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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 333-62989
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CDRJ INVESTMENTS (LUX) S.A.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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LUXEMBOURG 98-0185444
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4 BOULEVARD ROYAL
L-2449 LUXEMBOURG
LUXEMBOURG
(352) 226027
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 10, 2001, the registrant had outstanding 834,767 shares of
common stock, par value $2.00 per share.
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CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 8
3. Legal Proceedings........................................... 8
4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Market for Registrant's Common Equity and Related
5. Stockholder Matters....................................... 9
6. Selected Financial Data..................................... 10
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................. 12
Quantitative and Qualitative Disclosures About Market
7A. Risk...................................................... 24
8. Financial Statements and Supplementary Data................. 28
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................. 99
PART III
Directors, Executive Officers and Significant Employees of
10. the Company............................................... 99
11. Executive Compensation...................................... 102
Security Ownership of Certain Beneficial Owners and
12. Management................................................ 106
13. Certain Relationships and Related Transactions.............. 108
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K....................................................... 110
Signatures......................................................... 117
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PART I
ITEM 1. BUSINESS
GENERAL
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme ("Parent") is a
holding company that conducts all of its operations through its subsidiaries.
Prior to the consummation of the acquisition (the "Acquisition") by the Parent
of the Jafra Business (as defined) from The Gillette Company ("Gillette"), the
terms "Company" and "Jafra" refer to the various subsidiaries and divisions of
Gillette conducting the worldwide Jafra cosmetics business (the "Jafra
Business"), and, following the consummation of the Acquisition, collectively to
the Parent and its subsidiaries.
Jafra is a manufacturer and marketer of premium skin and body care
products, color cosmetics, fragrances, and other personal care products. Jafra
markets its products through a direct selling, multilevel distribution system
comprised of self-employed consultants (who perform the duties of sales
representatives). Jafra's business is comprised of one industry segment, direct
selling, with worldwide operations. Financial information relating to geographic
areas is incorporated by reference to the analysis of net sales and operating
income by geographic area in Note 11 to the financial statements included
herein.
Jafra was founded in 1956, as a California corporation, by Jan and Frank
Day and was purchased by Gillette in 1973. The Company expanded into Latin
America in 1977 and into Europe in 1978. On April 30, 1998, the Parent completed
the Acquisition of Jafra from Gillette. The Parent was organized to effect the
Acquisition. The Acquisition was sponsored by Clayton, Dubilier & Rice Fund V
Limited Partnership ("CD&R Fund V"), a Cayman Islands exempted limited
partnership managed by Clayton, Dubilier & Rice, Inc. ("CD&R"), a private
investment firm specializing in acquisitions that involve management
participation. As part of the financing for the Acquisition, CD&R Fund V,
certain members of new management, certain new directors and other persons made
an equity investment in the Parent of approximately $82.9 million in cash. In
addition, $100.0 million of 11 3/4% Senior Subordinated Notes due 2008 ("Notes")
were issued and the Company entered into a credit agreement (the "Senior Credit
Agreement") with certain lenders. The Senior Credit Agreement provides 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 of the
Acquisition, and a $65.0 million revolving credit facility (the "Revolving
Credit Facility").
STRATEGY
The Company's strategy consists primarily of the following key initiatives:
Deploy Senior Management Team with Significant Direct Selling
Experience. Jafra's senior management team has an average of over 25 years of
direct selling industry experience, including various senior management
positions with Jafra competitors Avon Products, Inc. ("Avon") and Mary Kay
Corporation ("Mary Kay"). Jafra believes that this management team will continue
to provide the dynamic leadership required to attract new consultants and
managerial talent, inspire new and existing consultants to greater productivity,
and execute the Company's new market development strategy.
Grow Consultant Base in Developed Markets. The Company plans to expand its
consultant base in developed markets by (i) focusing growth efforts on targeted
geographic areas and demographic groups, (ii) ensuring that the commission and
compensation structure remain competitive while rewarding those who sponsor new
consultants, (iii) providing more training meetings and marketing communications
materials for consultant managers, and (iv) initiating enhanced recognition
programs to motivate current as well as former or inactive consultants.
Increase Consultant Productivity. The Company plans to continue to focus on
increasing the productivity, as measured by net sales per active consultant, of
its existing consultants by (i) revitalizing and upgrading the Company's product
lines, (ii) offering an improved "product selling proposition" that generates
excitement by linking Company products to the latest fashion trends and (iii)
initiating improved marketing
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activities at the point of sale, by providing consultants with enhanced product
training and promotional materials that emphasize the product selling
proposition.
Develop New and Enhanced Products. The Company plans to continuously
introduce new and enhanced products based on technological advances and consumer
demand by (i) being on the "cutting edge" in development of skin care
formulations by fully availing itself of raw ingredients available from
manufacturers worldwide, (ii) being a leader in identification of fashion trends
which the Company integrates into its development of new shades of color
cosmetics, and (iii) identifying new areas for product line development that
utilize the Company's selling system and brand positioning, such as baby
products and spa-related products.
Expand Internationally. The Company believes that its existing distribution
and manufacturing capabilities provide a strong platform for expansion within
and into new and developing markets, which will allow it to diversify its
revenue base. The Company began distributing products through new subsidiaries
formed in the Dominican Republic, Peru, and Thailand in 2000, and in Brazil and
Chile in 1999. The Company presently has operations in 15 countries outside the
U.S. and in a number of additional countries through distributors, although
approximately 85% of the Company's sales in 2000 were in the United States and
Mexico. The Company intends to focus its expansion efforts in these new and
developing markets by (i) growing the consultant base, (ii) increasing
consultant productivity, and (iii) increasing operational efficiency. The
Company may target additional international markets in the future, if the
Company believes these markets (i) have proven to be receptive to direct selling
techniques, (ii) demonstrate promising economic demographics, including
population size, growth of gross domestic product and an expanding middle class,
and (iii) evidence demand for quality cosmetic products.
Utilize the Internet and Electronic Commerce to Augment Sales and Increase
Productivity. The Company plans to enhance its use of the Internet as a
communications and order fulfillment tool for its consultants. The Company
believes that use of the Internet as an order fulfillment tool by consultants
will result in better service to both the consultants and their customers at a
lower cost to the Company. During the fourth quarter of 2000, U.S. consultant
websites were established on the Internet that allow new and existing Jafra
customers to submit their orders to U.S. consultants via the Internet, while
maintaining the integrity of the consultant lineage structure. As part of the
Company's e-commerce strategy, the Company expects that during the second
quarter of 2001, U.S. consultants will be able to submit orders and payments to
Jafra electronically via the Internet. The Company plans to roll out its
e-commerce strategy to other countries starting in late 2001 and continuing
through 2002. The Company expects that the availability of Internet access,
twenty-four hours a day and seven days a week, will increase the overall
satisfaction level of its consultants.
