Company's operating
procedures. Also, the Company may experience difficulty entering new foreign
markets due to regulatory barriers, the necessity of adapting to new
regulatory systems and different cultural bases and political systems of such
markets. As the Company continues to expand its non-U.S. operations, these and
other risks associated with such operations are likely to increase.
Exchange Rate Risks
Approximately 69% of the Company's revenues in 1997 were generated in
currencies other than the U.S. dollar. Substantially all of Jafra S.A.'s
consolidated revenues, representing approximately 43% of the Company's
revenues in 1997, are denominated in Mexican pesos. As such, the Company's
results of operations are subject to fluctuations in foreign exchange rates.
Substantially all of the Company's indebtedness (including substantially
all the indebtedness of Jafra S.A.) is denominated in U.S. dollars. As a
result, declines relative to the U.S. dollar in the value of the currencies in
which the Company's revenues are generated (including the Mexican peso) may
materially adversely affect the Company's business, financial condition and
results of operations and the ability of the Issuers and the Note Guarantors
to meet their respective obligations under the Notes and the Guarantees.
The value of the Mexican peso in particular has been subject to significant
fluctuations with respect to the U.S. dollar in the past and may be subject to
significant fluctuations in the future. The value of the Mexican peso against
the U.S. dollar declined by 60.8% from December 31, 1993 to December 31, 1994;
by 54.8% from January 1, 1995 to December 31, 1995; by 1.8% from January 1,
1996 to December 31, 1996; by 2.4% from January 1, 1997 to December 31, 1997;
and by approximately 23.2% from January 1, 1998 to December 8, 1998. The
decline in the value of the Mexican peso in 1994 and 1995, and the associated
economic weakness, had a material adverse effect on the Company's business,
financial condition and results of operations. For example, in 1995, changes
in exchange rates (together with local liquidity issues and inflation)
resulted in a decrease of U.S. $59.0 million in sales in Mexico. Although the
Company anticipates that, as its worldwide revenues increase, Jafra S.A.'s
revenues will comprise a smaller percentage of the Company's total revenue,
there can be no assurance that this will be the case. Any future devaluation
against the U.S. dollar of the Mexican peso or any other currency in which the
Company earns revenue could materially adversely affect the ability of the
Company to service its U.S. dollar denominated liabilities, including the
Notes.
Historically, Jafra S.A. has been able to raise its prices in line with the
local inflation, thereby helping to mitigate the effect of devaluations of the
Mexican peso. For example, from 1994 to 1997, Jafra S.A. increased its prices
148%, compared to inflation of 119% and a depreciation of the Mexican peso by
150% over this period. However, there can be no assurance that Jafra S.A. will
be able to maintain this pricing policy in the future. The Company may manage
the exchange rate exposure presented by the Notes by entering into certain
hedging transactions, although there can be no assurance that the Company will
be able to do so at an acceptable cost or that future exchange rate
fluctuations will not have a material adverse effect on the ability of the
Company to pay when due the principal and interest on the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro will trade on currency exchanges
and be available for non-cash transactions during the transition period
between January 1, 1999 and January 1, 2002. During this transition period,
the existing currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro and public and private
parties may pay for goods and services using either the euro or the
participating countries' existing currencies.
20
<PAGE>
During the transition period, the Company will continue to utilize the
respective country's existing currency as the functional currency. Use of the
euro by the Company or its sales representatives is not expected to be
significant and will be converted and recorded in the Company's accounting
records in the existing functional currency.
The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the
euro. The Company does not believe that any necessary modifications to its
information systems will be material, and does not expect the introduction of
the euro to materially adversely affect its business, financial condition, or
results of operations.
Government Regulation
The Company is subject to or affected by governmental regulations
concerning, among other things, (i) product formulation, labeling and
packaging, (ii) product claims and advertising, whether made by the Company or
its sales representatives, (iii) fair trade and distributor practices and (iv)
environmental, health and safety matters. In addition, new regulations could
be adopted or any of the existing regulations could be changed at any time in
a manner that could have a material adverse effect on the Company's business
and results of operations. Present or future health and safety or food and
drug regulations could delay or prevent the introduction of new products into
a given country or marketplace or suspend or prohibit the sale of existing
products in such country or marketplace. The Company believes that it is in
compliance in all material respects with such laws and regulations now in
effect.
In particular, most countries have laws intended to prevent deceptive
schemes, often referred to as "pyramid" or "chain sales" schemes, that promise
quick rewards for little or no effort, require high entry costs, use high
pressure recruiting methods or do not involve legitimate products. The Company
believes that its method of distribution is in compliance in all material
respects with the laws and regulations relating to direct selling activities
of all of the countries in which the Company currently operates. However,
there can be no assurance that the Company will be allowed to conduct business
in new markets or continue to conduct business in each of its existing markets
on the basis of its current practices.
Jafra's sales representatives are self-employed and are not employees of the
Company. Periodically, the question of the legal status of the Company's sales
representatives has arisen, usually in regard to possible coverage under
social benefit laws that would require Jafra (and in most instances its sales
representatives) to make regular contributions to social benefit funds.
Although the Company has generally been able to address these questions in a
satisfactory manner, the matter has not been fully resolved in all countries.
If there should be a final determination adverse to the Company in a
particular country, the cost for future, and possibly past, contributions
could be so substantial in relation to the Company's operations in that
country that the Company could be forced to discontinue operations in that
country and the business, financial condition and results of operations of the
Company could be materially adversely affected.
Dependence on New Management
In connection with the Acquisition, several members of the Company's senior
management team have returned to Gillette and others remained with the Company
for a transition period that was completed as of November 30, 1998. See "The
Transactions." Certain departing employees have been replaced by the new
management team. See "Business--Marketing--Strategy" and "Management." The
success of the Company depends in large part on the Company's new management
and, to a lesser extent, on its ability to attract and retain other highly
qualified management personnel. There can be no assurance that the Company
will be successful in hiring or retaining such personnel or that such new
management will be successful in implementing the Company's strategy.
Risk of Inability to Successfully Implement Growth Strategy
The Company's strategy is to (i) identify additional strategic hires to
round out its new management team with significant direct selling experience,
(ii) grow its sales representative base in existing markets, (iii) increase
21
<PAGE>
sales representative productivity, (iv) develop new markets and (v) improve
operating efficiency. The Company's ability to implement its strategy
successfully will be dependent on business, financial and other factors that
may be beyond the Company's control, including the prevailing economic
conditions and changes in consumer preferences and in the competitive
environment. There can be no assurance that the Company will be successful in
the implementation of its strategy.
The Company's ability to anticipate changes in market and industry trends
and to successfully develop and introduce new and enhanced products on a
timely basis will be a critical factor in its ability to grow and to remain
competitive. There can be no assurance that new products and product
enhancements will be completed on a timely basis or will enjoy market
acceptance following their introduction. In addition, the anticipated
development schedules for new or improved products are inherently difficult to
predict and are subject to delay or change as a result of shifting priorities
in response to customers' requirements and competitors' new product
introductions.
Year 2000 Issue
Prior to the Acquisition, the Company established a year 2000 compliance
methodology and schedule based on the Gillette model. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Issue." The Company is currently in the process of repairing, upgrading
or replacing all hardware, software and equipment that has been identified as
non-compliant at a cost estimated to be $1.5 million through 1999. Part of
this process involves confirming with suppliers that their systems are or will
be year 2000 compliant. The Company has contacted but has not yet received
responses from all of its major suppliers of raw materials and finished
products with respect to their year 2000 compliance status. Based on the
replies received by the Company as of December 10, 1998, the Company does not
believe that the inability of any of the suppliers that have not yet responded
or have responded unfavorably to the Company's request for information, to
continue to supply the Company would have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
intends to seek and identify alternate sources of supply for the affected raw
materials and finished products in the event it has not received assurance by
March 31, 1999 from these companies that they will be able to supply the
Company without material disruption into the year 2000. The Company currently
believes there are alternative sources for all such materials.
In the event the Company does not complete all phases of its year 2000
compliance program by December 31, 1999, the Company's most likely worst case
scenario would be that it would have to consider outsourcing its customer
service and order processing functions. No assurance can be given that the
Company will be able to outsource these functions or that the Company will not
incur significant additional expense in doing so. In the event that the
Company could not outsource these functions, the Company would be unable to
process orders in a timely manner or respond to customer inquiries. This could
lead to a loss of revenue and customer satisfaction, which could have a
material adverse effect on the Company's results of operations, liquidity, and
financial condition. The Company will make a determination no later than the
end of March 1999 as to whether it needs to investigate the possibility of
outsourcing these functions.
Control by CD&R Fund V
CD&R Fund V owns approximately 92.73% of the outstanding shares of Parent.
As a result of its stock ownership, CD&R Fund V has the ability to control the
Company, including the power to elect the directors of the Company, appoint
new management, and approve any action requiring approval by the stockholders
of the Company (such as adopting amendments to the organizational documents of
the Company and approving any merger or sale of all or substantially all the
assets of the Company). In addition, the employment agreements of Ronald B.
Clark, Parent's CEO, and Gonzalo R. Rubio, Parent's COO, provide that each
will be a member of the Board of Directors during the term of his employment.
The stockholders, or in some countries the directors so elected, have the
authority to effect decisions affecting the capital structure of the Company,
including the issuance of preferred stock and the declaration of dividends.
There can be no assurance that the interests of CD&R Fund V and Messrs. Clark
and Rubio will not conflict with the interests of holders of the Notes.
22
<PAGE>
Service of Process and Enforcement of Civil Liabilities
Jafra S.A. and it subsidiaries are limited liability corporations with
variable capital (sociedades anonimas de capital variable) organized under the
laws of the United Mexican States. Parent is a Luxembourg company. Certain of
the officers and directors of the foregoing may be residents of various
jurisdictions outside the United States. All or a substantial portion of the
assets of such persons may be located outside the United States. As a result,
it may be difficult for investors to effect service of process within the
United States upon such persons or to enforce in United States courts
judgments obtained against such persons in United States courts and predicated
upon the civil liability provisions of the United States federal securities
laws.
In addition, Jafra S.A. and its subsidiaries have been advised by Ritch,
Heather Y Mueller, S.C., their Mexican counsel, that there is doubt as to (i)
the enforceability, in original actions in Mexican courts, of liabilities
predicated solely upon the United States federal securities laws and (ii) the
enforceability in Mexican courts of judgments of United States courts obtained
in actions predicated upon the civil liability provisions of the United States
federal securities Laws. Parent has also been advised by Bonn & Schmitt, its
Luxembourg counsel, that there is doubt as to (i) whether a Luxembourg court
has jurisdiction to entertain original cases or actions predicated solely upon
the United States federal securities laws, (ii) the enforceability, in
original actions in Luxembourg courts, of liabilities predicated solely upon
the United States federal securities laws and (iii) the enforceability in
Luxembourg courts of judgments of United States courts obtained in actions
predicated upon the civil liability provisions of the United States federal
securities laws.
Judgments in Foreign Currencies
Under the Monetary Law of Mexico, an obligation in a currency other than
Mexican currency, which is payable in Mexico, may be satisfied in Mexican
currency at the rate of exchange in effect on the date payment occurs. Such
rate is currently determined by Banco de Mexico every business banking day in
Mexico and published the following business banking day in the Official
Gazette. Accordingly, in the event that proceedings are brought in Mexico
seeking to enforce in Mexico Jafra S.A.'s Obligations under the Notes or the
Jafra S.A. Guarantees, neither Jafra S.A. nor its subsidiaries obligated under
the Guarantees would be required to discharge such obligations in a currency
other than the Mexican peso and no separate cause of action exists in Mexico
for compensation for any shortfall. Upon the declaration of bankruptcy of
Jafra S.A. or any subsidiary thereof, Jafra S.A.'s Obligations under the Notes
or a Jafra S.A. subsidiary's obligations in respect of its Guarantee (i) would
be converted into Mexican pesos at the exchange rate prevailing at the time of
such declaration and payment would occur at the time claims of the creditors
of Jafra S.A. or such subsidiary are satisfied, (ii) would be dependent upon
the outcome of the bankruptcy proceedings and (iii) would not be adjusted to
take into account depreciation of the Mexican peso against the U.S. dollar
occurring after such declaration of bankruptcy.
Fraudulent Transfer Considerations
The incurrence of indebtedness by the Issuers and the Note Guarantors, such
as the Notes and the Guarantees, may be subject to review under federal, state
or foreign fraudulent transfer laws in the event either Issuer or any such
Note Guarantor is the subject of a bankruptcy filing or lawsuit commenced by
or on behalf of its unpaid creditors of such Issuer or Note Guarantor. Under
such laws, if a court in a lawsuit by a creditor or a representative of
creditors of such Issuer or Note Guarantor, such as a trustee in bankruptcy,
were to find that, at the time such Issuer or Note Guarantor incurred
indebtedness, including indebtedness under the Notes or the Guarantees, such
Issuer or Note Guarantor (i) was insolvent or rendered insolvent thereby, (ii)
was engaged in a business or transaction for which its remaining assets
constituted an unreasonably small amount of capital, (iii) intended to incur,
or believed that it would incur, debts beyond its ability to pay as they
matured, or (iv) intended to hinder, delay or defraud current or future
creditors and, in the case of clauses (i), (ii) and (iii), that such Issuer or
Note Guarantor did not receive reasonably equivalent value or fair
consideration for incurring such indebtedness, such court could avoid or
subordinate the amounts owing under the Notes or the Guarantees to presently
existing and future indebtedness of such Issuer or Note Guarantor and take
other actions detrimental to the holders of the Notes.
If a court were to find that an Issuer or Note Guarantor came within any of
clauses (i) through (iv) above, such Issuer or Note Guarantor, or its
creditors or the trustee in bankruptcy, could seek to avoid the grant of
23
<PAGE>
security interests to the lenders under the Senior Credit Agreement. This
would result in an event of default with respect to indebtedness incurred
under such agreement which, under the terms of such indebtedness (subject to
applicable law), would allow the lenders to terminate their commitments
thereunder and to accelerate repayment of such indebtedness.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, a
company would be considered insolvent for purposes of the foregoing if, at the
time it incurred the indebtedness, (i) the sum of such company's debts
including contingent liabilities is greater than all such company's property
at a fair valuation, (ii) the present fair saleable value of such company's
assets is less than the amount that will be required to pay its probable
liability on its existing debts and liabilities (including contingent
liabilities) as they become absolute and matured or (iii) the company incurred
obligations beyond its ability to pay as such obligations become due. There
can be no assurance as to what standards a court would use to determine
whether an Issuer or a Note Guarantor was solvent at the relevant time, or
whether, whatever standard were to be used, the Notes or Guarantees would not
be avoided or further subordinated on grounds other than those set forth
above. In rendering their opinions in connection with the initial borrowings,
counsel for the Issuers and the Note Guarantors and counsel for the Initial
Purchasers will not express any opinion as to the applicability of federal,
state or foreign fraudulent transfer and conveyance laws. Moreover, any
solvency analysis conducted in connection with the Acquisition would not be
binding on a court and there can be no assurance that a court would not
determine that an Issuer or a Note Guarantor was insolvent at the time of or
after giving effect to the Acquisition.
The Issuers and the Note Guarantors believe that at the time the
indebtedness constituting the Notes and the Guarantees is initially incurred
by the Issuers and the Note Guarantors, the Issuers and the Note Guarantors
(i) will be (a) neither insolvent nor rendered insolvent thereby, (b) in
possession of sufficient capital to run their respective businesses
effectively and (c) incurring debts and obligations within their respective
abilities to pay as the same mature or become due and (ii) will have
sufficient assets to satisfy any probable money judgment against them in any
pending action. In reaching the foregoing conclusions, the Issuer and the Note
Guarantors have relied upon their respective analyses of internal cash flow
projections and estimated values of their respective assets and liabilities.
There can be no assurance, however, that a court passing on such questions
would reach the same conclusions.
Forward-Looking Statements May Not Prove Accurate
When used in this Prospectus, the words "anticipate," "estimate," "project,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future developments and their potential effect upon the
Company, and actual results will vary. In addition, such statements are
subject to certain risks, uncertainties and assumptions, including but not
limited to the risks set forth above in this "Risk Factors" section. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. There can be no assurance that the future
developments will be in accordance with management's expectations or that the
effect of future developments will be those anticipated by management. See
"Management's Discussion and Analysis." The forward-looking statements
contained herein are made as of the date of this Prospectus and the Company
assumes no obligation to update the forward-looking statements or to update
the reasons why the actual results could differ from those in the forward-
looking statements.
Absence of Public Market; Restrictions on Resales
The New Notes are new securities for which there is presently no established
market and for which no public market may develop. The Existing Notes have not
been registered under the Securities Act and are subject to restrictions on
transferability and resale. Although the Initial Purchasers have informed the
Company that they intend to make a market in the Existing Notes, and if
issued, the New Notes, the Initial Purchasers are not obligated to do so and
any such market-making may be discontinued at any time without notice, at the
sole discretion of the Initial Purchasers. In addition, such market-making
activity may be limited during the pendency of the Exchange Offer or the
effectiveness of a Shelf Registration Statement (as defined) in lieu thereof.
24
<PAGE>
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Existing Notes or, if issued, the New Notes. If an active
market for the Existing Notes or, if issued, the New Notes, fails to develop
or be sustained, the trading price of the Existing Notes or New Notes could be
materially adversely affected. The Existing Notes are eligible for trading
through the PORTAL market. The Company does not intend to apply for listing of
the New Notes on any securities exchange or for quotation of the New Notes
through the National Association of Securities Dealers Automated Quotation
System. See "Plan of Distribution."
Consequences of Failure to Exchange and Requirements for Transfer of New Notes
To the extent that Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for the remaining untendered or tendered but not
accepted Existing Notes could be adversely affected. Because the Company
anticipates that most holders of the Existing Notes will elect to exchange
such Existing Notes for New Notes due to the absence of restrictions on the
resale of New Notes under the Securities Act, the Company anticipates that the
liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market or by declines in the market for
similar securities. Such declines may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects
for, the Company.
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register Existing
Notes under the Securities Act. Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Existing Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distributions of such New
Notes. However, the Commission has not considered the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in,
a distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If any holder is an affiliate of
the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. For a period of 90 days after the Expiration Date, the Company
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. See "The Exchange Offer--Consequences of
Exchanging Old Notes."
25
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the New
Notes pursuant to the Exchange Offer. The $202.5 million purchase price of the
Acquisition and approximately $24 million of transaction-related fees and
expenses were funded with (i) the gross proceeds of $100 million of the
Offering; (ii) an equity investment of approximately $82.9 million by CD&R
Fund V certain directors, certain members of management and other persons; and
(iii) the borrowing of $25 million under the Term Loan Facility and $18.6
million under the Revolving Credit Facility. For further discussion of the
sources and uses of funds related to the Transactions, see "The Transactions."
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the combined financial statements of the Company and related
notes thereto, all included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of
September 30, 1998
------------------
(in millions)
<S> <C>
Debt:
Revolving Credit Facility.................................. $ 20.7(b)
Term Loan Facility......................................... 25.0
11 3/4% Senior Subordinated Notes Due 2008................. 100.0
Other...................................................... 0.2
------
Total debt............................................... 145.9
Total common stockholders' equity............................ 76.7(a)
------
Total capitalization..................................... $222.6
======
</TABLE>
- --------
(a) $78.9 million of equity was contributed to Parent in cash on or prior to
the Closing. The decrease of $2.2 million is due to a decrease of
approximately $6.2 million in stockholders' equity attributable to
operations for the five months ending September 30, 1998, which was
partially offset by an equity contribution on September 30, 1998 of
approximately $4.0 million to Parent in cash by certain members of
management, certain directors and other persons in a transaction exempt
from the registration requirements of the Securities Act. See "Management"
and "Ownership of Capital Stock."
(b) Includes $2.1 million of borrowings to support working capital needs of
the Company since the Closing of the Acquisition.
27
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Combined Statements of Operations of the
Company are based on the historical financial statements of the Company
included elsewhere in this Prospectus, adjusted to give effect to the
following: (i) the Acquisition of the worldwide Jafra Business from Gillette
for $202.5 million in cash (including the purchase price of $200 million and a
purchase price adjustment of $2.5 million discussed below) by Parent and its
subsidiaries; (ii) the receipt of $100 million in proceeds from the offering
of the Notes and the initial borrowing of $25 million under the Term Loan
Facility and $18.6 million under the Revolving Credit Facility; and (iii) the
payment of approximately $7.5 million in fees and expenses related to the
Acquisition and $16.5 million in fees and expenses related to the Financings.
See "The Transactions."
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 and the Unaudited Combined Pro Forma Statement of Operations
for the nine months ended September 30, 1998, give effect to the Transactions
as if the Transactions had occurred as of January 1, 1997. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The Unaudited Pro Forma Statements of
Operations do not purport to represent what the Company's results of
operations would actually have been had the Transactions in fact occurred as
of such dates or to project the Company's results of operations for any future
period. The Unaudited Pro Forma Statements of Operations should be read in
conjunction with the historical combined financial statements of the Company
and the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
The Acquisition was accounted for as a purchase. Under purchase accounting,
the total purchase cost and fair value of liabilities assumed will be
allocated to the assets of the Company based upon their respective fair values
as of the Closing based on valuations and other studies that have not yet been
finalized. A preliminary allocation of the purchase cost has been made to
major categories of assets and liabilities based on Company estimates. The
actual allocation of purchase cost and the resulting effect on income from
operations may differ significantly from the pro forma amounts included
herein.
On November 3, 1998, Parent and certain of its subsidiaries paid a purchase
price adjustment of approximately $2.5 million (net of a receivable from
Gillette of $5.1 million) to Gillette and certain of its subsidiaries. The
Unaudited Pro Forma Combined Statement of Operations has been revised to
reflect the adjusted price paid to Gillette of $202.5 million.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------
Pro Forma
Historical Adjustments Pro Forma(a)
---------- ----------- ------------
(in millions)
<S> <C> <C> <C>
Net sales................................. $229.5 $229.5
Cost of sales............................. 59.1 59.1
------ ------
Gross profit.............................. 170.4 170.4
Selling, general and administrative
expenses................................. 149.4 155.0
Depreciation and amortization........... $ 3.0 (c)
CD&R advisory fee....................... 0.5 (d)
Executive compensation restructuring.... (0.9)(e)
Insurance coverage...................... 0.3 (f)
Compensation expense.................... 2.7 (g)
------ ------ ------
Income (loss) from operations............. 21.0 (5.6) 15.4
------ ------ ------
Interest income (expense), net............ 0.3 (18.0)(h) (17.7)
Exchange gain............................. 0.3 0.3
Other expense, net........................ (1.3) (1.3)
------ ------ ------
Income (loss) before income taxes......... 20.3 (23.6) (3.3)
Income tax expense (benefit).............. 4.8 (5.6)(i) (0.8)
------ ------ ------
Net income (loss)(j)(k)................... $ 15.5 $(18.0) $ (2.5)
====== ====== ======
Other data:
Ratio of earnings to fixed charges(l)..... 12.9 --
====== ======
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Pro Forma
Predecessor Successor Nine Months
Four Months Five Months Pro Ended
Ended Ended Forma September
April 30, 1998 September 30, 1998 Adjustments 30, 1998(a)
-------------- ------------------ ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
Net Sales............... $ 77.3 $ 98.6 $ 175.9
Cost of Sales........... 20.3 29.5(b) 49.8
---------- --------- ----- -------
Gross profit.......... 57.0 69.1 126.1
Selling, general and
administrative
expenses............... 51.6 65.7 119.2
Depreciation and
amortization......... $ 1.0 (c)
CD&R Advisory fee..... 0.2 (d)
Executive compensation
restructuring........ (0.3)(e)
Insurance coverage.... 0.1 (f)
Compensation expense.. 0.9 (g)
---------- --------- ----- -------
Income (loss) from
operations............. 5.4 3.4 (1.9) 6.9
---------- --------- ----- -------
Interest income
(expense), net......... 0.1 (7.2) (5.9)(h) (13.0)
Exchange gain (loss).... 1.4 (1.3) 0.1
Other income (expense),
net.................... 0.1 (0.1) --
---------- --------- ----- -------
Income (loss) before
taxes.................. 7.0 (5.2) (7.8) (6.0)
Income tax expense
(benefit).............. 2.9 .8 (3.2)(i) 0.5
---------- --------- ----- -------
Net Income (loss)(j)(k). $ 4.1 $ (6.0) $(4.6) $ (6.5)
========== ========= ===== =======
<CAPTION>
Other data:
<S> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(l)....... 18.5 $ -- --
========== ========= =======
</TABLE>
30
<PAGE>
Notes to Unaudited Pro Forma Combined Statement of Operations
(in millions)
(a) The Acquisition was accounted for as a purchase. The purchase price for
the Jafra Business of approximately $210.0 includes $202.5 in cash and an
estimated $7.5 of direct costs. The $202.5 cash purchase price includes
$187.1 paid by the Company directly to Gillette in cash on the closing date,
net of cash of $2.4 received as part of the Acquisition, and $12.9 of
withholding taxes paid by the Company on behalf of Gillette subsequent to
the closing date of the Acquisition. In addition, on November 3, 1998, the
Company paid Gillette an additional $2.5 million (net of a receivable from
Gillette of $5.1 million) as a final adjustment of the purchase price. The
Company has also revised its estimate of direct acquisition costs to $7.5
million. Such costs are being accounted for as an increase to goodwill, and
have been reflected in the preliminary purchase price allocation below.
Accordingly, the purchase price has been allocated to the assets and
liabilities acquired based upon estimates of their respective fair values at
the date of Acquisition based on valuations and other studies that have not
yet been finalized. A preliminary allocation of the purchase price has been
made to major categories of assets and liabilities based on Company
estimates. The actual allocation of purchase cost and the resulting effect
on income from operations may differ significantly from the preliminary
amounts included herein. Although the final allocation has not yet been
determined, the following sets forth certain preliminary allocations:
<TABLE>
<S> <C>
Net tangible assets acquired........................................... $ 74.8
Allocation of excess purchase price:
Property, plant and equipment........................................ 18.4
Deferred income tax liability........................................ (0.6)
Accrual of restructuring/rationalization costs....................... (4.0)
Inventory............................................................ (1.5)
Other assets......................................................... (0.4)
Trademarks........................................................... 53.8
Goodwill............................................................. 69.5
------
Total.............................................................. $210.0
======
</TABLE>
The preliminary allocation of purchase price includes a $1.5 net decrease in
the fair value of inventory. This amount includes a $4.0 reduction in the
value of certain finished goods and raw materials which will be discarded
within 12 months of the Acquisition, net of a $2.5 increase in the value of
certain finished goods inventory which is expected to be sold within five
months following the Acquisition and, therefore, will result in a charge to
cost of sales. The $4.0 of inventory to be discarded reflects a change in
management philosophy. Predecessor management believed that such inventory
could be sold at substantially reduced margins. Current management believes
that sale of this inventory would adversely affect sales of higher margin
products, resulting in only a nominal increase in overall sales and a
decrease in gross profit. In conjunction with the Acquisition, the Company
recorded a $4.0 accrual for restructuring and rationalization costs. The
Company is currently planning the closure of certain distribution facilities
and related termination of certain employees. The following is a preliminary
schedule of the planned restructuring activities and related costs:
<TABLE>
<CAPTION>
Facility Severance Total
Costs Costs Costs
-------- --------- -----
<S> <C> <C> <C>
Costs expected to be incurred prior to December
31, 1998:........................................ $0.1 $1.2 $1.3
Costs expected to be incurred between January 1,
1999
and April 30, 1999:.............................. 1.0 1.7 2.7
---- ---- ----
$1.1 $2.9 $4.0
==== ==== ====
</TABLE>
The Company expects to complete these restructuring activities by April 30,
1999. No amounts were charged against this accrual through September 30,
1998 and the amount of the accrual has not been adjusted subsequent to the
Closing of the Acquisition.
(b) Cost of goods sold for the five months ended September 30, 1998 includes a
charge of $2.5 attributable to the write-up of finished goods as discussed
in note (a) above.
(c) The application of purchase accounting is expected to result in an
increase in depreciation and amortization of $3.0 annually. The adjustments
for estimated pro forma depreciation and amortization are based on their
estimated fair values. Property, plant and equipment is expected to be
depreciated over estimated useful lives
31
<PAGE>
ranging from 3 to 10 years for machinery and equipment and 40 years for
buildings and improvements. Other intangible assets and goodwill are
expected to be amortized over their estimated useful lives, not to exceed 40
years. For pro forma purposes, a 40 year life has been used for other
intangible assets and goodwill, as the assets are believed to have
indefinite useful lives. When determining the useful lives for goodwill
generated from the Acquisition and trademarks, the Company considered many
factors, including: (i) the age of the business being acquired, (ii) the
length of time the Company's competitors have been operating, (iii) the
competitive environment in which the business operates including related
consumer recognition and market share of the Company's products sold, (iv)
the Company's diverse customer base and the lack of dependency on any single
customer, (v) the nature of products sold and the lack of dependency on any
particular product, and (vi) the Company's ability to generate profit and
future cash flows. Based on the assessment of these factors, the Company
believes that it will receive future economic benefits from the acquisition
for an indefinite period, but in all cases in excess of the maximum 40 year
life allowed by APB 17. As a result, the Company has assigned a 40 year
useful life to the trademarks and the goodwill being generated from the
acquisition. The Company's balance sheet immediately following the
Acquisition includes an amount designated as goodwill that represents 26% of
assets and 88% of stockholders' equity. Goodwill arises when an acquirer
pays more for a business than the fair value of the tangible and separately
measurable intangible net assets. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
useful lives of the intangibles.
(d) Pursuant to a Consulting Agreement entered into as a result of the
Acquisition, CD&R will receive a fee for management consulting, monitoring
and financial advisory services provided to the Company. The fee will
initially be $0.5 per annum. CD&R manages CD&R Fund V, which is the
Company's largest stockholder. See "Certain Relationships and Related
Transactions."
(e) In connection with the Acquisition, the Company terminated certain
Gillette executive compensation plans of the predecessor including the
Gillette ESOP plan. The Company replaced these plans with stock options that
will qualify for fixed plan accounting under APB No. 25. As a result, the
estimated annual savings of $0.9 has been reflected for the year ended
December 31, 1997 and $0.3 for the nine months ended September 30, 1998,
which represents the savings during the predecessor operations ended April
30, 1998. The savings reflected in this adjustment are supported by executed
contracts.
(f) The predecessor participated in the Gillette insurance policies and
coverages providing certain economies of scale. As a result of the
Acquisition, the Company has had to obtain its own policies and separate
coverages, which will result in an estimated increase of $0.3 annually.
Therefore, a pro forma adjustment for the year ended December 31, 1997 of
$0.3 has been made to reflect this increase in expense. Additionally, an
adjustment of $0.1 has been reflected for the nine months ended September
30, 1998, which reflects the estimated increase for the four month
predecessor operations ended April 30, 1998. The additional expenses
reflected in this adjustment are supported by executed contracts.
(g) In connection with the Acquisition, the Company has had to replace certain
Gillette and other executives and hire certain senior management personnel
resulting in an annual incremental increase of approximately $2.7 in
additional compensation expense. As a result, a pro forma adjustment of $2.7
has been made to the year ended December 31, 1997 and a pro forma adjustment
of $0.9 for the nine months ended September 30, 1998, which represents the
predecessor four month operations, ended April 30, 1998. The additional
expenses reflected in this adjustment are supported by executed contracts.
(h) The pro forma adjustments to interest expense are based on the amounts
borrowed and the rates in effect as of the Closing:
<TABLE>
<CAPTION>
Nine months ended
Year ended September 30,
December 31, 1997 1998
----------------- -----------------
<S> <C> <C>
Revolving Credit Facility--$18.6 at
8.5%(1)............................... $ 1.6 $0.5
Term Loan Facility--$25.0 at 8.5%(1)... 2.2 0.7
Senior Subordinated Notes Offering--
$100.0 at 11.75%...................... 12.0 4.0
Estimated amortization of debt issuance
costs................................. 1.9 0.6(2)
----- ----
Pro forma interest expense............. 17.7 5.8
Elimination of historical interest
income, net .......................... 0.3 0.1
----- ----
Pro forma adjustment to interest ex-
pense, net............................ $18.0 $5.9(3)
===== ====
</TABLE>
32
<PAGE>
(1) The borrowings bear interest at an annual rate of LIBOR plus a margin
not to exceed 2.625% or an alternate base rate (the higher of the prime
rate and the federal funds rate plus 1%, plus an applicable margin not
to exceed 1.625%). 8.5% represents a reasonable approximation of the
interest rate in effect at the time the borrowings were drawn.
(2) The Company incurred approximately $16.5 of fees and expenses related to
the Senior Subordinated Notes Offering, the Revolving Credit Facility
and the Term Loan facility. Such costs are being amortized on a straight
line basis, which approximates the interest method, over the term of the
related indebtedness (10 years for the Senior Subordinated Notes and six
years for both the Revolving Credit Facility and the Term Loan
Facility).
(3) Amount represents the adjustment to interest expense related to the four
months ended April 30, 1998 of the predecessor company. The five months
ended September 30, 1998 of the successor reflects the capitalization
resulting from the Transactions. Accordingly, interest expense for such
period has not been adjusted.
The pro forma adjustments to interest expense include the effects of
Mexican withholding tax (currently expected to be 4.9%) on Jafra S.A.'s
obligations.
Each 0.125% change in interest rates in respect of the Revolving Credit
Facility would increase or decrease pro forma interest expense by less
than $0.1 for both the year ended December 31, 1997 and the nine months
ended September 30, 1998.
(i) The tax effects of the pro forma adjustments to income (loss) before
income taxes is based on the applicable statutory tax rates in the relevant
jurisdictions and assumes that valuation reserves will be required in
jurisdictions where the Company has net operating loss carryforwards.
The pro forma adjustments to income tax expense includes the estimated tax
effect of inflation and exchange losses relating to Jafra S.A.'s
Obligations in Mexico.
Undistributed earnings of the Company's foreign subsidiaries are
considered to be indefinitely reinvested and, accordingly, no provision
for U.S. federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries.
(j) EBITDA is defined as net income before net interest expense, income tax
expense, depreciation and amortization. The Company believes that EBITDA
provides useful information regarding the Company's ability to service debt
but should not be considered in isolation or as a substitute for the
combined statement of operations or cash flow data prepared in accordance
with generally accepted accounting principles and included elsewhere in this
Prospectus or as a measure of the Company's operating performance,
profitability or liquidity. While EBITDA is frequently used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other companies
due to differences and methods of calculation.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------
Pro Forma Pro
Historical Adjustments Forma(a)
---------- ----------- --------
<S> <C> <C> <C>
EBITDA..................................... $24.3 $(2.6) $21.7
===== ===== =====
Adjusted EBITDA............................ $30.4(k)
=====
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Four Months Successor Pro Forma
Ended Five Months Ended Pro Forma Nine Months Ended
April 30, 1998 September 30, 1998 Adjustments September 30, 1998(a)
-------------- ------------------ ----------- --------------------
<S> <C> <C> <C> <C>
EBITDA.................. $8.3 $5.0 $(0.9) $12.4
==== ==== ===== =====
Adjusted EBITDA......... $18.0(k)
=====
</TABLE>
The pro forma adjustments to historical EBITDA for the year ended December
31, 1997 consist of the sum of adjustments (d), (e), (f) and (g). The pro
forma adjustments to historical EBITDA for the nine months ended September 30,
1997 consist of the sum of adjustments (d), (e), (f) and (g).
33
<PAGE>
(k) Pro forma adjusted EBITDA reflects (i) the elimination of certain non-
recurring items that affected 1997 historical amounts and (ii) certain
changes in the cost structure of the Company that are expected to occur
following the consummation of the Transactions, as set forth below:
<TABLE>
<CAPTION>
Nine months ended
Year ended September 30,
December 31, 1997 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Historical EBITDA:
Predecessor...................... $24.4 $8.3
Successor........................ 5.0
Pro forma adjustments.............. (2.6) (0.9)
Non-recurring items:
Reorganization expenses(1)....... 3.5 --
Gain from legal settlement(2).... (2.3) --
Gain on sale of divested facili-
ty(3)........................... (0.8) --
--------
Total non-recurring items........ 0.4 --
--------- ---------
Cost savings:
Adjustment of existing employee
benefit plans(4)................ 1.4 0.5
Restructuring/rationalization(5). 5.7 4.3
Elimination of expatriate bene-
fits(6)......................... 1.1 0.8
--------
Total cost savings(7)............ 8.2 5.6
--------- ---------
Pro forma adjusted EBITDA........ $ 30.4 $ 18.0
========= =========
</TABLE>
--------
(1) In 1997, the Company incurred approximately $3.5 of cash severance costs
relating to the realignment of certain foreign operations. The Company
believes that such realignment has been completed and that such
severance costs are non-recurring.
(2) In 1997, the Company recorded a gain of approximately $2.3 relating to a
cash recovery under a legal settlement brought by the Company against a
software vendor.
(3) In 1997, the Company recorded a cash gain of approximately $0.8 relating
to the sale of a facility that had been previously written-off.
(4) The Company replaced certain U.S. employee benefit plans on May 1, 1998,
previously provided by Gillette, including defined benefit pension,
retirement savings, retiree medical, and health and welfare plans that
have resulted in an estimated annual savings of $1.4. As a result, the
pro forma adjusted EBITDA has been adjusted by $1.4 for the year ended
December 31, 1997 and for the nine months ended September 30, 1998, an
adjustment of $0.5 has been made to reflect the savings for the four
month period ended April 30, 1998 of the predecessor.
(5) The Company plans to rationalize certain distribution, manufacturing and
administrative functions which the Company believes will reduce annual
expenses by $5.7. As a result, the pro forma adjusted EBITDA has been
adjusted by $5.7 for the year ended December 31, 1997 to reflect the
estimated annual cost savings. The Company did not begin to rationalize
these functions until October 1998 and as a result has adjusted the nine
months ended September 30, 1998 by $4.3, which represents the pro rata
portion of the estimated annual savings. In addition, estimated non-
recurring charges of approximately $4.0 corresponding to the
restructuring/rationalization which were accrued as part of the purchase
price allocation have not been reflected in the Unaudited Pro Forma
Combined Statement of Operations.
(6) Gillette utilized expatriate executives in various management positions
throughout the organization. The Company, however, plans to convert to
local status or replace certain individuals currently employed on an
expatriate basis under the Gillette organizational structure of the
predecessor. As a result, the Company estimates that the annual cost
savings compared to Gillette's expatriate policy will be approximately
$1.1. The pro forma adjusted EBITDA has been adjusted by $1.1 for the
year ended December 31, 1997 and by $0.8 for the nine month period ended
September 30, 1998 to reflect such anticipated cost savings.
(7) The anticipated cost savings included in pro forma adjusted EBITDA are
based on estimates and assumptions made by the Company that are
inherently uncertain, although considered reasonable by the Company, and
are subject to significant business, economic and competitive
uncertainties and contingencies, all of which are difficult to predict
and many of which are beyond the control of the Company. As a result,
there can be no assurance that such savings will be achieved.
34
<PAGE>
(l) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization of
deferred financing fees, and one-third of rental expense on operating leases
representing that portion of rental expense deemed to be attributable to
interest. On a pro forma basis, earnings before income taxes and fixed
charges were insufficient to cover fixed charges by $3.3 and $6.0 for the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. For the five months ended September 30, 1998, earnings before
income taxes and fixed charges were insufficient to cover fixed charges by
$5.2. The calculation of pro forma earnings to fixed charges includes non-
cash depreciation and amortization expense of $7.4 and $5.4 and non-cash
amortization expense of deferred financing costs of $1.9 and $1.4 for the
year ended December 31, 1997 and the nine months ended September 30, 1998
respectively.
35
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA
The following table sets forth the combined financial data with respect to
the Company for the periods ended and as of the dates indicated. The historical
combined statement of operations data for the years ended December 31, 1995,
1996 and 1997 and the historical combined balance sheet data as of December 31,
1996 and 1997 are derived from the audited combined financial statements. The
historical combined statements of operations data for the nine months ended
September 30, 1997, four months ended April 30, 1998 and the five months ended
September 30, 1998 and the historical combined balance sheet data as of
September 30, 1997, April 30, 1998 and September 30, 1998 are derived from the
unaudited combined financial statements of the Company, both of which are
included elsewhere in this Prospectus. This information should be read in
conjunction with such combined financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
historical combined statement of operations data for the years ended December
31, 1993 and 1994 and the historical combined balance sheet data as of December
31, 1993, 1994 and 1995 are derived from the unaudited combined financial
statements of the Company that are not included in this Prospectus. The data
presented for the nine months ended September 30, 1997, for the four months
ended April 30, 1998 and for the five months ended September 30, 1998 are
derived from the unaudited combined financial statements included elsewhere in
this Prospectus and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary to present fairly the data
for such periods. Prior to 1998, accounts of subsidiaries and operations
outside the United States are included in the historical combined financial
data on the basis of fiscal years generally ending November 30.
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------------
Nine Months Four Months Five Months
Year Ended December 31, Ended Ended Ended
---------------------------------------- September 30, April 30, September 30,
1993 1994 1995 1996 1997 1997 1998 1998
------ ------ ------ ------ ------ ------------- ----------- -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales.............. $258.1 $263.9 $218.4(a) $224.5 $229.5 $162.6 $ 77.3 $ 98.6
Cost of sales.......... 55.7 59.8 54.3 58.2 59.1 41.1 20.3 29.5
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 202.4 204.1 164.1 166.3 170.4 121.5 57.0 69.1
Selling, general and
administrative
expenses (b).......... 155.3 172.3 154.0 155.8 149.4 107.1 51.6 65.7
------ ------ ------ ------ ------ ------ ------ ------
Income from operations. 47.1 31.8 10.1 10.5 21.0 14.4 5.4 3.4
Other income (expense)
Exchange gain (loss)... (0.5) 0.1 25.5(c) -- 0.3 (0.5) 1.4 (1.3)
Interest income (ex-
pense), net........... 4.9 0.5 4.3 0.9 0.3 0.8 0.1 (7.2)
Other expense, net..... (1.0) (1.0) (1.0) (1.4) (1.3) (0.1) 0.1 (0.1)
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes................. 50.5 31.4 38.9 10.0 20.3 14.6 7.0 (5.2)
Income taxes........... 14.4 13.4 6.1 2.6 4.8 3.4 2.9 (0.8)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 36.1 $ 18.0 $ 32.8 $ 7.4 $ 15.5 $ 11.2 $ 4.1 $ (6.0)
====== ====== ====== ====== ====== ====== ====== ======
Balance Sheet Data (at
end of period):
Cash and cash equiva-
lents................. $ 4.1 $ 6.2 $ 7.5 $ 8.7 $ 10.2 $ 6.3 $ 1.9 $ 10.4
Total working capital
(d)................... 85.4 75.1 49.4 24.4 31.1 34.3 41.0 34.7
Property, plant and
equipment, net........ 26.1 31.8 43.7 41.8 43.7 42.5 39.6 55.8
Total assets........... 203.1 217.4 203.1 164.5 175.2 196.5 141.9 295.0
Total debt............. -- -- -- -- 8.5 -- -- 145.9
Stockholders' equity... 111.7 120.8 108.7 78.6 77.3 87.7 90.1 76.7
Other Financial Data:
EBITDA (e)............. $ 48.6 $ 34.1 $ 37.4 $ 12.4 $ 24.4 $ 16.6 $ 8.3 $ 5.0
Net cash provided by
(used in) operating
activities............ 35.8 28.3 27.5 2.8 26.7 18.0 (8.0) (0.4)
Net cash provided by
(used in) investing
activities............ (6.2) (8.5) (13.9) (4.5) (5.8) (3.1) 2.6 (204.7)
Net cash provided by
(used in) financing
activities............ (33.6) (16.5) (13.4) 5.0 (19.0) (17.1) (8.8) 216.8
Ratio of earnings to
fixed charges (f)..... 25.0x 9.3x 22.6x 5.8x 12.9x 17.2x 18.5x -- (f)
Depreciation and amor-
tization.............. 3.0 3.2 2.8 3.3 4.4 2.8 1.4 3.0
Capital expenditures... 6.1 10.7 20.3 10.3 8.9 3.7 3.2 4.6
</TABLE>
36
<PAGE>
- --------
(a) In 1995, net sales in Mexico declined $59 or 43%, primarily as a result of
the December 1994 devaluation of the Mexican peso and related economic
weakness in Mexico. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(b) Selling, general and administrative expenses include the following non-
recurring items: for 1995, net reorganization charges of $9.6; for 1996, a
$5.4 non-cash charge for the write-off of certain computer systems and
related costs, and net reorganization charges of $0.7; and for 1997, net
reorganization charges of $3.5 that were partially offset by a cash
recovery of $2.3 relating to the $5.4 charge taken in 1996, resulting from
the settlement of a legal action brought by the Company against a computer
systems contractor, and a gain of $0.8 relating to the sale of a facility
that had previously been written-off.
(c) Other income (expense), net for 1995 includes a $25.5 foreign exchange
gain in Jafra S.A. resulting from having had U.S. dollar denominated
intercompany receivables from affiliates at the time of the December 1994
peso devaluation.
(d) Total working capital is defined as current assets less current
liabilities excluding third party short term debt with third parties.
(e) EBITDA is defined as net income before net interest expense, income tax
expense, depreciation and amortization. EBITDA for 1995 includes a $25.5
foreign exchange gain in Jafra S.A. resulting from having had U.S. dollar
denominated intercompany receivables from affiliates at the time of the
December 1994 peso devaluation, which was partially offset by $9.6 of non-
recurring charges relating to the reorganization and restructuring of
certain foreign operations. EBITDA for 1996 includes a non-recurring
charge in Jafra S.A. of $5.4 relating to the write-off of certain computer
systems and related costs, and net reorganization charges of $0.7. EBITDA
for 1997 includes $3.5 of cash severance costs relating to realignment of
certain foreign operations, which was partially offset by a cash gain of
$2.3 relating to a recovery under a legal settlement and a $0.8 cash gain
relating to the sale of a facility that was previously written-off. EBITDA
for the nine months ended September 30, 1997 includes $2.3 of cash
severance costs relating to realignment of certain foreign operations,
which was offset by a cash gain of $2.3 relating to a recovery under a
legal settlement. The Company believes that EBITDA provides useful
information regarding the Company's ability to service debt but should not
be considered in isolation or as a substitute for the combined statement
of operations or cash flow data prepared in accordance with the generally
accepted accounting principles and included elsewhere in this Prospectus
or as a measure of the Company's operating performance, profitability or
liquidity. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
differences and methods of calculation.
(f) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization
of deferred financing fees, and one-third of rental expense on operating
leases representing that portion of rental expense deemed to be
attributable to interest. For the five months ended September 30, 1998,
earnings before income taxes and fixed charges were insufficient to cover
fixed charges by $5.2.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements concerning the Company's
operations, economic performance and financial condition, all of which involve
risks and uncertainties. Forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. The Company's actual results may differ
significantly from management's expectations and there can be no assurance
that the effect of future developments on the Company will be those
anticipated by management. There are certain factors that might cause such a
difference. These factors include, but are not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, sales representative
turnover, commercialization and technological difficulties, capacity and
supply constraints or difficulties, availability of capital resources, general
business and economic conditions, the effect of the Company's accounting
policies, the impact of laws in various jurisdictions that may restrict direct
selling activities and other risks described herein. See "Risk Factors."
General
The following discussion and analysis of the results of operations,
financial condition and liquidity of the Company should be read in conjunction
with the combined financial statements of the Company and the "Unaudited Pro
Forma Combined Financial Statements" and the related notes thereto included
elsewhere in this Prospectus.
Overview
Jafra is a multi-level direct seller of premium skin and body care products,
color cosmetics, fragrances, nutritional supplements and other personal care
products. The Company sells its products to independent, self-employed sales
representatives. The Company has been in operation since 1956 and was
purchased by Gillette in 1973. Jafra entered Latin America in 1977 and Europe
in 1978. Since 1973, the Company's sales have grown at a compound annual
growth rate of 18.5%. Parent acquired the Jafra business from Gillette on
April 30, 1998.
The Company's revenues consist of sales of products and non-resale
materials, such as product brochures and certain sales aids. Jafra's sales
representatives earn income on the difference between the wholesale prices
paid to Jafra and the retail prices charged to consumers and commissions on
sales made by other sales representatives whom they have recruited. Jafra
commissions are included in selling, general and administrative ("SG&A")
expenses.
Although Jafra currently has operations in ten countries and
distributorships in a number of other countries, most of the Company's 1997
sales were derived from the United States, Mexico and Germany. Sales in Mexico
represented 46.8% and 46.5% of total sales for the five and nine months ended
September 30, 1998, respectively and 42.5% of total sales in 1997, an increase
from 34.9% of total sales in 1995. Sales in the United States over the same
period have remained flat at approximately 31% of total sales, and sales in
Germany were 12.5% of total sales in 1997, as compared to 17.2% in 1995.
The two key revenue drivers in the direct selling industry are the number of
sales representatives and the amount of sales, or productivity, per sales
representative. As of September 30, 1998, Jafra had 237,800 sales
representatives worldwide, an increase of 7.7% over December 31, 1997. Average
revenues per sales representative were approximately $1,023 on an annualized
basis for the nine month period ended September 30, 1998, which excludes the
seasonal Christmas period. At the end of 1997, Jafra had 220,800 sales
representatives worldwide, with average revenues per sales representative
being approximately $1,070 for all of 1997. The Company's worldwide sales
representative base increased 1.9% to 220,800 at the end of 1997 from 216,700
at the end of 1995. Sales representative productivity increased 6.2% over this
period, to $1,070 in 1997 from $1,008 in 1995. Jafra's sales representatives
have been affiliated with the Company for an average of four years, which the
Company believes is among the highest average tenure in the direct selling
industry.
38
<PAGE>
Jafra believes that the size and productivity of its sales representative
base are influenced by numerous factors, including: (i) new product
introductions and product line extensions, (ii) sales incentives such as
discounts on products, (iii) non-monetary incentives such as recognition, (iv)
product price increases, (v) leadership provided by senior management, and
(vi) the general economic condition of the countries in which it conducts
business. The Company offers lower prices on bundled products and volume
discounts, which has historically led to increased sales. New product
introductions, product line extensions and incentives such as prizes and trips
to national conventions have also served to increase productivity and sales.
The Company's results of operations are impacted by the timing of its
promotional activities. Products introduced in the prior five years accounted
for 70%, 58% and 54% of total sales for the years 1997, 1996 and 1995,
respectively. Jafra prices its products slightly below prestige level products
that are sold in department stores. Compared to its direct selling
competitors, this generally places prices on Jafra products on par with Mary
Kay product prices, but higher than Avon's prices.
Sales outside of the United States aggregated 69%, 69%, 68% and 69% of the
Company's total net sales for the nine months ended September 30, 1998, and
the fiscal years 1997, 1996 and 1995, respectively. Accordingly, the Company
has experienced and continues to be exposed to foreign exchange risk. Although
the Company historically has not entered into foreign currency hedging
contracts to mitigate this risk, it may do so in the future. Foreign currency
fluctuations can also impact operating results. During 1998, the stronger U.S.
dollar negatively affected revenues and operating income. Had exchange rates
remained constant for the nine months ended September 30, 1998, revenue would
have been approximately $18 million higher than reported for the nine months
ended September 30, 1998.
The Company derived approximately 46.8% and 46.5% of its net sales for the
five and nine months ended September 30, 1998, respectively, and 42.5% for the
year ended December 31, 1997 from Mexico, substantially all of which were
denominated in Mexican pesos. In 1997, approximately 50% of the Company's
total production was manufactured in Mexico, and approximately 65% of Jafra
S.A.'s total costs were denominated in pesos, which partially mitigates
Mexican peso exchange risk. The Company is seeking other ways, including
increased local sourcing of raw materials, to reduce the dollar cost component
of its products manufactured in Mexico. In 1995, the Company's sales in Mexico
decreased by $59.0 million primarily as a result of the December 1994
devaluation of the Mexican peso and the corresponding economic weakness in
Mexico. The impact of the decrease in sales in 1995 on the results of
operations was partially offset by an exchange gain of $25.5 million in
Mexico, which was primarily attributable to U.S. dollar denominated receivable
balances with affiliates. As a result of the Transactions, Jafra S.A. has
significant U.S. dollar denominated indebtedness. There can be no assurance
that future declines in the U.S. dollar-Mexican peso exchange rate will not
have a material adverse affect on the Company's results of operations and
financial condition.
SG&A expenses make up the largest portion of Jafra's costs. SG&A costs
consist primarily of overhead expenses related to administration,
manufacturing, distribution and marketing. The Company believes that a
substantial portion of SG&A costs are fixed. The largest component of variable
costs consist of sales commissions (paid to sales representative managers on
the wholesale value of their sales and the sales made by their recruits) which
were $26.8 million, or 15.3% of sales for the nine months ended September 30,
1998 and $35.4 million, or 15.4% of sales for the year ended December 31,
1997.
Recent Developments
On November 3, 1998, Parent and certain of its subsidiaries paid a purchase
price adjustment of approximately $2.5 million (net of a receivable from
Gillette of $5.1 million) to Gillette and certain of its subsidiaries.
39
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
------------------------------------------- -----------------------------------
1995 1996 1997 1997 1998(1)
------------- ------------- ------------- ---------------- ------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $218.4 100.0% $224.5 100.0% $229.5 100.0% $ 162.6 100.0% $ 175.9 100.0%
Cost of sales........................... 54.3 24.9 58.2 25.9 59.1 25.8 41.1 25.3 49.8 28.3
------ ----- ------ ----- ------ ----- ------- ------ --------- ------
Gross profit............................ 164.1 75.1 166.3 74.1 170.4 74.2 121.5 74.7 126.1 71.7
Selling, general & administrative expenses. 154.0 70.5 155.8 69.4 149.4 65.1 107.1 65.9 117.3 66.7
------ ----- ------ ----- ------ ----- ------- ------ --------- ------
Income from operations.................. 10.1 4.6 10.5 4.7 21.0 9.1 14.4 8.8 8.8 5.0
Exchange gain........................... 25.5 11.7 -- -- 0.3 0.1 (0.5) (0.3) 0.1 0.1
Interest income (expense), net.......... 4.3 2.0 0.9 0.4 0.3 0.1 0.8 0.5 (7.1) (4.0)
Other income (expense), net............. (1.0) (0.5) (1.4) (0.6) (1.3) (0.5) (0.1) -- -- --
------ ----- ------ ----- ------ ----- ------- ------ --------- ------
Income before income taxes.............. 38.9 17.8 10.0 4.5 20.3 8.8 14.6 9.0 1.8 1.0
Income taxes............................ 6.1 2.8 2.6 1.2 4.8 2.1 3.4 2.1 3.8 2.1
------ ----- ------ ----- ------ ----- ------- ------ --------- ------
Net income (loss)....................... $ 32.8 15.0% $ 7.4 3.3% $ 15.5 6.7% $ 11.2 6.9% $ (2.0) (1.1%)
====== ===== ====== ===== ====== ===== ======= ====== ========= ======
Statement of Cash Flows Data:
Net cash provided by Operating
Activities............................. $ 27.5 $ 2.8 $ 26.7 $ 18.0 $ (7.7)
Net cash (used in) provided by Investing
Activities............................. (13.9) (4.5) (5.8) (3.1) (202.1)
Net cash (used in) provided by Financing
Activities............................. (13.4) 5.0 (19.0) (17.1) 207.3
Effect of Exchange Rate Changes on Cash. 0.9 (2.2) (0.3) (0.1) (1.9)
Effect of Accounting Calendar Change
on Cash................................ -- -- -- -- 6.3
------ ------ ------ ------- ---------
Net Increase (Decrease) in Cash......... $ 1.1 $ 1.1 $ 1.6 $ (2.3) $ 1.9
====== ====== ====== ======= =========
</TABLE>
- --------
(1) Pursuant to the terms of the Acquisition Agreement (See "The
Transactions"), the Company was acquired by Parent on April 30, 1998.
Accordingly, for purposes of Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Discussion of
Business, the results of operations and cash flows for the nine months
ended September 30, 1998 are a combination of the historic results of the
predecessor for the four months ended April 30, 1998 and the Company's
results of operations for the five months ended September 30, 1998.
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997
Net Sales
Net sales in 1998 increased to $175.9 million from $162.6 million in 1997,
an increase of $13.3 million, or 8.2%. The total number of sales
representatives increased by approximately 23,400 in 1998, or 10.9%. Net sales
in Latin America rose 19.0% to $93.4 million in 1998 from $78.5 million in
1997 due to a larger sales representative base, product price increases, the
Company's successful annual convention and the introduction of new products.
Increased sales in Latin America were partially offset by decreased sales in
Western Europe, which declined 15.8% to $28.3 million in 1998 from $33.6
million in 1997. The reduction in sales in Western Europe was due principally
to a decrease of 20.0% in the sales representative base in Germany.
Gross Profit
Gross profit in 1998 increased to $126.1 million from $121.5 million in
1997, an increase of $4.6 million or 3.8% as a result of the increase in
sales. Gross margin decreased to 71.7% from 74.7%. The decrease in gross
margin was due principally to the effects of accounting for the Acquisition.
Cost of sales for the five months ended September 30, 1998 included $2.5
million relating to the write-up of certain inventories to fair value as a
result of accounting for the Acquisition.
Selling, general and administrative expenses
SG&A expenses in 1998 increased to $117.3 million from $107.1 million in
1997, an increase of $10.2 million or 9.5%. SG&A as a percentage of net sales
increased in 1998 to 66.7% from 65.9% for 1997. The increase was due
principally to a net increase of $5.0 million in sales promotion and marketing
expense and an additional $1.2 million in goodwill and trademark amortization
related to the Acquisition. In addition, expense during the comparable 1997
period was reduced by a $2.3 million recovery of costs related to a dispute
with a vendor regarding the installation of certain computer systems.
40
<PAGE>
Other expense (income)
Net other expense (income) increased to $7.0 million of expense in 1998 from
$(0.2) million of income in 1997, an increase of $7.2 million. Other expense
(income) generally includes foreign exchange gains and losses, interest income
and expenses and other miscellaneous items. The increase in other expense
(income) in 1998 was primarily due to an increase of $7.9 million in net
interest expense, primarily related to the Acquisition indebtedness.
Income before income taxes
Income before income taxes decreased $12.8 million to $1.8 million in 1998
from $14.6 million in 1997. This decrease was due principally to $7.9 million
of increased net interest expense in 1998 resulting from the new debt
structure, the $2.5 million increase in cost of sales resulting from the
write-up of inventory to fair value as a result of the Acquisition (net of
increased gross profit resulting from the increase in net sales), the increase
in selling, general and administrative expenses of $5.0 million (relating
primarily to increases in sales promotion and marketing expense) and $1.2
million in increased goodwill and trademark amortization.
Net income
Income taxes as a percentage of pre-tax income increased to 211.1% in 1998
from 23.3% in 1997. The increased tax rate resulted principally from valuation
allowances provided against net operating losses in the U.S. and Europe. The
net loss for the nine months ended September 30, 1998 was $2.0 million as
compared to net income of $11.2 million for the nine months ended September
30, 1997. The decrease in net income was attributable to an increase in income
taxes of $0.4 million and a decrease in income before taxes of $12.8 million.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Net sales
Net sales for 1997 increased to $229.5 million from $224.5 million in 1996,
an increase of $5.0 million, or 2.2%. The Company's year end number of total
sales representatives increased by approximately 12,300, or approximately
5.9%, in 1997, primarily in Latin America. Productivity increased slightly to
$1,070 per sales representative. Net sales in Latin America rose 23.4% to
$111.8 million in 1997 from $90.6 million in 1996 due to a larger sales
representative base, product price increases, the Company's successful
Christmas promotion and introduction of new products. Increased sales in Latin
America were partially offset by decreased sales in Western Europe, which
declined 22.3% to $46.8 million in 1997 from $60.2 million in 1996. The
reduction in sales in Western Europe was due principally to losses resulting
from currency depreciations and a significant reduction in sales
representative productivity mainly due to weak economic conditions.
Gross profit
Gross profit for 1997 increased to $170.4 million from $166.3 million in
1996, an increase of $4.1 million or 2.5%. Gross margin increased to 74.2%
from 74.1%. The increase in gross profit was due principally to product price
increases as well as improvements in production processes, particularly in
Mexico. These increases were partially offset by higher manufacturing overhead
costs. Gross profit was also negatively impacted by increased freight costs
resulting from a higher than normal use of air freight to Europe and increased
shipping costs in the United States.
Selling, general & administrative expenses
SG&A expenses for 1997 decreased to $149.4 million from $155.8 million for
1996, a decline of $6.4 million, or 4.1%. SG&A as a percentage of net sales
for 1997 decreased to 65.1% from 69.4% for 1996, a decline of 4.3% of net
sales. This decrease resulted primarily from a net decrease of $5.7 million of
non-recurring charges from 1996 to 1997, as discussed below. In addition, SG&A
expenses were lower due to a decrease of $2.2 million in sales and promotional
expenses and infrastructure improvements that provided for increased economies
of scale.
41
<PAGE>
Net non-recurring charges decreased by $5.7 million from 1996 to 1997 as a
result of the following factors: In 1996, the Company incurred $6.1 million of
net non-recurring charges, primarily due to the write off of $5.4 million of
charges related to certain proprietary computer systems which were improperly
installed by a vendor. In addition, $2.4 million of charges were incurred
relating to market closures in Brazil, which were partially offset by a $1.7
million gain recognized on the sale of property in Mexico. In 1997, net
reorganization costs of $3.5 million were incurred, but were substantially
offset by recovery through litigation of $2.3 million of the charges described
above relating to the improper computer installation and a $0.8 million gain
on the sale of a facility which had previously been written off.
Other expense (income)
Net other expense for 1997 increased $0.2 million to $0.7 million from $0.5
million in 1996. Other items generally include foreign exchange gains and
losses, interest income and expense and other miscellaneous items. In 1997,
the Company benefited from foreign exchange gains of $0.3 million. This
benefit was offset by a net reduction in interest income of $0.6 million, and
to a lesser extent from decreases in miscellaneous items, including credit
card fees and amortization of goodwill.
Income before income taxes
Income before income taxes for 1997 increased $10.3 million, or 102.4%, to
$20.3 million from $10.0 million in 1996. This increase was due principally to
the reduction in net non-recurring charges recorded in 1997 compared to 1996
and increased gross profit.
Net income
The effective tax rate for 1997 decreased 2.3% to 23.6% from 26.0% in 1996.
Net income for the year ended December 31, 1997 was $15.5 million as compared
to $7.4 million in 1996, an increase of $8.1 million or 109.5%.
Year ended December 31, 1996 compared to the year ended December 31, 1995
Net sales
Net sales for 1996 increased $6.1 million, or 2.8%, to $224.5 million from
$218.4 million for 1995. Sales in all regions increased in 1996 due to price
increases and economic recovery in many parts of Latin America, increased
sales representative productivity due to successful promotional activity in
the U.S. and a small increase in the sales representative base in the U.S. and
Western Europe. This increase was partially offset by a decrease in year-end
total sales representatives by approximately 8,000 persons in Mexico and
Venezuela. The effect of this decline in the number of sales representatives
was offset by an increase in sales representative productivity.
Gross profit
Gross profit for 1996 increased $2.2 million, or 1.3%, to $166.3 million
from $164.1 million in 1995. However, gross margin for the year ended December
31, 1996 decreased 1.0% to 74.1% from 75.1% for 1995. The increase in gross
profit was due principally to higher overall product sales prices worldwide
offset by increased labor and materials costs associated with new products.
Product price increases did not fully recoup increased product costs,
resulting in a decline in gross margins. However, lower freight costs in 1996
to Europe positively impacted gross profit in 1996.
Selling, general & administrative expenses
SG&A expenses for 1996 increased $1.8 million, or 1.2%, to $155.8 million
from $154.0 million for 1995. SG&A as a percentage of net sales for 1996
decreased 1.1% to 69.4% from 70.5% for 1995. This decrease was due primarily
to a reduction in net non-recurring charges of $3.5 million from 1996 as
compared to 1995, as discussed below. The decrease in net non-recurring
charges was partially offset by higher marketing costs to support new product
launches, as well as special events held in Mexico to recruit and motivate
sales representatives. Other SG&A increases included higher sales promotional
expenses of approximately $1.5 million and increased costs related to the
enhancement of software developed in Mexico for use in Germany.
42
<PAGE>
The $3.5 million decrease in net non-recurring charges referred to above
consists of the following factors. The Company incurred certain severance and
other legal costs of $5.6 million related to worldwide reduction in sales
force employees in 1995, for which no similar charges were incurred in 1996.
In addition, the Company incurred $4.0 million of costs related to the closure
and reorganization of markets in the United States, Italy, Holland, Germany,
Spain, and Brazil, as opposed to $2.4 million of such costs related to Brazil
in 1996. The Company also realized a gain in 1996 of $1.7 million related to
the sale of property in Mexico. These decreases were partially offset by the
write-off of $5.4 million of costs in 1996 related to certain proprietary
computer systems which were improperly installed by a vendor.
Other expense (income)
Net other expense (income) increased $29.3 million to a net expense of $0.5
million in 1996 compared to a net income of ($28.8) million in 1995. This
increase in net expenses was primarily due to a foreign currency exchange gain
of $25.5 million in 1995, resulting from U.S. dollar denominated intercompany
receivables from affiliates at the time of the December 1994 peso devaluation,
and a $3.4 million net decrease in interest income in 1996.
Income before income taxes
Income before income taxes for 1996 decreased $28.9 million to $10.0 million
from $38.9 million in 1995. During 1996, the Company recorded net one-time
non-recurring charges of $6.1 million related primarily to the write-off of
certain computer software. Excluding non-recurring charges and income, income
before income taxes would have been $16.1 million. The decrease in income
before income taxes was due principally to the foreign exchange gain recorded
in 1995 of $25.5 million, reduced interest income of $3.4 million and
increased marketing costs in support of new product launches.
Net income
The effective tax rate for 1996 increased 10.2% to 26.0% from 15.7% in 1995.
The effective income tax rate in 1995 was due to the positive impacts of
inflation effects recognized for tax purposes in Mexico. Net income for 1996
decreased $25.4 million to $7.4 million from $32.8 million in 1995.
Liquidity and Capital Resources
Cash flows from operations decreased to ($8.4) million for the nine-month
period ended September 30, 1998 from $18.0 million for the comparable period
in 1997. The decrease in cash flow from operations is attributable to a $10.6
million decrease in net income adjusted for depreciation and amortization and
other non-cash items included in net income and a $15.8 million decrease in
the change in working capital over 1997. Operating activities provided net
cash flow of $26.7 million, $2.8 million and $27.5 million in 1997, 1996 and
1995, respectively. Cash flow from operating activities increased $23.9
million in 1997 compared to 1996 primarily due to a $15.5 million decrease in
inventories following the success of the Company's 1997 Christmas promotion.
The increase in net income of $8.1 million and a decrease of $4.2 million
related to taxes also served to increase the Company's cash position in 1997.
These gains were partially offset by a net $2.7 million decrease in accounts
payable. Cash flow from operating activities decreased $24.7 million to $2.8
million in 1996 from $27.5 million in 1995. This decrease was primarily due to
a $25.4 million reduction in net income which was due to foreign exchange
gains in 1995 that resulted from U.S. dollars denominated intercompany
receivables from affiliates at the time of the December 1994 peso devaluation.
Cash flows from investing activities decreased to a net use of cash of
$202.1 million for the nine months ended September 30,1998 from a net use of
cash of $3.1 million for the comparable period in 1997. The decrease in cash
flows from investing activities is attributable to the cash requirements of
the Acquisition of $203.0 million which was partially offset by proceeds from
the sale of certain property and equipment of $5.9 million during the four
month period ended April 30, 1998 in anticipation of the Acquisition.
Investing activities required net cash of $5.8 million, $4.5 million, $13.9
million in 1997, 1996 and 1995, respectively. The substantial part of the
Company's historical capital expenditures in the last three years has resulted
from investments in
43
<PAGE>
equipment and facilities to augment the Company's manufacturing capabilities
as well as from data processing requirements. In 1995, the Company opened a
new customer service and office facility in Mexico City at a cost of
approximately $13.3 million. Capital expenditures in 1998 are expected to be
$12.1 million, comprised of $7.0 million for maintenance, $2.0 million for
information technology and $3.1 million for expenditures related to opening of
new markets. The Company expects that capital expenditures will remain
relatively flat for the next several years.
Cash flows from financing activities increased to $208.0 million for the
nine months ended September 30, 1998 from $17.1 million of cash used in
financing activities for the comparable period in 1997. Cash flows from
financing activities subsequent to the Acquisition reflect proceeds from the
financing of the Transactions, including: $100.0 million from the issuance of
11 3/4% Senior Subordinated Notes, $25.0 million from borrowing under the Term
Loan Facility, $20.7 million from borrowing under the Revolving Credit
Facility ($18.6 million of which was related to the Acquisition), and $82.9
million in equity contributed by CD&R Fund V, certain members of management,
certain directors and other persons. Cash flows from financing activities
prior to the Acquisition consisted principally of intercompany transactions
between the Company and Gillette, and resulted in a net cash payment of $8.8
million for the four months ended April 30, 1998. Transactions with affiliates
resulted in net cash payments of $27.5 million in 1997, net cash receipts of
$5.0 million in 1996, and net cash payments of $13.4 million in 1995. During
1997, financing activities included $8.5 million of proceeds from the issuance
of low-interest short term foreign bank debt.
The Senior Subordinated Notes represent the several obligation of JCI and
Jafra S.A. in the amount of $60 million and $40 million, respectively, with
each participating on a pro rata basis upon redemption. The Notes mature in
the year 2008 and bear a fixed interest rate of 11.75% payable semi-annually.
Each Issuer is an indirect, wholly-owned subsidiary of the Parent and has
fully and unconditionally guaranteed the obligations under the Notes of the
other on a senior subordinated basis, subject to a 30-day standstill period
prior to enforcement of such guarantees. In addition, the Parent has fully and
unconditionally guaranteed the Notes on a senior subordinated basis. The U.S.
Issuer currently has no U.S. subsidiaries. Each acquired or organized U.S.
subsidiary of the U.S. Issuer will fully and unconditionally guarantee the
Notes jointly and severally, on a senior subordinated basis. Each existing
subsidiary of Jafra S.A. fully and unconditionally guarantees the Notes
jointly and severally, on a senior subordinated basis, and each subsequently
acquired or organized subsidiary of Jafra S.A. will fully and unconditionally
guarantee the Notes jointly and severally, on a senior subordinated basis. The
nonguarantor entities are the Parent's indirect European subsidiaries in
Germany, Netherlands, Switzerland, Italy and Austria and its indirect South
American subsidiaries in Colombia, Argentina and Venezuela. All guarantor and
nonguarantor entities are either direct or indirect wholly owned subsidiaries
of the Parent. The Notes are unsecured and are generally non-callable for five
years. Thereafter, the Notes will be callable at premiums declining to par in
the eighth year. Prior to May 1, 2001, the Issuers at their option may
concurrently redeem the Notes on a pro rata basis in an aggregate principal
amount equal to up to 35% of the original aggregate principal amount of the
Notes not exceeding the aggregate cash proceeds of one or more equity
offerings, at a redemption price of 111.75% plus accrued interest. Borrowings
under the Term Loan Facility are payable in quarterly installments of
principal and interest over 6 years. Borrowings under the Revolving Credit
Facility mature on April 30, 2004. Borrowings under the Senior Credit
Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed
2.625% or an alternate base rate (the higher of the prime rate or federal
funds rate plus 1%, plus an applicable margin not to exceed 1.625%). The
interest rate at April 30, 1998 was 8.34% per annum. The Senior Credit
Agreement and the Indenture contain certain covenants which limit the
Company's ability to incur additional indebtedness, pay cash dividends and
make certain other payments. These debt agreements also require the Company to
maintain certain financial ratios including a minimum EBITDA to cash interest
expense coverage ratio and a maximum debt to EBITDA ratio.
The Company estimates that total Acquisition costs will be approximately $24
million, of which approximately $17 million has been paid as of September 30,
1998. $16.5 million has been capitalized as deferred financing fees and is
being amortized over the term of the related debt. The remaining acquisition
costs of $7.5 million are being accounted for as an increase to goodwill. In
addition, the Company expects to pay approximately $7.8 million in interest in
1998, assuming the interest rate in effect as of September 30, 1998.
44
<PAGE>
Financing activities consist principally of transactions with affiliates.
Transactions with affiliates resulted in net cash payments of $27.5 million in
1997, net cash receipts of $5.0 million in 1996 and net cash payments of $13.4
million in 1995. Cash flows from financing activities included $8.5 million of
proceeds from the issuance of bank debt in 1997.
The Company believes that its existing cash, cash flow from operations and
availability under the Senior Credit Agreement will provide sufficient
liquidity to meet the Company's cash requirements and working capital needs
over the next twelve months.
Effects of Inflation
Mexico has experienced from time to time in the past, including during most
of the 1980s and during 1995 through 1997, periods of high inflation. For
example, during the period 1995 through 1997, Mexican inflation ranged between
35.1% and 21.0%. In 1997, Mexico was classified as a hyperinflationary economy
for financial reporting purposes, and accordingly, the functional currency of
Jafra S.A. was designated as the U.S. dollar. The Company has generally been
able to offset the effects of inflation in Mexico by increasing its product
prices by at least the level of inflation, although there can be no assurance
that the Company will be able to maintain its pricing policy in the future. In
addition, the effects of Mexican inflation have been partially offset in the
Company's U.S. dollar denominated combined financial statements by the effects
of depreciation in the U.S. dollar-Mexican peso exchange rate of 2.4%, 1.8%
and 54.8% in 1997, 1996 and 1995, respectively.
Year 2000 Issue
Prior to the Acquisition, the Company established a year 2000 compliance
methodology and schedule based on the Gillette model. This methodology
encompassed six phases, namely discovery, planning, resolution, testing,
implementation and certification. The scope of the Company's compliance
program includes information technology (computer systems, hardware and
operating systems), facilities (phone systems, plant machinery, elevators and
security systems), embedded software in production equipment and major
suppliers of raw materials and finished goods. The Company has completed the
discovery and planning phases with respect to both its information technology
systems and non-information technology systems. Approximately 25% of the
systems addressed were found to require some level of remediation or
replacement. The Company is currently in the resolution phase with respect to
such systems in which all affected hardware, software, equipment etc. is being
repaired, upgraded or replaced.
The Company expects to complete the resolution phase for all systems
(information technology and non-information technology) by the end of the
first quarter of 1999. The Company expects to have completed the testing phase
for all systems by the end of the second quarter of 1999 and the
implementation and certification phases by the end of the third quarter of
1999 and has budgeted $1.5 million through 1999 to complete the program. As of
the date hereof, the Company estimates that its resolution and testing phase
for information technology systems is approximately 40% complete. The Company
has upgraded its main operating and financial systems to a Year 2000 compliant
version in Germany, Holland, and Colombia, and expects to have the operating
and financial systems upgraded in Austria by March 1999, Italy by July 1999,
Switzerland by May 1999, Venezuela by June 1999, and Argentina by May 1999.
Due to the nature of the upgrade, once it is complete no testing is required.
The two most important information technology systems that are not Year 2000
compliant are the operating and financial systems that are installed in the
United States and Mexico. The Company is currently upgrading these systems and
expects to have the upgrades completed by June 1999. These upgrades are
currently on schedule.
With respect to its non-information technology systems, the Company
estimates that its resolution and testing phases are virtually complete. Most
non-information technology systems were already Year 2000 compliant, but
several phone systems and one voice mail system required upgrades that are now
completed. The Company has spent approximately $600,000 to date on the
discovery, planning, and resolution phases for both information technology and
non-information technology systems.
45
<PAGE>
Funds for achieving Year 2000 compliance are provided for in the Company's
existing budget, and the Company believes it has sufficient cash, cash flow,
and borrowing availability to meet its cash needs. All costs are being
expensed. The allocation of amounts may change from time to time.
As part of its investigation conducted in the discovery phase, the Company
prepared a questionnaire that it distributed to approximately 106 of its major
suppliers, which supply 75% of the raw materials and finished goods purchased
by the Company from third party suppliers. As of December 10, 1998 the Company
has received written responses from 80 of these suppliers. Of these, 77 have
informed the Company that they do not expect that the dating problems
associated with the year 2000 will have a material adverse effect on their
ability to continue to supply the Company in accordance with past practice.
Based on these replies, the Company does not believe that the inability of any
of the suppliers that have not yet responded or have responded unfavorably to
the Company's request for information, to continue to supply the Company would
have in a material adverse effect on the Company's business, financial
condition or results of operations. The Company intends to seek and identify
alternate sources of supply for the affected raw materials and finished
products in the event it has not received assurance by March 31, 1999 from the
remaining companies that they will be able to supply the Company without
material disruption into the year 2000. The Company currently believes there
are alternative sources for all such materials.
In the event the Company does not complete all phases of its year 2000
compliance program by December 31, 1999, the Company's most likely worst case
scenario would be that it would have to consider outsourcing its customer
service and order processing functions. No assurance can be given that the
Company will be able to outsource these functions or that the Company will not
incur significant additional expense in doing so. In the event the Company
could not outsource these functions, the Company would be unable to process
orders in a timely manner or respond to customer inquiries. This could lead to
a loss of revenue and customer satisfaction, which could have a material
adverse effect on the Company's results of operations, liquidity, and
financial condition. The Company will make a determination no later than the
end of March 1999 as to whether it needs to investigate the possibility of
outsourcing these functions.
In August 1998, the Company's Chief Information Officer left to return to
Gillette. The Company had previously appointed a project manager whose duties
include oversight of the Company's year 2000 compliance program in all of the
Company's markets. The Company does not believe that the departure of the
Chief Information Officer will have a material adverse effect on the Company's
ability timely to achieve year 2000 compliance.
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro will trade on currency exchanges
and be available for non-cash transactions during the transition period
between January 1, 1999 and January 1, 2002. During this transition period,
the existing currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro and public and private
parties may pay for goods and services using either the euro or the
participating countries' existing currencies.
During the transition period, the Company will continue to utilize the
respective country's existing currency as the functional currency. Use of the
euro by the Company or its consultants is not expected to be significant and
will be converted and recorded in the Company's accounting records in the
existing functional currency.
The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the
euro. The Company does not believe that any necessary modifications to its
information systems will be material, and does not expect the introduction of
the euro to materially adversely affect its business, financial condition, or
results of operations.
46
<PAGE>
BUSINESS
General
Jafra is a direct seller of premium skin and body care products, color
cosmetics, fragrances, nutritional supplements and other personal care
products. Jafra currently operates in ten countries directly and in a number
of additional countries through distributors, although approximately 86% of
the Company's sales in 1997 were in the United States, Mexico and Germany.
Jafra markets its products through a direct selling, multilevel distribution
system comprised of approximately 237,800 self-employed salespersons (known as
"sales representatives"). The Company seeks to provide its sales
representatives attractive and flexible career opportunities selling quality
products at affordable prices. Jafra's sales representatives have the
opportunity to earn significant income and to receive non-financial awards
designed to motivate and recognize individual achievement.
Jafra believes that as a result of the strong infrastructure created to
date, it is well positioned to increase sales and profitability under the
Company's new, focused ownership and management. As more fully set forth
below, this existing infrastructure consists of four primary elements: first,
Jafra's motivated, well-trained and loyal base of sales representatives
through whom the Company reaches its customers; second, the Company's diverse
and high quality product line and its ability to satisfy changing demand
through its "fast follower" product development strategy; third, the Company's
operating infrastructure, including state-of-the-art manufacturing and
distribution facilities; and finally, the geographic diversity of the
Company's sales and operations, which the Company believes will help produce
consistent cash flow and help insulate the Company's financial performance
against changes in individual markets.
Prior to the consummation of the Acquisition, the terms "Company" and
"Jafra" refer to the various subsidiaries and divisions of Gillette conducting
the Jafra Business and, following the consummation of the Acquisition, to
Parent and its subsidiaries as a group. Parent and Jafra S.A. are holding
companies, and the U.S. Issuer is an operating company conducting the Jafra
Business in the United States and the corporate parent of certain Western
European operating subsidiaries. The Jafra S.A. Subsidiary Guarantors are
operating companies conducting the Jafra Business in Mexico.
Operating Strengths
Motivated and Loyal Sales Representative Base. Jafra has built a motivated,
well-trained and loyal direct sales force of approximately 237,800 self-
employed independent sales representatives. The average Jafra sales
representative has been affiliated with the Company for approximately four
years, which the Company believes is among the highest average tenure in the
direct selling industry. The Company offers its sales representatives
attractive opportunities for career development and significant potential for
financial rewards. Jafra sales representatives earn income on their own sales
and can also earn commissions on sales made by the sales representatives they
recruit. In 1997, Jafra sales representatives earned aggregate direct sale
income of over $190 million and total commissions of more than $35 million,
with the highest paid Jafra sales representative earning total compensation of
over $250,000. In addition to such financial benefits, the Company also offers
non-financial rewards, such as international travel, regional and national
conventions and incentive awards, all designed to motivate and recognize
individual achievement. Unlike many of its competitors, the Company requires
little or no start-up costs from new sales representatives, imposes no
inventory maintenance requirements, has low minimum order sizes and provides
retail discounts on all orders. The Company's worldwide sales representative
base grew 5.9% to approximately 220,800 at the end of 1997 from approximately
208,500 at the end of 1996. As of September 30, 1998, the Company's worldwide
sales representative base was 237,800, an increase of 7.7% over December 31,
1997.
Prestige Quality Product Offerings. The Company offers diverse, prestige
quality product lines that it believes appeal to a wide customer base, build
brand equity and product loyalty, and lead to repeat purchases. The Company
positions its products to appeal to middle income, value oriented consumers,
generally
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pricing below the prestige level. The Company tries to develop integrated
products and actively promotes products that bridge between categories, thus
encouraging multi-product sales and repeat purchases. In order to meet
changing consumer demand, the Company employs a "fast follower" product
development strategy that minimizes research costs and focuses development
efforts on products that have proven successful in the marketplace. In 1997,
approximately 70% of sales resulted from products introduced in the last five
years. The Company estimates that this percentage will remain the same in
1998.
Significant Investment in Operating Infrastructure. Over the last three
years, Jafra has invested approximately $30 million in new infrastructure,
including a customer service and office facility in Mexico, new machinery and
equipment, and upgraded data processing capabilities. The Company's
manufacturing facilities in Westlake Village, California, which produces skin
care products, and in Naucalpan, Mexico, which produces color cosmetics, are
equipped with some of the latest manufacturing technologies. Jafra also has
ten major distribution facilities worldwide and is generally able to fill
orders within four days from the time of receipt with 98% accuracy, a rate
which the Company believes is among the highest in the industry. In addition,
the Company has made significant improvements in sourcing raw materials
locally since 1995, and has recently implemented several programs to
standardize product packaging, including in-house bottle decorating. As a
result of these recent investments and the current strength of the Company's
infrastructure, Jafra expects that it will have relatively low maintenance
capital requirements over the next several years.
Geographic Diversification. The Company currently operates in ten countries
directly and through distributors in a number of additional countries, and
expects to expand its operations to include approximately four additional
countries (primarily in Latin America and Europe) over the next several years.
The Company's most important markets to date have been the United States,
Mexico and Germany, which represented approximately 31%, 43% and 13%,
respectively, of total 1997 sales and 31%, 47% and 10%, respectively, of 1998
sales as of September 30, 1998. With significant revenue coming from each of
the United States, Latin America and Europe, the Company believes that it is
less vulnerable to adverse economic developments in any particular market. The
Company expects that future growth in the United States and in new markets
will lead to greater diversification of the sources of revenue.
Strategy
The Company's new owners and management intend to build on Jafra's strong
existing infrastructure and to increase the Company's sales and profitability
by refocusing the Company on growing its sales representative base and
productivity in new and existing markets and by leveraging the Company's
comparative strengths. To this end, the Company intends to pursue the
following strategy:
Deploy New Senior Management Team with Significant Direct Selling
Experience. In connection with the Acquisition, Ronald B. Clark joined the
Company as its Chairman and Chief Executive Officer, Gonzalo R. Rubio joined
as its President and Chief Operating Officer, Michael DiGregorio joined as its
President of United States Operations, Eugenio Lopez Barrios joined as its
President of Mexican Operations, Jose Luis Peco joined as its President of
European Operations, Jaime Lopez Guirao joined as its President of Global
Operations and Alan Fearnley joined as its Senior Vice President of Global
Marketing. Messrs. Clark, Rubio, Mason, Guirao and Barrios have purchased
equity in Parent. See "Management." Messrs. Clark, Rubio, DiGregorio, Barrios,
Peco, Guirao and Fearnley have an average of over 20 years of direct selling
industry experience, including various senior management positions with Jafra
competitors Avon and Mary Kay. Jafra's new Chief Executive Officer also served
as the President of Jafra's United States operations from 1985 to 1988, and
Jafra's new Senior Vice President of Global Marketing served in the same
position at Jafra from 1987 to 1995. Jafra believes that this new team will
provide the dynamic leadership required to attract new sales representatives
and management talent, inspire new and existing sales representatives to
greater productivity and execute the Company's new market development
strategy.
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Grow Sales Representative Base in Existing Markets. Jafra plans to expand
its sales representative base in existing markets by (i) targeting U.S.
expansion into new geographic areas and demographic groups, (ii) streamlining
the commission structure to provide more rewards to those sales
representatives who actively recruit other sales representatives, (iii)
providing more training in business skills and recruiting techniques to sales
representative managers, and (iv) initiating programs to reactivate former or
inactive sales representatives. Although Jafra operates in all fifty states,
approximately 55% of its 1997 U.S. sales were concentrated in four states
(California, Texas, Illinois and New York) and Puerto Rico. The Company
believes that it has a significant opportunity to expand its distribution
reach to include new geographic areas, particularly in the United States, and
demographic segments such as baby boomers and minority groups.
Increase Sales Representative Productivity. The Company plans to focus on
increasing the productivity, as measured by sales per sales representative, of
its existing sales representatives by (i) expanding the Company's product
lines, (ii) initiating better-targeted marketing activities and (iii)
decreasing lead time on new product introductions. Over the next two years,
the Company plans to expand product offerings to include other complementary
merchandise that would be introduced into specific regions after test
marketing to establish the presence of sufficient demand. The Company believes
that sales representative productivity can also be increased through targeted
marketing efforts to increase brand and product awareness of existing product
lines. The Company intends to provide its sales representatives with increased
product knowledge and financial incentives to sell more products through
greater training, internal "advertising" and promotion. Finally, the Company
intends to adopt a shorter lead time on product development to get new
products to its sales representative base more quickly, decreasing the
Company's current time to market by up to one-third.
Develop New Markets. The Company believes that its existing distribution and
manufacturing capabilities provide a strong platform for Jafra to expand into
new markets. The Company expects that it will be able to implement its new
market development strategy with limited additional capital expenditures and
without diverting focus from the Company's core markets. The Company's new
senior management team has extensive experience and a proven track record in
developing new markets in Latin America and Central and Eastern Europe. The
Company intends to focus its expansion efforts on markets that the Company
believes (i) do not require high start-up costs, such as markets contiguous to
the Company's existing markets, (ii) have proven receptive to direct selling
techniques, (iii) demonstrate promising economic demographics, including
population size, growth of gross domestic product and an expanding middle
class, and (iv) evidence demand for quality cosmetic products.
Once a new target market has been identified, the Company will recruit local
management with demonstrated knowledge of the local market. Operations will
typically begin in one of the larger cities within the target market. The
Company plans to hold seminars conducted by successful sales representatives
and senior managers from existing markets to recruit and train local sales
representatives and to identify potential leaders. In addition, the Company
will use distribution capabilities from appropriate existing operations until
the market is able to support its own distribution capabilities.
Improve Operating Efficiency. The Company's new management team believes
that opportunities exist to improve operating efficiency through cost-cutting,
better inventory management, and streamlining of marketing efforts and product
lines. The Company expects these measures, when fully implemented, to result
in net annual savings of approximately $5.7 million. Over the past several
years, the Company has turned its inventory approximately 1.6 times per year.
By the end of 2000, the Company expects to increase inventory turns to
approximately three times per year, consistent with industry norms, which the
Company expects will reduce significantly its future working capital
requirements.
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History
Jafra was founded in 1956, as a California corporation, by Jan and Frank Day
and acquired by Gillette in 1973. The Company expanded into Latin America in
1977 and into Europe in 1978. During the 24 years that Jafra was owned by
Gillette, its revenues grew at a compound annual rate of 18.5%. Parent
acquired the Jafra Business from Gillette on April 30, 1998.
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
Net Sales
---------
1973 3.947
1974 6.181
1975 9.428
1976 12.809
1977 15.502
1978 20.007
1979 28.003
1980 44.989
1981 63.915
1982 73.417
1983 82.615
1984 96.2
1985 111.74
1986 123.251
1987 124.206
1988 136.501
1989 161.198
1990 193.459
1991 225.734
1992 257.53
1993 258.089
1994 263.896
1995 218.431
1996 224.544
1997 229.545
Industry Overview
The Direct Selling Industry
The Company operates in the direct selling industry, which involves the
marketing and sale of products to end consumers through an independent,
commission-based sales force. Direct selling does not rely on direct mail,
product advertising or physical retail store locations. Instead, salespersons
demonstrate and sell products to consumers, typically at home or work.
There are two main types of direct selling companies: single-level and
multi-level. Jafra is a multi-level direct selling company. In single-level
companies, independent salespersons purchase products directly from direct
selling companies and earn revenues solely from the resale of such products at
a profit to end users. In multi-level companies, independent salespersons not
only make direct sales to consumers but also recruit other salespersons and
earn commissions based on sales by such recruits and by salespersons recruited
by such original recruits.
Direct selling companies typically utilize one or both of two main direct
selling techniques, person-to-person and party plan. Jafra's sales
representatives use both techniques. Person-to-person sales consist of a
salesperson demonstrating the products on an individual basis and taking
immediate orders. If a customer is not ready to place an order, the
salesperson generally leaves a catalog and follows up with a telephone call or
personal visit. In party plan direct selling, an independent salesperson
demonstrates products to a group of potential customers, one of whom acts as
hostess for the function, generally by allowing the event to take place in her
residence. Again, if a customer is not prepared to place an order, the
salesperson provides a catalog and contacts such customer at a later date.
Based on information supplied by its sales representatives, the Company
estimates that approximately 70% of the Company's 1997 U.S. revenues resulted
from person-to-person sales.
The Cosmetics Industry
The cosmetics and toiletries industry is highly competitive and fragmented.
The Company believes that worldwide over 1,000 companies market over 20,000
brands in a number of major product categories. Brand recognition, product
quality, performance, price, and marketing efforts have substantial influence
on consumers'
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choices among competing products and brands. Products are distributed through
three primary channels: (i) prestige distribution, mainly department stores
and specialty stores, (ii) mass distribution, including drug stores, food
stores and warehouse clubs, and (iii) alternative distribution, such as direct
selling, mail order, salons, direct response television and health stores. The
Company believes that approximately 70% of products reach consumers through
mass distribution channels, while prestige distribution accounts for
approximately 22% and alternative distribution methods for approximately 8%.
Sales within the prestige distribution channel and certain outlets of the
alternative distribution channel are considered demonstrator-assisted and
command a price premium, whereas other sales are considered self-selected.
Generally, advertising, promotion, recommendations from other consumers,
reputation, merchandising and packaging, and the timing and frequency of new
product introduction and line extensions have a significant impact on cosmetic
product buying decisions.
Independent Sales Force
Jafra's self-employed sales force comprises approximately 237,800 motivated,
independent sales representatives. More seasoned senior sales representatives,
who have experience managing their own sales representative networks, recruit
and train the Company's field level organization. Jafra sells substantially
all of its products directly to its sales representatives. Each sales
representative conducts her Jafra sales operations as a stand-alone business,
purchasing Jafra goods and reselling them to customers, as well as offering
free personal care consultations. The Company's independent sales force
constitutes its primary marketing contact with the general public. Pride of
proprietorship and the drive to earn income create strong incentives for sales
representatives to satisfy customers, increase personal sales and recruit
others to sell Jafra products.
Selling
The primary role of a Jafra sales representative is to sell Jafra products.
Although the majority of the Company's sales occur as a result of person-to-
person sales, the Company also encourages its sales representatives to arrange
sales parties at customers' homes. Sales parties permit a more efficient use
of a sales representative's time, allowing the sales representative to offer
products and cosmetic advice to multiple potential customers at the same time,
and provide a comfortable selling environment in which clients can learn about
skin care and sample the Jafra product line. Such parties also provide an
introduction to potential recruits and the opportunity for referrals to other
potential clients, party hostesses and recruits.
Jafra does not require sales representatives to maintain any inventory. The
Company believes that the inventory requirements of other leading direct
sellers are often onerous to sales representatives. Instead, Jafra sales
representatives can wait to purchase products from the Company until they have
a firm client order to fill. Sales representatives generally personally
deliver orders to their clients within one week of placement of an order. By
delivering products directly to the customer, the Jafra sales representative
creates an additional sales opportunity.
Recruiting
The Company believes that it enjoys a competitive advantage in recruiting
sales representatives due to its lower start-up costs and its policy of
providing retail discounts even on small orders. In addition, the Company does
not burden its sales representatives with inventory maintenance requirements,
a common practice in the direct selling industry. Other major attractions to
prospective recruits include flexible hours, increased disposable income, an
attractive incentive program (including international travel, national and
regional meetings, awards and free products), personal and professional
recognition, social interaction, product discounts and career development
opportunities. The Company also emphasizes its commitment to sales
representatives' personal and professional training, thereby building sales
representatives' management and entrepreneurial skills.
Existing sales representatives recruit new sales representatives. Such
recruitment often occurs at party plan events. To join the Jafra sales force,
a new recruit signs an independent sales representative agreement and
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purchases an inexpensive sales representative kit for approximately thirty
dollars. Worldwide, Jafra's sales representative base grew 6% from 1996 to
1997, to a level of 220,800 as of December 31, 1997. As of September 30, 1998,
the number of the Company's sales representatives had increased to 237,800, an
increase of 7.7% from December 31, 1997. In Mexico, the sales representative
base, which had declined from a peak of 132,542 in 1994, rose 8% from 1996 to
1997, and was 129,062 as of December 31, 1997. The U.S. and German sales
representative bases have been relatively stable since 1994, totaling 53,138
and 13,350, respectively, as of the end of 1997.
Sales Representative Management and Training
To become a manager, a sales representative must sponsor a specified number
of recruits and meet certain minimum sales levels. A manager continues to gain
seniority in the Jafra sales force by meeting the prescribed recruitment and
sales requirements at each level of management. At more senior levels,
managers may have several junior managers who in turn sponsor and manage other
managers and sales representatives. The most successful managers have many
such downline managers and sales representatives. The following chart
illustrates the various levels of sales representative management in the
United States, Mexico and Germany:
<TABLE>
<CAPTION>
Percentage of Average Number of
Title* Description Total Sales Force Years with Jafra
------ ----------- ----------------- -----------------
<C> <S> <C> <C>
Sales represen- An independent salesperson who has 94.0% 4.0
tative purchased a sales case and earns a
percentage on every product sale.
Manager A sales representative who has recruited a 3.7 7.4
specified number of new sales
representatives and sold required minimum
dollar amounts, and has signed a manager's
contract. She earns a percentage on her
personal sales plus commissions on the
sales of her downline sales
representatives.
District Manager A manager who has promoted between 1 and 3 1.9 10.1
(Levels I-III) sales representatives to manager from her
downline group. She earns a percentage on
her personal sales plus commissions on her
downline group's sales.
District Direc- A district manager who has promoted at 0.4 14.3
tor least 5 sales representatives to manager
(Levels I-V) from her downline group. She earns a
percentage on her personal sales plus
commissions on her downline group's sales.
</TABLE>
- --------
* The titles of sales representative managers vary by country.
Managers progress to higher levels of management by growing their downline
sales representative networks. At the same time, managers' earnings increase,
as they become entitled to commissions on sales by an increasing number of
downline sales representatives. This is a powerful incentive for managers to
maintain a well-trained and enthusiastic base of downline sales
representatives.
Training for new sales representatives focuses first on the personalized
selling of the Jafra product line, beginning with skin care and the
administration of a Jafra business. Training is conducted primarily by the
Company's sales representative managers. Managers train their downline sales
representatives at monthly meetings using materials prepared by the Company.
In training managers, the Company seeks to improve leadership and management
skills, while teaching managers to motivate downline sales representatives to
higher sales levels. The Company also teaches its managers and more
experienced sales representatives techniques for recruiting their own downline
sales representative bases. A large part of sales representative and manager
training occurs at the Company's semi-annual national conventions.
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Income Opportunities and Recognition
Sales representatives earn income by purchasing products from Jafra at
retail discounts and selling to consumers at suggested retail prices. Once a
sales representative becomes a manager, her compensation also includes
commissions on the wholesale value of paid sales made by herself and her
recruits. Commissions vary among markets. Jafra pays commissions directly to
managers on receipt of payment for the underlying product sale. While this
commission-based incentive system diminishes the Company's profit margin on
individual product sales, it results in increased numbers of sales
representatives selling Jafra products, which ultimately earns greater profits
for the Company.
The Company believes that public recognition of sales accomplishments serves
the dual purpose of identifying successful role models and boosting sales
representative morale. Each year Jafra sponsors major events in each of its
national markets to recognize and reward sales and recruiting achievements and
strengthen the bond between the independent sales force and the Company. Sales
representatives and managers must meet certain minimum levels of sales and new
sales representative sponsorship in order to receive invitations to attend
these events.
Products
Jafra continuously introduces new products based on changes in consumer
demand and technological advances in order to enhance the quality, image and
price positioning of its products. Research and development activities occur
at the Jafra Skin, Body and Color Laboratory, located in the Westlake Village
facility. Twenty employees in the Research and Development Department
formulate products and analyze them for chemical purity and microbial
integrity. A separate pilot plant allows testing via small batch production
prior to full scale manufacture. Since 1993, Jafra has invested in the
globalization and upgrading of its product lines. Packaging and formulations
have been updated to build better brand awareness and a fresh image, and
contemporary fragrances have been added to the product line. Through
globalized product development, manufacturing and packaging, Jafra believes
that it has enhanced the consistency and quality of its products in all
geographic regions and across all product lines. Seventy percent of 1997
revenues derived from products introduced over the last five years, and the
Company expects this number to remain the same in 1998.
Certain of Jafra's products are based on formulas or include ingredients or
components that have been developed by Gillette. In addition, certain of
Jafra's products are manufactured at facilities owned by Gillette. The
Transition Services Agreement allows Jafra to continue using proprietary
Gillette formulas and materials in its products and provides that Gillette
will continue to provide manufacturing services until December 31, 1998.
The following table sets forth the sales of the Company's principal product
lines for fiscal 1997:
<TABLE>
<CAPTION>
Sales by
Product Line Percentage of
$ (in millions) total sales
--------------- -------------
<S> <C> <C>
Color Cosmetics................................... $ 66.9 29.1%
Skin Care......................................... 57.8 25.2
Body Care & Daily Use............................. 43.4 18.9
Fragrances........................................ 37.3 16.3
Other(1).......................................... 24.1 10.5
------ -----
Total........................................... $229.5 100.0%
====== =====
</TABLE>
- --------
(1) Includes sales aids (party hostess gifts, demonstration products, etc.)
and promotional materials.
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Color
Jafra's range of color cosmetics for the face, eyes, lips, cheeks and nails
contribute significantly to Company results. The Company develops internally
its lipstick formulas, foundations and mascaras. During 1996, Jafra introduced
an enhanced "global palette" of colors. This replacement product line features
an expanded palette of colors, improved quality and upgraded packaging. In
1997, Jafra launched its Always Color lipstick line, which competes with
products featuring the latest technology in long-wearing, transfer-resistant
formulas and has helped to revitalize the color line. Time Protector
lipsticks, launched in early 1998, feature contemporary colors with skin care
benefits, including sunscreen and antioxidants, as well as moisturizers and
conditioners.
Skin Care
Jafra sells skin care regimens tailored to five specific skin types. Each
regimen includes cleanser, mask, skin freshener and moisturizers for day and
night. In addition to basic skin care products, Jafra offers a range of
special care products for special needs, including its premier product, Royal
Jelly Milk Balm Moisture Lotion, an Alpha Hydroxy complex (Rediscover) and
products for maturing skin (Advanced Time Protector and Time Corrector), eye
care (Optimeyes) and extra firming (Skin Firming Complex).
Body Care and Daily Use
Jafra markets a broad selection of body, bath, sun and personal care
products. Jafra's premier body care product, Royal Jelly Body Complex,
contains "royal jelly" (a substance produced by queen bees) in an oil-free
deep moisturizing formula with natural botanical extracts and vitamins. Other
offerings in the body care line include sunscreens, hand care lotions,
contouring creams, revitalizing sprays, bath products, as well as an aroma
therapy brand, Aromascape. A children's product line featuring animal
characters was launched in 1997 and two sunless tanning lotions were launched
in early 1998.
Jafra's daily use products include deodorant, shampoo and nutritional
supplements. Jafra strengthened this category in 1997 with the launch of the
Daily Essentials line, which includes a conditioning body wash, a conditioning
body lotion with Alpha Hydroxy action, a body lotion for sensitive skin, a
multi-vitamin and a ginseng complex. Consumers use these products in regular
cycles, allowing more frequent contact with sales representatives and their
catalogs of Jafra products.
Fragrance
Direct selling is a significant distribution channel for fragrances, and
Jafra's new scents have enabled the Company to participate on a larger scale,
as evidenced by the double-digit growth in sales over the last two years. In
1996, Jafra introduced Adorisse, a contemporary women's fragrance, and Fm
Force Magnetique, a prestige men's fragrance. Jafra further extended its
fragrance line in 1997 with Le Moire for women and Legend for Men. The
fragrance category includes line extensions such as body lotions, shower gels,
deodorants, after-shave lotions and shave creams for some of the most popular
fragrances.