Improve Operating Efficiency. The Company plans to continue to improve
operating efficiency through cost-cutting, better inventory management, and
streamlining of marketing efforts and product lines. In June of 1999, U.S.
product manufacturing functions were outsourced to a third party vendor, which
has resulted in reduced product costs. In 2000, the Company repositioned its
European business in order to generate additional operating efficiencies. In
2001, the Company plans to place greater marketing focus on certain types of
"limited life" products (products that are only offered in the Company's catalog
for a limited period), which the Company believes will lead to faster inventory
turns and a reduced investment in inventories.
PRODUCTS
Jafra continuously introduces new and revitalized products based on changes
in consumer demand and technological advances in order to enhance the quality,
image and price positioning of its products. During 2000, the Company launched
26 new products, including 6 that were promotional. Research and development is
conducted at the Jafra Skin, Body and Color Laboratory, located in the Westlake
Village facility. Amounts incurred on research activities relating to the
development of new products and improvement of existing products were $1.9
million in 2000, $2.1 million in 1999, and $3.1 million in 1998.
Employees in the Research and Development Department formulate products and
analyze them for chemical purity and microbial integrity. A separate pilot plant
allows testing via small batch production prior
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to full scale manufacture. Jafra continues to invest in the globalization and
upgrading of its product lines by adding new formulations and contemporary
fragrances. In addition, during 1999, the Company changed its corporate logo to
build better brand awareness and a fresh image and the packaging of the products
was updated accordingly. Through globalized product development, manufacturing
and packaging, Jafra believes that it has enhanced the consistency and quality
of its products in all geographic regions and across all product lines.
The following table sets forth the sales of the Company's principal product
lines for the three years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
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SALES BY PERCENTAGE SALES BY PERCENTAGE SALES BY PERCENTAGE
PRODUCT LINE OF TOTAL PRODUCT LINE OF TOTAL PRODUCT LINE OF TOTAL
($ IN MILLIONS) SALES ($ IN MILLIONS) SALES ($ IN MILLIONS) SALES
--------------- ---------- --------------- ---------- --------------- ----------
Skin Care................. $ 65.8 21.0% $ 60.9 21.0% $ 58.4 23.5%
Color Cosmetics........... 82.4 26.2 81.3 28.0 70.9 28.6
Fragrances................ 103.7 33.0 76.4 26.3 47.3 19.1
Personal Care............. 29.6 9.4 35.6 12.2 46.5 18.7
Other(1).................. 32.6 10.4 36.3 12.5 25.2 10.1
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Subtotal before shipping
and handling fees.... 314.1 100.0% 290.5 100.0% 248.3 100.0%
===== ===== ======
Shipping and handling
fees.................... 10.0 8.7 7.8
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Total........... $324.1 $299.2 $256.1
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(1) Includes sales aids (party hostess gifts, demonstration products, etc.) and
promotional materials.
Skin Care. Jafra sells personalized skin programs including cleansers,
masks, skin fresheners 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). All of these special care products use the most recent
advances in biotech ingredients. During 2000, the Company completed a worldwide
launch of its Skin Care 2000 Line, also known as "TBS", a major upgrade of its
basic skin care line, which uses a unique free matrix skin care system that is
totally customizable to the individual needs of the customer. Products featured
within this launch were the T-Zone Mattifier, a formulation for which a patent
is currently pending, and the Elasticity Recovery Firming Hydrogel, a unique
product targeted at skin care elasticity. In mid-2001, the Company plans to
launch a new product containing retinol in capsule form.
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. 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. In 1999, the Company
implemented a new color palette strategy based increasingly on local, rather
than global, color preferences. In 2000, the Company continued to drive sales of
color products through innovative fashion color statements in the spring and
fall shade product offerings. A major redesign of the Color line is scheduled to
launch at the end of 2001.
Fragrance. Direct selling is a significant distribution channel for
fragrances, and Jafra's new scents have enabled the Company to participate on an
increasingly larger scale in this channel. 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. In 1999, Jafra introduced Chosen, a prestige fragrance
for women, as well as a special 20th anniversary fragrance for the Mexico
market. 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. During 2000, no major new
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fragrances were launched, but fragrance sales became an increasingly large part
of the business through increased sales of gift sets and line extensions. In
2001, two new global fragrances are planned to be introduced on a worldwide
basis. Another fragrance is planned be tailored to, and marketed only within,
the Mexico market. In addition, up to six new fragrances are planned for
production and distribution locally within Brazil in 2001.
Body Care and Personal Care. Jafra markets a broad selection of body, bath,
sun and personal care products, including deodorants and shampoos. 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,
and bath products. While Jafra varies its product offerings and continues to
develop new products, its Royal Almond and Precious Protein lines have been top
sellers for nearly forty years. In the latter part of 2000 and early 2001, the
Company had two major product launches of body care products: The Tender Moments
Baby Line and the Home Spa Line. The Tender Moments Baby Line consists of 5
products created to encourage the bonding and nurturing of mothers and babies,
while the Home Spa Line consists of aromatherapeutic oils, massage creams, and
hydrotherapeutic products as well as related products such as scented candles
and music. Additional body care products planned for launch in 2001 are fitness
and well-being products to be used in conjunction with exercise and leisure
activities.
MARKETING
Strategy and Product Positioning. 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.
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, thus encouraging multi-product sales
and repeat purchases. Product variety and modernization are keys to the
Company's success. The Company continues to look for ways to expand product
offerings and broaden its appeal in the marketplace. This led to the development
of the Tender Moments Baby Line and the Home Spa Line in late 2000.
Marketing Material & Corporate Image. The Company supports its identity and
corporate image through its energetic network of consultants and word-of-mouth.
The Company uses a sophisticated and integrated promotional approach that
includes meetings, marketing literature, and the Internet to create strong
corporate imagery and support the corporate identity. In mid-1999, the Company
revised its creative approach, achieving a more contemporary look and further
enhancing its brand personality with the launch of a new corporate logo.
Brand Enhancement. The Company is now using more traditional media, such as
advertising and public relations, to complement the efforts of its consultants
and enhance its brand image. In 2000, A full-time public relations agency was
engaged. Public relations and media activities are being carried out based on
local market initiatives in the United States, Mexico and Brazil, and
accordingly, they are tailored to the specific needs of each local market.