Marketing
Strategy
The Company's marketing vision is to provide glamour, excitement and variety
through prestige quality products at affordable prices. The Company's product
strategy and marketing and sales efforts reinforce this vision with its sales
representatives and their customers. The Company believes that this approach
builds brand equity that leads to product loyalty.
Jafra positions its products to appeal to a relatively wide range of market
categories, demographic groups and lifestyles. Jafra products generally price
at the higher end of the mass market category but slightly below prestige
brands such as Clinique. As compared to its direct selling competitors, Jafra
prices in line with Mary Kay, but higher than Avon, which targets the lower to
middle mass market.
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Jafra targets middle income, value-oriented consumers who seek a fresh,
diverse and quality product line. The Jafra consumer enjoys the personal
attention of prestige product cosmetic counters in department stores but is
not inclined to pay their premium prices. The Jafra consumer also likes the
convenience, flexibility and low-key atmosphere of shopping at home, the
personalized recommendations of her sales representative and the try-before-
you-buy sales policy of the Company. The Company believes that consumers are
very loyal to the Jafra brand.
Product Strategy
Jafra's product strategy is to provide customers with exciting and prestige
quality product lines that fit into Jafra's value-added demonstration sales
techniques and promote the sale of multiple products per home visit. To that
end, Jafra develops integrated products and actively promotes cross-selling
among categories.
Product variety and modernization are keys to the Company's success. Seventy
percent of 1997 revenues were derived from products introduced over the last
five years, and the Company expects this number to remain the same in 1998. To
seize upon new product trends, the Company employs a "fast follower" product
strategy which focuses the Company's development efforts on products that have
proven successful in the marketplace. For example, Color Stay Lipstick, a
transfer-resistant lipstick introduced by Revlon, has galvanized entire
product lines using the popular long-wearing "volatile" technology. Other
companies, including Jafra, quickly introduced their own successful "volatile"
lipsticks and color products. Jafra's version, Always Color, generated $5.2
million in sales in the first year of introduction. Jafra currently has
approximately 20 products in development and has launched or expects to launch
32 products in 1998. Over the past several years, the Company has turned its
inventory approximately 1.6 times per year. By the end of 2000, the Company
expects to increase inventory turns to approximately three times per year,
consistent with industry norms, which the Company expects will reduce
significantly its future working capital requirements.
Jafra has also recently expanded its offerings of nutritional supplements
and body washes, which are used in regular cycles and present sales
representatives with opportunities for more frequent contact with customers,
thereby increasing opportunities to market other Jafra products. In addition,
Jafra has introduced products to expand into other profitable categories,
targeting the mature market, upper income consumers and children. Sales of
these products have been successful, with Time Corrector and Advanced Time
Protector alone generating $3.5 million in sales in the first four months of
launch.
Marketing Material & Support
The Company generally does not advertise, relying instead on its energetic
network of sales representatives and favorable word-of-mouth that the Company
believes its products generate. The Company's marketing expenses are far below
those of its retail competitors. In 1997, Jafra's marketing expenses were $25
million, or 10.8% of net sales (excluding commissions paid to sales
representatives).
Sales representative kits, filled with products and colorful promotional
materials, play a crucial role in sales support. In their own homes, Jafra
consumers try Jafra products from these kits and get immediate feedback from
their personal sales representatives and friends before deciding whether to
commit to a purchase. This combination of sampling and positive reinforcement
is what the Company believes provides the stimulus for most of its sales
representatives' sales. Sales representatives and managers also purchase from
the Company various printed, video and audio materials for distribution to
customers and for use by managers with their sales representative networks.
Customer materials announce special promotions and sales, introduce new
products and generally keep customers informed of exciting product
developments. Finally, managers and sales representatives receive from the
Company fliers and newsletters intended to generate excitement, recognize top
sellers and reinforce a sense of belonging to the Jafra "family."
Manufacturing
Over the last three years, Jafra has invested approximately $30 million in
new infrastructure, including a customer service center and office facility in
Mexico, new machinery and equipment and upgraded data
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<PAGE>
processing capabilities. Consistent with Jafra's globalization strategy, the
Company recently consolidated its manufacturing operations, instituting a new
planning and procurement strategy and unifying the sourcing of products on a
worldwide basis. In addition, the Company has instituted uniform worldwide
packaging on most of its product lines.
The Company has also revamped its approach to product development,
accelerating its new product development cycle and forging additional research
and development alliances with third-party manufacturers and vendors of raw
materials. In the near term, Jafra will continue to outsource pressed powder
godets, liner pencils, liquid eyeliners and nail lacquers. New products may
increasingly be manufactured by third parties or be licensed formulations.
Jafra's manufacturing facilities are located in Westlake Village, California
and Naucalpan, Mexico, which is near Mexico City. Skin care products are
produced at the Westlake Village facility and color cosmetics and most
fragrances are produced at the Mexico facility. The manufacturing process at
the Westlake Village facility involves mixing, filling and in-house decoration
processes using product ingredients, plastic bottles, glass bottles, tubes and
caps. Jafra implemented a move to in-house color manufacturing beginning in
1993, and currently produces the majority of its color cosmetics in the Mexico
facility. During 1995, Jafra transitioned from a manual lipstick production
process to highly sophisticated automation in support of the global palette
launch.
The Company purchases from third party suppliers certain finished goods and
raw materials for use in its manufacturing operations. In general, the Company
does not have written contracts with suppliers. Finished goods and raw
materials used in the Company's products generally are available stock items
or can be obtained to Company specifications from more than one potential
supplier.
Distribution
The Company has ten principal distribution centers around the world. The
U.S. warehouses in Bridgeport, New Jersey and Westlake Village, California,
currently stock the entire Jafra product line. Management believes that these
facilities are adequate to meet domestic demand for the foreseeable future. In
Europe, the Company is in the process of pursuing alternatives to in-house
distribution facilities in Switzerland and Italy and may eventually combine
certain distribution operations into a central warehouse in Germany or enter
into agreements with third parties for these services. In Mexico, the Company
has outsourced some of its distribution needs to third parties, which has
enabled the Company to reduce inventories.
Typically, owned or leased distribution centers are located in an area that
allows for direct delivery to sales representatives by either post or carrier.
Maintaining a short delivery cycle in direct selling is an important
competitive advantage. The Company delivers 98% of its products within four
days of placement of an order at a packing accuracy rate of approximately 98%.
Competition
Jafra sells all of its products in highly competitive markets. The principal
bases of competition in the cosmetics direct selling industry are price,
quality and range of product offerings. On the basis of information available
to it from industry sources, management believes that there are over a
thousand companies (including both direct sales and cosmetic manufacturing
companies) that sell products that compete with Jafra's products. Several
direct sales companies compete with Jafra in sales of cosmetic products, and
at least two such competitors, Mary Kay Corporation and Avon Products, Inc.,
are substantially larger than Jafra in terms of total independent
salespersons, sales volume and resources. In addition, Jafra's products
compete with cosmetics and toiletry items manufactured by cosmetic companies
that sell their products in retail or department stores. Several of such
competitors are substantially larger than Jafra in terms of sales and have
substantially more resources. Jafra also faces competition in recruiting
independent salespersons from other direct selling organizations whose product
lines may or may not compete with Jafra's products.
56
<PAGE>
Patents and Trademarks
Jafra's operations do not depend to any significant extent upon any single
trademark other than the Jafra trademark. Some of the trademarks used by
Jafra, however, are identified with and important to the sale of Jafra's
products. Jafra's most important trademarks are: Adorisse (a contemporary
woman's fragrance), Eau D'Aromes (revitalizing fragrance spray), Fm Force
Magnetique (a men's prestige fragrance), Legend for Men (a men's premium
fragrance), Le Moire (a contemporary woman's fragrance), Optimascara
(mascara), Optimeyes (eye treatment lotion), Rediscover (skin cream with Alpha
Hydroxy), Royal Jelly Body Complex (body lotion), Royal Jelly Milk Balm
Moisture Lotion (moisturizing lotion), Time Corrector (skin cream) and Time
Protector (skin cream). Jafra's operations do not depend to any significant
extent on any single or related group of patents, although the Company has
applied for or received patent protection in its major markets for certain
dispensers and product containers, nor do they rely upon any single or related
group of licenses, franchises or concessions. Jafra has in the past licensed
know-how from Gillette relating to the design, development and manufacture of
its products. Jafra can continue to use such know-how in connection with its
products, although management expects to replace Gillette as a provider of
certain standard-setting and testing services.
A former employee of Gillette has applied to register, and, as of November
1998, had received registrations for the Jafra trademark in Algeria, China,
Cyprus, Malawi, Morocco, Pakistan, Sierra Leone, Surinam, Tanzania, Tunisia,
and Zambia, jurisdictions in which the Company does not currently operate.
Gillette has obtained a court order prohibiting this employee from
transferring or licensing such trademark applications and registrations and
requiring that the trademark applications and registrations be assigned to
Gillette. If Gillette is not successful in obtaining such assignments or does
not transfer these applications and registrations to Jafra, Jafra may be
prohibited from distributing its products in such jurisdictions, or may face
significant costs in establishing its right to do so.
Properties
The Company is headquartered in Westlake Village, California, 40 miles north
of Los Angeles. Manufacturing is done on a global basis and by product line in
Westlake Village and Naucalpan, Mexico. The Westlake Village, California and
Naucalpan, Mexico facilities are owned by the Company, except for a small
portion of the Naucalplan facility that is leased. In addition, the Company
leases certain distribution facilities, sales offices and service centers to
facilitate its operations globally. The Company's properties are suitable and
adequate to meet its current and anticipated requirements.
Management Information Systems
Historically, each marketing region within Jafra handled its own computing
systems, staffing and development, leading to the development of disparate
functionality and standards. In early 1995, management formulated and began to
implement a plan to replace the commercial systems that handle order entry,
commissions and accounts receivable, among other functions, at all existing
Jafra companies, other than in the United States, with the commercial system
developed in Mexico. The Company expects to complete this project and have a
year 2000 compliant version of the Mexican commercial system installed at all
Jafra companies, other than in the United States, in mid-1999. The Westlake
Village facility will continue to use an older commercial system that is not
currently year 2000 compliant but which will be modified to be year 2000
compliant by mid-1999. The Company has budgeted $1.5 million through 1999 to
modify or replace its business critical information systems so as to be year
2000 compliant prior to December 31, 1999. See "Risk Factors--Year 2000
Issue."
Employees
As of December 31, 1997, the Company had 851 full-time employees, of which
250 were in manufacturing, warehousing, distribution and technical operations,
408 were in sales and marketing, 148 were in administration and 45 were part
of the corporate staff. The Company also had 40 outside contract employees.
57
<PAGE>
Environment
The Company is subject to various federal, state, local and foreign laws or
regulations governing environmental, health and safety matters. The Company
believes that it is in material compliance with all such laws and regulations
and under present conditions the Company does not foresee that such laws and
regulations will have a material adverse effect on capital expenditures,
earnings or the competitive position of the Company.
Legal Proceedings
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operation.
58
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are listed below. The
business address for each executive officer is as follows: Jafra Cosmetics
International, Inc., 2451 Townsgate Road, Westlake Village, California 91361.
<TABLE>
<CAPTION>
Name Age
---- ---
<S> <C> <C>
Ronald B. Clark......... 63 Chairman and Chief Executive Officer; Director
Gonzalo R. Rubio........ 55 President and Chief Operating Officer; Director
Ralph S. Mason, III..... 47 Vice Chairman, Executive Vice President and General Counsel
James Brill............. 47 Chief Financial Officer
Michael DiGregorio...... 44 President of United States Operations
Eugenio Lopez Barrios... 57 President of Mexican Operations
Jose Luis Peco.......... 53 President of European Operations
Jaime Lopez Guirao...... 51 President of Global Operations
Alan Fearnley........... 48 Senior Vice President of Global Marketing
Donald J. Gogel......... 49 Director
Steven D. Goldstein..... 47 Director
Thomas E. Ireland....... 49 Director
David A. Novak.......... 29 Director
Paul Orfalea............ 51 Director
Ann Reese............... 45 Director
Edward H. Rensi......... 54 Director
Christopher Sinclair.... 48 Director
Kenneth D. Taylor....... 64 Director
</TABLE>
Ronald B. Clark currently serves as a director and the Chairman and Chief
Executive Officer of the Company. Mr. Clark served from 1996 to 1997 as
President, Richmont Europe (Mary Kay Holding Company). From 1992 to 1995, he
was President of Mary Kay Europe. Prior to that, he served as Executive Vice
President of Primerica Corp., President of Jafra Cosmetics International,
Inc., and Vice President of Avon Products, Inc.
Gonzalo R. Rubio currently serves as a director and the President and Chief
Operating Officer of the Company. Mr. Rubio served from 1992 to 1997 as Area
Vice President and later President of the European operations of Mary Kay Inc.
and was employed by Avon Products Inc. from 1970 to 1992, serving alternately
as Area Director for Europe, International Operations Director and Area
Director for Latin America.
Ralph S. Mason, III serves as the Vice Chairman, Executive Vice President
and General Counsel of the Company. For more than the prior five years, Mr.
Mason was the senior and founding partner at Mason, Taylor & Colicchio, a law
firm in Princeton, New Jersey.
James Brill serves as Chief Financial Officer of the Company. From 1996 to
1998, Mr. Brill served as Vice President, Finance and Administration and Chief
Financial Officer of Vertel Corporation. From 1988 to 1996, Mr. Brill was
employed by Merisel, Inc., serving as Senior Vice President, Finance, Chief
Financial Officer, and a Director.
Michael DiGregorio currently serves as President of United States Operations
of the Company. From 1993 to 1998, Mr. DiGregorio served as Vice President,
Treasurer and Chief Financial Officer of Atlantis Plastics, Inc. From 1989 to
1993, Mr. DiGregorio was employed by The Wackenhut Corporation, serving most
recently as Senior Vice President, Finance and Chief Financial Officer.
Eugenio Lopez Barrios currently serves as President of Mexican Operations of
the Company. From 1993 to 1998, Mr. Barrios was President of Mary Kay Mexico.
Prior to that, Mr. Barrios was employed by Avon Products, Inc. for over 30
years, where he oversaw Operations in Mexico, South America and Central
America.
59
<PAGE>
Jose Luis Peco currently serves as President of European Operations of the
Company. From 1994 to 1998, Mr. Peco served as Vice President of Europe
Operations for Mary Kay Cosmetics and President of Mary Kay Cosmetics--Iberia.
Prior to that, Mr. Peco served as Controller and Financial Director for
various European Operations for Avon Products, Inc. for over 20 years.
Jaime Lopez Guirao serves as President, Global Operations. For more than the
prior five years, Mr. Guirao was employed by Avon Products, Inc., holding
several operational, management and Country President positions in Europe and
the Americas.
Alan Fearnley currently serves as Senior Vice President of Global Marketing
of the Company. For the past year, Mr. Fearnley served as Vice President of
Marketing for Dermatologica. Prior to that, Mr. Fearnley took a year's
sabbatical to attend the Sloan Fellowship Masters Program at the London
Business School. During this sabbatical, Mr. Fearnley also served as
consultant to various companies. From 1987 to 1995, Mr. Fearnley served as
Senior Vice President of Global Marketing of Jafra.
Donald J. Gogel has been a director of the Company since January 1998. Mr.
Gogel has served as President and a director of CD&R since 1995 and, since
1989, has been a principal of CD&R. Mr. Gogel is also a limited partner of
CD&R Associates V Limited Partnership ("Associates V"), the general partner of
CD&R Fund V, and President and a director of CD&R Investment Associates II,
Inc. ("Investment Associates II"), a Cayman Islands exempted company that is
the managing general partner of Associates V. Mr. Gogel is a director of
Kinko's, Inc., a corporation in which Fund V has an investment, APS Holding
Corporation, a corporation in which an investment fund managed by CD&R has an
investment, and Turbochef, Inc. Mr. Gogel's business address is 375 Park
Avenue, New York, New York 10152.
Steven D. Goldstein has been a director of the Company since July 1998 and
is the Chairman and Chief Executive Officer of Invenet, LLC. Prior to joining
Invenet, LLC, Mr. Goldstein was employed as President, Credit of Sears,
Roebuck & Co. From 1982 to 1996, Mr. Goldstein was employed by American
Express Co., serving as the Chairman and Chief Executive Officer of American
Express Bank.
Thomas E. Ireland has been a director of the Company since March 1998 and is
a principal of CD&R, a limited partner of Associates V and a shareholder of
Investment Associates II. Prior to joining CD&R in 1997, Mr. Ireland served as
a senior managing director of Alvarez & Marsal, Inc. Prior to joining Alvarez
& Marsal in 1988, Mr. Ireland served as a managing director of Magten Asset
Management, a registered investment advisor, and was a vice president of
Citibank, N.A. Mr. Ireland also serves on the board of directors of the Maine
Coast Heritage Trust. Mr. Ireland's business address is 375 Park Avenue, New
York, New York 10152.
David A. Novak has been a director of the Company since January 1998, and is
a professional employee of CD&R and a limited partner of Associates V. Prior
to joining CD&R in 1997, Mr. Novak worked in the Merchant Banking and
Investment Banking Divisions of Morgan Stanley & Co. Incorporated and for the
Central European Development Corporation. Mr. Novak's business address is 375
Park Avenue, New York, New York 10152.
Paul Orfalea has been a director of the Company since July 1998 and is the
founder of the Kinko's chain. For more than the prior five years, Mr. Orfalea
has been employed by Kinko's, Inc., serving as its Chairperson. Mr. Orfalea is
also a director of DataProse, Inc., Espresso Caffe Corp., Glendale Federal
Bank and Kinko's, Inc.
Ann Reese has been a director of the Company since July 1998. From 1992
until March 1998, Ms. Reese was employed by ITT Corporation, serving most
recently as Chief Financial Officer.
Edward H. Rensi has been a director of the Company since July 1998. For more
than the prior five years, Mr. Rensi has been employed by McDonalds USA,
serving most recently as President and Chief Executive Officer. Mr. Rensi also
serves as a director of Snap-On Inc. and I.S.C. Corporation, and serves as a
member of the compensation committee of the board of directors of Snap-On Inc.
60
<PAGE>
Christopher A. Sinclair has been a director of the Company since July 1998
and is the President and Chief Executive Officer of Cutter Capital LLC. Prior
to that, Mr. Sinclair served from 1996 to 1998 as the President and Chief
Executive Officer of Quality Food Inc. From 1984 to 1996, Mr. Sinclair was
employed by Pepsico, Inc., serving most recently as the Chairman and Chief
Executive Officer of Pepsi-Cola Company. Mr. Sinclair also serves as a
director of Mattel, Inc., Perdue Farms, Inc. Venator Group (Woolworth) and
Grupo Azucarero de Mexico S.A. de C.V.
Kenneth D. Taylor has been a director of the Company since July 1998 and has
been the Chairman of Global Public Affairs, Inc. since October 1994. From 1991
to 1994, Mr. Taylor served as the Chairman of Taylor & Ryan, Inc.
Employment Agreements
Effective as of the Closing, the Company entered into employment agreements
with Messrs. Clark, Rubio and Mason and the Company has since entered into
employment agreements with each of Messrs. Guirao and Barrios (together with
Messrs. Clark, Rubio and Mason, the "Senior Executive Officers"). The
employment agreements of Messrs. Clark, Rubio and Mason have an initial term
of three years that becomes a continuous "rolling" two year term as of the
first anniversary of the Closing. The employment agreements of Messrs. Guirao
and Barrios have a continuous "rolling" term of two years, commencing as of
the Closing. Pursuant to their respective agreements, Messrs. Clark, Rubio,
Mason, Guirao and Barrios receive annual base salaries of $600,000, $500,000,
$450,000, $450,000 and $400,000, respectively. In addition, each of Messrs.
Clark, Rubio, Mason, Guirao and Barrios is eligible for a target annual bonus
equal to 60% of such Senior Executive Officer's annual base salary if the
Company achieves the performance goals established under its annual incentive
plan for executives and may receive a larger bonus if such goals are exceeded.
The employment agreements further provide that, in the event of a termination
of any such Senior Executive Officer's employment by the Company without
"cause" or by such executive for "good reason" (as defined below), such Senior
Executive Officer will be entitled to continued payments of his base salary
for the remaining term of his employment agreement and for payment of a pro
rata annual bonus for the year of termination provided that the Company
achieves the performance objectives applicable for such year. Under such
employment agreements, "Cause" means (i) the willful failure of the executive
substantially to perform his duties under the agreement (other than any such
failure due to the executive's physical or mental illness), (ii) the
executive's engaging in willful and serious misconduct that has caused or is
reasonably expected to result in material injury to employer or any of its
affiliates, (iii) the executive's conviction of, or entering a plea of guilty
or nolo contendere to, a crime that constitutes a felony or (iv) the willful
and material breach by the executive of any of his obligations hereunder or
under any other written agreement or covenant with employer or any of its
affiliates. "Without Cause" means a termination of the executive's employment
by employer other than due to Disability (as defined in the agreement) or for
Cause. Under the employment agreements, "Good Reason" generally means a
termination by the executive of his employment following the occurrence,
without the executive's consent, of any of the following events: (i) the
assignment to the executive of duties that are significantly different from,
and that result in a substantial diminution of, the duties that he was to
assume upon the closing of the Acquisition; (ii) the assignment to the
executive of a title that is different from and junior to the title specified
in the employment agreement; or (iii) the failure of the employer to obtain
the assumption of the employment agreement by any Successor (as defined in the
employment agreements) to the employer as contemplated by the employment
agreements. Each of the employment agreements also contains covenants
regarding nondisclosure of confidential information, noncompetition and
nonsolicitation.
Certain Incentive Arrangements
The Company has adopted a stock incentive plan (the "Stock Incentive Plan")
providing for the sale to members of senior management (including each Senior
Executive Officer) of up to 52,141 shares of Common Stock of Parent
(representing approximately 6.2% of the Common Stock outstanding or reserved
for issuance at the close of the September 1998 offering of shares of Common
Stock) and the issuance of options to purchase
61
<PAGE>
up to 104,282 additional shares of Common Stock (which in total represents
16.5% of the fully diluted Common Stock of Parent outstanding or reserved for
issuance at the close of such offering) under such plan. As of September 30,
1998, there were 25,602 additional options available for grants. At the
Closing of the Transactions, Messrs. Clarke, Rubio and Mason purchased 7,733,
6,800 and 5,370 shares of Common Stock of Parent, respectively, pursuant to
the Stock Incentive Plan and, on September 30, 1998, Messrs. Clark, Rubio,
Mason, Guirao, Barrios, and other senior management purchased 1,431, 2,364,
1,898, 3,000, 3,476, and 7,268 shares of Common Stock of Parent, respectively,
pursuant to the Stock Incentive Plan. The purchase price paid by the Senior
Executive Officers is $100 per share, which represents the fair market value
of each share of Common Stock based on the aggregate equity value of Parent
upon the consummation of the Acquisition. A portion of the cash purchase price
paid by each such Senior Executive Officer for such shares of Common Stock was
financed by loans from Chase Manhattan Bank on market terms. To help such
executives obtain such terms for such financing, the Company guaranteed up to
75% of the purchase price for the shares of Parent Common Stock purchased by
each such Senior Executive Officer.
In connection with his purchase of shares of Common Stock of Parent, at the
September closing of such purchases, each Senior Executive Officer was granted
options to purchase two additional shares of Parent Common Stock for each
share purchased by such Senior Executive Officer. The exercise price for all
of shares covered by such options was $100 per share, which represents the
fair market value of each share of Common Stock based on the aggregate equity
value of Parent upon the consummation of the Acquisition. Options covering
one-half of the shares of Parent Common Stock are expected to become vested in
three equal annual installments on the first three anniversaries of the date
of grant, subject to the Senior Executive Officer's continued employment. The
remaining options covering 50% of the shares are expected to become vested if,
and to the extent, the Company achieves certain annual and/or cumulative
EBITDA targets specified in the agreements pursuant to which such options are
expected to be granted or, regardless of whether such targets are achieved, on
the ninth year anniversary of such Senior Executive Officer's employment if
such Senior Executive Officer is employed by the Company on such date.
In addition, certain directors and other persons purchased an aggregate of
21,000 shares of Common Stock, representing approximately 2.49% of the Common
Stock of Parent outstanding or reserved for issuance as of the September 30,
1998 closing of such purchases.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
Parent owns, indirectly, all of the outstanding capital stock of the U.S.
Issuer and Jafra S.A. The table below sets forth the owners of 5% or more of
the Parent Common Stock and the ownership of Parent Common Stock by the
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Percent
Name Shares of Class
- ---- --------- --------
<S> <C> <C>
Clayton, Dubilier & Rice Fund V Limited Partnership (1)..... 769,600 92.73
Steven D. Goldstein......................................... 2,000 *
Paul Orfalea................................................ 2,500 *
Ann Reese................................................... 2,500 *
Edward H. Rensi............................................. 2,500 *
Christopher Sinclair........................................ 2,000 *
Kenneth D. Taylor........................................... 500 *
Ronald B. Clark............................................. 9,164 1.10
Gonzalo R. Rubio............................................ 9,164 1.10
Ralph S. Mason, III......................................... 7,268 *
Jaime Lopez Guirao.......................................... 3,000 *
Eugenio Lopez Barrios....................................... 3,476 *
All directors and executive officers as a group (15 persons)
(2)........................................................ 50,550 6.09
</TABLE>
- --------
(1) Associates V is the general partner of CD&R Fund V and has the power to
direct CD&R Fund V as to the voting and disposition of shares held by CD&R
Fund V. Investment Associates II is the managing general partner of
Associates V and has the power to direct Associates V as to its direction
of CD&R Fund V's voting and disposition of the shares held by CD&R Fund V.
No person controls the voting and dispositive power of Investment
Associates II with respect to the shares owned by CD&R Fund V. Each of
Associates V and Investment Associates II expressly disclaims beneficial
ownership of the shares owned by CD&R Fund V. The business address for each
of CD&R Fund V, Associates V and Investment Associates II is c/o Investment
Associates II, 1403 Foulk Road, Suite 106, Wilmington, Delaware 19803.
(2) Messrs. Clark, Rubio and Mason purchased shares of Parent Common Stock at
the Closing. On September 30, 1998, certain members of management, certain
directors and other persons purchased an aggregate of 40,437 shares of
Parent Common Stock in a transaction exempt from the registration
requirements of the Securities Act. Shares owned by CD&R Fund V are not
included herein. Mr. Gogel is an officer, director and shareholder of
Investment Associates II and Mr. Ireland is a shareholder of Investment
Associates II.
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<PAGE>
THE TRANSACTIONS
The following is a summary of the structure of the Acquisition and certain
provisions of the Acquisition Agreement and the Transition Services Agreement.
The Acquisition
On April 30, 1998, Parent completed the Acquisition of the Jafra Business
pursuant to the Acquisition Agreement. Parent, the U.S. Issuer, Jafra S.A. and
certain subsidiaries of Parent were organized to effect the Acquisition.
The Acquisition was accomplished as follows: (i) Jafra Cosmetics
International Inc., a California Corporation merged with the U.S. Issuer with
the U.S. Issuer surviving; (ii) Jafra S.A. acquired all the outstanding
capital stock of Grupo Jafra, which then merged with and into Jafra S.A., with
Jafra S.A. as the surviving entity; (iii) indirect subsidiaries of Parent
purchased the stock of Gillette subsidiaries conducting the Jafra Business in
Germany, Italy, the Netherlands and Switzerland; and (iv) indirect
subsidiaries of Parent acquired from various Gillette subsidiaries certain
assets used in the Jafra Business in Austria, Argentina, Colombia and
Venezuela.
The Acquisition Agreement
The purchase price for the Acquisition was approximately $202.5 million in
cash, including a $2.5 million purchase price adjustment paid to Gillette and
certain of its subsidiaries on November 3, 1998. The approximately $202.5
million purchase price of the Acquisition and approximately $24 million of
transaction-related fees and expenses were funded with (i) the gross proceeds
of $100 million of the Offering; (ii) an equity investment of approximately
$82.9 million by CD&R Fund V, certain directors, certain members of management
and other persons; and (iii) the borrowing of $25 million under the Term Loan
Facility and $18.6 million under the Revolving Credit Facility.
The following table illustrates the sources and uses of funds to consummate
the Transactions (dollars in millions):
<TABLE>
<CAPTION>
Sources
-------
<S> <C>
Revolving Credit Facility.. $ 18.6(a)
Term Loan Facility......... 25.0
Senior Subordinated Notes.. 100.0
------
Total Debt............... 143.6
Common Equity.............. 82.9
------
Total Sources............ $226.5
</TABLE>
<TABLE>
<CAPTION>
Uses
----
<S> <C>
Purchase Price to Gillette.......................................... $202.5
Transaction Fees and Expenses....................................... 24.0
------
Total Uses........................................................ $226.5
</TABLE>
- --------
(a) Represents the Acquisition-related drawdown of $18.6 under the $65.0
Revolving Credit Facility.
On November 3, 1998, Parent and certain of its subsidiaries paid a purchase
price adjustment of approximately $2.5 million (net of a receivable from
Gillette of $5.1 million) to Gillette and certain of its subsidiaries.
Pursuant to the Acquisition Agreement, Gillette has agreed, subject to
certain limitations, to retain or indemnify the Company for certain
liabilities and obligations relating to the Jafra Business prior to the
Closing, including liabilities and obligations relating to pre-Closing taxes,
employee compensation and other benefits and discontinued operations.
The Financings
In addition to the issuance of the Existing Notes, concurrently with and as
part of the financing for the Acquisition, Parent, the U.S. Issuer and Jafra
S.A. entered into the Senior Credit Agreement with the financial institutions
party thereto and Credit Suisse First Boston, as Administrative Agent,
providing for new senior secured credit facilities, including a $25 million
Term Loan Facility (all of which was drawn at the Closing) and a $65 million
multicurrency Revolving Credit Facility (approximately $18.6 million of which
has been drawn in connection with the Transactions). Chase Securities Inc.
acted as syndication agent in connection with the facilities. The initial
members of the lending syndicate were The Chase Manhattan Bank, Bank of
America National Trust and Savings Association, The Bank of Nova Scotia,
Marine Midland Bank, Union Bank of California, N.A., and The Bank of New York.
See "Description of the Senior Credit Agreement."
64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CD&R Fund V, which is Parent's largest stockholder, is a private investment
fund managed by CD&R. Amounts contributed to CD&R Fund V by its limited
partners are invested at the discretion of the general partner in equity or
equity-related securities of entities formed to effect leveraged buy-out
transactions and in the equity of corporations where the infusion of capital,
coupled with the provision of managerial assistance by CD&R, can be expected
to generate returns on investments comparable to returns historically achieved
in leveraged buyout transactions. The general partner of CD&R Fund V is
Associates V, and the general partners of Associates V are Investment
Associates II, CD&R Investment Associates, Inc. and CD&R Cayman Investment
Associates, Inc., a Cayman Islands exempted company. Each of Mr. Gogel, who is
President and a director of CD&R, President and a director of Investment
Associates II and a limited partner of Associates V, Mr. Ireland, who is a
principal of CD&R, a limited partner of Associates V and a shareholder of
Investment Associates II, and Mr. Novak, who is a professional employee of
CD&R and a limited partner of Associates V, are directors of Parent. See
"Management."
CD&R is a private investment firm which is organized as a Delaware
corporation. CD&R is the manager of a series of investment funds, including
CD&R Fund V. CD&R generally assists in structuring, arranging financing for
and negotiating the transactions in which the funds it manages invest. After
the consummation of such transactions, CD&R generally provides advisory,
management consulting and monitoring services to the companies in which its
investment funds have invested during the period of such fund's investment.
CD&R received at Closing an initial transaction fee of $2.7 million for
providing services related to the structuring, implementation and consummation
of the Acquisition, in addition to the reimbursement of out-of-pocket
expenses. Pursuant to a consulting agreement entered into at the Closing,
until the tenth anniversary of the Acquisition or the date on which CD&R Fund
V no longer has an investment in the Company, CD&R will receive an annual fee
of $500,000 (and reimbursement of out-of-pocket expenses) for providing
advisory, management consulting and monitoring services to the Company. Such
services include, among others, helping the Company to establish effective
banking, legal and other business relationships and assisting management in
developing and implementing strategies for improving the operational,
marketing and financial performance of the Company. As required by the terms
of the Company's lending arrangements, such fees were determined by arm's-
length negotiation and are believed by the Company to be reasonable.
CD&R, CD&R Fund V and Parent entered into an indemnification agreement,
pursuant to which Parent has agreed to indemnify the members of its board of
directors, as well as CD&R, CD&R Fund V, Associates V, Investment Associates
II and certain of their members, partners, associates and affiliates (the
"Indemnitees") to the fullest extent allowable under applicable law and to
indemnify the Indemnitees against any suits, claims, damages or expenses which
may be made against or incurred by them under applicable securities laws in
connection with offerings of securities of the Company, including the
Offering, liabilities to third parties arising out of any action or failure to
act by the Company, and, except in cases of gross negligence or intentional
misconduct, the provision by CD&R of advisory, management consulting and
monitoring services.
Ralph S. Mason, III, who became Vice Chairman, Executive Vice President and
General Counsel of Parent as of the Closing, was a partner in the law firm of
Mason, Taylor & Colicchio. Prior to Closing, Mr. Mason and the law firm of
Mason, Taylor & Colicchio acted as legal counsel for the new management team,
including Messrs. Clark, Rubio and Mason, in connection with the Transactions.
The Company has entered into employment agreements with 11 members of
management, including Messrs. Clark, Rubio and Mason. The employment
agreements of Messrs. Clark and Rubio provide that each will be a director of
Parent during the term of his employment. See "Management--Employment
Agreements."
Members of management financed a portion of the cash purchase price of the
shares of Parent Common Stock they acquired through loans from the Chase
Manhattan Bank on market terms. To help members of management obtain such
terms for such financing, the Company fully and unconditionally guaranteed up
to 75% of the purchase price for the shares of Parent Common Stock purchased
by each such member of management.
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DESCRIPTION OF THE SENIOR CREDIT AGREEMENT
General. In connection with the Transactions, the U.S. Issuer and Jafra S.A.
(the "Borrowers") and Parent entered into the Senior Credit Agreement with the
financial institutions party thereto and Credit Suisse First Boston, as
Administrative Agent (the "Agent"). Chase Securities Inc. acted as syndication
agent in connection with the facilities. The initial members of the lending
syndicate were The Chase Manhattan Bank, Bank of America National Trust and
Savings Association, The Bank of Nova Scotia, Marine Midland Bank, Union Bank
of California, N.A., and The Bank of New York. The following is a description
of the material terms of the Senior Credit Agreement and the related loan
documents (the "Credit Documentation") and is subject to and qualified in its
entirety by reference to the Credit Documentation, which has been filed as
Exhibits to the Registration Statement of which this Prospectus is a part.
The Senior Credit Agreement provides for senior secured credit facilities in
an aggregate principal amount of up to $90.0 million, consisting of (i) a
multicurrency revolving credit facility in an aggregate principal amount of up
to $65.0 million (the "Revolving Credit Facility") and (ii) a term loan
facility in an aggregate principal amount of $25.0 million (the "Term Loan
Facility", and together with the Revolving Credit Facility, the "Credit
Facilities"). The U.S. Issuer borrowed $15.0 million under the Term Loan
Facility and will be entitled to borrow up to 100% of the Revolving Credit
Facility available to it from time to time; Jafra S.A. borrowed $10.0 million
under the Term Loan Facility and is entitled to borrow up to 50% of the
Revolving Credit Facility available to it from time to time.
Use of Facility. In connection with the Transactions, the Borrowers borrowed
the entire amount available under the Term Loan Facility and approximately
$18.6 million under the Revolving Credit Facility, as part of the financing
for the Acquisition. See "The Transactions." The remaining unused commitment
under the Revolving Credit Facility as of November 30, 1998 was $40.0 million.
The remaining unused commitment will be available to the Borrowers from time
to time for general corporate purposes.
Guarantee. The obligations of each Borrower under the Senior Credit
Agreement and the other Credit Documentation is unconditionally guaranteed by
Parent. Each Borrower's obligations are also guaranteed by the other Borrower
on a senior basis, including a 30-day standstill period prior to enforcement
of each such guarantee. The U.S. Issuer's obligations under the Senior Credit
Agreement will also be guaranteed by each subsequently acquired or organized
U.S. subsidiary of the U.S. Issuer, subject to certain exceptions. Jafra
S.A.'s obligations under the Senior Credit Agreement are also guaranteed by
each existing and subsequently acquired or organized subsidiary of Jafra S.A.
Subsequently organized U.S. subsidiaries of Parent (other than those specified
above) will guarantee the obligations of the Borrowers under the Senior Credit
Agreement and other Credit Documentation.
Security. Each Borrower's obligations under the Senior Credit Agreement and
each guarantor's obligations under the related guarantees are secured as fully
as is permitted by applicable law by substantially all of the assets of
Parent, the U.S. Issuer, Jafra S.A., each existing and subsequently acquired
or organized subsidiary of each of Jafra S.A., and each subsequently acquired
or organized U.S. subsidiary of the U.S. Issuer, including, but not limited
to, (a) a pledge of all the capital stock of the Borrowers, certain
intermediate holding companies and each existing and each subsequently
acquired or organized direct subsidiary of each of the Borrowers (which
pledge, in the case of any foreign subsidiary of the U.S. Issuer, shall be
limited to 65% of the capital stock of such foreign subsidiary) and (b)
security interests in, and mortgages on, substantially all tangible and
intangible assets of the Borrowers and each existing and each subsequently
acquired or organized subsidiary of Jafra S.A. and each existing and each
subsequently acquired or organized U.S. subsidiary of the U.S. Issuer.
Amortization; Interest; Fees; Maturity. Loans under the Term Loan Facility
are repayable in quarterly principal payments over six years. Loans under the
Revolving Credit Facility mature on the sixth anniversary of the Closing date.
Loans under the Term Loan Facility and the Revolving Credit Facility will bear
interest at a rate per annum equal, at the applicable Borrower's option, to
(a) an adjusted London inter-bank offered rate ("Adjusted LIBOR") plus the
applicable margin (the "Adjusted LIBOR Margin") or (b) an Alternate Base Rate
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(equal to the higher of the Agent's prime rate and the Federal Funds Effective
Rate plus 1/2 of 1% plus the applicable margin (the "Applicable ABR Margin"
and, together with the Applicable LIBOR Margin, the "Applicable Margins")
where the Applicable Margins are determined by reference to the levels
specified for the Company's ratio of (i) Total Debt (as defined in the Senior
Credit Agreement) outstanding as of the date of determination to (ii)
Consolidated EBITDA (as defined in the Senior Credit Agreement) for the period
of four consecutive fiscal quarters most recently ended as of such date of
determination. Notwithstanding the foregoing, the Applicable LIBOR Margin and
the Applicable ABR Margin for loans under the Credit Facilities will not
exceed 2.625% and 1.625%, respectively. Overdue amounts under the Senior
Credit Agreement not paid when due shall bear interest at a default rate equal
to 2.00% per annum above the otherwise applicable rate. The Borrowers may
enter into certain interest rate protection arrangements following the Closing
with respect to a portion of their indebtedness under the Senior Credit
Agreement that will be designed to place a cap on the interest rates payable
thereon.
The transaction fees and expenses set forth in the sources and uses of funds
for the Acquisition (see "The Transactions") include transaction fees payable
in connection with the commitments under the Senior Credit Agreement. In
addition, a commitment fee is payable quarterly on the daily average undrawn
portion of the Revolving Credit Facility, in the amount of 0.50% per annum or
less (depending on the ratio described in the preceding paragraph).
Prepayments. The Senior Credit Agreement permits voluntary prepayment of
loans thereunder without premium or penalty. Subject to certain exceptions,
mandatory prepayments are required to be made from (a) 100% of net cash
proceeds of all non-ordinary asset sales or other dispositions of property
(including insurance and condemnation proceeds); (b) 100% of the net cash
proceeds of issuances of indebtedness by the Company, other than as permitted
by the Senior Credit Agreement; and (c) 50% of excess cash flow for each
fiscal year in which the Company's Total Debt on the last day of such fiscal
year to its Consolidated EBITDA for the four fiscal quarters then ended is
greater than or equal to 3.75:1.00. Such mandatory prepayments will be applied
to loans outstanding under the Term Loan Facility until the loans thereunder
have been paid in full.
Covenants and Events of Default. The Senior Credit Agreement contains
covenants that, among other things, restrict the ability of the Company and
its subsidiaries to dispose of assets, incur additional debt, guarantee
obligations or contingent liabilities, repay the Notes, pay dividends, prepay
other indebtedness (including a specific restriction on prepayment of the
Notes), create liens on assets, make investments, loans or advances, engage in
mergers or consolidations, make capital expenditures or engage in certain
transactions with affiliates, and will otherwise restrict corporate
activities. The Senior Credit Agreement also contains certain financial
covenants, including (i) a maximum consolidated leverage ratio which commenced
on September 30, 1998 at a ratio of 6.25 to 1.00 and decreases to 3.50 to 1.00
after December 30, 2002, and (ii) a minimum consolidated interest coverage
ratio, which will commence on December 31, 1998 at a ratio of 1.50 to 1.00 and
increases to 3.00 to 1.00 after December 31, 2002.
The Senior Credit Agreement also contains provisions that prohibit any
modification of the Indenture in any manner that adversely affects the
interests of the Lenders.
The Senior Credit Agreement contains customary events of default, including,
among others, non-payment of principal or interest, bankruptcy, breach of
covenants and change of control. If for any reason either Borrower is unable
to comply with the terms of the Senior Credit Agreement, including the
covenants included therein, such noncompliance could result in an event of
default under the Senior Credit Agreement and could result in an acceleration
of the payment of the indebtedness outstanding under the Senior Credit
Agreement. Upon a bankruptcy default, the lenders' commitments under the
Senior Credit Agreement immediately terminate and the loans under the Senior
Credit Agreement become immediately due and payable. Upon other events of
default (including defaults under the Notes, the Guarantee Agreements, the
Security Documents and the Indemnity, Subrogation and Contribution Agreement
contemplated by the Senior Credit Agreement), the Agent may, with the consent
of the lenders, declare the commitments to be terminated and the loans to be
due and payable.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
Terms of the Exchange Offer
General
In connection with the issuance of the Existing Notes pursuant to a Purchase
Agreement, dated as of April 28, 1998, between the Issuers and the Initial
Purchasers, the Initial Purchasers and their respective assignees became
entitled to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Issuers have agreed to use
their reasonable best efforts to (i) file with the Commission within 180 days
after April 30, 1998, the date the Existing Notes were issued (the "Issue
Date"), the Registration Statement of which this Prospectus is a part with
respect to a registered offer to exchange the Existing Notes for the New Notes
and (ii) cause the Registration Statement to be declared effective under the
Securities Act within 210 days after the Issue Date. The Company will keep the
Exchange Offer open for not less than 21 business days after the date notice
of the Exchange Offer is mailed to holders of the Existing Notes. The Exchange
Offer being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the
Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Existing Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will
be accepted for exchange. New Notes will be issued in exchange for an equal
principal amount of outstanding Existing Notes accepted in the Exchange Offer.
Existing Notes may be tendered only in integral multiples of $1,000. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders as of January 19, 1999. The Exchange Offer is not
conditioned upon any minimum principal amount of Existing Notes being tendered
for exchange. However, the obligation to accept Existing Notes for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
herein under "--Conditions."
Existing Notes shall be deemed to have been accepted as validly tendered
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Existing Notes for the purposes of receiving the New Notes and delivering
New Notes to such holders.
Based on interpretations by the Staff of the Commission as set forth in no-
action letters issued to third parties (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), the Issuers believe
that the New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is a broker-dealer or an "affiliate" of the Issuers within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that (i) such New Notes are acquired in the ordinary course of
business, (ii) at the time of the commencement of the Exchange Offer such
holder has no arrangement or understanding with any person to participate in a
distribution of such New Notes and (iii) such holder is not engaged in, and
does not intend to engage in, a distribution of such New Notes. The Issuers
have not sought, and do not intend to seek, a no-action letter from the
Commission with respect to the effects of the Exchange Offer, and there can be
no assurance that the staff would make a similar determination with respect to
the New Notes as it has in such no-action letters.
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By tendering Existing Notes in exchange for New Notes and executing the
Letter of Transmittal, each holder will represent to the Issuers that: (i) any
New Notes received by such holder will be acquired in the ordinary course of
business, (ii) such holder will have no arrangements or understanding with any
person to participate in a distribution of the Existing Notes or the New Notes
within the meaning of the Securities Act, (iii) such holder is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Issuers or
if it is an affiliate, such holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable, (iv) if such holder is not a broker-dealer, that it is not engaged
in, and does not intend to engage in, the distribution of the New Notes, (v)
if such holder is a broker-dealer, that it will receive New Notes for its own
account in exchange for Existing Notes that were acquired as a result of
market-making activities and that it will deliver a prospectus in connection
with any resale of such New Notes, and (vi) that it is not acting on behalf of
any person who could not truthfully make the foregoing representations.
Each broker-dealer that receives New Notes for its own account in exchange
for Existing Notes where such Existing Notes were acquired by such broker-
dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act and that it has not entered into any arrangement or
understanding with the Issuers or an affiliate of the Issuers to distribute
the New Notes in connection with any resale of such New Notes. See "Plan of
Distribution."
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Existing Notes who do not exchange their Existing Notes
for New Notes in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Existing Notes, unless such
Existing Notes are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Issuers and Note Guarantors will
have no obligation to do), except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws.
The Issuers and, by acquiring the Notes, the holders of Notes agree to treat
$400 of each $1,000 principal amount of the Notes as indebtedness of Jafra
S.A. and $600 of each $1,000 principal amount of the Notes as indebtedness of
the U.S. Issuer for all U.S. federal, state and local and non-U.S. tax
purposes.
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean February 26, 1999 (21 business days
following the commencement of the Exchange Offer), unless the Issuers, in
their sole discretion, extend the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. Notwithstanding any extension of the Exchange Offer, if the Exchange
Offer is not consummated by December 28, 1998, additional interest will accrue
on the Existing Notes at the rate of (a) prior to March 29, 1999, (until the
Exchange Offer is consummated), 0.25% per annum and (b) thereafter (until the
Exchange Offer is consummated), 0.50% per annum. See "Registration Rights."
To extend the Expiration Date, the Company will notify the Exchange Agent of
any extension by oral or written notice and will notify the holders of the
Existing Notes by means of a press release or other public announcement prior
to 9:00 A.M., New York City time, on the next business day after the
previously scheduled Expiration Date. Such announcement may state that the
Issuers are extending the Exchange Offer for a specified period of time.
The Issuers reserve the right (i) to delay acceptance of any Existing Notes,
to extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Existing Notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by the Issuers prior to the Expiration Date, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the holders of the Existing Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the Exchange Agent. If the
Exchange Offer is amended in a manner determined by the Issuers to constitute
a material change, the
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Issuers will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Existing Notes of such amendment,
including by filing a post-effective amendment to the Registration Statement
of which this Prospectus is a part if required to do so under the Securities
Act.
Without limiting the manner in which the Issuers may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuers shall have no obligations to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Interest on the New Notes
The New Notes will accrue interest at the rate of 11 3/4% per annum from the
Issue Date of the Existing Notes. Interest on the New Notes is payable on May
1 and November 1 of each year, commencing November 1, 1998.
Procedures for Tendering
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of
a book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes
into the Exchange Agent's account at The Depository Trust Company (the "Book-
Entry Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date or (ii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR
OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO THE COMPANY. Delivery of all
documents must be made to the Exchange Agent at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders.
The tender by a holder of Existing Notes will constitute an agreement
between such holder and the Issuer in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal. Any
beneficial owner whose Existing Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor" institution within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution") unless
the Existing Notes tendered pursuant thereto is tendered for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by the Issuers, evidence satisfactory
to the Issuers of their authority to so act must be submitted with the Letter
of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Existing Notes will be determined by
the Issuers in their sole discretion, which determination will be final and
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binding. The Issuers reserve the absolute right to reject any and all Existing
Notes not properly tendered or any Existing Notes which, if accepted, would,
in the opinion of counsel for the Issuers, be unlawful. The Issuers also
reserve the absolute right to waive any irregularities or conditions of tender
as to particular Existing Notes. The Issuers' interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Existing Notes must be
cured within such time as the Issuers shall determine. Neither the Issuers,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Existing
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Existing Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Existing Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost to such holder by the Exchange Agent, unless otherwise provided
in the Letter of Transmittal, as soon as practicable following the Expiration
Date.
In addition, the Issuers reserve the right in their sole discretion, subject
to the provisions of the Indenture, (i) to purchase or make offers for any
Existing Notes that remains outstanding subsequent to the Expiration Date or,
as set forth under "--Conditions", (ii) to terminate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement, (iii) to
redeem Existing Notes as a whole or in part at any time and from time to time,
as set forth under "Description of Notes--Optional Redemption" and (iv) to the
extent permitted by applicable law, to purchase Existing Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
Acceptance of Existing Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Existing Notes properly tendered will be accepted promptly after the
Expiration Date, and the New Notes will be issued promptly after acceptance of
the Existing Notes. See "--Conditions." For purposes of the Exchange Offer,
Existing Notes shall be deemed to have been accepted as validly tendered for
exchange when, as and if the Issuers have given oral or written notice thereof
to the Exchange Agent.
In all cases, issuance of New Notes for Existing Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a Book-Entry Confirmation of such Existing Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Existing Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer, such unaccepted or
such nonexchanged Existing Notes will be credited to an account maintained
with such Book- Entry Transfer Facility as promptly as practicable after the
expiration or termination of the Exchange Offer.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Existing Notes by causing
the Book-Entry Transfer Facility to transfer such Existing Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for transfer. However, the
Letter of Transmittal or facsimile thereof with any required signature
guarantees and any other required documents must, in any case, be transmitted
to and received by the Exchange Agent at one of the addresses set forth below
under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
Exchanging Book-Entry Notes
The Exchange Agent and the Book Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Existing Notes.
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Any participant in the Book Entry Transfer Facility may make book-entry
delivery of Existing Notes by causing the Book Entry Transfer Facility to
transfer such Existing Notes into the Exchange Agent's account in accordance
with the Book Entry Transfer Facility's ATOP procedures for transfer. However,
the exchange for the Existing Notes so tendered will only be made after a
Book-Entry Confirmation of such book-entry transfer of Existing Notes into the
Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as such term is defined in the next sentence) and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by the Book Entry Transfer Facility and received
by the Exchange Agent and forming part of a Book-Entry Confirmation, which
states that the Book Entry Transfer Facility has received an express
acknowledgment from a participant tendering Existing Notes that are the
subject of such Book-Entry Confirmation that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal, and that the
Issuers may enforce such agreement against such participant.