INDEPENDENT SALES FORCE
Jafra's self-employed sales force is comprised of approximately 310,000
consultants worldwide as of December 31, 2000. Approximately 65,000 of these
consultants are in the U.S., 185,000 are in Mexico, and 60,000 are in Europe and
other markets. These consultants are not agents or employees of Jafra; they are
independent contractors or dealers. They purchase products directly from the
Company and sell them directly to their customers.
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More seasoned senior consultants, who have experience managing their own
consultant networks, recruit and train the Company's field level organization.
Jafra sells substantially all of its products directly to its consultants. Each
consultant 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.
Selling. The primary role of a Jafra consultant 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 consultants to arrange
sales parties at customers' homes. Sales parties permit a more efficient use of
a consultant's time, allowing the consultant 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 consultants to maintain any inventory. The Company
believes that the inventory requirements of other leading direct sellers are
often onerous to consultants. Instead, Jafra consultants can wait to purchase
products from the Company until they have a firm customer order to fill.
Consultants generally personally deliver orders to their customers within one
week of placement of an order. By delivering products directly to the customer,
the Jafra consultant creates an additional sales opportunity. The short-term
delivery requirements and the nature of the Company's business preclude any
significant backlog.
Recruiting. The Company believes that it enjoys a competitive advantage in
recruiting consultants due to its lower start-up costs and its policy of
providing retail discounts even on small orders. 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 consultants'
personal and professional training, thereby building consultants' management and
entrepreneurial skills.
Consultant Management and Training. To become a manager, a consultant must
sponsor a specified number of recruits and meet certain minimum sales levels.
Once a consultant becomes a manager, she is eligible to earn commissions on her
personal sales plus commissions on the sales of her downline consultants. 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 consultants. The most successful managers
have many such downline managers and consultants, and earn commissions on their
personal sales plus commissions on their downline group's sales.
Training for new consultants 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 consultant
managers. Managers train their downline consultants 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 consultants to higher sales levels.
Income Opportunities and Recognition. Consultants earn income by purchasing
products from Jafra at retail discounts and selling to consumers at suggested
retail prices. Once a consultant 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 consultants selling
Jafra products, which ultimately earns greater profits for the Company. The
Company believes that its structure of discounts and commissions to consultants
is one of the most generous in the direct selling business.
The Company believes that public recognition of sales accomplishments
serves the dual purpose of identifying successful role models and boosting
consultant morale. Each year Jafra sponsors major events in each of its
geographic markets to recognize and reward sales and recruiting achievements and
strengthen the
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bond between the independent sales force and the Company. Consultants and
managers must meet certain minimum levels of sales and new consultant
sponsorship in order to receive invitations to attend these events.
INTERNATIONAL OPERATIONS
Jafra's international operations are subject to certain customary risks
inherent in carrying on business abroad, including the risk of adverse currency
fluctuations, the effect of regulatory and legal restrictions imposed by foreign
governments, and unfavorable economic and political conditions.
Jafra's international operations are conducted primarily through
subsidiaries in 15 countries outside the United States and in a number of
additional countries through distributors. The Company's most important markets
to date are Mexico, the United States, and Europe, which represented
approximately 62%, 23% and 8%, respectively, of total 2000 sales. See Note 11 of
the consolidated financial statements appearing elsewhere herein. The Company
intends to increase revenues in markets other than Mexico in order to diversify
its revenue base and to minimize any adverse impact that a downturn in the
Mexican economy may have on the Company given the increasingly large percentage
of sales attributable to the Mexican market. The Company has entered into
foreign currency forward exchange contracts to mitigate the risk of potential
currency devaluation in Mexico. See "Quantitative and Qualitative Disclosures
About Market Risk -- Foreign Currency Risk."
MANUFACTURING
Jafra has a manufacturing facility in Naucalpan, Mexico, which is near
Mexico City. This facility produces color cosmetics and most of Jafra's
fragrances. Until June of 1999, the Company produced skin care and personal use
products at its Westlake Village, California manufacturing facility. In June of
1999, the Company outsourced its U.S. product manufacturing functions to a third
party contractor (the "Contractor").
The Company and the Contractor entered into a manufacturing agreement,
dated as of June 10, 1999 (the "Manufacturing Agreement"). Subject to the terms
and conditions of the Manufacturing Agreement, the Contractor has agreed to
manufacture all of the Company's requirements for certain cosmetic and skin care
products for an initial term of five years. Following the expiration of the
initial five-year term, the Manufacturing Agreement will be automatically
extended for additional one-year terms unless terminated by six months' prior
written notice by either party. The Manufacturing Agreement provides for price
renegotiations by the Contractor if the Company's quarterly or annual purchase
volume falls below specified minimums. In addition, the Company is obligated to
purchase materials acquired by the Contractor based upon product forecasts
provided by the Company if the Contractor is unable to sell such materials to a
third party. The Contractor is solely responsible for obtaining the inventories,
manufacturing the inventories at its current location in Chino, California,
complying with applicable laws and regulations, and performing quality assurance
functions.
The Company purchases from other 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 its other suppliers. Finished goods
and raw materials used in the Company's products, such as glass, plastics, and
chemicals, generally are available stock items or can be obtained to Company
specifications from more than one potential supplier.
DISTRIBUTION
The Company uses fifteen distribution centers around the world, eight of
which are operated by Company personnel and seven of which are outsourced. The
U.S. warehouses in Bridgeport, New Jersey and Westlake Village, California
currently stock the entire Jafra product line. In Mexico, the Company has
outsourced virtually all of its distribution to third parties. Management
believes that its facilities are adequate to meet demand in its existing markets
for the foreseeable future.
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Typically, owned or leased distribution centers are located in an area that
allows for direct delivery to consultants by either post or carrier. Maintaining
a short delivery cycle in direct selling is an important competitive advantage.
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 and Avon, 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.
Jafra believes that its senior management team with a strong direct selling
track record, motivated and loyal direct sales force, prestige quality product
lines, product development capabilities, geographic diversification, short
delivery cycle, and manufacturing technology are significant factors in
establishing and maintaining its competitive position.
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 women's
fragrance), Chosen( a premium women'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 women'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 skin
creams, 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 and is permitted to continue to use such know-how in
connection with its products.