Guaranteed Delivery Procedures
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed Letter
of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuers (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of
Existing Notes and the amount of Existing Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, a Book-Entry Confirmation and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent and (iii) a Book-Entry Confirmation and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within three NYSE trading days after the date of execution of
the Notice of Guaranteed Delivery.
Withdrawal of Tenders
Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "--Exchange
Agent." Any such notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility from which the Existing Notes was
tendered, identify the principal amount of the Existing Notes to be withdrawn,
and specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Existing Notes and otherwise comply
with the procedures of such facility. All questions as to the validity, form
and eligibility (including time of receipt) of such notice will be determined
by the Issuers, whose determination shall be final and binding on all parties.
Any Existing Notes so withdrawn will be deemed not be have been validly
tendered for exchange for purposes of the Exchange Offer. Any Existing Notes
which have been tendered for exchange but which are not exchanged for any
reason will be credited to an account maintained with such Book-Entry Transfer
Facility for the Existing Notes as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Existing Notes may be retendered by following one of the procedures described
under "--Procedures for Tendering" and "--Book-Entry Transfer" above at any
time on or prior to the Expiration Date.
Conditions
The Company has no obligation to consummate the Exchange Offer if the New
Notes to be received by such holder or holders of Existing Notes in the
Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Exchange Act and without material
restrictions under the "blue sky" or securities laws of the several states of
the United States. All conditions to the Exchange Offer (with the exception of
certain necessary governmental approvals) must be satisfied or waived prior to
the Expiration Date.
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Exchange Agent
The State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail: By Overnight Carrier
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Corporate Trust Department Attention: Corporate Trust Department
Kellie Mullen Kellie Mullen
By Hand: in New York (as Drop Agent) By Hand: in Boston
State Street Bank and Trust Company, State Street Bank and Trust Company
N.A. Two International Place
61 Broadway, 15th Floor Fourth Floor, Corporate Trust
Corporate Trust Window Boston, Massachusetts 02110
New York, New York 10006
For Information Call:
(617) 664-5587
By Facsimile Transmission
(for Eligible Institutions only):
(617) 664-5314
Attention: Corporate Trust Department
Confirm by Telephone:
(617) 664-5314
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuers. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Issuers.
The Issuers will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Issuers, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Issuers may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents
to the beneficial owners of the Existing Notes, and in handling or forwarding
tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Issuers, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Issuers will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, New Notes or
Existing Notes for principal amounts not tendered or accepted for exchange are
to be registered or issued in the name of any person other than the registered
holder of the Existing Notes tendered, or if tendered Existing Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Existing Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
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<PAGE>
payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Consequences of Failure to Exchange
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Issuers do not currently anticipate that they will register the
Existing Notes under the Securities Act. To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Existing Notes could be adversely affected.
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REGISTRATION RIGHTS
The following is a description of the material provisions of the
Registration Rights Agreement that does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions
of the Registration Rights Agreement, which has been filed as an Exhibit to
the Registration Statement of which this Prospectus is a part.
Pursuant to the Registration Rights Agreement, the Issuers and the Note
Guarantors will file a shelf registration statement covering resales of
Existing Notes or New Notes, as the case may be (a "Shelf Registration
Statement"), if (i) any changes in the applicable interpretations of the staff
of the SEC do not permit the Issuers to effect such an Exchange Offer, (ii)
the Exchange Offer is not consummated within 240 days of the Issue Date, (iii)
under certain circumstances, the Initial Purchasers so request with respect to
Existing Notes not eligible to be exchanged for New Notes in the Exchange
Offer, or (iv) if any holder of Existing Notes (other than an Initial
Purchaser) is not permitted by applicable law to participate in the Exchange
Offer or does not receive freely tradeable New Notes in the Exchange Offer
(other than, in either case, due solely to the status of such holder as an
affiliate of either of the Issuers or due to such holder's inability to make
the representations referred to above). If any of these events occur, the
Issuers and the Note Guarantors will, at their own expense, use their
reasonable best efforts (a) as promptly as reasonably practicable, to file a
Shelf Registration Statement covering resales of Existing Notes or New Notes,
as the case may be, and (b) to cause the Shelf Registration Statement to be
declared effective under the Securities Act within 270 days after the Issue
Date. After such Shelf Registration Statement is declared effective, the
Issuers will use their reasonable best efforts to keep the Shelf Registration
Statement in effect until the earlier of two years from the Issue Date (or one
year in the case of a shelf registration effected at the request of the
Initial Purchasers) or such shorter period that will terminate when all the
Existing Notes or New Notes covered by the Shelf Registration Statement (i)
have been sold pursuant thereto or (ii) are distributed to the public pursuant
to Rule 144 or become eligible for resale pursuant to Rule 144 without volume
restriction, if any. Under certain circumstances, the Issuers may suspend the
availability of the Shelf Registration Statement for certain periods of time.
The Issuers will, in the event a Shelf Registration Statement is filed,
among other things, provide to each holder for whom such Shelf Registration
Statement was filed, copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required
to permit unrestricted resales of the Existing Notes or the New Notes, as the
case may be. A holder of Existing Notes selling such Existing Notes pursuant
to the Shelf Registration Statement generally would be required to be named as
a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by certain provisions of the Registration Rights Agreement (including
certain indemnification obligations). In addition, each such holder of
Existing Notes will be required, among other things, to deliver information to
be used in connection with the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to benefit
from the provisions regarding additional interest set forth in the following
paragraph.
Additional Interest. Although the Issuers intend to file one or more
registration statements described above, as required, there can be no
assurance that any such registration statement (other than the one of which
this Prospectus is a part) will be filed, or if filed, that any thereof will
become effective. From the date of a Registration Default (as defined below)
to the date on which such Registration Default has been cured, additional
interest will accrue on the Transfer Restricted Notes (as defined below) at
the rate of (a) prior to the 91st day of such period (for so long as such
period is continuing), 0.25% per annum and (b) thereafter (so long as such
period is continuing), 0.50% per annum. Any such additional interest shall not
exceed such respective rates for such respective periods, and shall not in any
event exceed 0.50% per annum in the aggregate, regardless of the number of
Registration Defaults that shall have occurred and be continuing. Any such
additional interest shall be paid in the same manner and on the same dates as
interest payments in respect of Transfer Restricted Notes. Following the cure
of all Registration Defaults, the accrual of such additional interest will
cease. All Registration Defaults shall be deemed cured upon consummation of
the Exchange Offer.
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For purposes of the foregoing, each of the following events is a
"Registration Default": (i) neither the Exchange Offer Registration Statement
nor a Shelf Registration Statement has been filed with the SEC on or before
the 180th day after the Issue Date; (ii) the Exchange Offer is not consummated
on or before the 240th day after the Issue Date; (iii) if a Shelf Registration
Statement is required to be filed under the Registration Rights Agreement, (A)
the Shelf Registration Statement is not declared effective by the SEC on or
before the 270th day after the Issue Date (or, in the case of a Shelf
Registration Statement required to be filed in response to any change in
applicable interpretations of the staff of the SEC, if later, on or before the
90th day after publication of such change) or (B) during the time the Issuers
are required to use their reasonable best efforts to keep the Shelf
Registration in effect, the Issuers shall have suspended and be continuing to
suspend the availability of the Shelf Registration Statement for more than 30
days in the aggregate in any consecutive twelve-month period.
For purposes of the foregoing, "Transfer Restricted Notes" means each
Existing Note until (i) the date on which such Note has been exchanged for a
freely transferable Exchange Note in the Exchange Offer, (ii) the date on
which such Note has been effectively registered under the Securities Act and
disposed of in accordance with a Shelf Registration Statement, or (iii) the
date on which such Note is distributed to the public pursuant to Rule 144 of
the Securities Act or is eligible for resale pursuant to Rule 144 without
volume restriction, if any.
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DESCRIPTION OF NOTES
General
The Existing Notes were issued, and the New Notes offered hereby will be
issued, under an Indenture, dated as of April 30, 1998 (the "Indenture"),
among the U.S. Issuer, Jafra S.A., the initial Note Guarantors (as hereafter
defined) and State Street Bank and Trust Company, as Trustee (the "Trustee").
Immediately after the issuance of the Existing Notes, (i) the U.S. Issuer
merged with Jafra Cosmetics International, Inc., a California corporation,
with the U.S. Issuer as the surviving entity and (ii) Jafra S.A. acquired the
stock of Grupo Jafra, which then merged into Jafra S.A., with Jafra S.A.
surviving as a wholly owned subsidiary of Parent. Following such mergers, the
U.S. Issuer and Jafra S.A. became the primary obligors on the Notes. Copies of
the form of the Indenture is available upon request to the Company.
The following is a summary of the material provisions of the Indenture and
the Notes after giving effect to the Acquisition and related transactions,
including such mergers. It does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
to be made a part thereof by the Trust Indenture Act of 1939, as amended
("TIA"). The capitalized terms defined in "--Certain Definitions" below are
used in this "Description of Notes" as so defined. As used herein, the term
"Company" refers to Parent, the term "JCI" refers to the U.S. Issuer and the
term "Issuers" refers to the U.S. Issuer and Jafra S.A.
Principal of, and premium, if any, and interest on, the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or
agency of the Issuers in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, at 61 Broadway,
15th Floor, New York, New York 10006), except that, at the option of the
Issuers, payment of interest may be made by check mailed to the address of the
registered holders of the Notes as such address appears in the Note Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Issuers may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Terms of the Notes
The Notes will be issued initially in an aggregate principal amount of
$100.0 million. Additional securities may be issued under the Indenture in one
or more series from time to time ("Additional Notes"), subject to the
limitations set forth under "--Certain Covenants--Limitation on Indebtedness,"
which may vote as a class with the Notes and otherwise be treated as Notes for
purposes of the Indenture.
The Notes are the several obligations of the Issuers. Of the aggregate
principal amount of Notes of $100.0 million, JCI will be severally liable with
respect to the payment of $60.0 million of principal, together with interest
thereon (the "JCI Portion"), and Jafra S.A. will be severally liable with
respect to the payment of $40.0 million of principal, together with interest
thereon (the "Jafra S.A. Portion"). Except as otherwise described herein, JCI
and Jafra S.A. will be severally liable in respect of each outstanding Note in
the relative proportions of the JCI Portion and the Jafra S.A. Portion,
respectively (each such portion, a "Portion").
The Notes will mature on May 1, 2008. Each Note will bear interest at a rate
per annum shown on the front cover of this Offering Circular from the date of
issuance, or from the most recent date to which interest has been paid or
provided for, payable semiannually in cash to Holders of record at the close
of business on the April 15 or October 15 immediately preceding the interest
payment date on May 1 and November 1 of each year, commencing November 1,
1998.
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Optional Redemption
Except as set forth in the following paragraph or under "--Redemption for
Changes in Withholding Taxes," the Notes will not be redeemable at the option
of the Issuers prior to May 1, 2003. Thereafter, the Notes will be redeemable,
at the Issuers' option, in whole or in part, and from time to time on and
after May 1, 2003 and prior to maturity; provided, however, that any such
optional redemption may only be effected concurrently by both of the Issuers
on a pro rata basis as between their respective Portions, based on the
relative proportions of the JCI Portion and the Jafra S.A. Portion. Such
redemption may be made upon notice mailed by first-class mail to each Holder's
registered address, not less than 30 nor more than 60 days prior to the
redemption date. Any such redemption and notice may, in the Issuers'
discretion, be subject to the satisfaction of one or more conditions
precedent. The Notes will be so redeemable at the following redemption prices
(expressed as a percentage of principal amount), plus accrued interest, if
any, to the relevant redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
May 1 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Period Price
------ ----------
<S> <C>
2003........................................ 105.875%
2004........................................ 103.917
2005........................................ 101.958
2006 and thereafter......................... 100.000
</TABLE>
In addition, at any time and from time to time prior to May 1, 2001, the
Issuers at their option may concurrently redeem the Notes on a pro rata basis
as between their respective Portions (based on the relative proportions of the
JCI Portion and the Jafra S.A. Portion), in an aggregate principal amount
equal to up to 35% of the original aggregate principal amount of the Notes
(including the principal amount of any Additional Notes), with funds in an
aggregate amount (the "Redemption Amount") not exceeding the aggregate cash
proceeds of one or more Equity Offerings (as defined below), at a redemption
price (expressed as a percentage of principal amount thereof) of 111.75% plus
accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that an aggregate
principal amount of the Notes equal to at least 65% of the original aggregate
principal amount of the Notes (including the principal amount of any
Additional Notes) must remain outstanding after each such redemption. "Equity
Offering" means a sale of Capital Stock (other than Disqualified Stock) (x)
that is a sale of Capital Stock of the Company, or (y) proceeds of which in an
amount equal to or exceeding the Redemption Amount are contributed to the
Company or any of its Restricted Subsidiaries. The Issuers may make such
redemption upon notice mailed by first-class mail to each Holder's registered
address, not less than 30 nor more than 60 days prior to the redemption date
(but in no event more than 180 days after the completion of the related Equity
Offering). Any such notice may be given prior to the completion of the related
Equity Offering, and any such redemption or notice may, at the Issuers'
discretion, be subject to the satisfaction of one or more conditions
precedent, including but not limited to the completion of the related Equity
Offering.
Selection
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. In the event of any partial
redemption (other than a redemption described under "--Redemption for Changes
in Withholding Taxes"), the several obligation of each Issuer for each Note
that remains outstanding shall continue in the same proportion as the relative
proportions of the JCI Portion and the Jafra S.A. Portion, respectively.
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Additional Amounts
All payments made on behalf of Jafra S.A. under or with respect to the Notes
or on behalf of any Note Guarantor (other than JCI) under or with respect to
any Note Guarantee (in any case a Person making such payment, a "Payor") shall
be made free and clear of and without withholding or deduction for or on
account of any present or future tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and other liabilities
related thereto) imposed or levied by or on behalf of the Governments of
Mexico, Luxembourg or the jurisdiction of incorporation, seat of management or
residence for income tax purposes of any future Jafra S.A. Subsidiary
Guarantor or any successors to the Company, Jafra S.A. or any Jafra S.A.
Subsidiary Guarantor (each a "Successor Jurisdiction"), as the case may be, or
of any territory thereof or by any authority or agency therein or thereof
having power to tax (hereinafter "Taxes"), unless the Payor is required to
withhold or deduct Taxes by law or by the interpretation or administration
thereof by the relevant government authority or agency. If a Payor is so
required to withhold or deduct any amount for or on account of Taxes from any
payment made under or with respect to the Notes or a Note Guarantee, such
Payor will be required to pay such additional amounts ("Additional Amounts")
as may be necessary so that the net amount received by each Holder (including
Additional Amounts) after such withholding or deduction will not be less than
the amount the Holder would have received if such Taxes had not been withheld
or deducted; provided, however, that no Additional Amounts will be payable
with respect to:
(i) any payment to a Holder which is subject to such Taxes by reason of
its (or the beneficial owner of the Notes) being connected with Mexico,
Luxembourg or any Successor Jurisdiction or any territory thereof other
than a connection arising from the mere holding of Notes or the receipt of
payments in respect of the Notes or the Note Guarantees;
(ii) any Taxes with respect to a Note presented for payment more than 30
days after the date on which such payment became due and payable or the
date on which payment thereof is duly provided for and notice thereof given
to the Holders, whichever occurs later, except to the extent that the
Holder of such Note would have been entitled to such Additional Amounts on
presenting such Note for payment on any date during such 30-day period;
(iii) Taxes that would not have been imposed but for the failure of the
Holder or beneficial owner of a Note to comply with any certification,
identification, information, or other documentation requirement under law,
regulation, administrative practice or an applicable treaty that is a
precondition to exemption from, or reduction in the rate of, the
imposition, deduction or withholding of Taxes, provided that at least 60
days prior to (a) the first payment date with respect to which this clause
(iii) shall be applied and (b) in the event of a change in such
certification, identification, information or other documentation
requirement, the first payment date subsequent to such change, the Payor
shall have notified the Trustee, in writing, that the Holders or beneficial
owners of the Notes will be required to provide such information or
documentation;
(iv) estate, inheritance, gift, sales, transfer, personal property or
other similar taxes imposed with respect to such Notes;
(v) any Tax which is only payable otherwise than by withholding or
deduction from payments in respect of the Notes or the Note Guarantees; and
(vi) any combination of items (i), (ii), (iii), (iv) and (v) above.
Each Payor will also make such withholding or deduction and remit the full
amount deducted or withheld to the relevant authority as and when required in
accordance with applicable law. Each Payor will furnish to the Trustee of the
Notes, within 30 days after the date the payment of any Taxes is due pursuant
to applicable law, certified copies of tax receipts evidencing such payment by
such Payor; provided, however, that if the relevant Payor is unable to obtain
such receipt within 30 days, notwithstanding such Payor's best efforts to
obtain such receipts, the Payor will furnish such receipts to the Trustee as
soon as receipts can be obtained.
Whenever in the Indenture there is mentioned, in any context, (a) the
payment of principal, (b) purchase prices in connection with a purchase of
Notes, (c) interest or (d) any other amount payable on or with respect to
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any of the Notes or a Note Guarantee, such reference shall be deemed to
include payment of Additional Amounts provided for in this section to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof.
Each Payor will pay any present or future stamp, court or documentary taxes
or any other similar taxes, charges or levies that arise in Mexico, Luxembourg
or any Successor Jurisdiction from the execution, delivery, registration of,
or enforcement of rights under, the Notes, the Indenture or any other document
or instrument in relation thereof.
The obligations of each Payor described under this heading shall survive any
termination, defeasance or discharge of the Indenture.
For a discussion of the reduction in Mexican withholding taxes applicable to
payments under or with respect to the Notes and the Note Guarantees, see
"Taxation."
Redemption for Changes in Withholding Taxes
The Jafra S.A. Portion of the Notes may be redeemed, at the option of Jafra
S.A., at any time as a whole but not in part, on not less than 30 nor more
than 60 days' notice, at a redemption price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest (if any) to the date of
redemption (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date), in the
event Jafra S.A., any successor to Jafra S.A. or any current or future Note
Guarantor of such Jafra S.A. Portion has become or would become obligated to
pay, on the next date on which any amount would be payable with respect to the
Notes, and such obligation cannot be avoided by such person's taking
reasonable measures available to it, any Additional Amounts in excess of
Additional Amounts that Jafra S.A., such successor or such Note Guarantor
would be required to pay if payments by Jafra S.A., such successor or such
Note Guarantor were subject to a 15% Mexican withholding tax as a result of a
change in or an amendment to applicable treaties or laws (including any
regulations promulgated thereunder) of Mexico (or any political subdivision or
taxing authority thereof or therein), or any change in or amendment to any
official position regarding the application or interpretation of such
treaties, laws or regulations, which change or amendment is announced or
becomes effective on or after the Issue Date ("Excessive Additional Amounts");
provided, however, that no such notice of redemption may be given earlier than
60 days prior to the earliest date on which Jafra S.A., such successor or such
Note Guarantor would, but for such redemption, be obligated to pay such
Excessive Additional Amounts. Prior to the publication of any notice of
redemption pursuant to this provision, Jafra S.A., any successor to Jafra S.A.
or any Note Guarantor will deliver to the Trustee (a) a certificate duly
signed by an officer of Jafra S.A., such successor or such Note Guarantor
stating that Jafra S.A., such successor or such Note Guarantor is entitled to
effect such redemption and setting forth a statement of facts showing that the
conditions precedent to the right of Jafra S.A., such successor or such Note
Guarantor so to redeem have occurred and (b) a written opinion of Mexican
legal counsel reasonably acceptable to the Trustee to the effect that Jafra
S.A., such successor or such Note Guarantor has or will become obligated to
pay such Excessive Additional Amounts as a result of an amendment or change
referred to in this provision.
Note Guarantees
The monetary obligations of the Issuers pursuant to the Notes, including any
repurchase obligation resulting from a Change of Control Triggering Event,
will be guaranteed on a senior subordinated basis by the Company. The
obligation of JCI with respect to the JCI Portion will also be guaranteed on a
senior subordinated basis by Jafra S.A. (subject to a 30-day standstill
period), and with certain exceptions, by each subsequently acquired or
organized U.S. Subsidiary of JCI. The obligation of Jafra S.A. with respect to
the Jafra S.A. Portion will also be guaranteed on a senior subordinated basis
by JCI (subject to a 30-day standstill period), and by each presently existing
or subsequently acquired or organized Restricted Subsidiary of Jafra S.A. The
terms and conditions of these Note Guarantees are further described below.
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The Company, as primary obligor and not merely as surety, will irrevocably
and fully and unconditionally Guarantee, on a senior subordinated basis, the
punctual payment when due, whether at Stated Maturity, by acceleration or
otherwise, of all monetary obligations of each Issuer under the Indenture and
the Notes, whether for principal of or interest on the Notes, expenses,
indemnification or otherwise (all such obligations of each Issuer being herein
called the "Guaranteed Note Obligations").
Each Issuer, as primary obligor and not merely as surety, will Guarantee, on
a senior subordinated basis, the punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all Guaranteed Note Obligations of
the other Issuer under the Indenture and the Notes with respect to the JCI
Portion (in the case of such Guarantee by Jafra S.A.) or the Jafra S.A.
Portion (in the case of such Guarantee by JCI). Proceedings or other actions
to enforce either such Note Guarantee of either Issuer may not be initiated or
taken until the earlier of (i) 30 days after written demand for payment has
been made thereunder by the Trustee or the Holders in accordance with the
terms of the Indenture and (ii) the occurrence of certain events of bankruptcy
of such Issuer.
Each U.S. Subsidiary Guarantor, as primary obligor and not merely as surety,
will jointly and severally, irrevocably and fully and unconditionally
Guarantee, on a senior subordinated basis, the punctual payment when due,
whether at Stated Maturity, by acceleration or otherwise, of all Guaranteed
Note Obligations of JCI under the Indenture and the Notes (all such Guaranteed
Note Obligations being herein called the "Guaranteed JCI Obligations"). At the
time of the Acquisition, JCI will not have any U.S. Subsidiaries. Each Jafra
S.A. Subsidiary Guarantor, as primary obligor and not merely as surety, will
jointly and severally, irrevocably and fully and unconditionally Guarantee, on
a senior subordinated basis, the punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all Guaranteed Note Obligations of
Jafra S.A. under the Indenture and the Notes (all such Guaranteed Note
Obligations being herein called the "Guaranteed Jafra S.A. Obligations"). Each
Subsidiary Guarantee will be limited in amount to an amount not to exceed the
maximum amount that can be guaranteed by the applicable Subsidiary Guarantor
without rendering the Subsidiary Guarantee, as it relates to such Subsidiary
Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors
generally. If a Subsidiary Guarantee were to be rendered voidable, it could be
subordinated by a court to all other indebtedness (including guarantees and
other contingent liabilities) of the applicable Subsidiary Guarantor, and,
depending on the amount of such indebtedness, a Subsidiary Guarantor's
liability on its Subsidiary Guarantee could be reduced to zero. See "Risk
Factors--Fraudulent Transfer Considerations."
Each Note Guarantor will also agree to pay any and all reasonable out-of-
pocket expenses (including reasonable counsel fees and expenses) incurred by
the Trustee or the Holders in enforcing any rights under its Note Guarantee.
Each Note Guarantee shall be a continuing Guarantee and shall (i) remain in
full force and effect until payment in full of the principal amount of all
outstanding Notes (whether by payment at maturity, purchase, redemption,
defeasance, retirement or other acquisition) and all other relevant Guaranteed
Note Obligations then due and owing, unless earlier terminated as described
below, (ii) be binding upon such Note Guarantor and (iii) inure to the benefit
of and be enforceable by the Trustee, the Holders and their permitted
successors, transferees and assigns.
Notwithstanding the preceding paragraph, Note Guarantees will be subject to
termination and discharge under the circumstances described in this paragraph:
(1) Any Subsidiary Guarantor will automatically and unconditionally be
released from all obligations under its Subsidiary Guarantee, and such
Subsidiary Guarantee shall thereupon terminate and be discharged and of no
further force or effect, (i) concurrently with any sale or disposition (by
merger or otherwise) of any Subsidiary Guarantor or any interest therein in
accordance with the terms of the Indenture (including the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock") by
the Company or a Restricted Subsidiary, following which such Subsidiary
Guarantor is no longer a Restricted Subsidiary of the Company, (ii)
pursuant to the terms of its Subsidiary Guarantee, (iii) at any time that
such Subsidiary
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Guarantor is released from all its obligations under all its Guarantees of
payment by the relevant Issuer of Indebtedness (other than Bank
Indebtedness) of such Issuer, (iv) upon the merger or consolidation of such
Subsidiary Guarantor with and into the Company, an Issuer or another
Subsidiary Guarantor that is the surviving Person in such merger or
consolidation, (v) upon legal or covenant defeasance of the relevant
Issuer's obligations, or satisfaction and discharge of the Indenture, and
(vi) subject to customary contingent reinstatement provisions, upon payment
in full of the aggregate principal amount of all Notes then outstanding for
which the relevant Issuer is liable and all other Guaranteed Note
Obligations of such Issuer then due and owing.
(2) The Company will automatically and unconditionally be released from
all obligations under its Note Guarantee, and such Note Guarantee shall
thereupon terminate and be discharged and of no further force or effect,
(i) with respect to the predecessor Company, as and when provided under the
provisions described in the second paragraph under "--Merger and
Consolidation," (ii) pursuant to the terms of its Note Guarantee, (iii)
upon legal or covenant defeasance of the relevant Issuer's obligations, or
satisfaction and discharge of the Indenture, and (iv) subject to customary
contingent reinstatement provisions, upon payment in full of the aggregate
principal amount of all Notes then outstanding for which the relevant
Issuer is liable and all other Guaranteed Note Obligations of such Issuer
then due and owing.
(3) An Issuer will automatically and unconditionally be released from all
obligations under its Note Guarantee, and such Note Guarantee shall
thereupon terminate and be discharged and of no further force or effect,
(i) with respect to the relevant predecessor Issuer, as and when provided
under the provisions described in the second paragraph under "--Merger and
Consolidation," (ii) pursuant to the terms of its Note Guarantee, (iii)
upon legal or covenant defeasance of the other Issuer's obligations, or
satisfaction and discharge of the Indenture, and (iv) subject to customary
contingent reinstatement provisions, upon payment in full of the aggregate
principal amount of all Notes then outstanding for which the other Issuer
is liable and all other Guaranteed Note Obligations of the other Issuer
then due and owing.
Upon any such occurrence specified in this paragraph, the Trustee shall
execute any documents reasonably required in order to evidence such release,
discharge and termination in respect of such Note Guarantee.
Neither the Issuers nor any Note Guarantor shall be required to make a
notation on the Notes to reflect any such Note Guarantee or any such release,
termination or discharge.
Ranking
The indebtedness evidenced by the Notes and each Note Guarantee will be
unsecured Senior Subordinated Indebtedness of the Issuers or the relevant Note
Guarantor, as the case may be, will be subordinated in right of payment, as
set forth in the Indenture, to the payment when due of all existing and future
Senior Indebtedness of the Issuers or such Note Guarantor, including such
Person's obligations under the Senior Credit Facility, will rank pari passu in
right of payment with all existing and future Senior Subordinated Indebtedness
of such Person and will be senior in right of payment to all existing and
future Subordinated Obligations of such Person. The Notes and each Note
Guarantee will also be effectively subordinated to any Secured Indebtedness of
the Issuers or the relevant Note Guarantor, as the case may be, to the extent
of the value of the assets securing such Indebtedness. However, payment from
the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "--Defeasance" below is not subordinated to
any Senior Indebtedness or subject to the restrictions described herein.
As of September 30, 1998, the outstanding Senior Indebtedness of the Issuers
was approximately $45.7 million, all of which was guaranteed by, and
constituted Senior Indebtedness of, the Note Guarantors (other than the
Issuers). In addition, the Issuers had additional availability of $44.3
million for borrowings under the Senior Credit Facility, all of which would
have been Secured Indebtedness, and no Senior Subordinated Indebtedness (other
than the indebtedness represented by the Notes). Although the Indenture
contains limitations on the
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amount of additional Indebtedness that the Issuers and the Note Guarantors may
Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness or
Secured Indebtedness. See "--Certain Covenants--Limitation on Indebtedness"
below.
The terms on which each Note Guarantee will be subordinated to the prior
payment in full of Senior Indebtedness of the relevant Note Guarantor will be
substantially identical to those described below governing the subordination
of the Notes to the prior payment in full of Senior Indebtedness of the
Issuers.
All the operations of the Company, and a substantial portion of the
operations of JCI, are conducted through their respective Subsidiaries. Claims
of creditors of such Subsidiaries, including trade creditors, and claims of
preferred shareholders (if any) of such Subsidiaries will have priority with
respect to the assets and earnings of
such Subsidiaries over the claims of creditors of the Company or JCI,
including holders of the Notes. Therefore, Company's Note Guarantee will be
effectively subordinated to creditors (including trade creditors) and
preferred shareholders (if any) of Subsidiaries of the Company that are not
Issuers or (to the extent of their Note Guarantees) Subsidiary Guarantors, and
JCI's obligations with respect to the JCI Portion of the Notes will be
effectively subordinated to creditors (including trade creditors) and
preferred shareholders (if any) of Subsidiaries of JCI that are not U.S.
Subsidiary Guarantors. Although the Indenture limits the incurrence of
Indebtedness (including preferred stock) by certain of the Company's
Subsidiaries, such limitation is subject to a number of significant
qualifications. At September 30, 1998, the outstanding Indebtedness and trade
payables of the Company's Subsidiaries (other than the Issuers and the
Subsidiary Guarantors) totaled approximately $6.1 million. No preferred stock
of such Subsidiaries was outstanding at such date. See "--Certain Covenants--
Limitation on Indebtedness" below.
"Senior Indebtedness" means, with respect to either Issuer or any Note
Guarantor, the following obligations, whether outstanding on the date of the
Indenture or thereafter issued, without duplication: (i) all Bank
Indebtedness, (ii) all obligations of such Person in respect of any
Receivables Financing, and (iii) all obligations of such Person consisting of
the principal of and premium, if any, and accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to such Person regardless of whether
post-filing interest is allowed in such proceeding) on, and fees and other
amounts owing in respect of, all other Indebtedness of such Person, unless, in
the instrument creating or evidencing the same or pursuant to which the same
is outstanding, it is expressly provided that the obligations in respect of
such Indebtedness are not senior in right of payment to the Notes or the Note
Guarantee of such Person; provided, however, that Senior Indebtedness shall
not include (1) any obligation of such Person to any Subsidiary of such
Person, (2) any liability for Federal, state, foreign, local or other taxes
owed or owing by such Person, (3) any accounts payable or other liability to
trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of such Person that is expressly subordinated in right of payment
to any other Indebtedness of such Person, (5) any Capital Stock of such Person
or (6) that portion of any Indebtedness of such Person that is Incurred by
such Person in violation of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" (but no such violation shall be deemed
to exist for purposes of this clause (6) if any holder of such Indebtedness or
such holder's representative shall have received an Officer's Certificate of
the Company to the effect that such Incurrence of such Indebtedness does not
(or that the Incurrence of the entire committed amount thereof at the date on
which the initial borrowing thereunder is made would not) violate such
covenant). If any Senior Indebtedness is disallowed, avoided or subordinated
pursuant to the provisions of Section 548 of Title 11 of the United States
Code or any applicable state fraudulent conveyance law, such Senior
Indebtedness nevertheless will constitute Senior Indebtedness.
Only Indebtedness of an Issuer or a Note Guarantor that is Senior
Indebtedness will rank senior to such Person's obligations with respect to the
Notes or such Person's Note Guarantee, as the case may be, in accordance with
the provisions of the Indenture. Each Issuer's or Note Guarantor's obligations
with respect to the Notes and the relevant Note Guarantee, as the case may be,
will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of such Person. The Company has agreed in the Indenture that it
will not Incur, and will not permit either Issuer or any Note Guarantor to
Incur, directly or indirectly, any Indebtedness that is
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expressly subordinated in right of payment to Senior Indebtedness of the
Company, such Issuer or such Note Guarantor, as the case may be, unless such
Indebtedness is pari passu with, or subordinated in right of payment to, the
Notes or the relevant Note Guarantee, as the case may be. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured, and Indebtedness that is not guaranteed by a
particular Person is not deemed to be subordinate or junior to Indebtedness
that is so guaranteed merely because it is not so guaranteed.
Neither Issuer may pay principal of, or premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under "--
Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness of
such Issuer is not paid in full when due or (ii) any other default on Senior
Indebtedness of such Issuer occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms (either such event, a
"Payment Default") unless, in either case, (x) the Payment Default has been
cured or waived and any such acceleration has been rescinded in writing or (y)
such Senior Indebtedness has been paid in full. However, an Issuer may pay the
Notes without regard to the foregoing if such Issuer and the Trustee receive
written notice approving such payment from the Representative for the
Designated Senior Indebtedness with respect to which the Payment Default has
occurred and is continuing.
In addition, during the continuance of any default (other than a Payment
Default) with respect to any Designated Senior Indebtedness of an Issuer
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace period (a "Non-payment
Default"), such Issuer may not pay the Notes for the period specified as
follows (a "Payment Blockage Period"). The Payment Blockage Period shall
commence upon the receipt by the Trustee (with a copy to such Issuer) of
written notice (a "Blockage Notice") of such Non-payment Default from the
Representative for such Designated Senior Indebtedness specifying an election
to effect a Payment Blockage Period and shall end on the earliest to occur of
the following events: (i) 179 days shall have elapsed since such receipt of
such Blockage Notice, (ii) the Non-payment Default giving rise to such
Blockage Notice is no longer continuing (and no other Payment Default or Non-
payment Default is then continuing), (iii) such Designated Senior Indebtedness
shall have been discharged or repaid in full or (iv) such Payment Blockage
Period shall have been terminated by written notice to the Trustee and such
Issuer from the Person or Persons who gave such Blockage Notice. An Issuer
shall promptly resume payments on the Notes, including any missed payments,
after such Payment Blockage Period ends, unless the holders of such Designated
Senior Indebtedness or the Representative of such holders have accelerated the
maturity of such Designated Senior Indebtedness, or any Payment Default
otherwise exists. Not more than one Blockage Notice to the Issuers in the
aggregate may be given in any 360 consecutive day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period, except that if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness other than
Bank Indebtedness, a Representative of holders of Bank Indebtedness may give
another Blockage Notice within such period. In no event may the total number
of days during which any Payment Blockage Period is in effect extend beyond
179 days from the date of receipt by the Trustee of the relevant Blockage
Notice, and there must be a 181 consecutive day period during any 360
consecutive day period during which no Payment Blockage Period is in effect.
Upon any payment or distribution of the assets of an Issuer upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to such Issuer or its property, or in a bankruptcy, insolvency,
receivership or similar proceeding relating to such Issuer or its property,
the holders of Senior Indebtedness of such Issuer will be entitled to receive
payment in full of such Senior Indebtedness before the Noteholders are
entitled to receive any payment from such Issuer and until the Senior
Indebtedness of such Issuer is paid in full, any payment or distribution from
such Issuer to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of such Senior
Indebtedness as their interests may appear. If a distribution from an Issuer
is made to Noteholders that due to the subordination provisions should not
have been made to them, such Noteholders are required to hold it in trust for
the holders of Senior Indebtedness of such Issuer and pay it over to them as
their interests may appear.
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If an Issuer fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Defaults." If payment of the Notes is
accelerated because of an Event of Default, the Issuers or the Trustee shall
promptly notify the holders of the Designated Senior Indebtedness of the
Issuers or the Representative of such holders of the acceleration. Such
acceleration will not be effective with respect to an Issuer, and such Issuer
may not pay the Notes, until five Business Days after such holders or the
Representative of each Designated Senior Indebtedness of such Issuer receive
notice of such acceleration and, thereafter, such Issuer may pay the Notes
only if the subordination provisions of the Indenture otherwise permit payment
at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of liquidation, receivership, reorganization or insolvency, (i)
creditors of an Issuer who are holders of Senior Indebtedness of such Issuer
may recover more, ratably, from such Issuer than the Noteholders, (ii) trade
creditors of an Issuer who are not holders of Senior Indebtedness of such
Issuer or of Senior Subordinated Indebtedness of such Issuer (including the
Notes) may recover less, ratably, than holders of Senior Indebtedness of such
Issuer and may recover more, ratably, than the holders of Senior Subordinated
Indebtedness of such Issuer, and (iii) an Issuer may be unable to meet its
obligations on the Notes. In addition, as described above, the Notes will be
effectively subordinated, with respect to an Issuer's Subsidiaries that are
not Subsidiary Guarantors, to the claims of creditors of those Subsidiaries.
Change of Control
Upon the occurrence after the Issue Date of a Change of Control (as defined
below) and the failure of the Notes to have, on the 30th day after such Change
of Control, a rating of at least BBB- (or equivalent successor rating) by S&P
and a rating of at least Baa3 (or equivalent successor rating) by Moody's (a
"Change of Control Triggering Event"), each Holder will have the right to
require the Issuers to repurchase, on a several basis in proportion to each
Issuer's several obligations in respect of the Notes, all or any part of such
Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date); provided,
however, that, the Issuers shall not be obligated to repurchase Notes pursuant
to this covenant in the event that they have exercised their right to redeem
all the Notes as described under "--Optional Redemption."
The term "Change of Control" means:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of a percentage of the total voting power of
the Voting Stock of the Company that is (x) greater than the percentage
thereof that is then held in the aggregate by Permitted Holders and (y)
greater than 35% of the total voting power of the Voting Stock of the
Company (for the purposes of this clause (i), such other person shall be
deemed to beneficially own any Voting Stock of the Company held by a parent
corporation, if the Company is a Subsidiary of such parent corporation and
such other person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of a percentage of the total voting power of the
Voting Stock of the parent corporation that is (x) greater than the
percentage thereof that is then held in the aggregate by Permitted Holders
and (y) greater than 35% of the total voting power of the Voting Stock of
such parent corporation);
(ii) the Company ceases to beneficially own, directly or indirectly, 100%
of the aggregate voting power of the Voting Stock of either Issuer
(excluding beneficial ownership of any other Person attributable to
Designated Equity Interests), other than in a transaction by the Company in
compliance with the provisions described under "--Merger and Consolidation"
in which the Company's Successor succeeds to such beneficial ownership of
the Company;
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(iii) during any period of two consecutive years (during which period the
Company has been a party to the Indenture), individuals who at the
beginning of such period were members of the board of directors of the
Company (together with any new members thereof whose election by such board
of directors or whose nomination for election by holders of Capital Stock
of the Company was approved by one or more Permitted Holders or by a vote
of a majority of the members of such board of directors then still in
office
who were either members thereof at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of such board of directors then in
office; or
(iv) the Company merges or consolidates with or into, or sells or
transfers (in one or a series of related transactions) all or substantially
all of the assets of the Company and its Restricted Subsidiaries to,
another Person (other than one or more Permitted Holders) and any "person"
(as defined in clause (i) above), other than one or more Permitted Holders,
is or becomes the "beneficial owner" (as so defined), directly or
indirectly, of a percentage of the total voting power of the Voting Stock
of the surviving Person in such merger or consolidation, or the transferee
Person in such sale or transfer of assets, as the case may be, that is (x)
greater than the percentage thereof that is then held in the aggregate by
Permitted Holders and (y) greater than 35% of the total voting power of
such Voting Stock (for purposes of this clause (iv), such other person
shall be deemed to beneficially own any Voting Stock of such surviving or
transferee Person held by a parent corporation, if such surviving or
transferee Person is a Subsidiary of such parent corporation and such other
person is the beneficial owner (as so defined), directly or indirectly, of
a percentage of the total voting power of the Voting Stock of such parent
corporation that is (x) greater than the percentage thereof that is then
held in the aggregate by Permitted Holders and (y) greater than 35% of the
total voting power of such Voting Stock).
In the event that, at the time of such Change of Control Triggering Event,
the terms of the Bank Indebtedness restrict or prohibit the repurchase of
Notes pursuant to this covenant, then prior to the mailing of the notice to
Holders provided for in the immediately following paragraph but in any event
not later than 30 days following the date the Company obtains actual knowledge
of any Change of Control Triggering Event (unless the Issuers have exercised
their right to redeem all the Notes as described under "--Optional
Redemption"), the Issuers shall (i) repay in full all Bank Indebtedness or
offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness
of each lender who has accepted such offer or (ii) obtain the requisite
consent under the agreements governing the Bank Indebtedness to permit the
repurchase of the Notes as provided for in the immediately following
paragraph. The Issuers shall first comply with the provisions of the
immediately preceding sentence before they shall be required to repurchase
Notes pursuant to the provisions described below. The Issuers' failure to
comply with such provisions or the provisions of the immediately following
paragraph shall constitute an Event of Default described in clause (iv) and
not in clause (ii) under "--Defaults" below.
Unless the Issuers have exercised their right to redeem all the Notes as
described under "--Optional Redemption," the Issuers shall, not later than 30
days following the date the Company obtains actual knowledge of any Change of
Control Triggering Event having occurred, mail a notice to each Holder with a
copy to the Trustee stating: (1) that a Change of Control Triggering Event has
occurred or may occur and that such Holder has, or upon such occurrence will
have, the right to require the Issuers, severally in proportion to their
respective obligations in respect of the Notes, to purchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on a record date to receive
interest on the relevant interest payment date); (2) the circumstances and
relevant facts and financial information regarding such Change of Control; (3)
the repurchase date (which shall be no earlier than 30 days nor later than 60
days from the date such notice is mailed); (4) the instructions determined by
the Issuers, consistent with this covenant, that a Holder must follow in order
to have its Notes purchased; and (5) if such notice is mailed prior to the
occurrence of a Change of Control or Change of Control Triggering Event, that
such offer is conditioned on the occurrence of such Change of Control
Triggering Event.
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The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, Rules 13e-4 and 14e-1 under the Exchange
Act, and any other securities laws or regulations in connection with the
repurchase of Notes pursuant to this covenant. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, the Issuers will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
covenant by virtue thereof.
The Change of Control Triggering Event purchase feature is a result of
negotiations between the Issuers and the Initial Purchasers. The Company has
no present plans to engage in a transaction involving a Change of Control,
although it is possible that the Company would decide to do so in the future.
Subject to the limitations discussed below, the Company could, in the future,
enter into certain transactions, including acquisitions, refinancings or
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
The occurrence of a Change of Control would constitute a default under the
Senior Credit Agreement. Agreements governing future Senior Indebtedness of
the Company may contain prohibitions of certain events that would constitute a
Change of Control or require such Senior Indebtedness to be repurchased or
repaid upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Issuers to repurchase the Notes could cause a
default under such agreements, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Issuers. Finally, an
Issuer's ability to pay cash to the Holders upon a repurchase may be limited
by such Issuer's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases.
The definition of Change of Control includes a phrase relating to the sale
or other transfer of "all or substantially all" of the Company's assets, as
such phrase is used in the Revised Model Business Corporation Act. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise definition of the phrase under applicable law.
Accordingly, in certain circumstances there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the assets of the Company, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
holders of the Notes have the right to require the Company to repurchase such
Notes.
Certain Covenants
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that
the Company, either Issuer or any Subsidiary Guarantor may Incur Indebtedness
if on the date of the Incurrence of such Indebtedness, after giving effect to
the Incurrence thereof, the Consolidated Coverage Ratio would be greater than
2.00:1.00 if such Indebtedness is Incurred prior to May 1, 2001 or 2.25:1.00
if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness Incurred pursuant to the Senior Credit Facility
(including in respect of letters of credit or bankers' acceptances issued
or created thereunder) and Indebtedness of any Foreign Subsidiary Incurred
other than under the Senior Credit Facility, and (without limiting the
foregoing), in each case, any Refinancing Indebtedness in respect thereof,
in a maximum principal amount which, when taken together with the amount of
all Indebtedness Incurred pursuant to this clause (i) and then outstanding,
does not exceed the amount equal to (A) $100.0 million, plus (B) the
amount, if any, by which the Borrowing Base exceeds $65.0 million, plus (C)
in the case of any refinancing of the Senior Credit Facility or any portion
thereof, the aggregate amount of fees, underwriting discounts, premiums and
other costs and expenses incurred in connection with such refinancing;
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(ii) Indebtedness (A) of any Restricted Subsidiary issued to and held by
the Company or (B) of the Company or any Restricted Subsidiary issued to
and held by any Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock of such Restricted
Subsidiary to which such Indebtedness is owed, or any other event, that
results in such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any other subsequent transfer of such Indebtedness (except to
the Company or a Restricted Subsidiary) will be deemed, in each case, an
Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Notes, any Indebtedness (other than
the Indebtedness described in clauses (i) or (ii) above) outstanding on the
Issue Date and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii) or paragraph (a) above;
(iv) Purchase Money Obligations and Capitalized Lease Obligations, and
any Refinancing Indebtedness with respect thereto, in an aggregate
principal amount at any time outstanding not exceeding an amount equal to
6% of Consolidated Total Assets at any time outstanding;
(v) Indebtedness of any Foreign Subsidiary Incurred for working capital
purposes;
(vi) (A) Guarantees by the Company or any Restricted Subsidiary of
Indebtedness or any other obligation or liability of the Company or any
Restricted Subsidiary (other than Indebtedness Incurred in violation of the
covenant described hereunder) or (B) Indebtedness of the Company or any
Restricted Subsidiary arising by reason of any Lien granted by or
applicable to such Person securing Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness Incurred in violation of the
covenant described hereunder);
(vii) Indebtedness of the Company or any Restricted Subsidiary (A)
arising from the honoring of a check, draft or similar instrument of such
Person drawn against insufficient funds, provided that such Indebtedness is
extinguished within five Business Days of its incurrence, or (B) consisting
of guarantees, indemnities, obligations in respect of earnouts or other
purchase price adjustments, or similar obligations, Incurred in connection
with the acquisition or disposition of any business, assets or Person
(including pursuant to the Acquisition);
(viii) Indebtedness of the Company or any Restricted Subsidiary in
respect of (A) letters of credit, bankers' acceptances or other similar
instruments or obligations issued, or relating to liabilities or
obligations incurred, in the ordinary course of business (including those
issued to governmental entities in connection with self-insurance under
applicable workers' compensation statutes), or (B) completion guarantees,
surety, judgment, appeal or performance bonds, or other similar bonds,
instruments or obligations, provided, or relating to liabilities or
obligations incurred, in the ordinary course of business, or (C) Hedging
Obligations entered into for bona fide hedging purposes in the ordinary
course of business, or (D) Management Guarantees or (E) the financing of
insurance premiums in the ordinary course of business;
(ix) Indebtedness of a Receivables Subsidiary secured by a Lien on all or
part of the assets disposed of in, or otherwise incurred in connection
with, a Financing Disposition;
(x) Indebtedness of any Person that is assumed by the Company or any
Restricted Subsidiary in connection with its acquisition of assets from
such Person or any Affiliate thereof or is issued and outstanding on or
prior to the date on which such Person was acquired by the Company or any
Restricted Subsidiary or merged or consolidated with or into the Company or
any Restricted Subsidiary (other than Indebtedness Incurred to finance, or
otherwise in connection with, such acquisition); provided, however, that on
the date of such acquisition, merger or consolidation, after giving effect
thereto, (x) with respect to any such Indebtedness of the Company, either
Issuer or any Subsidiary Guarantor, (A) the Company could Incur at least
$1.00 of additional Indebtedness pursuant to paragraph (a) above or (B) the
Consolidated Coverage Ratio is greater than it was on such date immediately
prior to giving effect to such acquisition and (y) with respect to any such
Indebtedness of any Restricted Subsidiary that is not a Subsidiary
Guarantor or an Issuer, the Company could Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) above; and any
Refinancing Indebtedness with respect to any such Indebtedness;
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(xi) Indebtedness in an amount at any time outstanding not exceeding
twice the amount of Excluded Contributions made after the Issue Date;
provided, however, that the proceeds of such Indebtedness and the related
amount of such Excluded Contributions are used to finance the acquisition
of assets of any Person in a Related Business or the merger or
consolidation of such a Person into or with the Company or any Restricted
Subsidiary (including but not limited to payment of any related fees and
expenses), or to refinance any such acquisition, merger or consolidation
with such Indebtedness being Incurred for such refinancing within nine
months of the closing of such acquisition, merger or consolidation; and any
Refinancing Indebtedness with respect to any such Indebtedness; and
(xii) Indebtedness of the Company or any Restricted Subsidiary in an
aggregate principal amount which, when taken together with the amount of
all Indebtedness Incurred pursuant to this clause (xii) and then
outstanding, does not exceed an amount equal to 11.5% of Consolidated Total
Assets at any time outstanding.
(c) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, (i) any other obligation of the obligor on
such Indebtedness (or of any other Person who could have Incurred such
Indebtedness under this covenant) arising under any Guarantee, Lien or letter
of credit, bankers' acceptance or other similar instrument or obligation
supporting such Indebtedness shall be disregarded to the extent that such
Guarantee, Lien or letter of credit, bankers' acceptance or other similar
instrument or obligation secures the principal amount of such Indebtedness;
(ii) in the event that Indebtedness meets the criteria of more than one of the
types of Indebtedness described in paragraph (b) above, the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses;
and (iii) the amount of Indebtedness issued at a price that is less than the
principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
(d) For purposes of determining compliance with any Dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign
currency, the Dollar-equivalent principal amount of such Indebtedness Incurred
pursuant thereto shall be calculated based on the relevant currency exchange
rate in effect on the date that such Indebtedness was Incurred, in the case of
term Indebtedness, or first committed, in the case of revolving credit
Indebtedness, provided that (x) the Dollar-equivalent principal amount of any
such Indebtedness outstanding on the Issue Date shall be calculated based on
the relevant currency exchange rate in effect on the Issue Date, (y) if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable Dollar-
denominated restriction to be exceeded if calculated at the relevant currency
exchange rate in effect on the date of such refinancing, such Dollar-
denominated restriction shall be deemed not to have been exceeded so long as
the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced and (z) the Dollar-
equivalent principal amount of Indebtedness denominated in a foreign currency
and Incurred pursuant to the Senior Credit Facility shall be calculated based
on the relevant currency exchange rate in effect on, at the Company's option,
(i) the Issue Date, (ii) any date on which any of the respective commitments
under the Senior Credit Facility shall be reallocated between or among
facilities or subfacilities thereunder, or on which such rate is otherwise
calculated for any purpose thereunder, or (iii) the date of such Incurrence.
The principal amount of any Indebtedness Incurred to refinance other
Indebtedness, if Incurred in a different currency from the Indebtedness being
refinanced, shall be calculated based on the currency exchange rate applicable
to the currencies in which such respective Indebtedness is denominated that is
in effect on the date of such refinancing.