In 1998, a former employee of Gillette filed applications to register the
Jafra trademark in Algeria, Bangladesh, China, Cyprus, Egypt, Gambia, Ghana,
Guyana, India, Kenya, Malawi, Morocco, Nigeria, OAPI, Pakistan, Sierra Leone,
Syria, Sudan, Surinam, Tanzania, Tunisia, Zambia, and Zimbabwe, jurisdictions in
which Jafra does not currently operate. In 1998, Gillette 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. The documentation has been transferred to
Jafra. Jafra has filed the documents obtained from this former employee in those
jurisdictions in which the documentation will be accepted in order to secure the
abandonment and cancellation of this employee's applications and registrations.
If Jafra is not able to secure cancellation or abandonment of the applications
and registrations in these jurisdictions, Jafra may be prohibited from
distributing its products in these jurisdictions.
MANAGEMENT INFORMATION SYSTEMS
During 2000, the Company redefined its Internet strategy and continued to
develop and implement an e-commerce system. The first phase of this system
became operational in the U.S. in the fourth quarter of
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2000 and the remainder of the system is expected to be implemented in the U.S.
in the second quarter of 2001. The Company plans to roll out its e-commerce
strategy to other countries during the latter part of 2001 and in 2002. During
2001, the Company plans to modify its European information systems to support a
streamlined European organization and to achieve compliance with the euro. In
addition, the Company plans to implement a new business system in Brazil to
enhance its financial and inventory management. The Company believes that the
commercial systems currently existing in Jafra's major markets are adequate to
support its business activities for the next two to three years. However, the
Company is in the process of identifying a new commercial system to upgrade its
technology platform and business processes in selected markets. This system will
be tailored to comply with local regulatory demands as well as the unique
aspects of each market. Initial implementation in Thailand will take place in
the second half of 2001, with subsequent country rollouts through 2004.
SEASONALITY
The Company's sales in the fourth quarter of the year are typically higher
than in the other three quarters of the year due to seasonal holiday purchases.
Fourth quarter net sales were approximately 28% of total net sales in 2000 and
29% of net sales in 1999. Fourth quarter operating profit was 35% and 44% of
total operating profit in 2000 and 1999, respectively.
ENVIRONMENTAL MATTERS
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.
EMPLOYEES
As of December 31, 2000, the Company had 822 full-time employees, of which
262 were employed in the U.S. and 560 in other countries. On a functional basis,
143 were in manufacturing, warehousing, distribution and technical operations,
445 were in sales and marketing, and 234 were in administration. The Company
also had 222 outside contract employees.
ITEM 2. PROPERTIES
The Company is headquartered and maintains a warehouse and distribution
facility in Westlake Village, California, 40 miles north of Los Angeles.
Manufacturing is done on a global basis for the color and fragrance product
lines at the Company's facility in Naucalpan, Mexico. The Westlake Village,
California and Naucalpan, Mexico facilities are owned by the Company, except for
a small portion of the Naucalpan 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.
ITEM 3. 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 operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Parent common stock (the
"Common Stock"). Prior to September 30, 1998, the only holders of the Common
Stock were CD&R Fund V and Messrs. Ronald B. Clark, Gonzalo R. Rubio, and Ralph
S. Mason, III. The number of holders of record of the Company's Common Stock on
March 10, 2001 was 34. On September 30, 1998, certain members of management,
certain directors and other persons purchased an aggregate of 40,437 shares of
Common Stock for a purchase price of $100 per share, or a total of $4,043,700;
on October 1, 1999, a former member of management exercised options to purchase
579 shares of Common Stock for a purchase price of $100 per share, or a total of
$57,900, and then sold a total of 2,317 shares of Common Stock back to the
Company at $150 per share, or a total of $347,550; on November 19, 1999, certain
members of management and a director purchased an aggregate of 2,457 shares of
Common Stock for a purchase price of $150 per share, or a total of $368,550; on
July 11, 2000, a member of management purchased 316 shares of Common Stock for a
purchase price of $150 per share, or a total of $47,400; on July 27, 2000, a
former member of management exercised options to purchase 158 shares of Common
Stock for a purchase price of $100 per share, or a total of $15,800, and then
sold a total of 632 shares of Common Stock back to the Company at $210 per
share, or a total of $132,720; on August 9, 2000, certain members of management
purchased an aggregate of 4,108 shares of Common Stock for a purchase price of
$210 per share, or a total of $862,860; and on November 6, 2000, a former member
of management sold 316 shares of Common Stock back to the Company at $210 per
share, or a total of $66,360. All of these transactions were exempt from the
registration requirements of the Securities Act of 1933, as amended, as either
offerings to accredited investors under Regulation D or offerings to employees
under Rule 701. See "Security Ownership of Certain Beneficial Owners and
Management." No dividends have been paid by Parent on its shares of the Common
Stock nor does Parent expect to pay dividends on its Common Stock in the
foreseeable future. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors of Parent, subject to
the restrictions set forth in the Senior Credit Agreement and the indenture for
its Senior Subordinated Notes (the "Indenture"), which currently restrict the
payment of cash dividends to stockholders, and restrictions, if any, imposed by
other indebtedness outstanding from time to time. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company
(amounts in millions except for consultant data). The audited financial
statements as of and for the years ended December 31, 2000 and 1999, the eight
months ended December 31, 1998, and the four months ended April 30, 1998 appear
elsewhere herein, and the related selected financial data should be read in
conjunction with such statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." All other
financial data presented has been derived from audited financial statements of
the Company which are not included herein. The financial data prior to April 30,
1998 reflect the Jafra Business prior to the Acquisition and are referred to as
the "Predecessor" operations.
PREDECESSOR
---------------------------------
YEAR ENDED EIGHT MONTHS FOUR MONTHS YEAR ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31,
------------------- DECEMBER 31, APRIL 30, -------------------
2000 1999 1998 1998 1997 1996
-------- -------- ------------ ----------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales(a)........................... $ 324.1 $ 299.2 $ 176.2 $ 79.9 $ 236.4 $ 231.4
Cost of sales(b)....................... 79.5 82.3 56.3 22.7 68.6 58.2
-------- -------- -------- -------- -------- --------
Gross profit........................... 244.6 216.9 119.9 57.2 167.8 173.2
Selling, general and administrative
expenses(a).......................... 199.5 183.5 112.6 51.8 147.4 157.4
Restructuring and other non-recurring
charges(c)........................... 2.6 4.8 -- -- 0.4 6.1
Loss (gain) on sale of assets.......... 0.1 (1.0) 0.2 -- (0.1) --
-------- -------- -------- -------- -------- --------
Income from operations................. 42.4 29.6 7.1 5.4 20.1 9.7
Other income (expense):
Exchange (loss) gain................. (11.7) 3.3 (1.8) 1.4 0.3 --
Interest (expense) income, net....... (15.7) (16.9) (11.5) 0.1 0.3 0.8
Other income (expense), net.......... 1.6 0.1 (0.1) 0.1 (0.5) (0.5)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... 16.6 16.1 (6.3) 7.0 20.2 10.0
Income taxes........................... 10.0 10.9 1.7 2.9 4.8 2.6
-------- -------- -------- -------- -------- --------
Net income (loss) before extraordinary
item................................. 6.6 5.2 (8.0) 4.1 15.4 7.4
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $0.2 in 2000 and $0.2
in 1999.............................. 0.3 0.6 -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $ 6.3 $ 4.6 $ (8.0) $ 4.1 $ 15.4 $ 7.4
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.............. $ 5.8 $ 4.9 $ 18.4 $ 10.2 $ 8.7
Working capital........................ 19.2 34.2 22.9 22.6 24.4
Property and equipment, net............ 51.4 50.6 56.2 43.7 41.8
Total assets........................... 276.9 278.4 288.6 175.2 164.5
Total debt............................. 109.0 133.5 141.5 8.5 --
Stockholders' equity................... $ 81.2 $ 75.8 $ 75.4 $ 77.3 $ 78.6
OTHER FINANCIAL DATA:
EBITDA(d).............................. $ 51.6 $ 36.8 $ 12.1 $ 6.9 $ 24.0 $ 12.5
Net cash provided by (used in)
operating activities................. 32.5 (1.6) 18.1 (8.0) 26.7 2.8
Net cash provided by (used in)
investing activities................. (7.2) (3.1) (211.1) 2.6 (5.8) (4.5)
Net cash provided by (used in)
financing activities................. (23.5) (7.4) 211.7 (8.8) (19.0) 5.0
Depreciation and amortization.......... 7.6 7.1 5.1 1.4 4.4 3.3
Amortization of deferred financing
fees................................. 1.4 1.8 1.4 -- -- --
Capital expenditures................... 7.1 5.8 6.4 6.1 8.9 10.3
Total consultants...................... 310,000 292,000 247,600 220,000 220,800 208,500
Active consultants..................... 150,000 137,000 116,000 109,000 104,000 102,000
Consultant productivity(e)............. $ 2,161 $ 2,184 $ 2,208 $ 2,208 $ 2,273 $ 2,268
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- ---------------
(a) In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and
Handling Fees and Costs", which requires that amounts billed to customers
for shipping and handling fees be classified as revenues. Reclassifications
have been made to all prior periods to reflect shipping and handling fees,
previously reported as reductions to selling, general and administrative
expenses, in net sales. The amounts that have been reclassified as net sales
are $8.7 million, $5.2 million, $2.6 million, $6.9 million, and $6.9 million
for the year ended December 31, 1999, the eight-month period ended December
31, 1998, the four-month period ended April 30, 1998, and the years ended
December 31, 1997 and 1996, respectively.
(b) Cost of sales for the eight months ended December 31, 1998 includes a $2.7
million charge relating to the sale of certain inventories that were
revalued to fair value in conjunction with the Acquisition.
(c) Restructuring and other non-recurring charges include the following: for
2000, approximately $1.6 million of restructuring charges and approximately
$1.0 million of asset impairment charges; for 1999, approximately $3.7
million of restructuring charges and approximately $1.1 million of asset
impairment charges; for 1997, net reorganization charges of $3.5 million
that were partially offset by a cash recovery of $2.3 million resulting from
the settlement of a legal action brought by the Company against a computer
systems contractor for which a $5.4 million charge was taken in 1996, and a
gain of $0.8 million relating to the sale of a facility that had previously
been written-off; and for 1996, a $5.4 million non-cash charge for the
write-off of certain computer systems and related costs, and net
reorganization charges of $0.7 million.
(d) EBITDA is defined as income or loss before income taxes, net interest
expense, exchange gains and losses, depreciation and amortization, and
extraordinary items. 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 statement of
operations or cash flow data prepared in accordance with generally accepted
accounting principles and included elsewhere in this Form 10-K 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.
(e) In 2000, the Company re-defined consultant productivity as net sales in U.S.
dollars per active consultant. In general, consultants are considered to be
active if they place at least one order within four months. Full year 1998
consultant productivity is shown for comparability purposes. Previously
reported consultant productivity amounts have been restated to conform to
the 2000 presentation.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations, financial condition
and liquidity of the Company should be read in conjunction with the information
contained in the consolidated financial statements and notes thereto included
elsewhere in this Form 10-K. These statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and require management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates.
RESULTS OF OPERATIONS
The following table represents selected components of the Company's results
of operations, in millions of dollars and as percentages of net sales. The table
reflects the operations of the Company for the years ended December 31, 2000 and
1999, and the combined operations of the Predecessor and the Company for the
year ended December 31, 1998.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998(1)(2)
--------------- --------------- ---------------
($ IN MILLIONS)
Net sales............................... $324.1 100.0% $299.2 100.0% $256.1 100.0%
Cost of sales........................... 79.5 24.5 82.3 27.5 79.0 30.8
------ ----- ------ ----- ------ -----
Gross profit............................ 244.6 75.5 216.9 72.5 177.1 69.2
Selling, general and administrative
expenses.............................. 199.5 61.6 183.5 61.3 164.4 64.2
Restructuring and impairment charges.... 2.6 0.8 4.8 1.6 -- 0.0
Loss (gain) on sale of assets........... 0.1 0.0 (1.0) (0.3) 0.2 0.1
------ ----- ------ ----- ------ -----
Income from operations.................. 42.4 13.1 29.6 9.9 12.5 4.9
Exchange (loss) gain.................... (11.7) (3.6) 3.3 1.1 (0.4) (0.1)
Interest (expense) income, net.......... (15.7) (4.9) (16.9) (5.6) (11.4) (4.5)
Other income (expense), net............. 1.6 0.5 0.1 0.0 -- 0.0
------ ----- ------ ----- ------ -----
Income before income taxes.............. 16.6 5.1 16.1 5.4 0.7 0.3
Income tax expense...................... 10.0 3.1 10.9 3.7 4.6 1.8
------ ----- ------ ----- ------ -----
Net income (loss) before extraordinary
item.................................. 6.6 2.0 5.2 1.7 (3.9) (1.5)
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $0.2 in 2000 and $0.2
in 1999............................... 0.3 0.1 0.6 0.2 -- 0.0
------ ----- ------ ----- ------ -----
Net income (loss)....................... $ 6.3 1.9% $ 4.6 1.5% $ (3.9) (1.5)%
====== ===== ====== ===== ====== =====
- ---------------
(1) Pursuant to the terms of the Acquisition, 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, the results of
operations and cash flows for the year ended December 31, 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 eight
months ended December 31, 1998.