Limitation on Layering. The Company shall not permit either Issuer to Incur
any Indebtedness that is expressly subordinated in right of payment to any
Senior Indebtedness of such Issuer, unless such Indebtedness so Incurred ranks
pari passu in right of payment with, or is subordinated in right of payment
to, such Issuer's Indebtedness with respect to the Notes. The Company shall
not Incur any Indebtedness that is expressly subordinated in right of payment
to any Senior Indebtedness of the Company, unless such Indebtedness so
Incurred ranks pari passu in right of payment with the Company's Note
Guarantee, or is subordinated in right of payment to the Company's Note
Guarantee. The Company shall not permit any Subsidiary Guarantor to Incur
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any Indebtedness that is expressly subordinated in right of payment to any
Senior Indebtedness of such Subsidiary Guarantor, unless such Indebtedness so
Incurred ranks pari passu in right of payment with the such Subsidiary
Guarantor's Subsidiary Guarantee, or is subordinated in right of payment to
such Subsidiary Guarantee. Unsecured Indebtedness is not deemed to be
subordinate or junior to secured Indebtedness merely because it is unsecured,
and Indebtedness that is not guaranteed by a particular Person is not deemed
to be subordinate or junior to Indebtedness that is so guaranteed merely
because it is not so guaranteed.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital
Stock (including any such payment in connection with any merger or
consolidation to which the Company is a party) except (x) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) and (y) dividends or distributions payable to the Company or any
Restricted Subsidiary (and, in the case of any such Restricted Subsidiary
making such dividend or distribution, to other holders of its Capital Stock on
no more than a pro rata basis, measured by value), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of the Company held by
Persons other than the Company or a Restricted Subsidiary (other than any
acquisition of Capital Stock deemed to occur upon the exercise of options if
such Capital Stock represents a portion of the exercise price thereof), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than a purchase, redemption,
defeasance or other acquisition or retirement for value in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of such acquisition or
retirement) or (iv) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition or retirement or Investment being herein
referred to as a "Restricted Payment"), if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company could not incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
as determined in good faith by the Board of Directors, whose determination
shall be conclusive) declared or made subsequent to the Issue Date and then
outstanding would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from April 30, 1998 to the end of
the most recent fiscal quarter ending prior to the date of such
Restricted Payment for which consolidated financial statements of the
Company are available (or, in case such Consolidated Net Income shall
be a negative number, 100% of such negative number);
(B) the aggregate Net Cash Proceeds, and fair value (as determined in
good faith by the Board of Directors) of property or assets, received
(x) by the Company as capital contributions to the Company after the
Issue Date or from the issuance or sale (other than to a Restricted
Subsidiary) of its Capital Stock (other than Disqualified Stock) after
the Issue Date (other than Excluded Contributions) or (y) by the
Company or any Restricted Subsidiary from the issuance and sale by the
Company or any Restricted Subsidiary after the Issue Date of
Indebtedness that shall have been converted into or exchanged for
Capital Stock of the Company (other than Disqualified Stock), plus the
amount of cash, property or assets (determined as provided above)
received by the Company or any Restricted Subsidiary upon such
conversion or exchange;
(C) the aggregate amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) dividends, distributions,
interest payments, return of capital, repayments of Investments or
other transfers of assets to the Company or any Restricted Subsidiary
from any Unrestricted Subsidiary, or (ii) the redesignation of any
Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case
as provided in the definition of "Investment"), not to exceed in the
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case of any such Unrestricted Subsidiary the aggregate amount of
Investments (other than Permitted Investments) made by the Company or
any Restricted Subsidiary in such Unrestricted Subsidiary after the
Issue Date; and
(D) in the case of any disposition or repayment of any Investment
constituting a Restricted Payment (without duplication of any amount
deducted in calculating the amount of Investments at any time
outstanding included in the amount of Restricted Payments), an amount
in the aggregate equal to the lesser of the return of capital,
repayment or other proceeds with respect to all such Investments and
the initial amount of all such Investments.
(b) The provisions of the foregoing paragraph (a) will not prohibit any of
the following (each, a "Permitted Payment"):
(i) any purchase, redemption, repurchase, defeasance or other acquisition
or retirement of Capital Stock of the Company or Subordinated Obligations
made by exchange (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares) for, or out of the proceeds of the
substantially concurrent issuance or sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold
to a Subsidiary) or a substantially concurrent capital contribution to the
Company; provided, however, that the Net Cash Proceeds from such issuance,
sale or capital contribution shall be excluded in subsequent calculations
under clause (B) of the preceding paragraph (a);
(ii) any purchase, redemption, repurchase, defeasance or other
acquisition or retirement of Subordinated Obligations (x) made by exchange
for, or out of the proceeds of the substantially concurrent issuance or
sale of, Indebtedness of either Issuer or any Note Guarantor or Refinancing
Indebtedness Incurred in compliance with the covenant described under "--
Limitation on Indebtedness," (y) from Net Available Cash to the extent
permitted by the covenant described under "--Limitation on Sales of Assets
and Subsidiary Stock" or (z) to the extent required by the agreement
governing such Subordinated Obligations, following the occurrence of a
Change of Control (or other similar event described therein as a "change of
control"), but only if the Company shall have complied with the covenant
described under "--Change of Control" and, if required, purchased all Notes
tendered pursuant to the offer to repurchase all the Notes required
thereby, prior to purchasing or repaying such Subordinated Obligations;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with the preceding paragraph (a);
(iv) Investments or other Restricted Payments in an aggregate amount
outstanding at any time not to exceed the amount of Excluded Contributions;
provided, however, that such Excluded Contributions shall not include any
Excluded Contribution the proceeds of which were used to finance the
acquisition of assets from any Person in a Related Business or the merger
or consolidation of such a Person into or with the Company or any
Restricted Subsidiary pursuant to clause (xi) of paragraph (b) of the
covenant described under "--Limitation on Indebtedness";
(v) payments by the Company to repurchase or otherwise acquire Capital
Stock (including any options, warrants or other rights in respect thereof),
from Management Investors (including loans, advances, dividends or
distributions by the Company to a Parent to permit such Parent to make any
such repurchase or other acquisition), such payments, loans, advances,
dividends or distributions not to exceed an amount (net of repayments of
any such loans or advances) equal to (1) $10.0 million, plus (2) $2.0
million multiplied by the number of calendar years that have commenced
since the Issue Date, plus (3) the Net Cash Proceeds received by the
Company since the Issue Date from, or as a capital contribution from, the
issuance or sale to Management Investors of Capital Stock (including any
options, warrants or other rights in respect thereof), to the extent such
Net Cash Proceeds are not included in any calculation under clause
(3)(B)(x) of the preceding paragraph (a);
(vi) the payment of (or loans, advances, dividends or distributions by
the Company to a Parent to pay) dividends on the common stock or equity of
the Company (or such Parent) following a public offering of
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such common stock or equity, in an amount not to exceed in any fiscal year
6% of the aggregate gross proceeds received by the Company in or from such
public offering;
(vii) Restricted Payments (including loans or advances) in an aggregate
amount which, when taken together with all Restricted Payments made
pursuant to this clause (vi) and then outstanding, net of repayments of any
such loans or advances, does not exceed $5.0 million at any time
outstanding;
(viii) payments by the Company or any Restricted Subsidiary to satisfy
obligations under the Management Agreements; and Permitted Parent Payments;
(ix) dividends or other distributions of Capital Stock, Indebtedness or
other securities of Unrestricted Subsidiaries; and
(x) the Transactions;
provided, that (A) in the case of clauses (iii), (vi) and (vii), the net
amount of any such Permitted Payment shall be included in subsequent
calculations of the amount of Restricted Payments, (B) in the case of clause
(v), at the time of any calculation of the amount of Restricted Payments, the
net amount of Permitted Payments that have then actually been made under
clause (v) that is in excess of 50% of the total amount of Permitted Payments
then permitted under clause (v) shall be included in such calculation of the
amount of Restricted Payments, (C) in all cases other than pursuant to clauses
(A) and (B) immediately above, the net amount of any such Permitted Payment
shall be excluded in subsequent calculations of the amount of Restricted
Payments and (D) solely with respect to clause (vii), no Default or Event of
Default shall have occurred or be continuing at the time of any such Permitted
Payment after giving effect thereto.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its
property or assets to the Company, except any encumbrance or restriction:
(1) pursuant to an agreement or instrument in effect at or entered into
on the Issue Date (including the Senior Credit Facility), the Indenture or
the Notes;
(2) pursuant to any agreement or instrument of a Person, or relating to
Indebtedness or Capital Stock of a Person, which Person is acquired by or
merged or consolidated with or into the Company or any Restricted
Subsidiary, or which agreement or instrument is assumed by the Company or
any Restricted Subsidiary in connection with an acquisition of assets from
such Person, as in effect at the time of such acquisition, merger or
consolidation (except to the extent that such Indebtedness was incurred to
finance, or otherwise in connection with, such acquisition, merger or
consolidation); provided, however, that for purposes of this clause (2), if
a Person other than the Company or the relevant Issuer is the Successor,
any Subsidiary thereof or agreement or instrument of such Person or any
such Subsidiary shall be deemed acquired or assumed, as the case may be, by
the Company or a Restricted Subsidiary, as the case may be, when such
Person becomes the Successor;
(3) pursuant to an agreement or instrument (a "Refinancing Agreement")
effecting a refinancing of Indebtedness Incurred pursuant to, or that
otherwise extends, renews, refunds, refinances or replaces, an agreement or
instrument referred to in clause (1) or (2) of this covenant or this clause
(3) (an "Initial Agreement") or contained in any amendment, supplement or
other modification to an Initial Agreement (an "Amendment"); provided,
however, that the encumbrances and restrictions contained in any such
Refinancing Agreement or Amendment are not materially less favorable to the
Holders of the Notes taken as a whole than encumbrances and restrictions
contained in the Initial Agreement or Initial Agreements to which such
Refinancing Agreement or Amendment relates (as determined in good faith by
the Company);
(4) (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, or the assignment or transfer of any lease, license
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or other contract, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) contained in mortgages, pledges or other security agreements
securing Indebtedness of a Restricted Subsidiary to the extent restricting
the transfer of the property or assets subject thereto, (D) pursuant to
customary provisions restricting dispositions of real property interests
set forth in any reciprocal
easement agreements of the Company or any Restricted Subsidiary, (E)
pursuant to Purchase Money Obligations that impose encumbrances or
restrictions on the property or assets so acquired, (F) on cash or other
deposits or net worth imposed by customers under agreements entered into in
the ordinary course of business, (G) pursuant to customary provisions
contained in agreements and instruments entered into in the ordinary course
of business (including leases and joint venture and other similar
agreements entered into in the ordinary course of business) or (H) that
arises or is agreed to in the ordinary course of business and does not
detract from the value of property or assets of the Company or any
Restricted Subsidiary in any manner material to the Company or such
Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary (or any of its property or
assets) imposed pursuant to an agreement entered into for the direct or
indirect sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary (or the property or assets that are
subject to such restriction) pending the closing of such sale or
disposition;
(6) required by any applicable law, rule, regulation or order or by any
regulatory authority having jurisdiction over the Company or any Restricted
Subsidiary or any of their businesses; or
(7) pursuant to an agreement or instrument (A) relating to any
Indebtedness permitted to be Incurred subsequent to the Issue Date pursuant
to the provisions of the covenant described under "--Limitation on
Indebtedness," if the Company determines that such encumbrance or
restriction will not cause the Issuers not to have the funds necessary to
pay the principal of or interest on the Notes, (B) relating to any sale of
receivables by a Foreign Subsidiary or (C) relating to Indebtedness of or a
Financing Disposition to or by any Receivables Entity.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless
(i) the Company or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person assuming
responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the
shares and assets subject to such Asset Disposition, as such fair market
value may be determined (and shall be determined, to the extent such Asset
Disposition or any series of related Asset Dispositions involves aggregate
consideration in excess of $5.0 million) in good faith by the Board of
Directors, whose determination shall be conclusive (including as to the
value of all noncash consideration);
(ii) in the case of any Asset Disposition (or series of related Asset
Dispositions) having a fair market value of $2.5 million or more, at least
75% of the consideration therefor (excluding any consideration by way of
relief from, or by any other Person assuming responsibility for, any
liabilities, contingent or otherwise, that are not Indebtedness) received
by the Company or such Restricted Subsidiary is in the form of cash, and
provided that this clause (ii) shall not apply to any Asset Disposition (or
series of related Asset Dispositions), involving assets that accounted for
less than two percent of Consolidated EBITDA during the period of the most
recent four consecutive fiscal quarters ending prior to the date of such
Asset Disposition for which consolidated financial statements of the
Company are available; and
(iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or any Restricted Subsidiary, as the
case may be) as follows:
(A) first, either (x) to the extent the Issuers elect (or to the
extent required by the terms of any Senior Indebtedness or any
Indebtedness of a Restricted Subsidiary), to prepay, repay or purchase
Senior Indebtedness or such Indebtedness of a Restricted Subsidiary (in
each case other than Indebtedness owed to the Company or a Restricted
Subsidiary) within 365 days after the date of such
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Asset Disposition, or (y) to the extent the Company or such Restricted
Subsidiary elects, to reinvest in Additional Assets (including by means
of an investment in Additional Assets by a Restricted Subsidiary with
Net Available Cash received by the Company or another Restricted
Subsidiary) within 365 days from the date of such Asset Disposition or,
if such reinvestment in Additional Assets is a project that is
authorized by the Board of Directors and committed to by the Company or
any Restricted Subsidiary and will take longer than such 365 days to
complete, the period of time necessary to complete such project;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A) above (such balance,
the "Excess Proceeds"), to make an offer (or to cause the Issuers to
make an offer) to purchase Notes and (to the extent the Issuers elect,
or to the extent required by the terms thereof) to purchase, redeem or
repay any other Senior Subordinated Indebtedness, pursuant and subject
to the conditions of the Indenture and the agreements governing such
other Indebtedness; and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B) above, to fund
(to the extent consistent with any other applicable provision of the
Indenture) any general corporate purpose (including the repurchase,
repayment or other acquisition or retirement of any Subordinated
Obligations);
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A)(x) or (B) above, the Company
or such Restricted Subsidiary will retire such Indebtedness and will cause the
related loan commitment (if any) to be permanently reduced in an amount equal
to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $10.0 million. If the aggregate
principal amount of Notes and Senior Subordinated Indebtedness validly
tendered and not withdrawn (or otherwise subject to purchase, redemption or
repayment) in connection with an offer pursuant to clause (B) above exceeds
the Excess Proceeds, the Excess Proceeds will be apportioned between the Notes
and such Senior Subordinated Indebtedness, with the portion of the Excess
Proceeds payable in respect of the Notes to equal the lesser of (x) the Excess
Proceeds amount multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes and the denominator of which is the
sum of the outstanding principal amount of the Notes and the outstanding
principal amount of the relevant Senior Subordinated Indebtedness, and (y) the
aggregate principal amount of Notes validly tendered and not withdrawn.
For the purposes of clause (ii) of paragraph (a) above, the following are
deemed to be cash: (1) Temporary Cash Investments and Cash Equivalents, (2)
the assumption of Indebtedness of the Company (other than Disqualified Stock
of the Company) or any Restricted Subsidiary and the release of the Company or
such Restricted Subsidiary from all liability on payment of the principal
amount of such Indebtedness in connection with such Asset Disposition, (3)
Indebtedness of any Restricted Subsidiary that is no longer a Restricted
Subsidiary as a result of such Asset Disposition, to the extent that the
Company and each other Restricted Subsidiary are released from any Guarantee
of payment of the principal amount of such Indebtedness in connection with
such Asset Disposition, (4) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash and (5) consideration consisting of
Indebtedness of the Company or any Restricted Subsidiary.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (iii)(B) of paragraph (a) above, the Issuers will be
required to purchase (on a several basis in proportion to each Issuer's
obligations in respect of the Notes) Notes tendered pursuant to an offer by
the Issuers for the Notes (the "Offer"), at a purchase price of 100% of their
principal amount plus accrued and unpaid interest to the Purchase Date, in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price
of the Notes tendered pursuant to the Offer is less than the Net Available
Cash allotted to the purchase of Notes, the remaining Net Available Cash will
be available to the
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Company and its Restricted Subsidiaries for use in accordance with clause
(iii)(B) of paragraph (a) above (to repay Senior Subordinated Indebtedness) or
clause (iii)(C) of paragraph (a) above. The Issuers shall not be required to
make an Offer for Notes pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause
(iii)(A) of paragraph (a) above) is less than $10.0 million for any particular
Asset Disposition (which lesser amounts shall be carried forward for purposes
of determining whether an Offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition).
(c) The Issuers will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions With Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
(i) the terms of such Affiliate Transaction are not materially less favorable
to the Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained at the time in a transaction with a Person who is not
such an Affiliate, and (ii) if such Affiliate Transaction involves aggregate
consideration in excess of $5.0 million, the terms of such Affiliate
Transaction have been approved by a majority of the Disinterested Directors.
For purposes of this paragraph, any Affiliate Transaction shall be deemed to
have satisfied the requirements set forth in this paragraph if (x) such
Affiliate Transaction is approved by a majority of the Disinterested Directors
or (y) in the event there are no Disinterested Directors, a fairness opinion
is provided by a nationally recognized appraisal or investment banking firm
with respect to such Affiliate Transaction.
(b) The provisions of the preceding paragraph (a) will not apply to:
(i) any Restricted Payment Transaction,
(ii) (1) the entering into, maintaining or performance of any employment
contract, collective bargaining agreement, benefit plan, program or
arrangement, related trust agreement or any other similar arrangement for
or with any employee, officer or director heretofore or hereafter entered
into in the ordinary course of business, including vacation, health,
insurance, deferred compensation, severance, retirement, savings or other
similar plans, programs or arrangements, (2) the payment of compensation,
performance of indemnification or contribution obligations, or any
issuance, grant or award of stock, options, other equity-related interests
or other securities, to employees, officers or directors in the ordinary
course of business, (3) the payment of fees to directors of the Company or
any of its Restricted Subsidiaries, (4) any transaction with an officer or
director in the ordinary course of business not involving more than
$100,000 in any one case, or (5) Management Advances and payments in
respect thereof,
(iii) any transaction with the Company, any Restricted Subsidiary or any
Receivables Entity,
(iv) any transaction arising out of agreements or instruments in
existence on the Issue Date, and any payments made pursuant thereto,
(v) execution, delivery and performance of the Management Agreements,
including (1) payment to CDR or any Affiliate of CDR of a fee of $2.7
million plus out-of-pocket expenses in connection with the Transactions,
and (2) payment to CDR or any Affiliate of CDR of fees of up to $1.0
million in any fiscal year plus all out-of-pocket expenses incurred by CDR
or any such Affiliate in connection with its performance of management
consulting, monitoring, financial advisory or other services with respect
to the Company and its Restricted Subsidiaries,
(vi) the Transactions, all transactions in connection therewith
(including the financing thereof), and, without duplication of clause (v)
above, all fees or expenses paid or payable in connection with the
Transactions,
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(vii) any transaction in the ordinary course of business on terms not
materially less favorable to the Company or the relevant Restricted
Subsidiary than those that could be obtained at the time in a transaction
with a Person who is not an Affiliate of the Company, and
(viii) any transaction in the ordinary course of business, or approved by
a majority of the Board of Directors, between the Company or any Restricted
Subsidiary and any Affiliate of the Company controlled by the Company that
is a joint venture or similar entity; provided, however, that no other
Affiliate of the Company (other than a Restricted Subsidiary) has any
Investment in such joint venture or similar entity.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist
any Lien (other than Permitted Liens) on any of its property or assets
(including Capital Stock of any other Person), whether owned on the date of
the Indenture or thereafter acquired, securing any Indebtedness of either
Issuer or any Note Guarantor that by its terms is expressly subordinated in
right of payment to or ranks pari passu in right of payment with the Notes or
such Note Guarantor's Note Guarantee (the "Initial Lien"), unless
contemporaneously therewith effective provision is made to secure the
Indebtedness of such Issuer or Note Guarantor due under the Indenture and the
Notes or, in respect of Liens on any Restricted Subsidiary's property or
assets, any Note Guarantee of such Restricted Subsidiary, equally and ratably
with such obligation for so long as such obligation is so secured by such
Initial Lien. Any such Lien thereby created in favor of the Notes or any such
Note Guarantee will be automatically and unconditionally released and
discharged upon (i) the release and discharge of the Initial Lien to which it
relates, or (ii) any sale, exchange or transfer to any Person not an Affiliate
of the Company of the property or assets secured by such Initial Lien, or of
all of the Capital Stock held by the Company or any Restricted Subsidiary in,
or all or substantially all the assets of, any Restricted Subsidiary creating
such Lien.
Future Subsidiary Guarantors. Except as described below, the Company will
cause each U.S. Subsidiary of JCI that is organized or acquired by JCI after
the Issue Date to execute and deliver to the Trustee a supplemental indenture
or other instrument pursuant to which such Subsidiary will guarantee payment
of the Guaranteed JCI Obligations, whereupon such Subsidiary will become a
Subsidiary Guarantor. The Company will also cause each Restricted Subsidiary
of Jafra S.A. that is organized or acquired by Jafra S.A. after the Issue Date
to execute and deliver to the Trustee a supplemental indenture or other
instrument pursuant to which such Subsidiary will guarantee payment of the
Guaranteed Jafra S.A. Obligations, whereupon such Subsidiary will become a
Subsidiary Guarantor. The Company will not be required to cause any U.S.
Subsidiary of JCI to become a Subsidiary Guarantor unless and until such time
as such Subsidiary, together with any other U.S. Subsidiary of JCI that has
not then become a Subsidiary Guarantor, accounts for two percent or more of
Consolidated Total Assets. In addition, the Company may cause any Subsidiary
thereof that is not a Subsidiary Guarantor so to guarantee payment of the
Guaranteed Note Obligations of either Issuer and become a Subsidiary
Guarantor.
Subsidiary Guarantees will be subject to termination and discharge under
certain circumstances. See "--Note Guarantees."
SEC Reports. Notwithstanding that the Company may not be required to be or
remain subject to the reporting requirements of Section 13(a) or 15(d) of the
Exchange Act applicable to a "foreign private issuer" (as such term is defined
in Rule 3b-4 under the Exchange Act), from and after the date on which the
Company first becomes subject to such reporting requirements, the Company will
file with the SEC (unless such filing is not permitted under the Exchange Act
or by the SEC), so long as Notes are outstanding, the following reports by the
dates indicated (or, in the case of the first such report, if later, the date
that is 45 days after the effectiveness of a registration statement in respect
of Notes or Exchange Notes, as the case may be): (i) within 120 days from the
end of each fiscal year, an annual report on Form 20-F (or any successor form)
containing the information required to be contained therein for such fiscal
year, and (ii) within 60 days after the end of each of the first three
quarters in each fiscal year, quarterly reports on Form 6-K containing
unaudited financial statements (including a balance sheet and statement of
income, changes in stockholders' equity and cash flows) and Management's
Discussion and Analysis of Financial Condition and Results of Operations for
and as of the end
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of such quarters (with comparable financial statements for such quarter of the
immediately preceding fiscal year). The Company will also, within 15 days
after the date on which the Company files such reports, transmit by mail to
all Holders, as their names and addresses appear in the Note Register, and to
the Trustee copies of any such information, documents and reports (without
exhibits) (or, in lieu of one or more of the quarterly reports for fiscal
1998, a registration statement filed with the SEC under the Securities Act or
any amendment thereto, provided such registration statement or amendment
contains the information that would have been included in each such report).
The Company will be deemed to have satisfied such requirements if a Parent
files and provides reports, documents and information of the types otherwise
so required to be filed by the Company, or of the types required to be filed
by a U.S. issuer with the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act, in each case within the applicable time periods, and the Company
is not required to file such reports, documents and information separately
under the applicable rules and regulations of the SEC (after giving effect to
any exemptive relief) because of the filings by such Parent. The Company also
will comply with the other provisions of TIA (S) 314(a).
Merger and Consolidation
The Company will not, and will not permit either Issuer to, consolidate with
or merge with or into, or convey, transfer or lease all or substantially all
its assets to, any Person, unless: (i) the resulting, surviving or transferee
Person (the "Successor") will be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia, or (in the case of the Company only) the Cayman Islands, Luxembourg,
Kingdom of the Netherlands (including the Netherlands Antilles) or any other
member of the European Union, or (in the case of Jafra S.A. only) Mexico, and
the Successor (if not the Company or such Issuer) will expressly assume all
the obligations of the Company or such Issuer under the Company's Note
Guarantee (in the case of the Company) or the Notes (in the case of such
Issuer) and the Indenture by executing and delivering to the Trustee a
supplemental indenture or one or more other documents or instruments in form
reasonably satisfactory to the Trustee; (ii) immediately after giving effect
to such transaction (and treating any Indebtedness that becomes an obligation
of the Successor or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor or such Restricted Subsidiary at the
time of such transaction), no Default will have occurred and be continuing;
(iii) immediately after giving effect to such transaction, either (A) the
Company (or, if applicable, its Successor) could Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of the covenant described
under "--Certain Covenants--Limitation on Indebtedness," or (B) the
Consolidated Coverage Ratio of the Company (or, if applicable, its Successor)
would equal or exceed the Consolidated Coverage Ratio of the Company
immediately prior to giving effect to such transaction; (iv) each Note
Guarantor (other than any party to any such consolidation or merger) shall
have delivered a supplemental indenture or other document or instrument in
form reasonably satisfactory to the Trustee, confirming its Note Guarantee;
and (v) the Company will have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each to the effect that such
consolidation, merger or transfer complies with the provisions described in
this paragraph; provided that (x) in giving such opinion such counsel may rely
on an Officer's Certificate as to compliance with the foregoing clauses (ii)
and (iii) and as to any matters of fact, and (y) no Opinion of Counsel will be
required for a consolidation, merger or transfer described in the last
paragraph of this covenant. Any Indebtedness that becomes an obligation of the
Company or any Restricted Subsidiary (or that is deemed to be Incurred by any
Restricted Subsidiary that becomes a Restricted Subsidiary) as a result of any
such transaction undertaken in compliance with this covenant, and any
Refinancing Indebtedness with respect thereto, shall be deemed to have been
Incurred in compliance with the covenant described under "--Certain
Covenants--Limitation on Indebtedness."
The Successor will succeed to, and be substituted for, and may exercise
every right and power of, the Company or the relevant Issuer under the
Indenture, and thereafter the predecessor Company or the relevant Issuer shall
be relieved of all obligations and covenants under the Indenture.
Clauses (ii) and (iii) of the first paragraph of this "Merger and
Consolidation" section will not apply to any transaction in which (1) any
Restricted Subsidiary consolidates with, merges into or transfers all or part
of its properties and assets to the Company or an Issuer or (2) the Company
consolidates or merges with or into or
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transfers all or substantially all its assets to (x) an Affiliate incorporated
or organized for the purpose of reincorporating or reorganizing the Company in
another jurisdiction in the United States of America, Cayman Islands,
Luxembourg or Kingdom of the Netherlands (including the Netherlands Antilles)
or any other member of the European Union, or changing its legal structure to
a corporation or other entity or (y) a Restricted Subsidiary of the Company so
long as all assets of the Company and the Restricted Subsidiaries immediately
prior to such transaction (other than Capital Stock of such Restricted
Subsidiary) are owned by such Restricted Subsidiary and its Restricted
Subsidiaries immediately after the consummation thereof. The first paragraph
of this "Merger and Consolidation" section will not apply to the Mergers.
Defaults
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due, whether at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, whether or not such payment is prohibited by the
provisions described under "--Ranking" above, (iii) the failure by the Company
or an Issuer to comply with its obligations under the covenants described
under "--Merger and Consolidation" above, (iv) the failure by the Company to
comply for 30 days after notice with any of its obligations under the
covenants described under "--Change of Control" above (other than a failure to
purchase Notes) and under "--Certain Covenants" (other than the covenant
described under "--Certain Covenants--SEC Reports"), (v) the failure by the
Company to comply for 60 days after notice with its other agreements contained
in the Notes or the Indenture, (vi) the failure by any Subsidiary Guarantor to
comply for 30 days after notice with its obligations under its Subsidiary
Guarantee, (vii) the failure by the Company, either of the Issuers or any
Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such Indebtedness by
the holders thereof because of a default, if the total amount of such
Indebtedness so unpaid or accelerated exceeds $10.0 million or its foreign
currency equivalent (the "cross acceleration provision"), (viii) certain
events of bankruptcy, insolvency or reorganization of the Company, either of
the Issuers or a Significant Subsidiary (the "bankruptcy provisions"), (ix)
the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect
thereof prior to or within 90 days from the entry thereof, or to be received
in respect thereof in the event any appeal thereof shall be unsuccessful) in
excess of $10.0 million or its foreign currency equivalent against the
Company, either of the Issuers or a Significant Subsidiary that is not
discharged, or bonded or insured by a third Person, if such judgment or decree
remains outstanding for a period of 90 days following such judgment or decree
and is not discharged, waived or stayed (the "judgment default provision") or
(x) the failure of any Note Guarantee by the Company or a Subsidiary Guarantor
that is a Significant Subsidiary to be in full force and effect (except as
contemplated by the terms thereof or of the Indenture) or the denial or
disaffirmation in writing by the Company or any Subsidiary Guarantor that is a
Significant Subsidiary of its obligations under its Note Guarantee, if such
Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body.
However, a Default under clause (iv), (v) or (vi) will not constitute an
Event of Default until the Trustee or the Holders of at least 25% in principal
amount of the outstanding Notes notify the Company of the Default and the
Company does not cure such Default within the time specified in such clause
after receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of an Issuer) occurs and is
continuing, the Trustee by notice to the Issuers, or the Holders of at least a
majority in principal amount of the outstanding Notes by notice to the Issuers
and the Trustee, may declare the principal of and accrued but unpaid interest
on all the Notes to be due and payable, provided that so long as any
Designated Senior Indebtedness of an Issuer shall be outstanding, such
acceleration shall not be effective until the earlier to occur of (x) five
Business Days following delivery of a written notice of such acceleration of
the Notes to the Issuers and the holders of all such Designated Senior
Indebtedness or each Representative
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thereof and (y) the acceleration of any such Designated Senior Indebtedness.
Upon the effectiveness of such a declaration, such principal and interest will
be due and payable immediately. Notwithstanding the foregoing, if an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Issuers occurs and is continuing, the principal of and accrued interest
on all the Notes will become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holders. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Notwithstanding the foregoing, in the event of a declaration of acceleration
in respect of the Notes because an Event of Default specified in clause (vii)
above shall have occurred and be continuing, such declaration of acceleration
of the Notes and such Event of Default and all consequences thereof (including
any acceleration or resulting payment default) shall be annulled, waived and
rescinded, automatically and without any action by the Trustee or the Holders,
and be of no further effect, if within 30 days after such Event of Default
arose (x) the Indebtedness that is the basis for such Event of Default has
been discharged, or (y) the holders thereof have rescinded or waived the
acceleration, notice or action (as the case may be) giving rise to such Event
of Default, or (z) the default in respect of such Indebtedness that is the
basis for such Event of Default has been cured.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered
the Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and
(v) the Holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period. Subject to certain restrictions, the Holders of a majority
in principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts with
law or the Indenture or that the Trustee determines is unduly prejudicial to
the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, or premium (if any) or interest on, any Note, the
Trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests
of the Noteholders. In addition, the Issuers are required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Issuers also are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event that would constitute certain Defaults, their status and what action the
Issuers are taking or propose to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including in each case, consents obtained in connection with a
tender offer or exchange offer for Notes). However, without the consent of
each Holder of an outstanding Note affected, no amendment or waiver may (i)
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reduce the principal amount of Notes whose Holders must consent to an
amendment or waiver, (ii) reduce the rate of or extend the time for payment of
interest on any Note, (iii) reduce the principal of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption of
any Note or change the date on which any Note may be redeemed as described
under "--Optional Redemption" above, (v) make any Note payable in money other
than that stated in the Note, (vi) make any change to the subordination
provisions of the Indenture that adversely affects the rights of any Holder in
any material respect, (vii) impair the right of any Holder to receive payment
of principal of and interest on such Holder's Notes on or after the due dates
therefor
or to institute suit for the enforcement of any payment on or with respect to
such Holder's Notes or (viii) make any change in the amendment or waiver
provisions described in this sentence. In addition, without the consent of the
Holders of 75% in principal amount of the Notes then outstanding, no amendment
may release the Company or either Issuer from any of its obligations under its
Note Guarantee, except in compliance with the terms thereof or of the
Indenture.
Without the consent of any Holder, the Company, the Issuers, the Trustee and
(as applicable) any Subsidiary Guarantor may amend the Indenture to cure any
ambiguity, omission, defect or inconsistency, to provide for the assumption by
a successor of the obligations of the Company or an Issuer under the
Indenture, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to add Guarantees with respect to the Notes, to secure the
Notes, to confirm and evidence the release, termination or discharge of any
Guarantee or Lien with respect to or securing the Notes when such release,
termination or discharge is provided for under the Indenture, to add to the
covenants of the Company or an Issuer for the benefit of the Noteholders or to
surrender any right or power conferred upon the Company or an Issuer, to
provide that any Indebtedness that becomes or will become an obligation of a
Successor or a Note Guarantor pursuant to a transaction governed by the
provisions described under "--Merger and Consolidation" (and that is not a
Subordinated Obligation) is Senior Subordinated Indebtedness for purposes of
the Indenture, to provide for or confirm the issuance of Additional Notes, to
make any change that does not adversely affect the rights of any Holder, or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the TIA or otherwise. However, no amendment may be made to
the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding (which Senior
Indebtedness has been previously designated in writing by the Company to the
Trustee for this purpose) unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment or waiver. It is
sufficient if such consent approves the substance of the proposed amendment or
waiver. Until an amendment or waiver becomes effective, a consent to it by a
Noteholder is a continuing consent by such Noteholder and every subsequent
Holder of all or part of the related Note. Any such Noteholder or subsequent
holder may revoke such consent as to its Note by written notice to the Trustee
or the Company, received thereby before the date on which the Company
certifies to the Trustee that the Holders of the requisite principal amount of
Notes have consented to such amendment or waiver. After an amendment or waiver
under the Indenture becomes effective, the Company is required to mail to
Noteholders a notice briefly describing such amendment or waiver. However, the
failure to give such notice to all Noteholders, or any defect therein, will
not impair or affect the validity of the amendment or waiver.
Defeasance
The Issuers at any time may concurrently (and not separately) terminate all
the respective obligations of the Company and the Issuers under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those relating to the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuers at any time may concurrently (and not separately) terminate
the respective obligations of the Company and the Issuers under certain
covenants under the Indenture, including the covenants described under "--
Certain Covenants" and "--Change of Control," the operation of the default
provisions relating to such covenants described under "--Defaults" above, the
operation of the cross acceleration provision, the bankruptcy
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provisions with respect to Subsidiaries and the judgment default provision
described under "--Defaults" above, and the limitations contained in clauses
(iii), (iv) and (v) under "--Merger and Consolidation" above ("covenant
defeasance"). If the Issuers exercise their legal defeasance option or its
covenant defeasance option, each Note Guarantor will be released from all its
obligations with respect to its Note Guarantee.
The Issuers may exercise their legal defeasance option notwithstanding their
prior exercise of their covenant defeasance option. If the Issuers exercise
their legal defeasance option, payment of the Notes may not be accelerated
because of an Event of Default with respect thereto. If the Issuers exercise
their covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (v) (as it relates to
the covenants described under "--Certain Covenants" above), (vi), (vii),
(viii) (but only with
respect to events of bankruptcy, insolvency or reorganization of a Significant
Subsidiary), (ix) or (x) under "--Defaults" above or because of the failure of
the Company to comply with clause (iii), (iv) or (v) under "--Merger and
Consolidation" above.
Either defeasance option may be exercised to any redemption date or to the
maturity date for the Notes. In order to exercise either defeasance option,
the Issuers must irrevocably deposit in trust (the "defeasance trust") with
the Trustee money or U.S. Government Obligations, or a combination thereof,
for the payment of principal of, and premium (if any) and interest on, the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable Federal income tax law since the
Issue Date).
Satisfaction and Discharge
The Indenture will be discharged and cease to be of further effect (except
as to surviving rights of registration of transfer or exchange of the Notes,
as expressly provided for in the Indenture) as to all outstanding Notes when
(i) either (a) all the Notes previously authenticated and delivered (other
than certain lost, stolen or destroyed Notes, and certain Notes for which
provision for payment was previously made and thereafter the funds have been
released to the Issuers) have been delivered to the Trustee for cancellation
or (b) all Notes not previously delivered to the Trustee for cancellation (x)
have become due and payable, (y) will become due and payable at their Stated
Maturity within one year or (z) are to be called for redemption within one
year under arrangements reasonably satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the expense, of the
Issuers, (ii) the Issuers have irrevocably deposited or caused to be deposited
with the Trustee money, U.S. Government Obligations, or a combination thereof,
sufficient to pay and discharge the entire indebtedness on the Notes not
previously delivered to the Trustee for cancellation, for principal, premium,
if any, and interest to the date of deposit; (iii) the Issuers have paid or
caused to be paid all other sums payable under the Indenture by the Issuers;
and (iv) the Issuers have delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel each to the effect that all conditions precedent
under the "Satisfaction and Discharge" section of the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with,
provided that any such counsel may rely on any Officer's Certificate as to
matters of fact (including as to compliance with the foregoing clauses (i),
(ii) and (iii)).
No Personal Liability of Directors, Officers, Employees, Incorporators and
Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
the Issuers, any Note Guarantor or any Subsidiary of any thereof shall have
any liability for any obligation of the Company, the Issuers or any Note
Guarantor under the Indenture, the Notes or any Note Guarantee, or for any
claim based on, in respect of, or by reason of, any such obligation or its
creation. Each Noteholder, by accepting the Notes, waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes.
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Concerning the Trustee
State Street Bank and Trust Company is to be the Trustee under the Indenture
and has been appointed by the Issuers as Registrar and Paying Agent with
regard to the Notes.
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are set forth
specifically in the Indenture. During the existence of an Event of Default,
the Trustee will exercise such of the rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and the TIA will impose certain limitations on the rights of
the Trustee, should it become a creditor of the Company, an Issuer or a Note
Guarantor, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions; provided,
however, that if it acquires any conflicting interest as described in the TIA,
it must eliminate such conflict, apply to the SEC for permission to continue
as Trustee with such conflict, or resign.
Governing Law
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York, without
giving effect to any principles of conflict of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
Certain Definitions
"Additional Assets" means (i) any property or assets that replace the
property or assets that are the subject of an Asset Disposition; (ii) any
property or assets (other than Indebtedness and Capital Stock) to be used by
the Company or a Restricted Subsidiary in a Related Business; (iii) the
Capital Stock of a Person that is engaged in a Related Business and becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; or (iv) Capital Stock of any
Person that at such time is a Restricted Subsidiary, acquired from a third
party.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"all or substantially all" has the meaning given to such phrase in the
Revised Model Business Corporation Act and commentary thereto.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than Designated
Equity Interests, or (in the case of a Foreign Subsidiary) to the extent
required by applicable law), property or other assets (each referred to for
the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction), other than (i) a disposition to the
Company or any Restricted Subsidiary, (ii) a disposition in the ordinary
course of business, (iii) the sale or discount (with or without recourse, and
on customary or commercially reasonable terms) of accounts receivable or notes
receivable arising in the ordinary course of business, or the conversion or
exchange of accounts receivable for notes receivable, (iv) any Restricted
Payment Transaction, (v) a disposition that is governed by the provisions
described under "--Merger and Consolidation", (vi) any Financing Disposition,
(vii) any "fee in lieu" or other disposition of assets to any governmental
authority or agency that continue in use by the Company or any Restricted
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Subsidiary, so long as the Company or any Restricted Subsidiary may obtain
title to such assets upon reasonable notice by paying a nominal fee, (viii)
any exchange of like property pursuant to Section 1031 (or any successor
section) of the Code, (ix) any financing transaction with respect to property
built or acquired by the Company or any Restricted Subsidiary after the Issue
Date, including any sale/leaseback transaction or asset securitization, (x)
any disposition arising from foreclosure, condemnation or similar action with
respect to any property or other assets, (xi) any disposition of Capital
Stock, Indebtedness or other securities of an Unrestricted Subsidiary, (xii) a
disposition of Capital Stock of a Restricted Subsidiary pursuant to an
agreement or other obligation with or to a Person (other than the Company or a
Restricted Subsidiary) from whom such Restricted Subsidiary was acquired, or
from whom such Restricted Subsidiary acquired its business and assets (having
been newly formed in connection with such acquisition), entered into in
connection with such acquisition, (xiii) a disposition of not more than 5% of
the outstanding Capital Stock of a Foreign Subsidiary that has been approved
by the Board of Directors or (xiv) any disposition or series of related
dispositions for aggregate consideration not exceeding $1.0 million.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means (i) any and all amounts, whether outstanding on
the Issue Date or thereafter incurred, payable under or in respect of the
Senior Credit Facility, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company, either Issuer or any
Restricted Subsidiary whether or not a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees, other monetary obligations of any nature and all
other amounts payable thereunder or in respect thereof and (ii) all Hedging
Obligations arising in connection therewith to any party to the Senior Credit
Facility (or any affiliate thereof).
"Board of Directors" means the board of directors or other governing body of
the Company or any committee thereof duly authorized to act on behalf of such
board or governing body.
"Borrowing Base" means the sum (determined as of the end of the most
recently ended fiscal quarter for which consolidated financial statements of
the Company are available) of (1) 60% of Inventory of the Company and its
Restricted Subsidiaries and (2) 80% of Receivables of the Company and its
Restricted Subsidiaries.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to
close in New York City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP. The Stated Maturity of any Capitalized Lease
Obligation shall be the date of the last payment of rent or any other amount
due under the related lease.
"Cash Equivalents" means any of the following: (a) securities issued or
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or
bankers' acceptances of (i) any lender under the Senior Credit Agreement or
(ii) any commercial bank having capital and surplus in excess of $500,000,000
and the commercial paper of the holding company of which is rated at least A-1
or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by
Moody's (or if at such time neither is issuing ratings, then a comparable
rating of another nationally recognized rating agency), (c)
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commercial paper rated at least A-1 or the equivalent thereof by S&P or at
least P-1 or the equivalent thereof by Moody's (or if at such time neither is
issuing ratings, then a comparable rating of another nationally recognized
rating agency) and (d) investments in money market funds complying with the
risk limiting conditions of Rule 2a-7 or any successor rule of the SEC under
the Investment Company Act of 1940, as amended.
"CDR" means Clayton, Dubilier & Rice, Inc.
"CDR Fund V" means Clayton, Dubilier & Rice Fund V Limited Partnership, a
Cayman Islands exempted limited partnership, and any successor in interest
thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means CDRJ Investments (Lux) S.A., a Luxembourg corporation, and
any successor in interest thereto.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA of the Company and
its Restricted Subsidiaries for the period of the most recent four
consecutive fiscal quarters ending prior to the date of such determination for
which consolidated financial statements of the Company are available to (ii)
Consolidated Interest Expense for such four fiscal quarters (in each case,
determined, for each fiscal quarter (or portion thereof) of the four fiscal
quarters ending prior to the Issue Date, on a pro forma basis to give effect
to the Acquisition as if it had occurred at the beginning of such four-quarter
period); provided, that
(1) if since the beginning of such period the Company or any Restricted
Subsidiary has Incurred any Indebtedness that remains outstanding on such
date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness,
Consolidated EBITDA and Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to such Indebtedness
as if such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness under
any revolving credit facility outstanding on the date of such calculation
shall be computed based on (A) the average daily balance of such
Indebtedness during such four fiscal quarters or such shorter period for
which such facility was outstanding or (B) if such facility was created
after the end of such four fiscal quarters, the average daily balance of
such Indebtedness during the period from the date of creation of such
facility to the date of such calculation),
(2) if since the beginning of such period the Company or any Restricted
Subsidiary has repaid, repurchased, redeemed, defeased or otherwise
acquired, retired or discharged any Indebtedness (each, a "Discharge")
since the beginning of the period or if the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio involves a Discharge of
Indebtedness (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently
repaid), Consolidated EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
Discharge of such Indebtedness, including with the proceeds of such new
Indebtedness, as if such discharge had occurred on the first day of such
period,
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have disposed of any company, any business or any group of
assets constituting an operating unit of a business (any such disposition,
a "Sale"), the Consolidated EBITDA for such period shall be reduced by an
amount equal to the Consolidated EBITDA (if positive) attributable to the
assets that are the subject of such Sale for such period or increased by an
amount equal to the Consolidated EBITDA (if negative) attributable thereto
for such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to (A) the Consolidated Interest Expense
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, redeemed, defeased or otherwise acquired,
retired or discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Sale for such period
(including through the assumption of such Indebtedness by another Person)
plus (B) if the Capital Stock of
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any Restricted Subsidiary is sold, the Consolidated Interest Expense for
such period attributable to the Indebtedness of such Restricted Subsidiary
to the extent the Company and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such Sale,
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger, consolidation or otherwise) shall have made an
Investment in any Person that thereby becomes a Restricted Subsidiary, or
otherwise acquired any company, any business or any group of assets
constituting an operating unit of a business, including any such Investment
or acquisition occurring in connection with a transaction causing a
calculation to be made hereunder (any such Investment or acquisition, a
"Purchase"), Consolidated EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any related Indebtedness) as if such Purchase occurred on
the first day of such period, and
(5) if since the beginning of such period any Person became a Restricted
Subsidiary or was merged or consolidated with or into the Company or any
Restricted Subsidiary, and since the beginning of such period such Person
shall have Discharged any Indebtedness or made any Sale or Purchase that
would have required an adjustment pursuant to clause (2), (3) or (4) above
if made by the Company or a Restricted Subsidiary
during such period, Consolidated EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect thereto
as if such Discharge, Sale or Purchase occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given to
any Sale, Purchase or other transaction, or the amount of income or earnings
relating thereto and the amount of Consolidated Interest Expense associated
with any Indebtedness Incurred or repaid, repurchased, redeemed, defeased or
otherwise acquired, retired or discharged in connection therewith, the pro
forma calculations in respect thereof (including in respect of anticipated
cost savings or synergies relating to any such Sale, Purchase or other
transaction) shall be as determined in good faith by a responsible financial
or accounting Officer of the Company. If any Indebtedness bears a floating
rate of interest and is being given pro forma effect, the interest expense on
such Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness). If any
Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a
rate of interest based on a prime or similar rate, a eurocurrency interbank
offered rate or other fixed or floating rate, and such Indebtedness is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated by applying such optional rate as the Company or such Restricted
Subsidiary may designate. If any Indebtedness that is being given pro forma
effect was Incurred under a revolving credit facility, the interest expense on
such Indebtedness shall be computed based upon the average daily balance of
such Indebtedness during the applicable period. Interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate determined in
good faith by a responsible financial or accounting officer of the Company to
be the rate of interest implicit in such Capitalized Lease Obligation in
accordance with GAAP.
"Consolidated EBITDA" means, for any period, the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) provision for all taxes (whether or not paid,
estimated or accrued) based on income, profits or capital, (ii) Consolidated
Interest Expense and any Receivables Fees, (iii) depreciation, amortization
(including amortization of goodwill and intangibles and amortization and
write-off of financing costs) and all other non-cash charges or non-cash
losses, and (iv) any expenses or charges related to any Equity Offering,
Investment or Indebtedness permitted by the Indenture (whether or not
consummated or incurred).
"Consolidated Interest Expense" means, for any period, (i) the total
interest expense of the Company and its Restricted Subsidiaries to the extent
deducted in calculating Consolidated Net Income, net of any interest income of
the Company and its Restricted Subsidiaries, including any such interest
expense consisting of (a) interest expense attributable to Capitalized Lease
Obligations, (b) amortization of debt discount, (c) interest in respect of
Indebtedness of any other Person that has been Guaranteed by the Company or
any Restricted
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Subsidiary, but only to the extent that such interest is actually paid by the
Company or any Restricted Subsidiary, (d) non-cash interest expense, (e) the
interest portion of any deferred payment obligation, and (f) commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing, plus (ii) Preferred Stock dividends paid in
cash in respect of Disqualified Stock of the Company held by Persons other
than the Company or a Restricted Subsidiary and minus (iii) to the extent
otherwise included in such interest expense referred to in clause (i) above,
Receivables Fees and amortization or write-off of financing costs, in each
case under clauses (i) through (iii) as determined on a Consolidated basis in
accordance with GAAP; provided, however, that gross interest expense shall be
determined after giving effect to any net payments made or received by the
Company and its Restricted Subsidiaries with respect to Interest Rate
Agreements.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its Restricted Subsidiaries, determined on a consolidated
basis in accordance with GAAP and before any reduction in respect of Preferred
Stock dividends; provided, however, that there shall not be included in such
Consolidated Net Income:
(i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained
in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in the net loss of such
Person shall be included to the extent of the aggregate Investment of the
Company or any of its Restricted Subsidiaries in such Person,
(ii) any net income (loss) of any Person acquired by the Company or a
Restricted Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition,
(iii) any net income (loss) of any Restricted Subsidiary that is not an
Issuer or a Subsidiary Guarantor if such Restricted Subsidiary is subject
to restrictions, directly or indirectly, on the payment of dividends or the
making of similar distributions by such Restricted Subsidiary, directly or
indirectly, to the Company by operation of the terms of such Restricted
Subsidiary's charter or any agreement, instrument, judgment, decree, order,
statute or governmental rule or regulation applicable to such Restricted
Subsidiary or its stockholders (other than (x) restrictions that have been
waived or otherwise released, (y) restrictions pursuant to the Notes or the
Indenture and (z) restrictions in effect on the Issue Date with respect to
a Restricted Subsidiary and other restrictions with respect to such
Restricted Subsidiary that taken as a whole are not materially less
favorable to the Noteholders than such restrictions in effect on the Issue
Date), except that (A) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of any dividend or distribution that was
or that could have been made by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary (subject, in the
case of a dividend that could have been made to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the net
loss of such Restricted Subsidiary shall be included to the extent of the
aggregate Investment of the Company or any of its other Restricted
Subsidiaries in such Restricted Subsidiary,
(iv) any gain or loss realized upon the sale or other disposition of any
asset of the Company or any Restricted Subsidiary (including pursuant to
any sale/leaseback transaction) that is not sold or otherwise disposed of
in the ordinary course of business (as determined in good faith by the
Board of Directors),
(v) any item classified as an extraordinary, unusual or nonrecurring
gain, loss or charge (including (a) any compensation expense for stock
options that will be cashed out, converted, exchanged or otherwise retired
in connection with the Acquisition, (b) any charge or expense incurred for
employee bonuses in connection with the Acquisition, and (c) fees, expenses
and charges associated with the Acquisition or any acquisition, merger or
consolidation after the Issue Date),
(vi) the cumulative effect of a change in accounting principles,
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(vii) all deferred financing costs written off and premiums paid in
connection with any early extinguishment of Indebtedness,
(viii) any unrealized gains or losses in respect of Currency Agreements,
(ix) any unrealized foreign currency transaction gains or losses in
respect of Indebtedness of any Person denominated in a currency other than
the functional currency of such Person, and
(x) any non-cash compensation charge arising from any grant of stock,
stock options or other equity-based awards.
In the case of any unusual or nonrecurring gain, loss or charge not included
in Consolidated Net Income pursuant to clause (v) above in any determination
thereof, the Company will deliver an Officer's Certificate to the Trustee
promptly after the date on which Consolidated Net Income is so determined,
setting forth the nature and amount of such unusual or nonrecurring gain, loss
or charge.
"Consolidated Total Assets" means, as of any date of determination, the
total assets shown on the consolidated balance sheet of the Company and its
Restricted Subsidiaries as of the most recent date for which such a balance
sheet is available, determined on a consolidated basis in accordance with GAAP
(and, in the case of any determination relating to any Incurrence of
Indebtedness or any Investment, on a pro forma basis including any property or
assets being acquired in connection therewith), provided that for purposes of
paragraph (b) of the covenant described in "--Certain Covenants--Limitation on
Indebtedness" and the definition of "Permitted Investments," Consolidated
Total Assets shall not be less than $258.5 million. At December 31, 1997, on a
pro forma basis giving effect to the Acquisition and the issuance of the
Notes, Consolidated Total Assets was $258.5 million. See "Unaudited Pro Forma
Combined Financial Statements."
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of the Company or
any Restricted Subsidiary in any Unrestricted Subsidiary will be accounted for
as an investment. The term "Consolidated" has a correlative meaning.
"Currency Agreement" means, in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement or arrangements
(including derivative agreements or arrangements), as to which such Person is
a party or a beneficiary.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Equity Interests" means (i) directors' qualifying shares, or
(ii) in the case of a Foreign Subsidiary, Capital Stock required by law to be
held by a Person other than the Company or any Restricted Subsidiary.
"Designated Senior Indebtedness" with respect to a Person means (i) the Bank
Indebtedness and (ii) any other Senior Indebtedness of such Person that, at
the date of determination, has an aggregate principal amount equal to or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $10.0 million and is specifically designated by such Person in
an agreement or instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disinterested Director" means, with respect to any Affiliate Transaction, a
member of the Board of Directors having no material direct or indirect
financial interest in or with respect to such Affiliate Transaction. A member
of the Board of Directors shall not be deemed to have such a financial
interest in any Affiliate Transaction by reason of such member's holding
Capital Stock of the Company or a Parent or any options, warrants or other
rights in respect of such Capital Stock.
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"Disqualified Stock" means, with respect to any Person, any Capital Stock
(other than Management Stock) that by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable) or upon the happening of any event (other than following the
occurrence of a Change of Control or other similar event described under such
terms as a "change of control," or any Asset Disposition) (i) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof (other than following
the occurrence of a Change of Control or other similar event described under
such terms as a "change of control," or any Asset Disposition), in whole or in
part, in each case on or prior to the final Stated Maturity of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Contribution" means Net Cash Proceeds, or the fair value, as
determined in good faith by the Board of Directors, of property or assets,
received by the Company as capital contributions to the Company after the
Issue Date or from the issuance or sale (other than to a Subsidiary of the
Company) of Capital Stock (other
than Disqualified Stock) of the Company, in each case to the extent designated
as an Excluded Contribution pursuant to an Officer's Certificate of the
Company and not previously included in the calculation set forth in
subparagraph (a)(3)(B)(x) of the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" for purposes of determining
whether a Restricted Payment may be made.
"Financing Disposition" means any sale, transfer, conveyance or other
disposition of property or assets by the Company or any Subsidiary thereof to
any Receivables Entity, or by any Receivables Subsidiary, in each case in
connection with the Incurrence by a Receivables Entity of Indebtedness, or
obligations to make payments to the obligor on Indebtedness, which may be
secured by a Lien in respect of such property or assets.
"Foreign Subsidiary" means (a) any Restricted Subsidiary of the Company that
is not organized under the laws of the United States of America or any state
thereof or the District of Columbia and (b) any Restricted Subsidiary of the
Company that has no material assets other than securities of one or more
Foreign Subsidiaries, and other assets relating to an ownership interest in
any such securities or Subsidiaries.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date (for purposes of the definitions of
the terms "Consolidated Coverage Ratio," "Consolidated EBITDA," "Consolidated
Interest Expense," "Consolidated Net Income" and "Consolidated Total Assets,"
all defined terms in the Indenture to the extent used in or relating to any of
the foregoing definitions, and all ratios and computations based on any of the
foregoing definitions) and as in effect from time to time (for all other
purposes of the Indenture), including those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as approved by a significant segment of the accounting profession. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any other Person; provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
in the Register.
"Holding Company Expenses" means (i) costs (including all professional fees
and expenses) incurred by a Parent to comply with its reporting obligations
under federal or state laws or under the Indenture, including any reports
filed with respect to the Securities Act, Exchange Act or the respective rules
and regulations promulgated
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thereunder, (ii) indemnification obligations of a Parent owing to directors,
officers, employees or other Persons under its charter or by-laws or pursuant
to written agreements with any such Person, (iii) other operational expenses
of a Parent incurred in the ordinary course of business, and (iv) expenses
incurred by a Parent in connection with any public offering of Capital Stock
or Indebtedness (x) where the net proceeds of such offering are intended to be
received by or contributed or loaned to the Company or a Restricted
Subsidiary, or (y) in a prorated amount of such expenses in proportion to the
amount of such net proceeds intended to be so received, contributed or loaned,
or (z) otherwise on an interim basis prior to completion of such offering so
long as a Parent shall cause the amount of such expenses to be repaid to the
Company or the relevant Restricted Subsidiary out of the proceeds of such
offering promptly if completed.
"Incur" means issue, assume, enter into any Guarantee of, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock
of a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. Accrual of
interest, the accretion of accreted value and the
payment of interest in the form of additional Indebtedness will not be deemed
to be an Incurrence of Indebtedness. Any Indebtedness issued at a discount
(including Indebtedness on which interest is payable through the issuance of
additional Indebtedness) shall be deemed Incurred at the time of original
issuance of the Indebtedness at the initial accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal of indebtedness of such Person for borrowed money,
(ii) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all reimbursement obligations of such Person in respect of letters
of credit or other similar instruments (the amount of such obligations
being equal at any time to the aggregate then undrawn and unexpired amount
of such letters of credit or other instruments plus the aggregate amount of
drawings thereunder that have not then been reimbursed),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property (except Trade Payables), which purchase price is
due more than one year after the date of placing such property in final
service or taking final delivery and title thereto,
(v) all Capitalized Lease Obligations of such Person,
(vi) the redemption, repayment or other repurchase amount of such Person
with respect to any Disqualified Stock of such Person or (if such Person is
a Subsidiary of the Company other than an Issuer or a Subsidiary Guarantor)
any Preferred Stock of such Subsidiary, but excluding, in each case, any
accrued dividends (the amount of such obligation to be equal at any time to
the maximum fixed involuntary redemption, repayment or repurchase price for
such Capital Stock, or if less (or if such Capital Stock has no such fixed
price), to the involuntary redemption, repayment or repurchase price
therefor calculated in accordance with the terms thereof as if then
redeemed, repaid or repurchased, and if such price is based upon or
measured by the fair market value of such Capital Stock, such fair market
value shall be as determined in good faith by the Board of Directors or the
board of directors or other governing body of the issuer of such Capital
Stock),
(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of (A) the fair market value of such asset at such date of
determination (as determined in good faith by the Company) and (B) the
amount of such Indebtedness of such other Persons,
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person, and
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(ix) to the extent not otherwise included in this definition, net Hedging
Obligations of such Person (the amount of any such obligation to be equal
at any time to the termination value of such agreement or arrangement
giving rise to such Hedging Obligation that would be payable by such Person
at such time).
The amount of Indebtedness of any Person at any date shall be determined as
set forth above or otherwise provided in the Indenture, or otherwise shall
equal the amount thereof that would appear on a balance sheet of such Person
(excluding any notes thereto) prepared in accordance with GAAP.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate protection agreement, interest rate future agreement, interest rate
option agreement, interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement (including derivative agreements or arrangements), as
to which such Person is party or a beneficiary.
"Inventory" means goods held for sale or lease by a Person in the ordinary
course of business, net of any reserve for goods that have been segregated by
such Person to be returned to the applicable vendor for credit, as determined
in accordance with GAAP.
"Investment" in any Person by any other Person means any direct or indirect
advance, loan or other extension of credit (other than to customers,
suppliers, directors, officers or employees of any Person in the ordinary
course of business) or capital contribution (by means of any transfer of cash
or other property to others or any payment for property or services for the
account or use of others) to, or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by, such Person. For purposes
of the definition of "Unrestricted Subsidiary" and the covenant described
under "--Certain Covenants--Limitation on Restricted Payments," (i)
"Investment" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount
(if positive) equal to (x) the Company's "Investment" in such Subsidiary at
the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation, (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer and (iii) in each case
under clause (i) or (ii) above, fair market value shall be as determined in
good faith by the Board of Directors. Guarantees shall not be deemed to be
Investments. The amount of any Investment outstanding at any time shall be the
original cost of such Investment, reduced (at the Company's option) by any
dividend, distribution, interest payment, return of capital, repayment or
other amount or value received in respect of such Investment; provided,
however, that to the extent that the amount of Restricted Payments outstanding
at any time is so reduced by any portion of any such amount or value that
would otherwise be included in the calculation of Consolidated Net Income,
such portion of such amount or value shall not be so included for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
paragraph (a) of the covenant described under "--Certain Covenants--Limitation
on Restricted Payments."
"Investor" means CDR Fund V.
"Issue Date" means the first date on which Notes are issued.
"Jafra S.A. Subsidiary Guarantor" means each Restricted Subsidiary of Jafra
S.A. that enters into a Subsidiary Guarantee.
"JCI" means the U.S. Issuer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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"Management Advances" means (1) loans or advances made to directors,
officers or employees of a Parent, the Company or any Restricted Subsidiary
(x) in respect of travel, entertainment or moving-related expenses incurred in
the ordinary course of business, (y) in respect of moving-related expenses
incurred in connection with any closing or consolidation of any facility or
(z) in the ordinary course of business and (in the case of this clause (z))
not exceeding $2.5 million in the aggregate outstanding at any time, (2)
promissory notes of Management Investors acquired in connection with the
issuance of Management Stock to such Management Investors, (3) Management
Guarantees or (4) other guarantees of borrowings by Management Investors in
connection with the purchase of Management Stock, which guarantees are
permitted under the covenant described under "--Certain Covenants--Limitation
on Indebtedness."
"Management Agreements" means, collectively, the Consulting Agreement and
the Indemnification Agreement, each dated as of April 30, 1998, each between
the Company and CD&R (and its permitted successors and assigns thereunder), as
each may be amended, supplemented, waived or otherwise modified from time to
time in accordance with the terms thereof and of the Indenture.
"Management Guarantees" means guarantees (x) of up to an aggregate principal
amount of $10.0 million of borrowings by Management Investors in connection
with their purchase of Management Stock or (y) made on behalf of, or in
respect of loans or advances made to directors, officers or employees of a
Parent, the Company or any Restricted Subsidiary (1) in respect of travel,
entertainment and moving-related expenses incurred in the ordinary course of
business, or (2) in the ordinary course of business and (in the case of this
clause (2)) not exceeding $2.5 million in the aggregate outstanding at any
time.
"Management Investors" means the officers, directors, employees and other
members of the management of a Parent, the Company or any of its Subsidiaries,
or family members or relatives thereof, or trusts or partnerships for the
benefit of any of the foregoing, or any of their heirs, executors, successors
and legal representatives, who at any date beneficially own or have the right
to acquire, directly or indirectly, Capital Stock of the Company or a Parent.
"Management Stock" means Capital Stock of the Company or a Parent (including
any options, warrants or other rights in respect thereof) held by any of the
Management Investors.
"Mergers" means the merger of Acquisition Co. with the California
corporation then known as Jafra Cosmetics International, Inc., with JCI
surviving, and the merger of Jafra S.A. with and into Grupo Jafra, with Jafra
S.A. surviving.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition (including as a consequence of any
transfer of funds in connection with the application thereof in accordance
with the covenant described under "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock"), (ii) all payments made, and all installment
payments required to be made, on any Indebtedness that is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or that must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid
out of the proceeds from such Asset Disposition, (iii) all
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distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, or to any other Person (other than the Company or a Restricted
Subsidiary) owning a beneficial interest in the assets disposed of in such
Asset Disposition and (iv) any liabilities or obligations associated with the
assets disposed of in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition, including pension and
other post-employment benefit liabilities, liabilities related to
environmental matters, and liabilities relating to any indemnification
obligations associated with such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of any securities
of the Company or any Subsidiary by the Company or any Subsidiary, or any
capital contribution, means the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Note Guarantee" means any of (i) the Guarantee of the Notes by the Company,
the Guarantee of the Guaranteed JCI Obligations by Jafra S.A., the Guarantee
of the Guaranteed Jafra Obligations by JCI and the Subsidiary Guarantees, to
be entered into on the Issue Date as described under "--Note Guarantees," and
(ii) any Subsidiary Guarantee that may from time to time be entered into by a
Restricted Subsidiary pursuant to the covenant described under "--Certain
Covenants--Future Subsidiary Guarantors."
"Note Guarantor" means any of the Company and its Restricted Subsidiaries
that enters into a Note Guarantee.
"Officer" means with respect to the Company, an Issuer or any other obligor
upon the Notes, the Chairman of the Board, the President, the Chief Executive
Officer, the Chief Financial Officer, any Vice President, the Controller, the
Treasurer or the Secretary of such Person.
"Officer's Certificate" means with respect to the Company, an Issuer or any
other obligor upon the Notes, a certificate signed by one Officer of such
Person.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company, an Issuer or the Trustee.
"Parent" means any Person of which the Company at any time is or becomes a
Subsidiary after the Issue Date.
"Permitted Holder" means any of the following: (i) any of the Investor,
Management Investors, CDR and their respective Affiliates; (ii) any investment
fund or vehicle managed, sponsored or advised by CDR; (iii) any limited or
general partners of, or other investors in, any of the Investor and its
Affiliates, or any such investment fund or vehicle; and (iv) any Person acting
in the capacity of an underwriter in connection with a public or private
offering of Capital Stock of a Parent or the Company.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in, or consisting of, any of the following:
(i) a Restricted Subsidiary, the Company, or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary;
(ii) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, or is liquidated into, the Company or a
Restricted Subsidiary;
(iii) Temporary Cash Investments or Cash Equivalents;
(iv) receivables owing to the Company or any Restricted Subsidiary, if
created or acquired in the ordinary course of business;
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(v) any securities or other Investments received as consideration in, or
retained in connection with, sales or other dispositions of property or
assets, including Asset Dispositions made in compliance with the covenant
described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock";
(vi) securities or other Investments received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary, or as a result of foreclosure, perfection or
enforcement of any Lien, or in satisfaction of judgments, including in
connection with any bankruptcy proceeding or other reorganization of
another Person;
(vii) Investments in existence or made pursuant to legally binding
written commitments in existence on the Issue Date;
(viii) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which obligations are Incurred in compliance with the covenant
described under "--Certain Covenants--Limitation on Indebtedness";
(ix) pledges or deposits (x) with respect to leases or utilities provided
to third parties in the ordinary course of business or (y) otherwise
described in the definition of "Permitted Liens" or made in connection with
Liens permitted under the covenant described under "--Certain Covenants--
Limitations on Liens";
(x) any Investment in a joint venture or similar entity that is not a
Restricted Subsidiary, or in any Related Business, in an aggregate amount
outstanding at any time not to exceed 4% of Consolidated Total Assets;
(xi) (1) Investments in any Receivables Subsidiary, or in connection with
a Financing Disposition by or to any Receivables Entity, including
Investments of funds held in accounts permitted or required by the
arrangements governing such Financing Disposition or any related
Indebtedness, or (2) any promissory note issued by the Company or a Parent
to a Receivables Subsidiary; provided that if such Parent receives cash
from the relevant Receivables Entity in exchange for such note, an equal
cash amount is contributed by such Parent to the Company;
(xii) bonds secured by assets leased to and operated by the Company or
any Restricted Subsidiary that were issued in connection with the financing
of such assets so long as the Company or any Restricted Subsidiary may
obtain title to such assets at any time by paying a nominal fee, canceling
such bonds and terminating the transaction;
(xiii) Notes;
(xiv) any Investment to the extent made using Capital Stock of the
Company (other than Disqualified Stock), or Capital Stock of a Parent, as
consideration;
(xv) Management Advances; and
(xvi) other Investments in an aggregate amount outstanding at any time
not to exceed 6% of Consolidated Total Assets.
"Permitted Liens" means:
(i) Liens for taxes, assessments or other governmental charges not yet
delinquent or the nonpayment of which in the aggregate would not reasonably
be expected to have a material adverse effect on the Company and its
Restricted Subsidiaries, or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are
maintained on the books of the Company or a Subsidiary thereof, as the case
may be, in accordance with GAAP;
(ii) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
in respect of obligations that are not overdue for a period of more than 60
days, or that are bonded or that are being contested in good faith and by
appropriate proceedings;
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(iii) pledges, deposits or Liens in connection with workers'
compensation, unemployment insurance and other social security and other
similar legislation or other insurance-related obligations (including,
without limitation, pledges or deposits securing liability to insurance
carriers under insurance or self-insurance arrangements);
(iv) pledges, deposits or Liens to secure the performance of bids,
tenders, trade, government or other contracts (other than for borrowed
money), obligations for utilities, leases, licenses, statutory obligations,
completion guarantees, surety, judgment, appeal or performance bonds, other
similar bonds, instruments or obligations, and other obligations of a like
nature incurred in the ordinary course of business;
(v) easements (including reciprocal easement agreements), rights-of-way,
building, zoning and similar restrictions, utility agreements, covenants,
reservations, restrictions, encroachments, changes, and other similar
encumbrances or title defects incurred, or leases or subleases granted to
others, in the ordinary course of business, which do not in the aggregate
materially interfere with the ordinary conduct of the business of the
Company and its Subsidiaries, taken as a whole;
(vi) Liens existing on, or provided for under written arrangements
existing on, the Issue Date, or (in the case of any such Liens securing
Indebtedness of the Company or any of its Subsidiaries existing or arising
under written arrangements existing on the Issue Date) securing any
Refinancing Indebtedness in respect of such Indebtedness so long as the
Lien securing such Refinancing Indebtedness is limited to all or part of
the same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or under such
written arrangements could secure) the original Indebtedness;
(vii) (i) mortgages, liens, security interests, restrictions,
encumbrances or any other matters of record that have been placed by any
developer, landlord or other third party on property over which the Company
or any Restricted Subsidiary of the Company has easement rights or on any
leased property and subordination or similar agreements relating thereto
and (ii) any condemnation or eminent domain proceedings affecting any real
property;
(viii) Liens securing Hedging Obligations, Purchase Money Obligations or
Capitalized Lease Obligations Incurred in compliance with the covenant
described under "--Certain Covenants--Limitation on Indebtedness";
(ix) Liens arising out of judgments, decrees, orders or awards in respect
of which the Company shall in good faith be prosecuting an appeal or
proceedings for review, which appeal or proceedings shall not have been
finally terminated, or if the period within which such appeal or
proceedings may be initiated shall not have expired;
(x) leases, subleases, licenses or sublicenses to third parties;
(xi) Liens securing (1) Indebtedness Incurred in compliance with clause
(b)(i), (b)(iv), (b)(v), (b)(vii), (b)(viii)(E) or (b)(x) of the covenant
described under "--Certain Covenants--Limitation on Indebtedness," or
clause (b)(iii) thereof (other than Refinancing Indebtedness Incurred in
respect of the Notes or Indebtedness described in paragraph (a) thereof),
(2) Bank Indebtedness, (3) commercial bank Indebtedness, (4) Indebtedness
of any Restricted Subsidiary that is not a Subsidiary Guarantor or an
Issuer, (5) the Notes or (6) Indebtedness or other obligations of any
Receivables Entity;
(xii) Liens existing on property or assets of a Person at the time such
Person becomes a Subsidiary of the Company (or at the time the Company or a
Restricted Subsidiary acquires such property or assets); provided, however,
that such Liens are not created in connection with, or in contemplation of,
such other Person becoming such a Subsidiary (or such acquisition of such
property or assets), and that such Liens are limited to all or part of the
same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or, under the
written arrangements under which such Liens arose, could secure) the
obligations to which such Liens relate;
(xiii) Liens on Capital Stock or other securities of an Unrestricted
Subsidiary that secure Indebtedness or other obligations of such
Unrestricted Subsidiary;
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(xiv) any encumbrance or restriction (including, but not limited to, put
and call agreements) with respect to Capital Stock of any joint venture or
similar arrangement pursuant to any joint venture or similar agreement; and
(xv) Liens securing Refinancing Indebtedness Incurred in respect of any
Indebtedness secured by, or securing any refinancing, refunding, extension,
renewal or replacement (in whole or in part) of any other obligation
secured by, any other Permitted Liens, provided that any such new Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the obligations to which such Liens relate.
"Permitted Parent Payments" means loans, advances, dividends or
distributions to a Parent or other payments by the Company or any Restricted
Subsidiary (A) to permit such Parent to satisfy obligations under the
Management Agreements or (B) to pay or permit such Parent to pay any Holding
Company Expenses or any Related Taxes.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that by its terms
is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Purchase Money Obligations" means any Indebtedness Incurred to finance or
refinance the acquisition, leasing, construction or improvement of property
(real or personal) or assets, and whether acquired through the direct
acquisition of such property or assets or the acquisition of the Capital Stock
of any Person owning such property or assets, or otherwise.
"Receivable" means a right to receive payment arising from a sale or lease
of goods or services by a Person pursuant to an arrangement with another
Person pursuant to which such other Person is obligated to pay for goods or
services under terms that permit the purchase of such goods and services on
credit, as determined in accordance with GAAP.
"Receivables Entity" means (x) any Receivables Subsidiary or (y) any other
Person that is engaged in the business of acquiring, selling, collecting,
financing or refinancing Receivables, accounts (as defined in the Uniform
Commercial Code as in effect in any jurisdiction from time to time), other
accounts and/or other receivables, and/or related assets.
"Receivables Fees" means distributions or payments made directly or by means
of discounts with respect to any participation interest issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Financing.
"Receivables Financing" means any financing of Receivables of the Company or
any Restricted Subsidiary that have been transferred to a Receivables Entity
in a Financing Disposition.
"Receivables Subsidiary" means a Subsidiary of the Company that (a) is
engaged solely in the business of acquiring, selling, collecting, financing or
refinancing Receivables, accounts (as defined in the Uniform Commercial Code
as in effect in any jurisdiction from time to time) and other accounts and
receivables (including any thereof constituting or evidenced by chattel paper,
instruments or general intangibles), all proceeds thereof and all rights
(contractual and other), collateral and other assets relating thereto, and any
business or activities incidental or related to such business, and (b) is
designated as a "Receivables Subsidiary" by the Board of Directors.
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"refinance" means refinance, refund, replace, renew, repay, modify, restate,
defer, substitute, supplement, reissue, resell or extend (including pursuant
to any defeasance or discharge mechanism); and the terms "refinances,"
"refinanced" and "refinancing" as used for any purpose in the Indenture shall
have a correlative meaning.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refinance
any Indebtedness existing on the date of the Indenture or Incurred in
compliance with the Indenture (including Indebtedness of the Company that
refinances Indebtedness of any Restricted Subsidiary (to the extent permitted
in the Indenture) and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including
Indebtedness that refinances Refinancing Indebtedness; provided, however, that
with respect to any Refinancing Indebtedness (other than Bank Indebtedness),
(i) if the Indebtedness being refinanced is a Subordinated Obligation, the
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced, (ii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the sum of
(x) the aggregate principal amount (or if issued with original issue discount,
the aggregate accreted value) then outstanding of the Indebtedness being
refinanced, plus (y) fees, underwriting discounts, premiums and other costs
and expenses incurred in connection with such Refinancing Indebtedness, and
(iii) Refinancing Indebtedness shall not include (x) Indebtedness of a
Restricted Subsidiary that is not a Subsidiary Guarantor or an Issuer that
refinances Indebtedness of the Company, an Issuer or a Subsidiary Guarantor
that was Incurred by such Company, Issuer or Subsidiary Guarantor pursuant to
paragraph (a) of the covenant described under "--Certain Covenants--Limitation
on Indebtedness" or (y) Indebtedness of the Company or a Restricted Subsidiary
that refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means those businesses in which the Company or any of its
Subsidiaries is engaged on the Issue Date, or that are related, complementary,
incidental or ancillary thereto or extensions, developments or expansions
thereof.
"Related Taxes" means (x) any taxes, charges or assessments, including but
not limited to sales, use, transfer, rental, ad valorem, value-added, stamp,
property, consumption, franchise, license, capital, net worth, gross receipts,
excise, occupancy, intangibles or similar taxes, charges or assessments (other
than federal, state or local taxes measured by income and federal, state or
local withholding imposed on payments made by a Parent), required to be paid
by such Parent by virtue of its being incorporated or having Capital Stock
outstanding (but not by virtue of owning stock or other equity interests of
any corporation or other entity other than the Company or any of its
Subsidiaries), or being a holding company parent of the Company or having
received Capital Stock of the Company as a capital contribution, or receiving
dividends from or other distributions in respect of the Capital Stock of the
Company, or having guaranteed any obligations of the Company or any Subsidiary
thereof, or having made any payment in respect of any of the items for which
the Company is permitted to make payments to such Parent pursuant to the
covenant described under "--Certain Covenants --Limitation on Restricted
Payments," or (y) any other U.S. or non-U.S. taxes measured by income for
which such Parent is liable up to an amount not to exceed with respect to U.S.
federal taxes the amount of any such taxes that the Company would have been
required to pay on a separate company basis or on a consolidated basis if the
Company had filed a consolidated return on behalf of an affiliated group (as
defined in Section 1504 of the Code) of which it were the common parent, or
with respect to non-U.S. taxes and U.S. state and local taxes, on a combined
basis if the Company had filed a combined return on behalf of an affiliated
group consisting only of the Company and its Subsidiaries.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Payment Transaction" means any Restricted Payment permitted
pursuant to the covenant described under "--Certain Covenants--Limitation on
Restricted Payments," any Permitted Payment, any Permitted Investment, or any
transaction (other than Guarantees) specifically excluded from the definition
of the term "Restricted Payment."
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"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" with respect to a Person means any Indebtedness of
such Person secured by a Lien.
"Senior Credit Agreement" means the credit agreement dated as of April 30,
1998, among the Company, the Issuers, the lenders named therein and Credit
Suisse First Boston, as administrative agent, as such agreement may be assumed
by any successor in interest, and as such agreement may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended
from time to time (whether in whole or in part, whether with the original
agent and lenders or other agents and lenders or otherwise, and whether
provided under the original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior Credit
Agreement, any Loan Documents (as defined therein), any notes and letters of
credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications and other guarantees, pledge agreements, security agreements and
collateral documents, and other instruments and documents, executed and
delivered pursuant to or in connection with any of the foregoing, in each case
as the same may be amended, supplemented, waived or otherwise modified from
time to time, or refunded, refinanced, restructured, replaced, renewed,
repaid, increased or extended from time to time (whether in whole or in part,
whether with the original agent and lenders or other agents and lenders or
otherwise, and whether provided under the original Senior Credit Agreement or
one or more other credit agreements, indentures (including the Indenture) or
financing agreements or otherwise). Without limiting the generality of the
foregoing, the term "Senior Credit Facility" shall include any agreement (i)
changing the maturity of any Indebtedness incurred thereunder or contemplated
thereby, (ii) adding Subsidiaries of the Company as additional borrowers or
guarantors thereunder, (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder or (iv) otherwise altering
the terms and conditions thereof.
"Senior Subordinated Indebtedness" with respect to either Issuer or any Note
Guarantor means the Notes (in the case of such Issuer) or the Note Guarantee
of such Person (in the case of such Note Guarantor) and any other Indebtedness
of such Person that ranks pari passu with the Notes or such Note Guarantee, as
the case may be.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC, as in effect on the Issue Date.
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and its successors.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligations" with respect to either Issuer or any Note
Guarantor means any Indebtedness of such Person (whether outstanding on the
Issue Date or thereafter Incurred) that is expressly subordinated in right of
payment to the Notes (in the case of such Issuer) or to the Note Guarantee of
such Person (in the case of such Note Guarantor), pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other equity interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person or (ii) one or
more Subsidiaries of such Person.
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"Subsidiary Guarantee" means any of (i) the Guarantees of the Guaranteed JCI
Obligations by the U.S. Subsidiary Guarantors and the Guarantees of the
Guaranteed Jafra Obligations by the Jafra S.A Subsidiary Guarantors, to be
entered into on the Issue Date as described under "--Note Guarantees," and
(ii) any Guarantee in respect of the Notes that may from time to time be
entered into by a Restricted Subsidiary pursuant to the covenant described
under "--Certain Covenants--Future Subsidiary Guarantors."
"Subsidiary Guarantor" means any Restricted Subsidiary that enters into a
Subsidiary Guarantee.
"Successor" shall have the meaning assigned thereto in clause (i) under "--
Merger and Consolidation."
"Temporary Cash Investments" means any of the following: (i) any investment
in (x) direct obligations of the United States of America or any agency or
instrumentality thereof or obligations Guaranteed by the United States of
America or any agency or instrumentality thereof or (y) direct obligations of
any foreign country recognized by the United States of America rated at least
"A" by S&P or "A-1" by Moody's (or, in either case, the equivalent of such
rating by such organization or, if no rating of S&P or Moody's then exists,
the equivalent of such rating by any nationally recognized rating
organization), (ii) overnight bank deposits, and investments in time deposit
accounts, certificates of deposit, bankers' acceptances and money market
deposits (or, with respect to foreign banks, similar instruments) maturing not
more than one year after the date of acquisition thereof issued by (x) any
lender under the Senior Credit Agreement or (y) a bank or trust company that
is organized under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America having
capital and surplus aggregating in excess of $250 million (or the foreign
currency equivalent thereof) and whose long term debt is rated at least "A" by
S&P or "A-1" by Moody's (or, in either case, equivalent of such rating by such
organization or, if no rating of S&P or Moody's then exists, the equivalent of
such rating by any nationally recognized rating organization) at the time such
Investment is made, (iii) repurchase obligations with a term of not more than
30 days for underlying securities of the types described in clause (i) or (ii)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 270
days after the date of acquisition, issued by a Person (other than the Company
or any of its Subsidiaries) with a rating at the time as of which any
Investment therein is made of "P-2" (or higher) according to Moody's or "A-2"
(or higher) according to S&P (or, in either case, the equivalent of such
rating by such organization or, if no rating of S&P or Moody's then exists,
the equivalent of such rating by any nationally recognized rating
organization), (v) Investments in securities maturing not more than one year
after the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or "A"
by Moody's (or, in either case, the equivalent of such rating by such
organization or, if no rating of S&P or Moody's then exists, the equivalent of
such rating by any nationally recognized rating organization), (vi) Preferred
Stock (other than of the Company or any of its Subsidiaries) having a rating
of A or higher by S&P or A2 or higher by Moody's (or, in either case, the
equivalent of such rating by such organization or, if no rating of S&P or
Moody's then exists, the equivalent of such rating by any nationally
recognized rating organization), (vii) investment funds investing 95% of their
assets in securities of the type described in clauses (i)-(vii) above (which
funds may also hold reasonable amounts of cash pending investment or
distribution), (viii) any money market deposit accounts issued or offered by a
domestic commercial bank or a commercial bank organized and located in a
country recognized by the United States of America, in each case, having
capital and surplus in excess of $250 million (or the foreign currency
equivalent thereof), or investments in money market funds complying with the
risk limiting conditions of Rule 2a-7 (or any successor rule) of the SEC,
under the Investment Company Act of 1940, as amended and (ix) similar short-
term investments approved by the Board of Directors in the ordinary course of
business.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-7bbbb)
as in effect on the Issue Date.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
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"Transactions" means, collectively, the Acquisition, the Mergers, the
initial equity investment by the Investor and (if applicable) one or more
Management Investors, the offering and the issuance of the Notes, the initial
borrowings under the Senior Credit Facility, and all other transactions
relating to the Acquisition or the financing thereof.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination is an Unrestricted Subsidiary, as designated by the
Board of Directors in the manner provided below, and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Restricted Subsidiary of the
Company that is not a Subsidiary of the Subsidiary to be so designated;
provided, however, that either (A) the Subsidiary to be so designated has
total consolidated assets of $1,000 or less or (B) if such Subsidiary has
consolidated assets greater than $1,000, then such designation would be
permitted under the covenant described under "--Certain Covenants--Limitation
on Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation either (x) the Company could incur at
least $1.00 of additional Indebtedness under paragraph (a) in the covenant
described under "--Certain Covenants--Limitation on Indebtedness" or (y) the
Consolidated Coverage Ratio would be greater than it was immediately prior to
giving effect to such designation. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the resolution of the Company's Board of Directors giving
effect to such designation and an Officer's Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Subsidiary" means any Restricted Subsidiary of the Company other than
a Foreign Subsidiary.
"U.S. Subsidiary Guarantor" means any U.S. Subsidiary of JCI that enters
into a Subsidiary Guarantee.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
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TAXATION
The following is a description of the material Mexican, Luxembourg and U.S.
federal income tax consequences of the purchase, ownership and disposition of
the Notes to purchasers of the Notes at original issue, but it does not
purport to be a comprehensive description of all of the tax considerations
that may be relevant to a decision to purchase, own or dispose of the Notes.
This summary is based on the tax laws in force on the date of this
Registration Statement, including the tax treaty between the United States and
Mexico together with a related protocol thereto (the "U.S.-Mexico Treaty"), as
well as regulations, rulings and decisions of the U.S. and regulations of
Mexico available on or before such date and now in effect and does not
describe any tax consequences arising under the laws of any state, locality or
taxing jurisdiction other than Mexico, Luxembourg and the United States. The
Issuers and, by acquiring the Notes, the holders of Notes agree to treat $400
of each $1,000 principal amount of the Notes as indebtedness of Jafra S.A. and
$600 of each $1,000 principal amount of the Notes as indebtedness of the U.S.
Issuer for all U.S. federal, state and local and non-U.S. tax purposes.
EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE MEXICAN, LUXEMBOURG,
U.S. OR OTHER TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES BY SUCH HOLDER, INCLUDING THE EFFECT OF ANY FOREIGN,
STATE OR LOCAL TAX LAWS, INCLUDING ANY APPLICABLE TAX TREATY. THERE CAN BE NO
ASSURANCE THAT THE MEXICAN, LUXEMBOURG OR U.S. TAX AUTHORITIES WILL NOT TAKE
POSITIONS THAT ARE CONTRARY TO THOSE CONSIDERED BELOW.
Mexican Taxation
The following is a summary of the material consequences under the Mexican
Ley del Impuesto sobre la Renta (the "Mexican Income Tax Law") and rules and
regulations issued thereunder, as currently in effect, of an investment in the
Notes. This summary of certain Mexican tax considerations deals only with
holders of Notes or of a beneficial interest therein that are not residents of
Mexico for Mexican tax purposes and that do not conduct a trade or business
through a permanent establishment or fixed base in Mexico (a "Non-Mexican
Holder"). For purposes of Mexican taxation, an individual is a resident of
Mexico if he has established his domicile in Mexico, unless he has resided in
another country for more than 183 calendar days, whether consecutive or not,
in any one calendar year and can demonstrate that he has become a resident of
that other country for tax purposes, and a legal entity is a resident of
Mexico if it has been incorporated under the laws of Mexico. A Mexican citizen
is presumed to be a resident of Mexico for tax purposes unless such person can
demonstrate otherwise. If a person has a permanent establishment or fixed base
in Mexico, such permanent establishment or fixed base shall be required to pay
taxes in Mexico on income attributable to such permanent establishment or
fixed base in accordance with relevant tax provisions.
Exchange Offer
The exchange of Existing Notes for New Notes pursuant to the Exchange Offer
will not be a taxable event for Mexican federal income tax purposes because
the New Notes will not be considered to differ materially from the Existing
Notes. As a result, there will be no material Mexican federal income tax
consequences to a holder exchanging Existing Notes for the New Notes pursuant
to the Exchange Offer.
Taxation of Interest and Principal
Under the Mexican Income Tax Law, payments of interest made by Jafra S.A. in
respect of the Notes (including payments of principal in excess of the issue
price of such Notes, which, under Mexican law, are deemed to be interest) to a
Non-Mexican Holder generally will be subject to a Mexican withholding tax
assessed at a rate of 15%, because the Notes are registered in the Special
Section of the RNVI.
Pursuant to the Mexican Income Tax Law, payments of interest made by Jafra
S.A. in respect of the Notes to a Non-Mexican Holder will be subject to a
reduced 4.9% Mexican withholding tax rate (the "Reduced Rate")
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until December 31, 1998 if the Notes are registered with the Special Section
of the RNVI as set forth above and (i) the effective beneficiary of the
interest is a Non-Mexican Holder who resides for tax purposes in a country
which has entered into a treaty to avoid double taxation with Mexico; and (ii)
the requirements for the application of the rates therein specified for this
type of interest income are satisfied.
Notwithstanding the foregoing, pursuant to Rule 3.32.9 (the "Reduced Rate
Rule") issued by Secretaria de Hacienda y Credito Publico (the "Ministry of
Finance") and expected to be effective through March 31, 1999, payments of
interest with respect to the Notes made by Jafra S.A. to Non-Mexican Holders,
regardless of the place of residence or the tax regime applicable to the Non-
Mexican Holder recipient of the interest, will be subject to withholding taxes
imposed at the Reduced Rate if (i) the Notes are registered with the Special
Section of the RNVI and copies of approval of such registration are provided
to the Ministry of Finance, (ii) Jafra S.A. timely files with the Ministry of
Finance the original Offering Circular for the Notes and certain information
relating to the issuance of the Notes after completion of the transactions
contemplated by such Offering Circular, (iii) Jafra S.A. timely files with the
Ministry of Finance on a quarterly basis, information relating to the amount
and dates of interest payments made during each quarter and information
representing that no party related to Jafra S.A. (as such terms are defined in
the Reduced Rate Rule), directly or indirectly, is the effective beneficiary
of five percent (5%) or more of the aggregate amount of each such interest
payment, and (iv) Jafra S.A. maintains records that evidence compliance with
(i), (ii) and (iii) above. Jafra S.A. expects that such conditions will be met
and, accordingly, expects to withhold Mexican tax from interest payments at
the Reduced Rate during the effectiveness of such rule. The Reduced Rate Rule
is effective for only one year and hence is subject to promulgation on an
annual basis. There can be no assurance that the provisions set forth in the
Reduced Rate Rule described above for the application of the Reduced Rate will
be extended beyond March 1999. In the event that an equivalent rule does not
become effective after such date, higher rates may apply, as described above.
In addition, the rate of Mexican withholding tax may be reduced under an
applicable tax treaty.
Payments of interest by Jafra S.A. with respect to the Notes to non-Mexican
pension or retirement funds will be exempt from Mexican withholding taxes,
provided that any such fund (i) is the effective beneficiary of the income,
(ii) is duly incorporated pursuant to the laws of its country of origin
(regardless of the type of organization), (iii) is exempt from the payment of
income taxes in such country, (iv) is registered with the Ministry of Finance
for that purpose and (v) if Mexican pension or retirement funds are
reciprocally exempt from the payment of withholding taxes in the jurisdiction
of incorporation of any such fund.
Under existing Mexican law and regulations, a Non-Mexican Holder will not be
subject to any Mexican taxes in respect of payments of principal made by Jafra
S.A. with respect to the Notes.
Interest and principal paid by the U.S. Issuer pursuant to the U.S. Issuer's
Obligations to a Non-Mexican Holder will not be subject to Mexican taxes. In
accordance with the Mexican Income Tax Law, interest payments made by any Note
Guarantors which are residents of Mexico will be subject to Mexican
withholding taxes pursuant to the rules set forth in this section. Interest
payments made by a Note Guarantor in respect of the Notes also may be subject
to Mexican withholding tax pursuant to the rules set forth herein, unless an
applicable tax treaty provides otherwise.
Additional Amounts
Jafra S.A. and the Note Guarantors have agreed, subject to specified
exceptions and limitations, to pay Additional Amounts to the holders of the
Notes in respect of the Mexican withholding taxes mentioned above. See
"Description of Notes--Additional Amounts."
Holders or beneficial owners of Notes may be requested to provide certain
information or documentation necessary to enable Jafra S.A. to establish the
appropriate Mexican withholding tax rate applicable to such holders or
beneficial owners. In the event that the specified information or
documentation concerning the holder
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or beneficial owner, if requested, is not provided on a timely basis, the
obligation of Jafra S.A. to pay Additional Amounts will be limited. See
"Description of Notes--Additional Amounts."
Taxation of Dispositions
Capital gains resulting from the sale or other disposition of the Notes by a
Non-Mexican Holder will not be subject to Mexican income or other taxes.
Transfer and Other Taxes
There are no Mexican stamp, registration, or similar taxes payable by a Non-
Mexican Holder in connection with the purchase, ownership or disposition of
the Notes. A Non-Mexican Holder will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes.
Luxembourg Taxation
Under current law, no withholding or deduction is imposed in Luxembourg in
respect of any payment in respect of the Notes to be made by Parent under the
Parent Guarantee. Noteholders or holders of a beneficial interest in the Notes
who are neither resident nor engaged in trade or business through a permanent
establishment in Luxembourg will not be subject to taxes or duties in
Luxembourg in respect of any payment in respect of the Notes to be made by
Parent under the Parent Guarantee. No stamp, registration or similar taxes,
duties or charges are payable under Luxembourg law in connection with the
issue of the Parent Guarantee or in connection with any payment in respect of
the Notes to be made by the Parent under the Parent Guarantee.
United States Federal Income Taxation
The following is a discussion of the material United States federal income
tax consequences of the purchase, ownership and disposition of the Notes. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes, and is limited to investors
who hold the Notes as capital assets. Moreover, this discussion is for general
information only, and does not address all of the tax consequences that may be
relevant to particular investors in light of their personal circumstances, or
to certain types of investors (such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities, persons who
have acquired the Notes as part of a straddle, hedge, conversion transaction
or other integrated investment or persons whose functional currency is not the
U.S. Dollar).
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S.
FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE NOTES BY SUCH HOLDERS, INCLUDING THE APPLICABILITY OF
ANY FEDERAL ESTATE OR GIFT TAX LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS.
United States Taxation of U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is, for U.S. federal income tax purposes, (i) an individual citizen or
resident of the United States, (ii) a corporation created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) a domestic partnership, (iv) an estate the income of which is includible
in income for U.S. federal income and estate tax purposes regardless of its
source or (v) a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more U.S.
persons have the authority to control all substantial decisions of such trust.
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Exchange Offer. The exchange of an Existing Note by a U.S. Holder for a New
Note will not constitute a taxable exchange of the Note. Accordingly, a U.S.
Holder will not recognize taxable gain or loss upon receipt of a New Note, a
U.S. Holder's holding period for a New Note will include the holding period
for the Existing Note so exchanged and such holder's adjusted tax basis in a
New Note will be the same as such holder's adjusted tax basis in the Existing
Note so exchanged.
Taxation of Interest and Additional Amounts. Subject to the discussion below
under "Payments on Registration Default," in general, interest and Additional
Amounts (without reduction for applicable withholding taxes) paid or payable
on a Note or with respect to a Guarantee will be taxable to a U.S. Holder as
ordinary interest income as received or accrued, in accordance with such
holder's method of accounting for U.S. federal income tax purposes.
Payments Upon Registration Default. Because the Notes provide for the
payment of liquidated damages under the circumstances described above under
"Exchange Offer; Registration Rights," the Notes could be subject to certain
Treasury Regulations relating to debt instruments that provide for one or more
contingent payments (the "Contingent Payment Regulations"). Under the
Contingent Payment Regulations, however, a payment is not a contingent payment
merely because of a contingency that, as of the issue date, is "remote." The
Issuers intend to take the position that, for purposes of the Contingent
Payment Regulations, the payment of such liquidated damages was a remote
contingency as of the issue date. Accordingly, the Contingent Payment
Regulations should not apply to the Notes unless payments are actually made
upon a Registration Default, in which case, the rules described below would
apply to such payments.
If (a) the payment of such liquidated damages were not a remote contingency
for purposes of the Contingent Payment Regulations or (b) payments were
actually made upon a Registration Default, and such payments were to be
treated as contingent payments payable on the occurrence of an "incidental
contingency" under such regulations, then such payments would be includible in
a U.S. Holder's gross income in the taxable year in which such payments were
actually made, regardless of the tax accounting method used by such holder. If
(i) the payment of such liquidated damages were not a remote contingency for
purposes of the Contingent Payment Regulations or (ii) payments were actually
made upon a Registration Default, and such payments were not to be treated as
contingent payments payable on the occurrence of an "incidental contingency"
under such regulations, then (x) all payments (including any projected
payments of such liquidated damages) on a Note in excess of its issue price
would effectively be treated as original issue discount, and (y) in each
taxable year, a holder would be required to include an allocable portion of
such amounts in gross income on a constant yield basis whether or not the
payment of such liquidated damages were fixed or determinable in the taxable
year.
Prospective acquirors should consult their tax advisors as to the tax
considerations relating to debt instruments providing for payments such as the
liquidated damages payable upon a Registration Default, particularly in
connection with the possible application of the Contingent Payment
Regulations.
Foreign Tax Credit. Mexican taxes withheld (as described above under
"Mexican Taxation") at the appropriate rate applicable to a U.S. Holder with
respect to Jafra S.A.'s Obligations generally will be treated as foreign
income taxes eligible for credit against such U.S. Holder's U.S. federal
income tax liability, subject to generally applicable limitations and
conditions, or, at the election of such U.S. Holder, for deduction in
computing such U.S. Holder's taxable income but only for a year for which such
U.S. Holder elects to do so with respect to all foreign income taxes. The
Issuers believe that interest and Additional Amounts paid by Jafra S.A. in
respect of Jafra S.A.'s Obligations and payments, if any, by a Note Guarantor
of Jafra S.A.'s Obligations will be treated as income from sources without the
U.S. for foreign tax credit purposes. Such income generally will constitute
"passive income" or, in the case of certain U.S. Holders, "financial services
income" for U.S. foreign tax credit purposes unless the Mexican withholding
tax rate applicable to the U.S. Holder is imposed at a rate of at least 5%, in
which case such income generally will constitute "high withholding tax
interest." The Issuers believe that interest paid by the U.S. Issuer in
respect of the U.S. Issuer's Obligations will be treated as income from U.S.
sources for foreign tax credit purposes.
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The calculation of foreign tax credits and, in the case of a U.S. Holder
that elects to deduct foreign income taxes, the availability of deductions,
involves the application of rules that depend on a U.S. Holder's particular
circumstances. U.S. Holders should consult their own tax advisors regarding
the availability of foreign tax credits in respect of Jafra S.A.'s Obligations
and payments, if any, by Jafra S.A. in its capacity as Note Guarantor of the
U.S. Issuer's Obligations.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a U.S.
Holder will generally recognize taxable gain or loss equal to the difference
between the sum of cash plus the fair market value of all other property
received on such disposition (except to the extent such cash or property is
attributable to accrued interest, which will be taxable as ordinary income)
and such holder's adjusted tax basis in the Note. Gain or loss recognized on
the disposition of a Note generally will be capital gain or loss and will be
long-term capital gain or loss if, at the time of such disposition, the U.S.
Holder's holding period for the Note is more than one year. Net capital losses
are subject to certain limitations. The Issuers believe that separate
determinations of amounts realized and basis with respect to the U.S. Issuer's
Obligations and Jafra S.A.'s Obligations generally will not be necessary
(unless one Issuer's obligations are redeemed separately from the other's).
Backup Withholding and lnformation Reporting. In general, a U.S. Holder of a
Note will be subject to backup withholding at the rate of 31% with respect to
interest, principal and premium, if any, paid on a Note or under a Guarantee,
unless the holder (a) is an entity (including corporations, tax-exempt
organizations and certain qualified nominees) that is exempt from withholding
and, when required, demonstrates this fact, or (b) provides the U.S. Issuer or
Paying Agent with its Taxpayer Identification Number ("TIN") (which for an
individual would be the holder's Social Security number), certifies that the
TIN provided to the U.S. Issuer or Paying Agent is correct and that the holder
has not been notified by the IRS that it is subject to backup withholding due
to under reporting of interest or dividends, and otherwise complies with
applicable requirements of the backup withholding rules. In addition, such
payments of principal, premium and interest to U.S. Holders that are not
corporations, tax-exempt organizations or qualified nominees will generally be
subject to information reporting requirements.
Backup withholding is not an additional tax. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit
against such holder's U.S. federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
IRS.
United States Taxation of Non-U.S. Holders
Payment of Interest by U.S. Issuer. In general, interest paid (or accrued)
in respect of the U.S. Issuer's Obligations to a beneficial owner of a Note
that is not a U.S. Holder (a "Non-U.S. Holder") will not be subject to U.S.
federal withholding tax, provided that (i)(a) the Non-U.S. Holder does not
actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
U.S. Issuer entitled to vote within the meaning of Section 871(h)(3)(B) of the
Code and the Treasury Regulations thereunder, (b) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the U.S. Issuer actually or
constructively through stock ownership, (c) the Holder is not a bank whose
receipt of interest from the U.S. Issuer on a Note is described in section
881(c)(3)(A) of the Code and (d) either (x) the beneficial owner of the Note,
under penalties of perjury, provides the U.S. Issuer or its agent with the
beneficial owner's name and address and certifies that it is not a U.S. Holder
on Form W-8 (or a suitable substitute or successor form) or (y) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") holds the Note and certifies to the U.S. Issuer or
its agent under penalties of perjury that such Form W-8 (or suitable
substitute or successor form) has been received by it from the beneficial
owner or qualifying intermediary and furnishes the payor a copy thereof; (ii)
the Non-U.S. Holder is subject to U.S. federal income tax with respect to the
Note on a net basis because payments received with respect to the Note are
effectively connected with a U.S. trade or business of the Non-U.S. Holder and
provides the U.S. Issuer with a properly executed IRS Form 4224 or successor
form; or (iii) the Non-U.S. Holder is entitled to the benefits of
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an income tax treaty under which the interest is exempt from United States
withholding tax, and the Non-U.S. Holder or such holder's agent provides a
properly executed IRS Form 1001 or successor form claiming the exemption.
Payments of interest not exempt from U.S. federal withholding tax as described
above will be subject to such withholding tax at the rate of 30% (subject to
reduction under an applicable income tax treaty).
Recently issued Treasury regulations (the "New Withholding Regulations")
generally will be effective with respect to payments made after December 31,
1999, regardless of the issue date of the instrument with respect to which
such payments are made. The New Withholding Regulations generally will not
affect the certification rules described above, but will provide alternative
methods for satisfying such requirements. The New Withholding Regulations also
generally will require, in the case of Notes held by a foreign partnership,
that (x) the certification described in the preceding paragraph be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information. A look-through rule will apply in the case of
tiered partnerships. In addition, the New Withholding Regulations may require
that a Non-U.S. Holder (including a foreign partnership or a partner thereof)
obtain a taxpayer identification number and make certain certifications if
interest in respect of a Note is not portfolio interest and the Non-U.S.