(2) In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and
Handling Fees and Costs", which requires that amounts billed to customers
for shipping and handling fees be classified as revenues. Reclassifications
have been made to all prior periods to reflect shipping and handling fees,
previously reported as reductions to selling, general and administrative
expenses, in net sales. The amounts that have been reclassified as net sales
are $8.7 million and $7.8 million for the years ended December 31, 1999 and
1998, respectively.
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15
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR DECEMBER 31, 1999
Net sales. Net sales for 2000 increased to $324.1 million from $299.2
million in 1999, an increase of $24.9 million, or 8.3%. Sales in local
currencies for 2000 increased by 9.6% over 1999. The Company defines consultant
productivity as net sales in U.S. dollars per active consultant. In general,
consultants are considered to be active if they place one order within four
months. The Company's average number of consultants worldwide increased to
approximately 307,000 in 2000, or 11.8%, over the 1999 average. The average
number of consultants in Brazil increased by approximately 11,000 in 2000, which
accounts for one-third of the Company's total increase over the 1999 average.
The Company's consultant productivity decreased 1.1% in 2000, as increased
productivity in Mexico was not enough to offset declines in productivity in the
U.S. and Europe, and consultant productivity in Brazil is below the average for
the Company.
In Mexico, net sales for 2000 increased to $201.7 million from $175.9
million in 1999, an increase of $25.8 million, or 14.7%. Sales in Mexico in
local currency increased by 13.4% over 1999. The year-to-year increase was
driven by the larger consultant base, product price increases, the introduction
of new products and increased productivity of consultants. In Mexico, the
average number of consultants in 2000 increased to approximately 192,000, or
6.7% over the 1999 average. Consultant productivity in Mexico increased 13.4% in
2000.
In the U.S., net sales for 2000 increased to $74.7 million from $74.1
million in 1999, an increase of $0.6 million, or 0.8%. In 1999, U.S. net sales
included low margin sales to a third party manufacturer of $1.2 million, and
there were no such sales in 2000. In addition, during 1999, the U.S. generated
$0.9 million of net sales in the Dominican Republic. The Company established a
separate subsidiary in the Dominican Republic in 2000, so that territory is no
longer a source of sales for the U.S. Excluding the impact of these two items,
net sales in the U.S. for 2000 increased 3.8%, primarily due to increases in the
number of consultants, partially offset by lower productivity. In the U.S., the
average number of consultants in 2000 increased to approximately 62,000, or
10.7% above the 1999 average. The U.S. implemented a program in 2000 whereby
consultants received higher discounts on their purchases, at lower order sizes
than before. This stimulated growth of consultants and ordering activity, but at
lower average order sizes, resulting in lower productivity per order.
In Europe, net sales for 2000 decreased to $27.0 million from $33.1 million
in 1999, a decrease of $6.1 million, or 18.4%. Contributing to the sales decline
was an unfavorable exchange rate impact on sales of $1.9 million. Excluding the
exchange rate impact, net sales decreased 12.7%, principally due to decreases in
the number and productivity of consultants. In Europe, the average number of
consultants in 2000 decreased to approximately 17,000, or 5.6% less than the
1999 average. Consultant productivity in Europe decreased 12.6% in 2000.
Gross profit. Gross profit in 2000 increased to $244.6 million from $216.9
million in 1999, an increase of $27.7 million, or 12.8%. Gross profit as a
percentage of sales (gross margin) increased to 75.5% from 72.5%.
In Mexico, the margin improved due to sales price increases, a more
favorable product mix, and reduced product costs. The reduced product costs for
2000 included foreign exchange gains from inventory and components purchased in
dollar-denominated transactions when the peso was stronger against the U.S.
dollar compared to 1999. Mexico's fourth quarter 2000 gross margin decreased
compared to the fourth quarter of 1999 due to a combination of certain
adjustments related to changes in cost accounting estimates, totaling $3
million, a higher promotional product mix due to the holiday season, and sales
of slow moving inventory items at lower margins in the fourth quarter of 2000 as
part of a plan to increase inventory turnover and reduce investment in
inventory. In the U.S., the margin improvement was the result of improved gross
margins on both regular and promotional products as a result of price increases
and product cost reductions. The margin on non-resale items (demonstration
products used by consultants, but not re-sold to clients) improved significantly
from the comparable prior year period due to price increases and the
reconfiguration of cases sold to first-time consultants. The reduced product
costs in the U.S. and Mexico included cost reductions on skin and body products
that were not achieved until the beginning of the third quarter of 1999, after
the U.S. manufacturing of these products was outsourced. In Europe, margins were
flat in 2000 compared to 1999,
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16
reflecting the lower product costs discussed above offset by an increase due to
the strengthening of the dollar against European currencies.
Selling, general and administrative expenses. SG&A expenses in 2000
increased to $199.5 million from $183.5 million in 1999, an increase of $16.0
million, or 8.7%. SG&A as a percentage of net sales increased in 2000 to 61.6%
from 61.3% for 1999.
In Mexico, SG&A as a percentage of net sales for 2000 was virtually the
same as in 1999. The primary drivers of the increased expenses were increased
sales promotional and commission expenses, which tend to increase proportionally
with sales, and increased administrative expenses, which represent additional
infrastructure costs to support the higher sales volume. The U.S. incurred
additional sales promotional expenses in 2000 primarily as a result of the
Company's decision to hold two major promotional events within the same year,
compared to just one in 1999, as part of the Company's commitment to expand
business in the U.S. market. In addition, the U.S. made a change in the lineage
program in May 1999 that resulted in higher commissions expense for the full
year 2000 compared to only seven months' impact in 1999. In Europe, SG&A
expenses in 2000 decreased compared to 1999, as a result of expense containment
measures, primarily in Germany. Developing markets, particularly Brazil,
incurred additional SG&A expenses in year 2000 compared to 1999. Corporate
expenses decreased approximately $1.1 million in 2000 from the 1999, primarily
as a result of reduced compensation expenses, partially offset by expenses
incurred in connection with the development of the Company's e-commerce systems.
Restructuring and impairment charges. Restructuring and impairment charges
for 2000 were $2.6 million and were $4.8 million in 1999. In 2000, the Company
recorded approximately $1.6 million of restructuring charges and approximately
$1.0 million of asset impairment charges. The restructuring charges in 2000
related to the Company's repositioning activities in Europe, and consisted
primarily of severance costs. The asset impairment charges consisted of
approximately $0.3 million related to the Company's repositioning activities in
Europe and approximately $0.7 million relating to the writedown of certain
capitalized computer software costs in the United States. In 2000, the Company
consolidated the sales support and administrative functions for Austria, Italy,
and the Netherlands in the Company's Germany office. Field sales personnel
continue to perform sales and marketing functions in those locations, but the
requirements for local office space and resources have been significantly
reduced. In addition, the Company implemented a plan to close its Poland
operation, and will be serving that territory through a distributor starting in
mid-2001.
In 1999, the Company recorded approximately $3.7 million of restructuring
charges and approximately $1.1 million of asset impairment charges. The
restructuring charges consisted of approximately $2.7 million of charges related
to the outsourcing of the Company's U.S. product manufacturing functions, and
approximately $1.0 million of other restructuring activities in the U.S., Europe
and Mexico. Substantially all of the charges related to severance costs. The
asset impairment charges consisted of approximately $1.1 million relating to
long-lived assets (goodwill and trademarks) owned by its German subsidiary
("Jafra Germany"). The Company performed an impairment review and concluded that
Jafra Germany's future undiscounted cash flows were below the carrying value of
its related long-lived assets. Accordingly, the Company recorded a non-cash
impairment loss of approximately $1.1 million to adjust the carrying values of
Jafra Germany's goodwill and trademarks to their estimated fair values, which
were determined based on anticipated future cash flows discounted at a rate
commensurate with Jafra Germany's weighted average cost of capital.
Loss (gain) on sale of assets. The Company's loss on sale of assets was
$0.1 million in 2000, compared to a gain of $1.0 million in 1999, a decrease of
$1.1 million. In 1999, the Company recognized a $1.0 million gain on the sales
of a parcel of property and an office building in the United States.
Exchange (loss) gain. The Company's foreign exchange loss in 2000 was $11.7
million, compared to an exchange gain of $3.3 million in 1999, a change of $15.0
million. The Company's foreign exchange gains and losses primarily result from
its operations in Mexico. In 2000, foreign exchange losses of $11.3 million were
incurred in Mexico, while in 1999, there were $3.7 million of exchange gains in
Mexico. The net foreign exchange loss for 2000 has three elements: gains or
losses on forward currency contracts, unrealized gains or losses on the
remeasurement of U.S. dollar-denominated debt, and gains or losses on
transactions denominated in foreign currencies. During December 1999, the
Company implemented a hedging program to protect
14
17
against potential devaluation of the Mexican peso, and purchased forward
contracts selling Mexican pesos and buying U.S. dollars based upon forward
exchange rates. These contracts are marked-to-market each month and the fair
value of the contracts is included in current assets and liabilities, with the
offsetting gain or loss included in exchange gain (loss) in the accompanying
consolidated statements of operations. Throughout 2000, the forward currency
contract pricing reflected the market's expectation that the peso would devalue
relative to the dollar. However, in 2000, the peso to U.S. dollar exchange rate
was stable, resulting in a $10.0 million exchange loss on forward contracts. The
benefit of the stable peso is reflected in the Company's operating income. The
remeasurement of U.S. dollar denominated-debt in 2000 resulted in an unrealized
exchange loss of $0.7 million, as the peso weakened against the U.S. dollar at
year-end. Net realized and unrealized losses on other foreign currency
transactions were $0.6 million. The 1999 foreign exchange gains were primarily
the result of remeasurement of U.S. dollar-denominated debt, as the peso
strengthened against the U.S. dollar.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments and hedging activities. The
derivative instruments utilized by the Company did not qualify for hedge
accounting under the applicable accounting standards prior to adoption of SFAS
133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the statements of
operations for the years ended December 31, 2000 and 1999. Under SFAS 133, the
Company's current mark-to-market accounting treatment will continue to be
applied to certain of the Company's derivative instruments. However, under SFAS
133, the Company's use of forward contracts to hedge certain forecasted
transactions will now qualify for hedge accounting. Unrealized gains and losses
from such derivative instruments arising subsequent to January 1, 2001 will be
deferred as a separate component of other comprehensive income, and will be
recognized in income at the same time that the underlying hedged exposure is
recognized in income. This accounting treatment will result in the matching of
gains and losses from certain forward exchange contracts with the corresponding
gains and losses generated by the underlying hedged transactions.
Interest expense. Interest expense decreased to $15.7 million in 2000 from
$16.9 million in 1999, a decrease of $1.2 million, or 7.1%. Approximately $0.9
million of the reduced interest expense was due to the impact of debt
restructuring activities which occurred in the latter part of 1999 and early
2000, whereby the Company repurchased a portion of its Notes with a face value
of $24.8 million and replaced the repurchased Notes with debt under the
Revolving Credit Facility, which currently has a lower effective interest rate
than the Notes. The remainder of the decrease was due to a combination of lower
average debt balances and lower average interest rates.
Other income (expense). Other income for 2000 was $1.6 million, which
consisted primarily of income related to a recovery of the effect of inflation
upon accounts receivable due from the Mexican government. Other income (expense)
in 1999 was nominal.
Income tax expense. Income tax expense decreased to $10.0 million in 2000
from $10.9 million in 1999, a decrease of $0.9 million, or 8.3%. The decreased
income tax expense for 2000 is the result of lower taxable income generated by
the Company's Mexican subsidiary in 2000 as compared to 1999. In 2000, the
Company's effective income tax rate decreased to 59.9% from a 67.7% effective
income tax rate in 1999, driven by a decrease in the U.S. effective income tax
rate to 31.1% in 2000 from 51.5% in 1999. The decrease in the U.S. effective
income tax rate is due to utilization in 2000 of certain deferred tax assets
that were previously fully reserved. Valuation allowances are provided against
operating losses of European and South American subsidiaries, and against tax
credit carryforwards in the United States.