Holder wishes to claim a reduced rate of withholding under an income tax
treaty. Each Non-U.S. Holder should consult such holder's own tax advisor
regarding the application to such holder of the New Withholding Regulations.
Payment of Interest by Jafra S.A. In general, interest paid (or accrued) in
respect of Jafra S.A.'s Obligations to a Non-U.S. Holder will not be subject
to U.S. federal withholding tax.
Sales, Exchange or Retirement of the Notes. A Non-U.S. Holder generally will
not be subject to U.S. federal income tax (and generally no tax will be
withheld) with respect to gain realized on the sale, exchange, redemption,
retirement at maturity or other disposition of a Note, unless (i) the gain is
effectively connected with a U.S. trade or business conducted by the Non-U.S.
Holder or (ii) the Non-U.S. Holder is an individual who is present in the
United States for a period or periods aggregating 183 or more days in the
taxable year of the disposition and certain other conditions are met.
With respect to a Non-U.S. Holder subject to U.S. federal income tax as
described in the preceding paragraph, an exchange of a Note for an Exchange
Note should not constitute a taxable exchange of the Note. See "United States
Taxation of U.S. Holders, Sale, Exchange or Retirement of the Notes."
Effectively Connected lncome. If interest or gain on a Note held by a Non-
U.S. Holder received with respect to the Note is effectively connected with a
U.S. trade or business of the Non-U.S. Holder, although exempt from
withholding tax, such income or gain will be subject to regular U.S. tax in
the same manner as if it were a U.S. Holder. See "United States Taxation of
U.S. Holder." In addition, if such U.S. Holder is a foreign corporation, it
may also be subject to branch profits tax equal to 30% of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
Backup Withholding and Reporting. Under current Treasury Regulations, backup
withholding and information reporting on IRS Form 1099 do not apply to
payments made by the U.S. Issuer or a Paying Agent to Non-U.S. Holders if the
certification described under "United States Taxation of Non-U.S. Holders--
Payment of Interest on Notes" is received, provided that the payor does not
have actual knowledge that the holder is a U.S. Holder. If any payments of
principal, premium (if any) and interest are made to the beneficial owner of a
Note by or through the foreign office of a foreign custodian, foreign nominee
or other foreign agent of such beneficial owner, or if the foreign office of a
foreign "broker" (as defined in applicable U.S. Treasury Regulations) pays the
proceeds of the sale of a Note to the seller thereof, backup withholding and
information reporting will not apply. Information reporting requirements (but
not backup withholding) will apply, however, to any such payments by a foreign
office of a broker that is, for U.S. federal income tax purposes, a U.S.
person, or a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
or a "controlled foreign corporation" (generally, a foreign corporation
controlled by U.S. shareholders) with respect to the United States, unless the
broker has documentary evidence in its records that the holder is a Non-U.S.
Holder and certain other conditions are met, or the holder otherwise
125
<PAGE>
establishes an exemption. Any such payments by a U.S. office of a custodian,
nominee or agent or by a U.S. office of a broker are subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a Non-U.S. Holder and the
payor does not have actual knowledge that the beneficial owner is a United
States person or otherwise establishes an exemption. The New Withholding Tax
Regulations revise (substantially, in certain respects) the procedures that
withholding agents and payees must follow to comply with, or to establish an
exemption from, information reporting and backup withholding provisions for
payments after December 31, 1999. Each Non-U.S. Holder should consult such
holder's tax advisor regarding the application to such holder of the New
Withholding Regulations.
A Non-U.S. Holder may obtain a refund or a credit against such holder's U.S.
federal income tax liability of any amounts withheld under the backup
withholding rules, provided the required information is furnished to the IRS.
BOOK-ENTRY; DELIVERY AND FORM
The New Notes will be issued in fully registered form without interest
coupons. The Notes will be represented by one or more permanent global Notes
in definitive, fully registered form without coupons (the "Global Security")
and will be registered in the name of a nominee of DTC and deposited with the
Trustee as custodian for DTC for credit to the respective accounts of the
purchasers (or to such other accounts as they may direct).
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member
of the Federal Reserve System, (iv) a "clearing corporation" within the
meaning of the Uniform Commercial Code, and (v) a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
The Company expects, pursuant to procedures established by DTC, that upon
deposit of the Global Security, DTC or its custodian will credit, on its
internal system, the respective principal amount of the individual beneficial
interests represented by such Global Security to the accounts of persons who
have accounts with such depositary. Such accounts initially will be designated
by or on behalf of the Initial Purchasers. Ownership of beneficial interests
in the Global Security will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Ownership
of beneficial interests in the Global Security will be shown on, and the
transfer of that ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). QIBs may hold their interests in the Global Security directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
The Indenture will not provide for issuance of Notes in definitive form
except in limited circumstances, described below under "--Certificated Notes."
The laws of some states require that certain persons take physical delivery in
definitive form of securities that they own and that security interests in
negotiable instruments can only be perfected by delivery of certificates
representing the instruments. Consequently, the ability to transfer the Notes
or to pledge the Notes as collateral to persons in such states will be limited
to such extent. For certain other restrictions on the transferability of the
Notes, see "Transfer Restrictions."
126
<PAGE>
So long as DTC or its nominee is the registered owner or holder of the
Global Security, DTC or such nominee, as the case may be, will be considered
the sole record owner or holder of the Notes represented by such Global
Security for all purposes under the Indenture and the Notes. No beneficial
owners of an interest in the Global Security will be able to transfer that
interest except in accordance with the applicable procedures of DTC or
Euroclear, in addition to those provided for under the Indenture. Beneficial
owners of an interest in a Global Security will not be entitled to have Notes
represented by such Global Security registered in their names, will not
receive or be entitled to receive physical delivery of Notes in definitive
form, and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. As a result, the
ability of a person having a beneficial interest in Notes represented by a
Global Security to pledge or transfer such interest to persons or entities
that do not participate in DTC's system or otherwise to take action with
respect to such interest, may be affected by lack of a physical certificate
evidencing such interest.
Accordingly, each holder owning a beneficial interest in a Global Security
must rely on the procedures of DTC or Euroclear and, if such holder is not a
participant or an indirect participant, on the procedures of the participant
through which such holder owns its interest, to exercise any rights of a
holder of Notes under the Indenture or such Global Security. The Company
understands that under existing practice, in the event the Company requests
any action of holders of Notes or a holder that is an owner of a beneficial
interest in a Global Security requests any action of holders of Notes or a
holder that is an owner of a beneficial interest in a Global Security desires
to take any action that DTC as the holder of such Global Security, is entitled
to take, DTC would authorize the participants to take such action and the
participant would authorize holders owning through such participants to take
such action or would otherwise act upon the instruction of such holders.
Payments of the principal of, premium, if any, and interest on the Global
Security will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Security,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of
such Global Security, as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in immediately available
funds.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations. Although DTC and its participants have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Security among
participants, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
127
<PAGE>
Certificated Securities
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository or DTC ceases to be registered as a
clearing agency under the Exchange Act and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Securities, definitive
Notes in registered form without coupons will be issued, subject to certain
certification requirements, to each person that DTC identifies as the
beneficial owner of the Notes represented by the Global Security.
128
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Existing Notes
where such Existing Notes were acquired as a result of market-making
activities or other trading activities. The Issuers have agreed that, for a
period of 90 days after the Expiration Date, they will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale. In addition, until April 27, 1999, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Issuers will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes by market-makers (which
options would not require additional registration by any of the Registrants
under the federal securities laws) or a combination of such methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers of any such New Notes. Any broker-dealer that resells
New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit or any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Issuers will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Issuers have agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the Holders of
the Existing Notes) other than commissions or concessions of any broker-
dealers and will indemnify the Holders of the Existing Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
Credit Suisse First Boston, a Swiss Bank and an affiliate of Credit Suisse
First Boston Corporation, is the administrative agent with respect to the
Senior Credit Agreement. Credit Suisse First Boston Corporation provided
certain financial advisory services to the Company in connection with the
Acquisition and received customary compensation in connection therewith. In
addition, Credit Suisse First Boston and its affiliates perform various
investment banking and commercial banking services from time to time for
Sponsor and its affiliates.
Chase Securities Inc. is an affiliate of The Chase Manhattan Bank which is a
lender to the Issuers under the Senior Credit Agreement and has provided loans
to certain members of management in connection with their purchase of equity
of Parent. In addition, Chase Securities Inc. and its affiliates perform
various investment banking and commercial banking services from time to time
for Sponsor and its affiliates, and an affiliate of Chase Securities Inc. is a
limited partner of CD&R Fund V.
LEGAL MATTERS
The validity of the Notes and the Guarantees will be passed upon for the
Issuers and the Note Guarantors by Debevoise & Plimpton, New York, New York
and certain other matters will be passed upon for the Parent, Jafra S.A. and
the Note Guarantors by Bonn & Schmitt, Luxembourg, and Ritch, Heather y
Mueller, S.C., Mexico City, Mexico. Franci J. Blassberg, Esq., a member of
Debevoise & Plimpton, is married to Joseph L. Rice, III, who is a shareholder
of the general partner of CD&R Fund V.
129
<PAGE>
EXPERTS
The audited combined financial statements of the Company and its
subsidiaries as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The combined balance sheet of CDRJ Investments (Lux) S.A. as of April 28,
1998 included in this prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and has been
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
130
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Combined Balance Sheets -- As of December 31, 1997 and 1996............... F-3
Combined Statements of Operations -- For the years ended December 31,
1997, 1996 and 1995...................................................... F-4
Combined Statements of Divisional Equity -- For the years ended December
31, 1997, 1996 and 1995.................................................. F-5
Combined Statements of Cash Flows -- For the years ended December 31,
1997, 1996 and 1995...................................................... F-6
Notes to Combined Financial Statements.................................... F-7
Independent Auditors' Report.............................................. F-23
Combined Balance Sheet -- CDRJ Investments (Lux) S.A. -- as of April 28,
1998..................................................................... F-24
Notes to Combined Balance Sheet........................................... F-25
Unaudited:
Consolidated Balance Sheet -- As of September 30, 1998.................. F-27
Consolidated Statements of Operations for the periods ended September
30, 1998, April 30, 1998 and September 30, 1997........................ F-28
Consolidated Statements of Cash Flows for the periods ended September
30, 1998, April 30, 1998 and September 30, 1997........................ F-29
Notes to Consolidated Financial Statements.............................. F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Jafra Cosmetics International:
We have audited the accompanying combined financial statements of Jafra
Cosmetics International, as defined in note 1, as listed in the accompanying
index. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Jafra Cosmetics
International as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
February 27, 1998
Los Angeles, California
F-2
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Combined Balance Sheets
December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 10,231 $ 8,662
Receivables, less allowance for doubtful accounts of
$2,057 and
$1,919, respectively..................................... 27,298 26,271
Inventories (note 3)...................................... 38,028 45,141
Due from Gillette and other divisions (note 9)............ 39,885 24,416
Prepaid expenses and other current assets................. 3,197 2,540
Prepaid income taxes (note 7)............................. -- 814
--------- --------
Total current assets.................................... 118,639 107,844
Property, plant and equipment, at cost, net (note 4)........ 43,682 41,795
Goodwill, less accumulated amortization..................... 10,269 10,591
Other assets................................................ 2,660 4,231
--------- --------
$ 175,250 $164,461
========= ========
Liabilities and Divisional Equity
Current liabilities:
Short-term notes payable to bank (note 5)................. $ 8,513 $ --
Accounts payable and accrued liabilities (note 6)......... 35,384 39,066
Due to Gillette and other divisions (note 9).............. 45,440 41,046
Deferred income taxes (note 7)............................ 711 3,307
Income taxes payable (note 7)............................. 5,978 --
--------- --------
Total current liabilities............................... 96,026 83,419
Other long-term liabilities................................. 1,920 2,401
--------- --------
Total liabilities....................................... 97,946 85,820
--------- --------
Divisional equity........................................... 77,304 78,641
Commitments and contingencies (note 11)
--------- --------
$ 175,250 $164,461
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Combined Statements of Operations
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $229,524 $224,544 $218,431
Cost of sales.................................... 59,129 58,216 54,310
-------- -------- --------
Gross profit................................. 170,395 166,328 164,121
Selling, general and administrative expenses
(note 9)........................................ 149,430 155,759 154,024
-------- -------- --------
Income from operations....................... 20,965 10,569 10,097
Other (expense) income:
Exchange gain (loss)........................... 312 (7) 25,459
Interest income, net (note 9).................. 306 834 4,343
Other expense, net............................. (1,318) (1,383) (982)
-------- -------- --------
Income before income taxes................... 20,265 10,013 38,917
Income taxes (note 7)............................ 4,816 2,620 6,095
-------- -------- --------
Net income................................... $ 15,449 $ 7,393 $ 32,822
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Combined Statements of Divisional Equity
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Cumulative
foreign
Additional currency Total
Common paid- translation Retained divisional
stock in capital adjustment earnings equity
------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994....................... $46,853 $1,918 $ (7,613) $83,774 $124,932
Net income.................. -- -- -- 32,822 32,822
Dividends paid to Gillette.. -- -- -- (5,600) (5,600)
Capital of new division
included in combined group. 788 -- -- -- 788
Translation adjustment...... -- -- (45,444) -- (45,444)
Divestiture of an
international division..... -- -- 1,237 -- 1,237
------- ------ -------- ------- --------
Balance at December 31,
1995....................... 47,641 1,918 (51,820) 110,996 108,735
Net income.................. -- -- -- 7,393 7,393
Dividends paid to Gillette.. -- -- -- (37,970) (37,970)
Capital contributions by
Gillette (Note 9).......... 2,646 2,646
Translation adjustment...... -- -- (2,163) -- (2,163)
------- ------ -------- ------- --------
Balance at December 31,
1996....................... 47,641 4,564 (53,983) 80,419 78,641
Net income.................. -- -- -- 15,449 15,449
Dividends paid to Gillette.. -- -- -- (18,355) (18,355)
Capital of new division
included in combined group. 1,926 -- -- -- 1,926
Translation adjustment...... -- -- (357) -- (357)
------- ------ -------- ------- --------
Balance at December 31,
1997....................... $49,567 $4,564 $(54,340) $77,513 $ 77,304
======= ====== ======== ======= ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Combined Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 15,449 $ 7,393 $32,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on disposal of property and
equipment..................................... (126) 3,462 --
Depreciation and amortization.................. 4,361 3,317 2,761
Changes in assets and liabilities:
(Increase) decrease in:
Receivables.................................. (1,027) (3,733) 7,660
Inventories.................................. 7,113 (8,406) 4,151
Prepaid expenses and other current assets.... (657) 1,011 2,304
Other assets................................. 1,571 636 (22)
Increase (decrease) in:
Accounts payable and accrued liabilities..... (3,682) (976) (7,364)
Deferred income taxes........................ (2,596) (9,253) 10,288
Income taxes payable......................... 6,792 9,245 (25,287)
Other long-term liabilities.................. (481) 66 154
-------- ------- -------
Net cash provided by operating activities... 26,717 2,762 27,467
-------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment..... 3,132 5,805 6,428
Purchases of property and equipment.............. (8,932) (10,313) (20,319)
-------- ------- -------
Net cash used in investing activities....... (5,800) (4,508) (13,891)
-------- ------- -------
Cash flows from financing activities:
Net proceeds from bank debt...................... 8,513 -- --
Capital contributions by Gillette................ 1,926 2,646 788
Dividends paid to Gillette....................... (18,355) (37,970) (5,600)
Transactions with Gillette and other divisions... (11,075) 40,365 (8,567)
-------- ------- -------
Net cash (used in) provided by financing
activities................................. (18,991) 5,041 (13,379)
-------- ------- -------
Effect of exchange rate change on cash............ (357) (2,163) 894
-------- ------- -------
Net increase in cash and cash equivalents... 1,569 1,132 1,091
Cash and cash equivalents at beginning of year.... 8,662 7,530 6,439
-------- ------- -------
Cash and cash equivalents at end of year.......... $ 10,231 $ 8,662 $ 7,530
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest....................................... $ 2,811 $ 3,657 $ 5,767
Taxes.......................................... $ 4,313 $ 441 $ 4,157
-------- ------- -------
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
As described in Note 9, $3,580,000 of debt due to an affiliate of Gillette
by Jafra Brazil was forgiven. This amount, net of the $934,000 tax effect, was
accounted for as a contribution of equity.
See accompanying notes to combined financial statements.
F-6
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements
December 31, 1997 and 1996
(1) Basis of Presentation
The combined financial statements of Jafra Cosmetics International (the
"Company") include the following subsidiaries and divisions of The Gillette
Company ("Gillette"): Jafra Cosmetics International, Inc., a California
corporation; Jafra Cosmetics GmbH, a German company; Jafra Cosmetics
International B.V., a Netherlands company; Jafra Cosmetics S.p.A., an Italian
company; Jafra Cosmetics A.G., a Swiss company; Grupo Jafra, S.A. de C.V., a
Mexican company, and its Subsidiaries, together with certain operating assets
and the related operating profit of Gillette Braun used in the Jafra business
in Mexico (the "Braun Assets"); the divested operations of the Company,
principally in Portugal, Spain, Brazil and the United Kingdom (collectively
the "Divested Markets"); the Jafra related operations of Gillette affiliates
in Austria, Argentina, Colombia and Venezuela; and the assets related to the
Jafra intellectual property, held by Gillette, that are used in the Jafra
business.
All interdivisional balances and transactions between the entities have been
eliminated. Accounts of subsidiaries and operations outside the United States
are included on the basis of fiscal years generally ending November 30.
Accordingly, the accompanying combined financial statements include the
accounts of these subsidiaries and operations for the twelve months ended
November 30. No significant events occurred in the month of December of any of
the fiscal years presented that would have a material impact upon the combined
financial statements presented herein.
The common stock of the Company primarily represents the stock of Jafra
Cosmetics International, Inc., a California corporation. Given the combined
group are all subsidiaries of Gillette, earnings per share data is omitted
from the accompanying combined financial statements.
The Company is a leading direct seller of high-quality skin and body care
products, color cosmetics, fragrances, nutritional supplements and other
personal care products. The Company's products are sold through a personalized
direct selling system comprised of approximately 221,000 self-employed sales
representatives operating worldwide. The Company is headquartered in Westlake
Village, California and has major manufacturing operations in Westlake Village
and in Naucalpan, Mexico.
The accompanying combined financial statements were prepared in
contemplation of the transaction between Gillette and a third party, effective
April 30, 1998. Upon consummation of this transaction certain purchase
accounting adjustments were made pursuant to generally accepted accounting
principles. No such adjustments were made to the accompanying combined
financial statements.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and all highly liquid
debt instruments with an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost, as determined by the first-in,
first-out (FIFO) basis, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective assets
on the straight-line method. Estimated useful lives are 40 years for building
and improvements and 3 to 10 years for machinery and equipment.
F-7
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Maintenance and repairs, including cost of minor replacements, are charged
to operations as incurred. Costs of additions and betterments are added to
property and equipment accounts provided that such expenditures increase the
useful life or the value of the asset.
Intangible Assets
Intangible assets principally consist of goodwill, which is amortized on the
straight-line method, generally over a period of 37.5 years. The carrying
amounts of intangible assets are assessed for impairment when income from
operations from the applicable related business indicates that the carrying
amounts of the assets may not be recoverable. No write-downs for impairment
were recorded during the years ended December 31, 1997, 1996 and 1995.
Impairment of Long-Lived Assets and Assets Held for Sale
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement is effective for fiscal years
beginning after December 15, 1995. The statement establishes accounting
standards for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles and goodwill either to be held or
disposed of. The Company adopted Statement No. 121 in 1996. The adoption did
not have a material impact on the Company's financial position or results of
operations.
As part of an ongoing review of the valuation and amortization of intangible
assets, management assesses the carrying value of the Company's intangible
assets if facts and circumstances suggest that it may be impaired. If this
review indicates that the intangibles will not be recoverable, as determined
by an undiscounted operating cash flow analysis over the remaining
amortization period, the carrying value of the Company's intangibles would be
reduced to its estimated fair market value.
Financial Instruments
The carrying amounts of cash, short-term investments, receivables, accounts
payable and accrued liabilities, and loans payable approximate fair value
because of the short-term maturities of these instruments. The carrying
amounts of other long-term liabilities are based upon the present value of
such liabilities. The carrying amounts of interdivisional accounts approximate
fair value.
The fair value of the Company's short-term debt instruments, which
approximate the carrying values, are based upon the current rates offered to
the Company for similar maturities.
Advertising
Advertising costs are expensed as incurred. Total advertising expense
aggregated $250,000, $348,000 and $409,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Research and Development
Research and development costs are expensed as incurred. Total research and
development expense aggregated $2,911,000, $3,319,000 and $3,098,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Other Expenses
Included in other, net are credit card fees incurred of $904,000, $841,000
and $637,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-8
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Income Taxes
Income taxes are recorded using the asset and liability method whereby
deferred tax assets and liabilities are recognized for the temporary
differences between the financial statement carrying amounts and the tax bases
of the Company's assets, liabilities and loss and tax credit carryforwards at
income tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment
date.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries and divisions are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. Where the U.S. dollar is the functional currency, translation
adjustments are recorded in income.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (SFAS
131). The Company is required to adopt these statements in fiscal year 1998.
SFAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. SFAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operations and major customers. Management has not yet determined whether the
above statements will have a material impact on the Company's combined
financial position, results of operations or cash flows.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions. These affect the reported amounts of assets,
liabilities, revenues and expenses and the amount of any contingent assets or
liabilities disclosed in the financial statements. Actual results could differ
from the estimates made.
(3) Inventories
Inventories are summarized as follows at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials and supplies............................... $ 8,439 $ 9,246
Work in process.......................................... 198 1,385
Finished goods........................................... 29,391 34,510
------- -------
$38,028 $45,141
======= =======
</TABLE>
F-9
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
(4) Property, Plant and Equipment
Property, plant and equipment is summarized as follows at December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Land................................................... $ 6,072 $ 6,072
Buildings.............................................. 17,150 16,925
Machinery and equipment................................ 40,173 35,923
------- --------
63,395 58,920
Less accumulated depreciation.......................... (26,528) (23,681)
------- --------
36,867 35,239
Land held for sale..................................... 6,815 6,556
------- --------
$43,682 $ 41,795
======= ========
</TABLE>
(5) Short-Term Notes Payable to Bank
Short-term notes payable to bank consist of three loans to foreign banks
which are payable in foreign currencies and bear interest at rates ranging
between 2.9% and 3.15%. All loans are due in fiscal year 1998.
(6) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are summarized as follows at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts payable......................................... $12,688 $16,375
Advertising and sales promotion.......................... 12,608 11,748
Payroll and payroll taxes................................ 2,427 3,306
State and local sales taxes.............................. 1,455 1,318
Miscellaneous............................................ 6,206 6,319
------- -------
$35,384 $39,066
======= =======
</TABLE>
(7) Income Taxes
The Company's income is included in Gillette's consolidated U.S. income tax
return. For financial reporting purposes, the Company has provided income
taxes (benefit) on a separate-company basis. Income tax expense is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal...................................... $ 222 $(1,095) $(1,388)
Foreign:
Mexico..................................... 4,717 3,391 7,743
Western Europe............................. 1,938 1,954 1,584
United Kingdom............................. -- -- 804
Canada..................................... 854 -- --
Other...................................... -- 127 154
------- ------- -------
7,731 4,377 8,897
State........................................ (170) (380) (568)
------- ------- -------
Total current............................ 7,561 3,997 8,329
Deferred -- foreign -- Mexico.................. (2,745) (443) (2,234)
------- ------- -------
$ 4,816 $ 3,554 $ 6,095
======= ======= =======
</TABLE>
F-10
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Actual income tax rate differs from the "expected" tax rate (computed by
applying the U.S. Federal corporate rate of 35% to income before income taxes)
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory Federal tax rate..................... 35.0% 35.0% 35.0%
State taxes, net of Federal tax benefit........ .1 (.7) (.3)
Reduction in valuation allowance............... (2.5) (2.1) (.8)
Effect of foreign operations................... (11.4) (10.9) (20.4)
Other.......................................... 2.6 4.8 2.2
------- ------- -------
Effective tax rate........................... 23.8% 26.1% 15.7%
======= ======= =======
The components of income before income taxes for the Company's domestic and
foreign operations are as follows (in thousands):
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic..................................... $ 6,129 $ (875) $(2,394)
Foreign...................................... 14,136 10,888 41,311
------- ------- -------
$20,265 $10,013 $38,917
======= ======= =======
</TABLE>
The above tables include the impact of $934,000 of income tax expense
recorded in 1996 resulting from the capital contribution by Gillette to the
Company related to the closure of the Brazil market (see note 9).
The components of deferred tax assets and deferred tax liabilities are shown
below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts........................................ $ 584 $ 534
Inventory, principally due to additional costs capitalized
for tax purposes and accrued reserves.................... 1,833 2,376
Accrued liability relating to compensation-related ex-
pense.................................................... 299 291
Advertising and sales promotion........................... 1,946 1,701
Other accrued liabilities................................. 819 724
Fixed assets, principally attributable to differences in
depreciation methods..................................... 1,274 1,428
Other..................................................... 1,319 1,220
------- --------
Total deferred tax assets............................... 8,074 8,274
Less valuation allowance.................................. (965) (1,524)
------- --------
Net deferred tax assets................................. 7,109 6,750
------- --------
Deferred tax liabilities:
Depreciation.............................................. (1,841) (1,684)
Inventory reserves........................................ (5,979) (8,373)
------- --------
Total deferred tax liabilities.......................... (7,820) (10,057)
------- --------
Net deferred tax liabilities............................ $ (711) $ (3,307)
======= ========
</TABLE>
The Company records a valuation allowance on the deferred tax assets to
reduce the total to an amount that management believes will ultimately be
realized. The deferred tax valuation allowance relates entirely to the
Company's domestic operations. The valuation allowance at December 31, 1997
and 1996 is based upon the Company's estimates of the future realization of
deferred tax assets to reduce taxable income. The Company had established a
valuation allowance prior to 1995 as a result of taxable losses incurred by
the Company's domestic
F-11
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
operations and a determination by management that the deferred tax assets
could not be fully utilized. In 1996, the Company reduced its valuation
allowance as a result of improved profitability of the Company's domestic
operations and management's determination that the valuation allowance should
be reduced. In 1997, the Company's domestic operations again improved,
resulting in management's determination that an increasing amount of the
deferred tax assets will be realized. In 1997, the valuation allowance was
reduced by 37% to an amount representing 12% of the deferred tax assets.
(8) Retirement Benefits
The Company participates in The Gillette Company Retirement Plan (the Plan)
which is a defined benefit pension plan covering substantially all of
Gillette's domestic employees. Benefits are based on age, years of service and
the level of compensation during the final years of employment. Gillette's
funding policy is to contribute annually to the Plan the amount necessary to
meet the minimum funding standards established by the Employee Retirement
Income Security Act.
The components of Gillette's net pension expense for the Plan for the years
ended December 31, 1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned.............. $ 29,892 $ 28,828 $ 24,185
Interest cost on projected benefit
obligation................................ 60,245 55,731 53,440
Actual return on Plan assets............... (184,649) (118,046) (152,662)
Net amortization and deferral.............. 116,569 64,129 113,161
--------- --------- ---------
Pension expense.......................... $ 22,057 $ 30,642 $ 38,124
========= ========= =========
</TABLE>
The Company's share of the above pension expense was $970,000, $1,223,000
and $1,250,000 in 1997, 1996 and 1995, respectively. The Company's share of
pension expense is based on the Company's payroll covered by the Plan as a
percentage of total payroll covered by the Plan.
The funded status of the Plan is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Vested benefits.............................. $693,835 $629,252 $ 601,462
Nonvested benefits........................... 94,981 89,185 88,062
-------- -------- ---------
Accumulated benefit obligation............. 788,816 718,437 689,524
Benefit obligation related to future
compensation levels......................... 170,642 160,792 147,752
-------- -------- ---------
Projected benefit obligation............... 959,458 879,229 837,276
Fair value of Plan assets, invested primarily
in equities and debt securities............. 990,026 815,737 689,658
-------- -------- ---------
Projected benefit obligation in excess of
Plan assets............................... 30,568 (63,492) (147,618)
Unrecognized transition obligation........... 1,648 1,097 325
Unrecognized prior service cost.............. 11,478 7,750 17,720
Unrecognized net loss........................ 9,178 97,173 158,801
Minimum liability adjustment................. (25,459) (25,828) (23,352)
-------- -------- ---------
Gillette's prepaid pension cost.............. $ 27,413 $ 16,700 $ 5,876
======== ======== =========
</TABLE>
F-12
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
The primary assumptions used in determining obligations of the Plan are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................ 7.00% 7.00% 6.75%
Increase in compensation levels.......................... 5.00 5.00 5.00
Long-term rate of return on assets....................... 9.00% 9.00% 9.00%
==== ==== ====
</TABLE>
The Company also participates in Gillette's plans which provide certain
health care and life insurance benefits to retired employees. Substantially
all of the Company's employees become eligible for these benefits upon
retirement. At the time of retirement, employees who elect to participate are
required to pay some portion of such medical costs if hired before July 1,
1990, or all of such costs if hired after that date. Gillette's employee stock
ownership plan (ESOP) was established to assist employees who retire after
January 1, 1992 to finance their retiree medical costs.
The Company recognizes the cost of postretirement benefits other than
pensions during employees' active working lives. The components of Gillette's
net other postretirement benefit expense follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest cost................................... $17,008 $19,181 $23,376
Service cost.................................... 4,758 1,652 151
Actual return on assets......................... (6,010) (3,543) (3,360)
Net amortization expense........................ (3,631) (906) (993)
------- ------- -------
Other postretirement benefit expense.......... $12,125 $16,384 $19,174
======= ======= =======
</TABLE>
The Company's share of the above other postretirement benefit expense for
1997, 1996 and 1995 was $128, $205 and $306, respectively. The status of
Gillette's plans and the amounts recognized in the balance sheets follow (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Retirees..................................... $162,739 $171,854 $182,179
Fully eligible active employees.............. 18,356 25,341 30,770
Other active employees....................... 66,735 69,126 67,208
-------- -------- --------
Accumulated postretirement benefit
obligation................................ 247,830 266,321 280,157
Fair value of plan assets.................... (33,249) (24,000) (17,375)
Unrecognized net gain........................ 86,947 67,636 47,327
-------- -------- --------
Gillette's accrued postretirement liability.. $301,528 $309,957 $310,109
======== ======== ========
</TABLE>
The accumulated postretirement benefit obligation was determined using an
assumed discount rate of 7.00%, 7.00% and 6.75% in 1997, 1996 and 1995,
respectively. The assumed health care cost trend rate was 9%, 10% and 11% in
1997, 1996 and 1995, respectively, decreasing to 5% by the year 2001. A one
percentage point increase in the trend rate would have increased Gillette's
accumulated postretirement benefit obligation by 12% and interest and service
cost by 14% in 1997.
ESOP shares allocated to participants reduce Gillette obligations over the
period of allocation. The account balance is assumed to have an annual yield
of 12%. In addition, Gillette established a retiree health benefits account
within its pension plan that will be used to partially fund health care
benefits for future retirees.
F-13
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Certain of the Company's Germany employees participate in the Germany Plan,
which is a defined benefit pension plan covering key employees. Benefits are
based on age, years of service and the level of compensation during the final
years of employment. The Company's funding policy is to contribute annually to
the Germany Plan the amount necessary to meet the minimum funding standards.
The total pension expense amounted to $140,000, $245,000 and $321,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Under Mexican Labor Laws, employees of Grupo Jafra, S.A. de C.V. and its
Subsidiaries are entitled to a payment when they leave the Company if they
have fifteen or more years of service. In addition, the Company makes
government mandated employee profit sharing distributions equal to ten percent
of the taxable income of the company in which they work.
Certain key employees of the Company have been granted options to purchase
stock of The Gillette Company. Gillette applies APB Opinion No. 25 and related
Interpretations in accounting for these options. Accordingly, no compensation
cost has been allocated to the Company. The fair value of each option granted
by Gillette has been estimated on the date of the grant using the Black
Scholes option pricing model, with the following assumptions used for grants
in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate....................................... 6.6% 6.5% 6.0%
Expected option life (in years)............................... 4.6 4.6 4.6
Expected volatility........................................... 19.2% 22.0% 22.4%
Expected dividend yield....................................... .9% 1.2% 1.4%
</TABLE>
A summary of the activity of the Gillette Company options held by employees
of the Company is as follows (thousands of shares):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 612 $37.00 586 $32.00 600 $25.00
Granted........................ 98 93.00 108 61.00 78 46.00
Exercised...................... (128) 30.00 (76) 26.00 (90) 20.00
Canceled....................... (2) 66.00 (6) 38.00 (2) 31.50
Outstanding at year-end........ 580 54.00 612 37.00 586 32.00
Options exercises at year-end.. 464 428 394
Weighted average fair value
options granted during the
year.......................... $25.00 $17.00 $13.00
</TABLE>
Had the Company recorded an allocated charge for the fair value of options
granted consistent with FASB Statement 123, pro forma net income would have
been as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Net income, as reported................................. $15,449 $7,393 $32,822
Fair value of options granted........................... 2,800 1,800 1,100
------- ------ -------
Pro forma net income.................................... $12,649 $5,593 $31,722
======= ====== =======
</TABLE>
(9) Related Parties
Certain expenses are charged by Gillette to the Company. Management believes
the amounts and methods of allocation are reasonable and approximate actual
services provided. The allocations are based principally upon a formula using
the percentage of revenues of the Company to the total consolidated revenues
of Gillette.
F-14
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Management performs regular reviews of the allocated costs and has determined
that the cost of these services to the Company, as if it were a stand-alone
entity, would be comparable to the costs allocated to it by Gillette. Such
services include legal, trademark and patent support, internal audit, and
other administrative costs. Total related net charges were $2,045,000,
$2,495,000 and $2,550,000 in 1997, 1996 and 1995, respectively, and are
included in selling, general and administrative expenses in the accompanying
combined statements of operations.
Jafra Cosmetics International, Inc. provides certain management services to
Grupo Jafra, S.A. de C.V., an affiliated subsidiary of the Company, which are
general and administrative in nature. Total related services amounted to
$5,373,000, $3,933,000 and $3,613,000 in 1997, 1996 and 1995, respectively,
and have been eliminated in the accompanying combined statements of
operations.
During 1997, Jafra Cosmetics International, Inc. wrote off approximately
$3,200,000 of payables due from its affiliate in Canada, as a result of the
decision to close the market in Canada. The division in Canada recorded this
as a credit to earnings. Accordingly, these transactions offset in
combination.
Interest is charged and earned on affiliated payables and receivables at the
LIBOR rate. The total related interest was $592,000, $41,000 and $2,890,000 in
1997, 1996 and 1995, respectively, and is included in interest, net in the
accompanying combined statements of operations.
The Company transferred $32,330,000, $20,058,000 and $17,894,000 of
inventory to intercompanies and affiliates at prices covering materials, labor
and overhead during 1997, 1996 and 1995, respectively.
During 1996, $3,580,000 of debt due to an affiliate of Gillette by Jafra
Brazil was forgiven in connection with the divestiture of the Brazil market.
This amount, net of the $934,000 income tax effect, was recorded as a capital
contribution by Gillette to the Company. All other assets and liabilities were
liquidated with a nominal impact on the combined financial statements.
In addition, Gillette acts as a cash manager for the Company. As such,
balances due to/from Gillette and other divisions consist of amounts related
to this and the above transactions.
In 1996, the Company decided to cease the development and installation of
certain proprietary computer systems, including hardware, software, and
related installation costs, due to the failure of the outside contractor to
properly install and support the system. It was determined that the Company
would never gain any benefit from these assets and that the net book value of
the assets was not recoverable. A loss of $5.4 million was recorded
representing the net book value of the related assets at the time of
management's decision. The related depreciation expense was minor as
depreciation had not yet begun because the assets were not placed into
service. This loss was included in selling, general and administrative
expenses in the 1996 statement of operations. In 1997, the Company brought
legal action against the outside contractor and recovered $2.3 million in
damages. This amount was recorded and included in selling, general and
administrative expenses in the 1997 statement of operations.
Income from operations for the years ended December 31, 1997, 1996 and 1995
included net non-recurring charges of $3,500,000, $700,000 and $9,600,000,
respectively.
In 1997, the net charge resulted from realignment programs in Italy and the
South American markets. The Company paid severance and exit costs of $2.6
million. Additionally, decisions were made during 1997 to close the Hungary
and Canada markets resulting in an estimated loss of $900,000 principally
related to severance, closure (lease costs) and other exit costs. The net
charge of $3.5 million was included in income from operations in 1997.
Management adopted the aforementioned programs in early 1997. The majority of
the payments associated with the reserves recorded in 1997 were made prior to
the end of 1997. The operations in Italy, South America, Hungary and Canada
were such that impairment write downs were not necessary prior to their
closure.
F-15
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
The 1996 net charge relates to similar reorganization programs whereby the
Company paid additional severance, legal and exit payments to exit the
Brazilian market of $2.4 million. The decision to close the remaining
Brazilian markets was made in early 1996. The majority of the payments were
made prior to the end of 1996. Also during 1996, the Company sold a building
in Mexico as a result of the decision to reorganize and consolidate the
Mexican market. The gain on the sale of the building was $1.7 million,
resulting in a net charge of $700,000 which was included in income from
operations in 1996. No impairment of the related assets was recorded in these
markets as the circumstances indicated that after these changes the continuing
operations in Mexico were profitable and that the assets were recoverable. The
operations in Brazil were such that impairment write downs were not necessary
prior to the closure.
The 1995 net charge results from the Company's decision to reorganize and
eliminate redundant functions in the markets within the United States, Italy,
the Netherlands, Germany, Spain and Brazil. The Company entered into several
severance agreements with key executives in these markets and paid
approximately $4.0 million related to these agreements. Additionally, the
Company paid approximately $5.6 million related to the severance and related
legal costs associated with the elimination of certain sales force employees.
The total costs of $9.6 million were included in income from operations in
1995. The 1995 restructuring plan was adopted in 1995 by management. The
majority of the payments under this restructuring plan were made prior to the
end of 1995. No impairment of the related assets was recorded in these markets
as the circumstances indicated that after these changes the operations were
profitable and that the assets were recoverable.
As discussed above, the components of the aforementioned reserves include
severance, lease and other exit costs, and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Severance....................................... $ 2,860 $1,480 $8,800
Lease costs..................................... 520 690 565
Other........................................... 120 230 235
------- ------- -------
$ 3,500 $ 2,400 $ 9,600
======= ======= =======
A rollforward of the activity of the restructuring reserves is summarized as
follows (in thousands):
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Opening balance................................. $ 380 $ 740 $ --
New additions................................... 3,500 2,400 9,600
Charges against reserves........................ (3,590) (2,760) (8,860)
------- ------- -------
Ending balance.................................. $ 290 $ 380 $ 740
======= ======= =======
The severance costs included herein were generally all paid in the year in
which the charge was recorded. The remaining costs at each year end included
in the restructuring reserve are summarized as follows:
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Severance....................................... $ 140 $ 275 $ 620
Lease costs..................................... 150 75 60
Other........................................... -- 30 60
------- ------- -------
$ 290 $ 380 $ 740
======= ======= =======
</TABLE>
The costs included in "Other" are principally legal costs associated with
establishing severance agreements in international markets. The remaining
balance at the end of 1997 was paid in the first quarter of 1998. At the end
of 1997, the Company's restructuring plans were essentially complete.
F-16
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
The principal component of the restructuring reserves is severance. A
summary of the severance activity is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
# of # of # of
Employees Amt. Employees Amt. Employees Amt.
--------- ------- --------- ------- --------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Opening balance......... 10 $ 275 45 $ 620 -- $ --
Planned terminations.... 145 2,860 80 1,480 630 8,800
Actual terminations..... (147) (2,995) (115) (1,825) (585) (8,180)
---- ------- ---- ------- ---- -------
Ending balance.......... 8 $ 140 10 $ 275 45 $ 620
==== ======= ==== ======= ==== =======
</TABLE>
The operations of the markets that were restructured or eliminated were not
material to the combined financial statements; accordingly, separate financial
information on these markets has not been provided.
(10) Financial Information by Geographic Area
The following financial information is provided by geographic area (in
thousands):
<TABLE>
<CAPTION>
Western Latin Total United
Europe America Mexico Other foreign States Total
------- ------- ------- ------- -------- ------- --------
1997
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $46,806 $14,204 $97,577 $ 300 $158,887 $70,637 $229,524
======= ======= ======= ======= ======== ======= ========
Income (loss) from oper-
ations................. $ 717 $(2,879) $16,363 $(1,366)(1) $ 12,835(1) $ 8,130(1) $ 20,965
======= ======= ======= ======= ======== ======= ========
Identifiable assets..... $37,277 $10,727 $83,032 $ 4,462 $135,498 $55,510 $191,008
Consolidating and com-
bining adjustments..... (1,104) -- (731) -- (1,835) (13,923) (15,758)
------- ------- ------- ------- -------- ------- --------
Identifiable assets... $36,173 $10,727 $82,301 $ 4,462 $133,663 $41,587 $175,250
======= ======= ======= ======= ======== ======= ========
1996
Net sales............... $60,202 $11,012 $79,548 $ 1,188 $151,950 $72,594 $224,544
======= ======= ======= ======= ======== ======= ========
Income (loss) from oper-
ations................. $ 687 $(1,874) $11,572 $ (978) $ 9,407 $ 1,162 $ 10,569
======= ======= ======= ======= ======== ======= ========
Identifiable assets..... $29,346 $11,019 $82,843 $ 2,956 $126,164 $52,485 $178,649
Consolidating and com-
bining adjustments..... (996) -- (2,764) -- (3,760) (10,428) (14,188)
------- ------- ------- ------- -------- ------- --------
Identifiable assets... $28,350 $11,019 $80,079 $ 2,956 $122,404 $42,057 $164,461
======= ======= ======= ======= ======== ======= ========
1995
Net sales............... $59,815 $12,676 $76,246 $ 918 $149,655 $68,776 $218,431
======= ======= ======= ======= ======== ======= ========
Income (loss) from oper-
ations................. $ 724 $ (166) $12,249 $(1,225) $ 11,582 $(1,026) $ 10,556
Consolidating and com-
bining adjustments..... 552 -- -- (71) 481 (940) (459)
------- ------- ------- ------- -------- ------- --------
Income (loss) from op-
erations............. $ 1,276 $ (166) $12,249 $(1,296) $ 12,063 $(1,966) $ 10,097
======= ======= ======= ======= ======== ======= ========
</TABLE>
All material intercompany transactions have been eliminated.
(1) During 1997, Jafra Cosmetics International, Inc. (United States) wrote off
approximately $3,200,000 of payables due from its affiliate in Canada
(other), as a result of the decision to close the market in Canada. The
division in Canada recorded this as a credit to earnings, accordingly,
these transactions offset in combination. The effects of these
transactions in the above table, however, have been eliminated from the
separate segment presentation to reflect the income from operations
exclusive of this transaction.
F-17
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
(11) Commitments and Contingencies
The Company leases office and warehouse facilities as well as manufacturing,
transportation and data processing equipment under operating leases which
expire at various dates through March 2004. Future minimum lease payments
under noncancelable operating leases as of December 31, 1997 are (in
thousands):
<TABLE>
<S> <C>
1998............................................ $1,322
1999............................................ 1,030
2000............................................ 882
2001............................................ 878
2002............................................ 414
Thereafter...................................... 513
------
$5,039
======
</TABLE>
Certain of the aforementioned operating leases may be terminated upon
transfer or sale of the Company (note 1).
Rental expense amounted to $1,500,000, $1,800,000 and $1,800,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company is subject to legal proceedings and claims arising out of its
business. Management, after review and consultation with counsel, considers
that any liability from such pending legal proceedings and claims would not
materially affect the combined financial position, results of operations or
liquidity of the Company.
(12) Supplemental Information
The following combined condensed balance sheets, statements of operations,
and statements of cash flows have been presented in contemplation of the
transaction between Gillette and a third party, as described in Note 1. Such
financial statements have been segregated between those entities that will
guarantee the debt to be issued in connection with the transaction ("Guarantor
entities"), and those entities that will not guarantee such debt
("Nonguarantor entities").
Combining condensed statement of operations data for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
--------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions(5) Eliminations combined
--------- ------------ -------- ---------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $70,637 $46,806 $117,443 $97,577 $14,504 -- $229,524
Cost of sales........... 18,519 9,638 28,157 27,124 3,848 -- 59,129
------- ------- -------- ------- ------- ------ --------
Gross profit........... 52,118 37,168 89,286 70,453 10,656 170,395
Selling, general and
administrative
expenses............... 43,988(4) 36,451 80,439 54,090 13,314(4) 1,587 149,430
------- ------- -------- ------- ------- ------ --------
Income (loss) from
operations............ 8,130 717 8,847 16,363 (2,658) (1,587) 20,965
Other (income) expense.. 2,001 170 2,171 591 (3,237) 1,175 700
------- ------- -------- ------- ------- ------ --------
Income (loss) before
income taxes.......... 6,129 547 6,676 15,772 579 (2,762) 20,265
Income taxes............ 52 1,938 1,990 1,972 854 -- 4,816
------- ------- -------- ------- ------- ------ --------
Net income (loss)...... $ 6,077 $(1,391) $ 4,686 $13,800 $ (275) (2,762) $ 15,449
======= ======= ======== ======= ======= ====== ========
</TABLE>
F-18
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
--------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions (5) Eliminations combined
--------- ------------ -------- ---------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $72,594 $60,202 $132,796 $79,548 $12,200 -- $224,544
Cost of sales........... 17,872 12,296 30,168 24,696 3,352 -- 58,216
------- ------- -------- ------- ------- ------ --------
Gross profit........... 54,722 47,906 102,628 54,852 8,848 -- 166,328
Selling, general and
administrative
expenses............... 53,560(4) 47,219 100,779 43,280 10,253 1,447 155,759
------- ------- -------- ------- ------- ------ --------
Income (loss) from
operations............ 1,162 687 1,849 11,572 (1,405) (1,447) 10,569
Other (income) expense.. 2,037 269 2,306 (2,014) (935) 1,199 556
------- ------- -------- ------- ------- ------ --------
Income (loss) before
income taxes
(benefit)............. (875) 418 (457) 13,586 (470) (2,646) 10,013
Income taxes (benefit).. (1,475) 1,954 479 2,948 (807) -- 2,620
------- ------- -------- ------- ------- ------ --------
Net income (loss)...... $ 600 $(1,536) $ (936) $10,638 $ 337 (2,646) $ 7,393
======= ======= ======== ======= ======= ====== ========
<CAPTION>
Year ended December 31, 1995
--------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
--------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions (5) Eliminations combined
--------- ------------ -------- ---------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $68,776 $59,815 $128,591 $76,246 $13,594 -- $218,431
Cost of sales........... 20,539 13,736 34,275 19,698 337 -- 54,310
------- ------- -------- ------- ------- ------ --------
Gross profit........... 48,237 46,079 94,316 56,548 13,257 -- 164,121
Selling, general and
administrative
expenses............... 49,263 45,355 94,618 44,299 14,181 926 154,024
------- ------- -------- ------- ------- ------ --------
Income (loss) from
operations............ (1,026) 724 (302) 12,249 (924) (926) 10,097
Other (income) expense.. 1,368 147 1,515 (28,562)(3) (847) (926) (28,820)(3)
------- ------- -------- ------- ------- ------ --------
Income (loss) before
income taxes
(benefit)............. (2,394) 577 (1,817) 40,811 (77) -- 38,917
Income taxes (benefit).. (1,956) 1,584 (372) 5,509 958 -- 6,095
------- ------- -------- ------- ------- ------ --------
Net income (loss)...... $ (438) $(1,007) $ (1,445) $35,302 $(1,035) -- $ 32,822
======= ======= ======== ======= ======= ====== ========
</TABLE>
F-19
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Combining condensed balance sheet data as of December 31, 1997 and 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc.(1) Guarantor
------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V.(2) regions(5) Eliminations combined
--------- ------------ -------- --------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables............. $ 4,090 $ 6,225 $10,315 $14,323 $ 2,660 $ -- $ 27,298
Inventories............. 17,452 8,635 26,087 10,329 3,031 (1,419) 38,028
Due from parent company. 14,192 17,457 31,649 14,270 8,583 (14,617) 39,885
Other current assets.... 2,057 2,445 4,502 8,310 236 380 13,428
------- ------- ------- ------- ------- -------- --------
Total current assets... 37,791 34,762 72,553 47,232 14,510 (15,656) 118,639
Property, plant and
equipment.............. 17,369 1,497 18,866 23,980 836 -- 43,682
Other assets........... 350 1,018 1,368 11,820 822 (1,081) 12,929
------- ------- ------- ------- ------- -------- --------
Total assets............ $55,510 $37,277 $92,787 $83,032 $16,168 $(16,737) $175,250
======= ======= ======= ======= ======= ======== ========
Accounts payable and
accrued expenses....... $11,011 $ 6,471 $17,482 $15,461 $ 3,028 $ (587) $ 35,384
Due to parent........... 14,621 21,418 36,039 13,347 12,155 (16,101) 45,440
Other current
liabilities............ 2,364 10,625 12,989 2,852 -- (639) 15,202
------- ------- ------- ------- ------- -------- --------
Total current
liabilities........... 27,996 38,514 66,510 31,660 15,183 (17,327) 96,026
Other liabilities....... -- 1,900 1,900 -- 20 -- 1,920
------- ------- ------- ------- ------- -------- --------
Total liabilities...... 27,996 40,414 68,410 31,660 15,203 (17,327) 97,946
Divisional equity....... 27,514 (3,137) 24,377 51,372 965 590 77,304
------- ------- ------- ------- ------- -------- --------
Total liabilities and
equity................ $55,510 $37,277 $92,787 $83,032 $16,168 $(16,737) $175,250
======= ======= ======= ======= ======= ======== ========
<CAPTION>
As of December 31, 1996
--------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc.(1) Guarantor
------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V.(2) regions(5) Eliminations combined
--------- ------------ -------- --------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables............. $ 4,136 $ 7,780 $11,916 $11,823 $ 2,532 $ -- $ 26,271
Inventories............. 16,536 8,891 25,427 13,332 6,382 -- 45,141
Due from parent company. 12,259 6,531 18,790 12,096 1,350 (7,820) 24,416
Other current assets.... 1,431 3,364 4,795 9,669 -- (2,448) 12,016
------- ------- ------- ------- ------- -------- --------
Total current assets... 34,362 26,566 60,928 46,920 10,264 (10,268) 107,844
Property, plant and
equipment.............. 17,267 1,672 18,939 21,839 1,017 -- 41,795
Other assets............ 856 1,108 1,964 14,084 -- (1,226) 14,822
------- ------- ------- ------- ------- -------- --------
Total assets........... $52,485 $29,346 $81,831 $82,843 $11,281 $(11,494) $164,461
======= ======= ======= ======= ======= ======== ========
Accounts payable and
accrued expenses....... $ 9,540 $ 8,252 $17,792 $19,008 $ 2,266 -- $ 39,066
Due to parent........... 18,416 15,918 34,334 7,622 6,397 (7,307) 41,046
Other current
liabilities............ 50 2,023 2,073 5,421 -- (4,187) 3,307
------- ------- ------- ------- ------- -------- --------
Total current
liabilities........... 28,006 26,193 54,199 32,051 8,663 (11,494) 83,419
Other liabilities....... -- 2,381 2,381 -- 20 -- 2,401
------- ------- ------- ------- ------- -------- --------
Total liabilities...... 28,006 28,574 56,580 32,051 8,683 (11,494) 85,820
Divisional equity....... 24,479 772 25,251 50,792 2,598 -- 78,641
------- ------- ------- ------- ------- -------- --------
Total liabilities and
equity................ $52,485 $29,346 $81,831 $82,843 $11,281 $(11,494) $164,461
======= ======= ======= ======= ======= ======== ========
</TABLE>
F-20
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
Combining condensed statement of cash flows data for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
-------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions (5) Eliminations combined
--------- ------------ -------- ---------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 13,467 $(4,031) $ 9,436 $ 11,534 $ 5,747 -- $ 26,717
Net cash provided by
(used in) investing
activities............. (2,130) (437) (2,567) 4,162 (7,395) -- (5,800)
Net cash provided by
(used in) financing
activities............. (11,228) 4,347 (6,881) (13,220) 1,110 -- (18,991)
Effect of exchange rate
changes on cash........ 158 (587) (429) (200) 272 -- (357)
Cash at beginning of
period................. 492 2,021 2,513 5,182 967 -- 8,662
-------- ------- ------- -------- -------- ----- --------
Cash at end of period... $ 759 $ 1,313 $ 2,072 $ 7,458 $ 701 -- $ 10,231
======== ======= ======= ======== ======== ===== ========
<CAPTION>
Year ended December 31, 1996
------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
-------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions (5) Eliminations combined
--------- ------------ -------- ---------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 5,286 $(4,107) $ 1,179 $ 9,174 $ (7,591) -- $ 2,762
Net cash provided by
(used in) investing
activities............. (3,787) (309) (4,096) 24,133 (24,545) -- (4,508)
Net cash used in
financing activities... (1,007) 2,246 1,239 (30,000) 33,802 -- 5,041
Effect of exchange rate
changes on cash........ -- (488) (488) (90) (1,585) -- (2,163)
Cash at beginning of
period................. -- 4,679 4,679 1,965 886 -- 7,530
-------- ------- ------- -------- -------- ----- --------
Cash at end of period... $ 492 $ 2,021 $ 2,513 $ 5,182 $ 967 -- $ 8,662
======== ======= ======= ======== ======== ===== ========
<CAPTION>
Year ended December 31, 1995
------------------------------------------------------------------------------------
Jafra Cosmetics International,
Inc. (1) Guarantor
-------------------------------- entity
Guarantor Nonguarantor Total Grupo Jafra Other Total
entity entities combined S.A. de C.V. (2) regions (5) Eliminations combined
--------- ------------ -------- ---------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (3,689) $ 4,846 $ 1,157 $ 32,529 $ (6,219) -- $ 27,467
Net cash provided by
(used in) investing
activities............. (3,647) (863) (4,510) (30,514) 21,133 -- (13,891)
Net cash provided by
(used in) financing
activities............. 6,832 (2,927) 3,905 (76) (17,208) -- (13,379)
Effect of exchange rate
changes on cash........ 6 356 362 (32) 564 -- 894
Cash at beginning of
period................. 498 3,267 3,765 58 2,616 -- 6,439
-------- ------- ------- -------- -------- ----- --------
Cash at end of period... $ -- $ 4,679 $ 4,679 $ 1,965 $ 886 -- $ 7,530
======== ======= ======= ======== ======== ===== ========
</TABLE>
- --------
(1) The combined financial statements of Jafra Cosmetics International, Inc.
include the accounts of the following subsidiaries of the Gillette
Company: Jafra Cosmetics International, Inc., a California corporation
(the Guarantor entity); Jafra Cosmetics GmbH, a German company; Jafra
Cosmetic International B.V., a Netherlands company; Jafra Cosmetics
S.p.A., an Italian company; Jafra Cosmetics A.G., a Swiss company; the
Jafra related operations of a Gillette affiliate in Austria; and the
assets related to the Jafra intellectual properties, held by the Gillette
Company, that are used in the Jafra business (collectively, the
Nonguarantor entities).
F-21
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Notes to Combined Financial Statements, Continued
(2) The combined financial statements of Grupo Jafra, S.A. de C.V. include the
accounts of Grupo Jafra, S.A. de C.V., a guarantor entity, and all of its
subsidiaries together with certain operating assets and the related
operating profit of Gillette Braun used in the Jafra business in Mexico
and the assets related to the Jafra intellectual properties held by the
Gillette Company.
(3) Includes foreign currency gains of $25,501.
(4) During 1997, Jafra Cosmetics International, Inc., the Guarantor entity,
wrote off approximately $3,200,000 of payables due from its affiliate in
Canada (Other), as a result of the decision to close the market in Canada.
The division in Canada recorded this as a credit to earnings, accordingly,
these transactions offset in combination. The effects of these
transactions in the above table, however, have been eliminated from the
above presentation to reflect the income from operations exclusive of this
transaction.
(5) Includes the activity of certain Divested Markets and smaller markets in
Austria, Argentina, Colombia and Venezuela.
(13) Year 2000
The Company has developed plans to address the possible exposures related to
the impact on its computer systems of the year 2000. Key financial,
information and operational systems have been assessed and detailed plans have
been developed to address systems modifications required by December 31, 1999.
The financial impact of making the required systems changes is not expected to
be material to the Company's combined financial position, results of
operations or cash flows.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
CDRJ Investments (Lux) S.A.
We have audited the accompanying combined balance sheet of CDRJ Investments
(Lux) S.A. as of April 28, 1998. This combined balance sheet is the
responsibility of CDRJ Investments (Lux) S.A.'s management. Our responsibility
is to express an opinion on the combined balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined balance sheet is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined balance sheet.
An audit also includes assessing the accounting principles used and the
significant estimates made by management, as well as evaluating the overall
presentation of the combined balance sheet. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, such combined balance sheet presents fairly, in all material
respects, the combined financial position of CDRJ Investments (Lux) S.A. as of
April 28, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
August 25, 1998
F-23
<PAGE>
CDRJ INVESTMENTS (LUX) S.A.
Combined Balance Sheet
April 28, 1998
ASSETS
<TABLE>
<S> <C>
Cash.................................................................. $243,798
========
STOCKHOLDER'S EQUITY
Common Stock, par value $2.00 per share; 20,000 shares authorized;
20,000
shares issued and outstanding........................................ 40,000
Additional paid-in-capital............................................ 203,798
--------
Total stockholder's equity.......................................... $243,798
========
</TABLE>
See accompanying notes to combined balance sheet.
F-24
<PAGE>
CDRJ INVESTMENTS (LUX) S.A.
Notes to Combined Balance Sheet
April 28, 1998
1. Organization
CDRJ Investments (Lux) S.A., a Luxembourg company (the "Parent"), its
indirect wholly owned subsidiary, CDRJ Acquisition Corporation, a Delaware
corporation (the "U.S. Issuer"), a related company, Jafra Cosmetics
International, S.A. de C.V., a Mexican corporation ("Jafra S.A." together with
the U.S. Issuer, the "Issuers") and certain other related companies were
formed on behalf of Clayton, Dubilier & Rice Fund V Limited Partnership ("Fund
V"), a Cayman Islands exempted limited partnership, managed by Clayton,
Dubilier & Rice, Inc. ("CD&R"), and other investors to acquire (the
"Acquisition") the worldwide Jafra cosmetics business (the "Jafra Business")
from The Gillette Company ("Gillette").
2. Principles of Combination
The Parent was formed to acquire the worldwide Jafra Cosmetics business from
Gillette. The balance sheet date is prior to the date of the Acquisition and
the Parent had not yet had any operations. As a result, Consolidated
Statements of Operations and Cash Flows have not been presented. The combined
balance sheet includes the accounts of the Parent, its subsidiaries and other
related companies which were formed by Fund V in connection with the
Acquisition after the elimination of all intercompany accounts and
transactions.
3. Supplemental Information
The consolidating balance sheet data, as of April 28, 1998, has been
aggregated by the Guarantor entities of the Notes (See Note 5), the U.S.
Issuer and Jafra S.A. and the Nonguarantor entities. The Nonguarantor entities
are the Parent's indirect European subsidiaries in Germany, the Netherlands,
Switzerland, Italy and Austria and its indirect South American subsidiaries in
Colombia, Argentina and Venezuela.
<TABLE>
<CAPTION>
As of April 28, 1998
------------------------------------------------------------------------------------------------
CDRJ Acquisition Corp. Guarantor
------------------------------ Jafra Guarantor
Guarantor Nonguarantor Cosmetics CDRJ
Parent European International, Investments Nonguarantor Total
only Subsidiaries Total S.A. de C.V. (Lux) S.A. Subsidiaries Eliminations Consolidated
--------- ------------ ------- -------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash.................... 1,000 69,933 70,933 -- -- 172,865 -- 243,798
Investment in Subs...... 242,798 -- 242,798 -- -- -- (242,798) --
Liabilities............. -- -- -- -- -- -- --
Stockholder's Equity.... 243,798 69,933 313,731 -- -- 172,865 (242,798) 243,798
</TABLE>
4. Stockholders' Equity
Additional paid-in capital has been reduced by a $25,000 receivable from
Fund V resulting from the initial capitalization of the Parent. The
shareholders purchased 20,000 shares for $40,000 of which $15,000 was paid and
$25,000 is receivable from the shareholders. In addition, the shareholders
contributed $228,798, which has been included in additional paid-in capital.
5. Subsequent Event--Financing
On April 30, 1998, the U.S. Issuer, an indirect wholly-owned subsidiary of
the Parent, and Jafra S.A., a related Company, borrowed $140 million by
issuing $100 million aggregate principal amount of 11 3/4% Subordinated Notes
due 2008 (the "Notes") pursuant to an Indenture dated April 30, 1998 (the
"Indenture") and $40 million under a Senior Credit Agreement.
The Notes represent the several obligation of the U.S. Issuer and Jafra S.A.
in the amount of $60 million and $40 million, respectively, with each
participating on a pro rata basis upon redemption. The Notes mature in 2008
and bear a fixed interest rate of 11.75% payable semi-annually.
F-25
<PAGE>
Each Issuer has fully and unconditionally guaranteed the obligations under
the Notes of the other on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. In addition, Parent
has fully and unconditionally guaranteed the Notes on a senior subordinated
basis. The U.S. Issuer currently has no U.S. subsidiaries. Each acquired or
organized U.S. subsidiary of the U.S. Issuer will fully and unconditionally
guarantee the Notes jointly and severally, on a senior subordinated basis.
Each existing subsidiary of Jafra S.A. fully and unconditionally guarantees
the Notes jointly and severally, on a senior subordinated basis, and each
subsequently acquired or organized subsidiary of Jafra S.A. will fully and
unconditionally guarantee the Notes jointly and severally, on a senior
subordinated basis. The nonguarantor entities are the Parent's indirect
European subsidiaries in Germany, the Netherlands, Switzerland, Italy and
Austria and its indirect South American subsidiaries in Colombia, Argentina
and Venezuela. All guarantor and nonguarantor entities are either direct or
indirect wholly owned subsidiaries of the Parent.
The Notes are unsecured and are generally non-callable for five years.
Thereafter, the Notes will be callable at premiums declining to par in the
eighth year. Prior to May 1, 2001, the issuers at their option may
concurrently redeem the Notes on a pro rata basis in an aggregate principal
amount equal to up to 35% of the original aggregate principal amount of the
Notes not exceeding the aggregate cash proceeds of one or more equity
offerings, at a redemption price of 111.75% plus accrued interest. The Notes
are required to be registered in a registered exchange offer under the
Securities Act of 1933. Failure to exchange the existing Notes for Notes
registered under the Securities Act of 1933 within approximately 270 days from
the effective date of the Acquisition will cause an increase of up to 0.5% in
the interest rate required to be paid by the Issuers.
In addition, the Issuers entered into a Senior Credit Agreement that
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a multicurrency revolving credit facility of $65
million (the "Revolving Credit Facility") and a term loan facility of $25
million (the "Term Loan Facility"). Borrowings under the Term Loan Facility
are payable in quarterly installments of principal and interest over 6 years.
Borrowings under the Revolving Credit Facility mature on April 30, 2004.
Borrowings under the Senior Credit Agreement bear interest at an annual rate
of LIBOR plus a margin not to exceed 2.625% or an alternate base rate (the
higher of the prime rate and the federal funds rate plus 1%, plus an
applicable margin not to exceed 1.625%). The interest rate at April 30, 1998
was 8.34% per annum.
Both the Indenture and the Senior Credit Agreement contain certain covenants
which limit the Issuers' ability to incur additional indebtedness, pay cash
dividends and make certain other payments and require the Issuers to maintain
certain financial ratios including a minimum EBITDA to cash interest expense
coverage ratio and a maximum debt to EBITDA ratio.
6. Subsequent Event--Acquisition
On April 30, 1998, the Parent acquired the Jafra Business, pursuant to which
(i) Jafra Cosmetics International, Inc. a California corporation, merged with
the U.S. Issuer, with the U.S. Issuer as the surviving entity and assuming the
name Jafra Cosmetics International, Inc. (ii) Jafra S.A. acquired all of the
outstanding capital stock of Grupo Jafra, S.A. de C.V. which was then merged
with and into Jafra S.A. (iii) indirect subsidiaries of the Parent purchased
the stock of Gillette subsidiaries conducting the Jafra Business in Germany,
Italy, the Netherlands and Switzerland; and (iv) indirect subsidiaries of the
Parent acquired from various Gillette subsidiaries certain assets used in the
Jafra Business in Austria, Argentina, Colombia and Venezuela. The Acquisition
will be accounted for as a purchase business combination.
F-26
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1998 (Unaudited)
(In Thousands Except Share Amounts)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents.......................................... $ 10,443
Receivables, less allowance for doubtful accounts of $2,091........ 29,224
Inventories (Note 3)............................................... 41,429
Prepaid taxes...................................................... 10,365
Prepaid expenses and other current assets.......................... 6,981
--------
Total current assets............................................. 98,442
Property, plant and equipment, net (Note 4).......................... 55,756
Other assets:
Goodwill, net (Note 5)............................................. 69,914
Trademarks, net (Note 5)........................................... 53,594
Deferred financing fees and other (Notes 2 and 8).................. 17,288
--------
Total............................................................ $294,994
========
Liabilities And Stockholders' Equity
Current liabilities:
Short-term notes payable to bank (Note 8).......................... $ 2,100
Accounts payable and accrued liabilities (Note 6).................. 61,848
Income taxes payable (Note 7)...................................... 1,874
--------
Total current liabilities........................................ 65,822
Long-term debt (Note 8):
Revolving credit facility.......................................... 20,700
Term loan facility................................................. 23,100
Senior subordinated notes.......................................... 100,000
--------
Total long-term debt............................................. 143,800
Deferred income taxes.............................................. 6,735
Other long-term liabilities........................................ 1,920
--------
Total liabilities................................................ 218,277
--------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, par value $2.00; authorized, 1,020,000 shares; issued
and outstanding, 829,940 shares................................... 1,660
Additional paid-in capital......................................... 81,275
Accumulated deficit................................................ (6,065)
Cumulative foreign currency translation............................ (153)
--------
Total stockholders' equity....................................... 76,717
--------
Total............................................................ $294,994
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited) (In Thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------
Five Months Four Months Nine Months
Ended Ended Ended
September 30, April 30, September 30,
1998 1998 1997
------------- ----------- -------------
<S> <C> <C> <C>
Net sales.............................. $98,616 $77,282 $162,644
Cost of sales.......................... 29,464 20,322 41,092
------- ------- --------
Gross profit........................... 69,152 56,960 121,552
Selling, general and administrative
expenses.............................. 65,778 51,519 107,169
------- ------- --------
Income from operations................. 3,374 5,441 14,383
Other (expense) income:
Exchange gain (loss)................. (1,280) 1,376 (512)
Interest, net (Note 8)............... (7,234) 78 852
Other, net........................... (94) 104 (77)
------- ------- --------
Income (loss) before income taxes...... (5,234) 6,999 14,646
Provision for income taxes (Note 7).... 831 2,899 3,486
------- ------- --------
Net income (loss)...................... $(6,065) $ 4,100 $ 11,160
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-28
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Predecessor
-----------------------
Four
Five Months Months Nine Months
Ended Ended Ended
September 30, April 30, September 30,
1998 1998 1997
------------- --------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ (6,065) $ 4,100 $11,160
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 2,981 1,363 2,753
Amortization of deferred financing
fees................................. 630
Gain on disposal of property and
equipment............................ (95)
Deferred income taxes................. 2,215 3,211 5,204
Change in assets and liabilities:
(Increase) decrease in:
Receivables......................... (8,870) (2,063) 2,883
Inventories......................... (2,026) (512) (1,059)
Prepaid expenses and other current
assets............................. (10,779) (7,457) (1,882)
Other assets........................ (601) 3,948 1,569
Increase (decrease) in:
Accounts payable and accrued
liabilities........................ 19,250 (7,144) 2,195
Income taxes payable................ 2,340 (3,083) (4,698)
Other long-term liabilities......... 568 (408) (21)
-------- ------- -------
Net cash provided by (used in)
operating activities............. (357) (8,045) 18,009
-------- ------- -------
Cash flows from investing activities:
Purchase of Jafra Business, net of cash
received of $2,339..................... (184,732)
Withholding taxes on purchase price..... (12,929)
Acquisition fees........................ (5,355)
Purchases of marketable securities...... (97)
Proceeds from sale of property and
equipment.............................. 2,917 5,900 649
Purchases of property and equipment..... (4,555) (3,213) (3,747)
-------- ------- -------
Net cash provided by (used in)
investing activities............. (204,654) 2,590 (3,098)
-------- ------- -------
Cash flows from financing activities:
Dividends paid to Gillette.............. (3,270)
Capital contributions by Gillette....... 5,013 1,348
Transactions with Gillette and other
divisions.............................. (13,792) (15,166)
Proceeds from issuance of subordinated
debt................................... 100,000
Proceeds from revolving credit facility. 20,700
Proceeds from term loan................. 25,000
Contribution of equity.................. 82,707
Financing fees.......................... (11,645)
-------- ------- -------
Net cash provided by (used in)
financing activities............. 216,762 (8,779) (17,088)
-------- ------- -------
Effect of exchange rate changes on cash... (1,536) (333) (142)
Effect of accounting calendar change on
cash (Note 1)............................ 6,276
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents.............................. 10,215 (8,291) (2,319)
Cash and cash equivalents at beginning of
period................................... 228 10,231 8,662
-------- ------- -------
Cash and cash equivalents at end of
period................................... $ 10,443 $ 1,940 $ 6,343
======== ======= =======
Supplemental disclosure of cash flow
information..............................
Cash paid during the year for:
Interest.............................. $ 3,011 $ 501 $ 1,000
Income taxes.......................... 6 4,135 1,775
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
As described in Note 11, certain intercompany balances between Gillette and
the Company were forgiven at April 30, 1998. The following sets forth the
amount of such balances, which were accounted for as direct contributions to
(reductions from) equity (amounts in thousands):
<TABLE>
<S> <C>
Intercompany Accounts Payable................................... $26,722
Intercompany Accounts Receivable................................ (20,990)
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme (the "Parent"),
CDRJ Acquisition Corporation (to be renamed Jafra Cosmetics International,
Inc.), a Delaware corporation ("JCI"), Jafra Cosmetics International, S.A. de
C.V. a sociedad anonima de capital variable organized under the laws of the
United Mexican States ("Jafra S.A.") and certain other subsidiaries of the
Parent were organized by Clayton, Dubilier & Rice Fund V Limited Partnership,
a Cayman Islands exempted limited partnership managed by Clayton, Dubilier &
Rice, Inc. ("CD&R") to acquire (the "Acquisition") the worldwide Jafra
Cosmetics business (the "Jafra Business") of The Gillette Company
("Gillette"). JCI and Jafra S.A. are indirect, wholly owned subsidiaries of
the Parent. The Parent is a holding company that conducts all its operations
through its subsidiaries. The Parent and its subsidiaries are collectively
referred to as the "Company". On April 30, 1998 pursuant to an acquisition
agreement (the "Acquisition Agreement") between the Parent, certain of its
subsidiaries and Gillette, (i) Jafra Cosmetics International Inc., a
California corporation merged with JCI, with JCI as the surviving entity, (ii)
Jafra S.A. acquired the stock of Grupo Jafra, S.A. de C.V., a Mexican Company
("Grupo Jafra"), which merged with and into Jafra S.A. following the
consummation of the acquisition, with Jafra S.A. as the surviving entity,
(iii) indirect subsidiaries of the Parent purchased the stock of Gillette
subsidiaries conducting the Jafra Business in Germany, Italy, the Netherlands
and Switzerland; and (iv) indirect subsidiaries of the Parent, acquired from
various Gillette subsidiaries certain assets used in the Jafra Business in
Austria, Argentina, Colombia and Venezuela. The Predecessor's financial
statements include the divested operations principally in Portugal, Spain,
Brazil and the United Kingdom; however, Parent did not acquire these divested
operations as part of the Jafra Business.
The purchase price for the Jafra Business of approximately $210.0 million
(excluding $16.5 million of financing fees and expenses) includes $202.5
million in cash, (including the purchase price adjustment discussed below) and
an estimated $7.5 million of direct costs. The $202.5 million cash purchase
price includes $187.1 paid by the Company directly to Gillette in cash at the
closing date, (net of cash of $2.4 received as part of the Acquisition), and
$12.9 of withholding taxes paid by the Company on behalf of Gillette
subsequent to the closing date of the Acquisition. In addition, on November 3,
1998, the Company paid Gillette an additional $2.5 million (net of a
receivable from Gillette of $5.1 million) as a final adjustment of the
purchase price. The $7.5 million of direct costs are being accounted for as an
increase to goodwill, and have been reflected in the preliminary purchase
price allocation below. The Acquisition has been accounted for under the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets and liabilities acquired based upon estimates of their
respective fair values at the date of acquisition based on valuations and
other studies that have not yet been finalized. A preliminary allocation of
the purchase price has been made to major categories of assets and liabilities
based on Company estimates. The actual allocation of purchase cost and the
resulting effect on income from operations may differ significantly from the
preliminary amounts included herein. Although the final allocation has not yet
been determined, the following sets forth certain preliminary allocations
(amounts in thousands):
<TABLE>
<S> <C>
Net tangible assets acquired.............................................. $ 74.8
Allocation of excess purchase price:
Property, plant and equipment........................................... 18.4
Deferred income tax liability........................................... (0.6)
Accrual of restructuring/rationalization costs.......................... (4.0)
Inventory............................................................... (1.5)
Other assets............................................................ (0.4)
Trademarks.............................................................. 53.8
Goodwill................................................................ 69.5
------
Total................................................................. $210.0
======
</TABLE>
F-30
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
In conjunction with the Acquisition, the Company recorded a $4 million
accrual for restructuring and rationalization costs. Management is currently
planning the closure of certain distribution facilities and related
termination of certain employees. The following is a preliminary schedule of
the planned restructuring activities, and related costs:
<TABLE>
<CAPTION>
Facility Severance Total
Costs Costs Costs
-------- --------- -----
<S> <C> <C> <C>
Costs expected to be incurred prior to
December 31, 1998:............................. $0.1 $1.2 $1.3
Costs expected to be incurred between January 1,
1999 and April 30, 1999:....................... 1.0 1.7 2.7
---- ---- ----
$1.1 $2.9 $4.0
==== ==== ====
</TABLE>
No amounts were charged against this accrual through September 30, 1998 and
the amount of the accrual has not been adjusted subsequent to the closing date
of the Acquisition. The Company expects to complete these restructuring
activities by April 30, 1999. As of December 31, 1997, the Predecessor had a
restructuring reserve of $290,000, which was fully utilized during the nine
months ended September 30, 1998.
The accompanying consolidated financial statements as of and for the five
months ended September 30, 1998 reflect the operations of the Parent and its
subsidiaries. The accompanying combined financial statements for the four
months ended April 30, 1998 and the nine months ended September 30, 1997,
reflect the operations of the Jafra Business prior to the Acquisition and are
referred to as the "Predecessor" operations. Because of the debt financing
incurred in connection with the Acquisition, the exclusion of certain assets
and liabilities not acquired and the adjustments made to allocate the excess
of the aggregate purchase price over the historical value of the net assets
acquired, the accompanying financial statements of the Parent and its
subsidiaries are not directly comparable to those of the Predecessor.
The accompanying financial statements for the nine months ended September
30, 1997 include the operating results of the Predecessor's foreign
subsidiaries for the nine months ended August 31, 1997. Beginning January 1,
1998, the reporting period for the foreign operations was changed from a
fiscal year ending November 30 to a calendar year ending December 31. The line
item denoted "Effect of accounting calendar change on cash" in the
consolidated statements of cash flows represents the change in the cash
balance of the Company's foreign operations from November 30, 1997 to December
31, 1997. The results of operations for the period December 1, through
December 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Net sales......................................................... $ 9,619
Gross profit...................................................... 7,201
Loss from operations.............................................. 727
Income taxes...................................................... 470
Net loss.......................................................... 1,197
</TABLE>
The following pro forma information gives effect to certain adjustments
including depreciation expense, amortization of goodwill, trademarks and
deferred financing costs, CD&R management fees, executive compensation,
insurance expense, interest expense on acquisition debt, and the related
income tax effect of the foregoing adjustments as if the transaction had
occurred at the beginning of the periods presented (in thousands):
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net sales..................................... $175,898 $162,644
Net loss...................................... $ (6,565) $ (2,340)
</TABLE>
F-31
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
The pro forma information presented above does not purport to represent what
the Company's actual results of operations would have been had the transaction
occurred as of the beginning of the periods presented and is not intended to
be a projection of future results or trends.
2. Summary of Significant Accounting Policies
Interim Financial Statements--The interim consolidated financial data for
the five months ended September 30, 1998, and the combined financial data for
the four months ended April 30, 1998, and the nine months ended September 30,
1997 is unaudited. This information reflects all adjustments, consisting of
normal recurring adjustments, that in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods indicated. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the
full year. The interim financial statements should be read in conjunction with
the audited financial statements presented for the years ended December 31,
1997, 1996, and 1995.
Deferred Financing Costs--In connection with the acquisition of the Jafra
Business, the Company incurred approximately $16.5 million of fees and
expenses related to the Senior Subordinated Notes Offering, the Revolving
Credit Facility and the Term Loan Facility (see Note 8). Such costs are being
amortized on a basis that approximates the interest method over the expected
terms of the debt.
New Accounting Standards--In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosure about Segments of an Enterprise and Related Information." The
Company is required to adopt this statement as of December 31, 1998. SFAS No.
131 requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operations and major customers. The
Company has not analyzed the impact of adopting this statement.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Post Retirement Benefits." SFAS No. 132 requires disclosure
of certain information regarding pensions and other post retirement benefits.
The effect of adopting this statement will not be material to the Company's
consolidated financial statements.
In March 1998, the AICPA's Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed for Internal Use." SOP 98-1 provides guidance
on the capitalization of software for internal use. Effective as of January 1,
1998, the Company adopted the SOP, which had no material impact on the
Company's financial statements.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Cost of Start-Up
Activities." SOP 98-5 requires that all the costs of start-up activities,
including organizational costs, be expensed as incurred. The Company adopted
SOP 98-5 effective as of May 1, 1998. The effect of adopting this SOP was not
material to the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement will be effective January
1, 2000. The Company has not yet analyzed the impact of adopting the
statement.
F-32
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes new standards for reporting and displaying
comprehensive income, its components and accumulated balances. A
reconciliation of net income as reported and comprehensive income for the
periods presented is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
-------------------------
Five Months Four Months Nine Months
Ended Ended Ended
September 30, April 30, September 30,
1998 1998 1997
------------- ----------- -------------
<S> <C> <C> <C>
Net income (loss) as reported ... $(6,065) $4,100 $11,160
Foreign currency translation ad-
justment........................ (153) (333) (142)
------- ------ -------
Comprehensive income (loss) ..... $(6,218) $3,767 $11,018
======= ====== =======
</TABLE>
3. Inventories
Inventories consist of the following at September 30, 1998 (amounts in
thousands):
<TABLE>
<S> <C>
Raw materials and supplies....................................... $ 8,085
Work in process.................................................. 113
Finished goods................................................... 33,231
-------
Total inventories................................................ $41,429
=======
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following at September 30, 1998
(amounts in thousands):
<TABLE>
<S> <C>
Land............................................................. $20,126
Buildings........................................................ 16,597
Machinery and equipment.......................................... 20,980
-------
57,703
Less accumulated depreciation.................................... (1,947)
-------
Property, plant and equipment, net............................... $55,756
=======
</TABLE>
5. Other Assets
Amounts included in goodwill and trademarks result from the Company's
acquisition of the Jafra Business from Gillette. Such amounts are being
amortized over their estimated useful lives of 40 years. Accumulated
amortization of goodwill and trademarks at September 30, 1998 was $754,000 and
$507,000, respectively.
F-33
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following at
September 30, 1998 (amounts in thousands):
<TABLE>
<S> <C>
Accounts payable................................................. $31,812
Advertising and sales promotion.................................. 9,371
Accrued restructuring/rationalization costs...................... 4,000
Accrued interest................................................. 5,733
Payroll and payroll taxes........................................ 2,288
State and local sales taxes...................................... 1,646
Miscellaneous.................................................... 6,998
-------
$61,848
=======
</TABLE>
The accrual for restructuring/rationalization costs represents non-recurring
charges the Company estimates that it will incur prior to April 30, 1999 to
rationalize certain distribution and administrative functions.
7. Income Taxes
The actual income tax rate differs from the "expected" tax rate (computed by
applying the U.S. federal corporate rate of 35% to income before taxes) for
the five months ended September 30, 1998 principally as a result of valuation
allowances applied to losses of JCI and certain foreign subsidiaries, and non-
deductible goodwill in certain foreign subsidiaries (principally Mexico).
8. Long Term Debt
On April 30, 1998, JCI and Jafra S.A. (collectively, the "Issuers") borrowed
$140.0 million by issuing $100 million aggregate principal amount of 11 3/4%
Subordinated Notes due 2008 (the "Notes") pursuant to an Indenture dated April
30, 1998 (the "Indenture") and $40 million under a Senior Credit Agreement.
The Notes represent the several obligation of JCI and Jafra S.A. in the
amount of $60 million and $40 million, respectively, with each participating
on a pro rata basis upon redemption. The Notes mature in 2008 and bear a fixed
interest rate of 11.75% payable semi-annually.
Each Issuer is an indirect, wholly owned subsidiary of the Parent and Parent
has fully and unconditionally guaranteed the obligations under the Notes on a
senior subordinated basis on the terms provided in the Indenture governing the
Notes. Each Issuer's obligations will also be fully and unconditionally
guaranteed by the other Issuer on a senior subordinated basis on the terms
provided in the Indenture, including a 30-day standstill period prior to
enforcement of such guarantees. In addition, Parent has fully and
unconditionally guaranteed the Notes on a senior subordinated basis. JCI
currently has no U.S. subsidiaries. Each acquired or organized U.S. subsidiary
of JCI will fully and unconditionally guarantee the Notes jointly and
severally, on a senior subordinated basis. Each existing subsidiary of Jafra
S.A. fully and unconditionally guarantees the Notes jointly and severally, on
a senior subordinated basis, and each subsequently acquired or organized
subsidiary of Jafra S.A. will fully and unconditionally guarantee the Notes
jointly and severally, on a senior subordinated basis. The nonguarantor
entities are the Parent's indirect European subsidiaries in Germany, the
Netherlands, Switzerland, Italy and Austria and its indirect South American
subsidiaries in Colombia, Argentina and Venezuela. All guarantor and
nonguarantor entities are either direct or indirect wholly owned subsidiaries
of the Parent.
The Notes are unsecured and are generally non-callable for five years.
Thereafter, the Notes will be callable at premiums declining to par in the
eighth year. Prior to May 1, 2001, the Issuers at their option may
concurrently redeem the Notes on a pro rata basis in an aggregate principal
amount equal to up to 35% of the original
F-34
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
aggregate principal amount of the Notes not exceeding the aggregate cash
proceeds of one or more equity offerings, at a redemption price of 111.75%
plus accrued interest. The Notes are required to be registered in a registered
exchange offer under the Securities Act of 1933. Failure to exchange the
existing Notes for Notes registered under the Securities Act of 1933 within
approximately 270 days from the effective date of the Acquisition will cause
an increase of up to 0.5% in the interest rate required to be paid by the
Issuers.
In addition, the Issuers entered into a Senior Credit Agreement that
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a multicurrency revolving credit facility of $65
million (the "Revolving Credit Facility") and a term loan facility of $25
million (the "Term Loan Facility"). Borrowings under the Term Loan Facility
are payable in quarterly installments of principal and interest over 6 years.
Borrowings under the Revolving Credit Facility mature on April 30, 2004.
Borrowings under the Senior Credit Agreement bear interest at an annual rate
of LIBOR plus a margin not to exceed 2.625% or an alternate base rate (the
higher of the prime rate and the federal funds rate plus 1%, plus an
applicable margin not to exceed 1.625%). The interest rate at April 30, 1998
was 8.34% per annum. At September 30, 1998, the Company had approximately
$44.3 million available under the Revolving Credit Facility.
Both the Indenture and the Senior Credit Agreement contain certain covenants
which limit the Issuer's ability to incur additional indebtedness, pay cash
dividends and make certain other payments and require the Issuers to maintain
certain financial ratios including a minimum EBITDA to cash interest expense
coverage ratio and a maximum debt to EBITDA ratio.
9. Commitments and Contingencies
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operation.
10. Management Incentive Arrangements
The Company has adopted a stock incentive plan (the "Stock Incentive Plan"),
providing for the sale to members of senior management of up to 52,141 shares
of common stock of the Parent and the issuance of options to purchase up to
104,282 additional shares of common stock. As of September 30, 1998, 39,340
shares have been sold subject to the Stock Incentive Plan. The purchase price
of such shares was $100 per share, which represents the fair market value of
each share based on the aggregate equity value of Parent upon consummation of
the Acquisition.
A portion of the cash purchase price of the shares acquired by members of
management was financed by loans from the Chase Manhattan Bank on market
terms. To help members of senior management obtain such terms for such
financing, the Company fully and unconditionally guaranteed up to 75% of the
purchase price for the shares of Parent common stock purchase by each such
member of management.
In connection with the purchase of common stock of the Parent, as of
September 30, 1998 each senior executive officer has been granted options to
purchase two additional shares of common stock for each share purchased at not
less than the fair market value at the date of grant. As of September 30,
1998, there were 25,602 additional options available for grants. Options
covering one-half of the shares are expected to vest in three equal
installments on the first three anniversaries of the date of grant, subject to
the senior executive's continued employment. The remaining options covering
50% of the shares vest on the ninth anniversary of such senior executive
officer's employment if such executive is employed on such date. Such options
may vest at an earlier date if the Company achieves certain annual and/or
cumulative EBITDA targets that are expected to be specified in the agreements
pursuant to which such options are granted.
F-35
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
In addition, certain senior executive officers have employment agreements
which provide for annual bonuses if the Company achieves the performance goals
established under its annual incentive plan for executives.
11. Transactions with Affiliates
CD&R received a fee of $2.7 million, which was recorded as a direct
acquisition cost, for providing services related to the structuring,
implementation and consummation of the acquisition of the Jafra Business, in
addition to the reimbursement of out-of-pocket expenses. Pursuant to a
consulting agreement entered into following the acquisition, until the 10th
anniversary of the acquisition or the date on which CD&R Fund V no longer has
an investment in the Company, CD&R will receive an annual fee of $500,000 (and
reimbursement of out-of-pocket expenses) for providing advisory, management
consulting and monitoring services to the Company. In addition, certain
officers and directors of CD&R or its affiliates serve as directors of the
Company. Certain directors and other persons purchased an aggregate of 21,000
shares of common stock in connection with the Transaction as of September 30,
1998.
In April of 1998, the Company sold land in Mexico to Gillette with a book
value of approximately $6 million for $12 million. The excess of the sales
price over the book value of the land, net of taxes, was recorded as a
contribution of capital from Gillette to the Company. Prior to the Closing
Date of the Acquisition, intercompany accounts receivable and accounts payable
between Jafra entities and Gillette were forgiven, and as such were accounted
for as direct reductions from (additions to) equity, respectively.
Certain expenses were charged by Gillette to the Company prior to the
Acquisition. Management believes the amounts and methods of allocation are
reasonable and approximate actual services provided. The allocations are based
principally upon a formula using the percentage of revenues of the Company to
the total consolidated revenues of Gillette. Management performs regular
reviews of the allocated costs and has determined that the cost of these
services to the Company, as if it were a stand-alone entity, would be
comparable to the costs allocated to it by Gillette. Such services included
legal, trademark and patent support, internal audit, and other administrative
costs. Total related net charges were $1,482,000 and $749,000 in the nine
months ended September 30, 1997 and the four months ended April 30, 1998,
respectively. Such charges are included in selling, general, and
administrative expenses in the accompanying consolidated statements of
operations. Such allocations ceased upon consummation of the Acquisition, and,
as such, no amounts are included for the five months ended September 30, 1998.
Interest was charged and earned on intercompany receivables and payables
between Gillette and the Company at the LIBOR rate prior to the Acquisition.
The total related interest was $275,000 and $152,000 in the nine months ended
September 30, 1997 and the four months ended April 30, 1998, respectively, and
is included in interest, net, in the accompanying consolidated statements of
operations.
The Company recognized profit on the sale of inventory to Gillette of
$90,000 and $157,000 in the nine months ended September 30, 1997 and the four
months ended April 30, 1998, respectively.
Gillette acted as a cash manager for the Company prior to the Acquisition.
As such, balances due to/from Gillette and other divisions consist of amounts
related to this and to the above transactions.
12. Supplemental Information
The consolidating financial statement data, as of September 30, 1998, and
for the five months ended September 30, 1998 has been aggregated by the
Guarantor entities, JCI and Jafra S.A. and the Nonguarantor entities. Prior to
the Acquisition, JCI and Jafra S.A. were Jafra Cosmetics International, Inc.,
a California corporation, and Grupo Jafra, respectively, as defined below. The
Nonguarantor entities are the Parent's indirect European subsidiaries in
Germany, the Netherlands, Switzerland, Italy and Austria and its indirect
South American subsidiaries in Colombia, Argentina and Venezuela.
F-36
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
The combined financial statements of the Predecessor for the four months
ended April 30, 1998, and the nine months ended September 30, 1997 include the
accounts of the following subsidiaries of Gillette: Jafra Cosmetics
International, Inc., a California corporation (the Guarantor entity); Jafra
Cosmetics GmbH, a German company; Jafra Cosmetic International B.V., a
Netherlands company; Jafra Cosmetics S.p.A., an Italian company; Jafra
Cosmetics A.G., a Swiss company; the Jafra related operations of a Gillette
affiliate in Austria; and the assets related to the Jafra intellectual
properties, held by Gillette, that are used in the Jafra business
(collectively, the Nonguarantor entities). Additionally, the combined
financial statements of Grupo Jafra include the accounts of Grupo Jafra and
all of its subsidiaries together with certain operating assets and the related
operating profit of Gillette Braun used in the Jafra business in Mexico and
the assets related to the Jafra intellectual properties held by Gillette.
Prior to the Acquisition, Jafra's operations in Argentina, Venezuela and
Colombia were not separate subsidiaries of the Company, but rather divisions
of Gillette subsidiaries that also conducted operations unrelated to the Jafra
business. The accompanying financial statements include only the carved out
financial statements related to the Jafra business of the South American
entities. As such, for the four months ended April 30, 1998 and the nine
months ended September 30, 1997, the results of operations and cash flows of
the Jafra business in these countries and the immaterial results of operations
and cash flows of certain markets divested by Jafra prior to the Acquisition
are presented in the column denoted "Other Regions."
<TABLE>
<CAPTION>
Five months ended September 30, 1998
-------------------------------------------------------------------
Guarantor Entities
--------------------------- Nonguarantor Total
JCI Jafra S.A. Total Entities Eliminations Consolidated
------- ---------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $30,578 $46,113 $76,691 $21,925 -- $98,616
Cost of sales........... 7,878 15,555 23,433 6,031 -- 29,464
------- ------- ------- ------- ----- -------
Gross profit............ 22,700 30,558 53,258 15,894 -- 69,152
Selling, general and
administrative
expenses............... 20,980 24,986 45,966 19,812 -- 65,778
------- ------- ------- ------- ----- -------
Income (loss) from
operations............. 1,720 5,572 7,292 (3,918) -- 3,374
Other (income) expense.. 4,214 4,198 8,412 (10) 206 8,608
------- ------- ------- ------- ----- -------
Income (loss) before
income taxes........... (2,494) 1,374 (1,120) (3,908) (206) (5,234)
Income taxes (benefit).. -- 1,201 1,201 (370) -- 831
------- ------- ------- ------- ----- -------
Net income (loss)....... $(2,494) $ 173 $(2,321) $(3,538) $(206) $(6,065)
======= ======= ======= ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
Four months ended April 30, 1998
------------------------------------------------------------------------
Guarantor Entities
---------------------------- Nonguarantor Other Total
JCI Grupo Jafra Total Entities Regions Eliminations Combined
------- ----------- ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $23,611 $35,722 $59,333 $13,047 $4,902 -- $77,282
Cost of sales........... 6,415 9,984 16,399 2,962 856 105 20,322
------- ------- ------- ------- ------ ---- -------
Gross profit............ 17,196 25,738 42,934 10,085 4,046 (105) 56,960
Selling, general and
administrative
expenses............... 16,783 20,201 36,984 10,743 3,792 -- 51,519
------- ------- ------- ------- ------ ---- -------
Income (loss) from
operations............. 413 5,537 5,950 (658) 254 (105) 5,441
Other (income) expense.. 864 (2,791) (1,927) 353 16 -- (1,558)
------- ------- ------- ------- ------ ---- -------
Income (loss) before
income taxes........... (451) 8,328 7,877 (1,011) 238 (105) 6,999
Income taxes ........... 1 2,524 2,525 374 -- -- 2,899
------- ------- ------- ------- ------ ---- -------
Net income (loss)....... $ (452) $ 5,804 $ 5,352 $(1,385) $ 238 (105) $ 4,100
======= ======= ======= ======= ====== ==== =======
</TABLE>
F-37
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
-----------------------------------------------------------------------------
Guarantor Entities
---------------------------- Nonguarantor Other Total
JCI Jafra S.A. Total Entities Regions Eliminations Consolidated
------- ---------- -------- ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $50,462 $67,979 $118,441 $33,644 $10,559 $ -- $162,644
Cost of sales........... 13,850 17,592 31,442 6,807 2,666 177 41,092
------- ------- -------- ------- ------- ------- --------
Gross profit............ 36,612 50,387 86,999 26,837 7,893 (177) 121,552
Selling, general and
administrative
expenses............... 33,329 37,751 71,080 27,856 9,233 (1,000) 107,169
------- ------- -------- ------- ------- ------- --------
Income (loss) from
operations............. 3,283 12,636 15,919 (1,019) (1,340) 823 14,383
Other (income) expense.. (470) (218) (688) 424 -- 1 (263)
------- ------- -------- ------- ------- ------- --------
Income (loss) before
income taxes........... 3,753 12,854 16,607 (1,443) (1,340) 822 14,646
Income taxes ........... 947 2,538 3,485 -- 1 -- 3,486
------- ------- -------- ------- ------- ------- --------
Net income (loss)....... $ 2,806 $10,316 $ 13,122 $(1,443) $(1,341) $ 822 $ 11,160
======= ======= ======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1998
---------------------------------------------------------------------------
Guarantor Entities
------------------------------------ Nonguarantor Total
JCI Jafra S.A. Parent Total Entities Eliminations Consolidated
-------- ---------- ------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables............ $ 8,306 $ 14,531 $ -- $ 22,837 $ 5,908 $ 479 $ 29,224
Inventories............ 16,476 15,340 -- 31,816 9,613 -- 41,429
Other current assets... 23,724 14,835 4,032 42,591 10,312 (25,114) 27,789
-------- -------- ------- -------- ------- --------- --------
Total current assets... 48,506 44,706 4,032 97,244 25,833 (24,635) 98,442
Property, plant and
equipment.............. 25,519 27,548 -- 53,067 2,689 -- 55,756
Other assets:
Goodwill, net.......... 32,471 26,271 50 58,792 11,122 -- 69,914
Trademarks............. 20,781 26,719 200 47,700 5,894 -- 53,594
Other.................. 16,401 5,943 72,485 94,829 1,053 (78,594) 17,288
-------- -------- ------- -------- ------- --------- --------
Total.................. $143,678 $131,187 $76,767 $351,632 $46,591 $(103,229) $294,994
======== ======== ======= ======== ======= ========= ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and
accrued expenses...... $ 26,440 $ 22,787 $ -- $ 49,227 $12,621 $ -- $ 61,848
Other current
liabilities........... 1,197 8,107 50 9,354 19,255 (24,635) 3,974
-------- -------- ------- -------- ------- --------- --------
Total current
liabilities........... 27,637 30,894 50 58,581 31,876 (24,635) 65,822
Total long term debt.... 84,600 59,200 -- 143,800 -- -- 143,800
Other liabilities....... -- 6,735 -- 6,735 1,920 -- 8,655
-------- -------- ------- -------- ------- --------- --------
Total liabilities....... 112,237 96,829 50 209,116 33,796 (24,635) 218,277
Stockholders' equity.... 31,441 34,358 76,717 142,516 12,795 (78,594) 76,717
-------- -------- ------- -------- ------- --------- --------
Total................... $143,678 $131,187 $76,767 $351,632 $46,591 $(103,229) $294,994
======== ======== ======= ======== ======= ========= ========
</TABLE>
F-38
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Five Months Ended September 30, 1998
----------------------------------------------------------------------------------
Guarantor Entities
------------------------------------------- Nonguarantor Total
JCI Jafra S.A. Parent Total Entities Eliminations Consolidated
--- ---------- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating Activities... $(6,642) $ 5,331 $ 28 $ (1,283) $ 906 20 $ (357)
Investing Activities... (87,758) (93,190) -- (180,948) (23,706) -- (204,654)
Financing Activities... 94,825 89,452 4,004 188,281 28,481 -- 216,762
Effect of Exchange rate
changes on cash........ -- -- -- -- (1,516) (20) (1,536)
Cash at beginning of pe-
riod................... -- -- -- -- 228 -- 228
------- ------- -------- --------- -------- ------- ---------
Cash at end of period... $ 425 $ 1,593 $ 4,032 $ 6,050 $ 4,393 -- $ 10,443
======= ======= ======== ========= ======== ======= =========
<CAPTION>
Four Months Ended April 30, 1998
---------------------------------------------------------------------
Guarantor Entities
----------------------------- Nonguarantor Other Total
JCI Grupo Jafra Total Entities Regions Eliminations Combined
--- ----------- ----- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating Activities... $ 1,361 $(7,425) $ (6,064) $ (7,860) $ 5,879 -- $ (8,045)
Investing Activities... (528) 546 18 (242) 2,814 -- 2,590
Financing Activities... (1,138) (6,232) (7,370) 7,276 (8,685) -- (8,779)
Effect of Exchange rate
changes on cash........ -- (181) (181) 364 (516) -- (333)
Effect of Accounting
Calendar change on cash
(Note 1)............... -- 6,358 6,358 (82) -- -- 6,276
Cash at beginning of pe-
riod................... 759 7,458 8,217 1,370 644 -- 10,231
------- ------- -------- --------- -------- ------- ---------
Cash at end of period... $ 454 $ 524 $ 978 $ 826 $ 136 -- $ 1,940
======= ======= ======== ========= ======== ======= =========
<CAPTION>
Nine Months Ended September 30, 1997
---------------------------------------------------------------------
Guarantor Entities
----------------------------- Nonguarantor Other Total
JCI Jafra S.A. Total Entities Regions Eliminations Consolidated
--- ---------- ----- ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating Activities... $ 3,589 $11,127 $ 14,716 $ 1,763 $ 1,530 -- $ 18,009
Investing Activities... (720) 809 89 (3,222) 35 -- (3,098)
Financing Activities... (3,334) (9,657) (12,991) (2,532) (1,565) -- (17,088)
Effect of Exchange rate
changes on cash........ -- (8) (8) (134) -- -- (142)
Cash at beginning of pe-
riod................... 841 2,101 2,942 5,182 538 -- 8,662
------- ------- -------- --------- -------- ------- ---------
Cash at end of period... $ 376 $ 4,372 $ 4,748 $ 1,057 $ 538 -- $ 6,343
======= ======= ======== ========= ======== ======= =========
</TABLE>
F-39
<PAGE>
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the
accompanying Letter of Transmittal, and, if given or made, such information or
representations must not be relied upon as having been authorized. Neither
this Prospectus or the accompanying Letter of Transmittal, or both together,
constitute an offer to sell or the solicitation of an offer to buy any
securities other than the securities to which it relates or an offer to sell
or the solicitation of an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor the accompanying Letter
of Transmittal, or both together, nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... v
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 26
Capitalization............................................................ 27
Unaudited Pro Forma Combined Statements of Operations .................... 28
Unaudited Pro Forma Combined Statement of Operations...................... 29
Selected Historical Combined Financial Data............................... 36
Management's Discussion And Analysis of Financial Condition And Results of
Operations............................................................... 38
Business.................................................................. 47
Management................................................................ 59
Ownership of Capital Stock................................................ 63
The Transactions.......................................................... 64
Certain Relationships and Related Transactions............................ 65
Description of the Senior Credit Agreement................................ 66
The Exchange Offer........................................................ 68
Registration Rights....................................................... 75
Description of Notes...................................................... 77
Taxation.................................................................. 120
Book-Entry; Delivery and Form............................................. 126
Plan of Distribution...................................................... 129
Legal Matters............................................................. 129
Experts................................................................... 130
Index to Financial Statements............................................. F-1
</TABLE>
---------------
Until April 27, 1999, all dealers effecting transactions in the New Notes,
whether or not participating in this distribution, may be required to deliver
a prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Jafra Cosmetics International
Offer to Exchange
11 3/4% Senior Subordinated Notes
due 2008, which have been
registered under the
Securities Act of 1933
as amended, for any and all
outstanding 11 3/4% Senior
Subordinated Notes due 2008.
---------------
PROSPECTUS
---------------
January 27, 1999
- -------------------------------------------------------------------------------