Net income (loss). Net income increased to $6.3 million in 2000 from $4.6
million in 1999, an increase of $1.7 million, or 37.0%. The increase was
primarily due to a $27.7 million increase in gross profit, a $2.2 million
decrease in restructuring and impairment charges, a $1.2 million decrease in
interest expense, a $1.5 million increase in other income, a $0.9 million
decrease in income tax expense, and a $0.3 million decrease in extraordinary
loss on early extinguishment of debt, net of tax, partially offset by a $15.0
million
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increase in exchange losses, a $1.1 million decrease in loss (gain) on sale of
assets, and a $16.0 million increase in SG&A expenses.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR DECEMBER 31, 1998
Net sales. Net sales for 1999 increased to $299.2 million from $256.1
million in 1998, an increase of $43.1 million, or 16.8%. Sales in local
currencies for 1999 increased by 23.6% over 1998. The sales in local currencies
were higher than the increase measured in U.S. dollars, primarily as a result of
a weaker average exchange rate for the Mexican peso when measured against the
U.S. dollar in 1999 as compared to 1998. The Company's 1999 average number of
consultants worldwide increased to approximately 275,000, or 19.6%, over the
1998 average. The Company defines consultant productivity as net sales in U.S.
dollars per active consultant. In general, consultants are considered to be
active if they place one order within four months. The Company's consultant
productivity decreased 1.1% in 1999.
In Mexico, net sales for 1999 increased to $175.9 million from $122.0
million in 1998, an increase of $53.9 million, or 44.2%. Sales in Mexico in
local currency increased by 53.1% over 1998. The significant year to year
increase was driven by the larger consultant base, product price increases, the
introduction of new products and increased productivity of consultants. In
Mexico, the 1999 average number of consultants increased to approximately
180,000, or 32.7% over the 1998 average. Consultant productivity in Mexico
increased 9.7% in 1999.
In the U.S., net sales for 1999 decreased to $74.1 million from $77.7
million in 1998, a decrease of $3.6 million, or 4.6%. Low margin sales to a
third party manufacturer in 1999 and 1998 were $1.2 million and $3.1 million,
respectively. Excluding the impact of these sales, net sales in the U.S. for
1999 decreased 2.3%, primarily due to small decreases in the number and
productivity of consultants. In the U.S., the 1999 average number of consultants
decreased to approximately 56,000, or 2.1% below the 1998 average. Consultant
productivity in the U.S. decreased 0.5% in 1999.
In Europe, net sales for 1999 decreased to $33.1 million from $41.0 million
in 1998, a decrease of $7.9 million, or 19.3%. Contributing to the sales decline
was an unfavorable exchange rate impact on sales of $1.3 million. Excluding the
exchange rate impact, net sales decreased 16.0%, also due in part to decreases
in the number and productivity of consultants. In Europe, the 1999 average
number of consultants decreased to approximately 18,000, or 8.7% under the 1998
average. Consultant productivity in Europe decreased 5.7% in 1999.
Gross profit. Gross profit in 1999 increased to $216.9 million from $177.1
million in 1998, an increase of $39.8 million, or 22.5%. Gross profit as a
percentage of sales (gross margin) increased to 72.5% from 69.2%. Cost of sales
for 1998 included a $2.7 million charge related to the sale of certain
inventories, primarily in Mexico, that were revalued in conjunction with the
Acquisition. Additionally, low margin third party sales in the U.S. in 1999 and
1998 were $1.2 million and $3.1 million, respectively. Excluding the effects of
these items, adjusted gross margin was 72.8% and 71.1% for 1999 and 1998,
respectively.
In Mexico, the increased margin was due to a combination of product price
increases, manufacturing efficiencies related to increased volume, cost control
measures and the management of product mix. In the U.S., the margin improvement
was due primarily to a combination of lower discounting on promotional sales,
product price increases, and a more favorable sales mix which included fewer low
margin third party sales. Additionally, the cost efficiencies gained in the
second half of 1999 as a result of the outsourcing of the manufacturing facility
increased the U.S. gross margin for the year by approximately 100 basis points
(one percent of sales). In Europe, margins improved due to product cost
reductions and a more favorable sales mix in 1999.
Selling, general and administrative expenses. SG&A expenses in 1999
increased to $183.5 million from $164.4 million in 1998, an increase of $19.1
million, or 11.6%. SG&A as a percentage of net sales decreased in 1999 to 61.3%
from 64.2% for 1998.
In Mexico, SG&A expenses increased to $79.5 million from $59.8 million in
1998, an increase of $19.7 million, or 32.9%. The increased SG&A in Mexico
related primarily to sales promotions, commissions
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and administrative expenses incurred to support growing sales. In addition,
Mexico incurred $0.7 million of incremental expenses for amortization of
goodwill and trademarks as a result of the Acquisition, representing a full year
of amortization in 1999 versus eight months in 1998. In the U.S., SG&A expenses
in 1999 increased to $46.3 million from $46.0 million in 1998, an increase of
$0.3 million, or 0.7%. The U.S. incurred $0.5 million of incremental expenses
for amortization of goodwill and trademarks in 1999 as a result of the
Acquisition, representing a full year of amortization in 1999 versus eight
months in 1998. Excluding those expenses, the SG&A spending in the U.S. actually
declined by $0.2 million in 1999. In Europe, SG&A expenses in 1999 decreased to
$26.4 million from $31.2 million in 1998, a decrease of $4.8 million, or 15.4%,
due to a combination of lower variable expenses related to lower sales levels,
and expense controls. Corporate expenses in 1999 increased to $17.4 million from
$14.0 million, an increase of $3.4 million, or 24.3%, primarily as a result of
increased personnel costs of the post-Acquisition management team.
Restructuring and impairment charges. In 1999, the Company recorded
approximately $3.7 million of restructuring charges and approximately $1.1
million of asset impairment charges. The restructuring charges consisted of
approximately $2.7 million of charges related to the outsourcing of the
Company's U.S. product manufacturing functions, and approximately $1.0 million
of other restructuring activities in the U.S., Europe and Mexico. Substantially
all of the charges related to severance costs.
Also in 1999, the Company recognized an asset impairment charge of
approximately $1.1 million relating to long-lived assets (goodwill and
trademarks) owned by its German subsidiary ("Jafra Germany"). In the fourth
quarter of 1999, concurrent with the Company's annual business planning process,
the Company recognized that sales levels in Jafra Germany had declined more than
anticipated since the Acquisition. The Company performed an impairment review
and concluded that Jafra Germany's future undiscounted cash flows were below the
carrying value of its related long-lived assets. Accordingly, the Company
recorded a non-cash impairment loss of approximately $1.1 million to adjust the
carrying values of Jafra Germany's goodwill and trademarks to their estimated
fair values, which were determined based on anticipated future cash flows
discounted at a rate commensurate with Jafra Germany's weighted average cost of
capital.
Loss (gain) on sale of assets. Gain on sale of assets increased to $1.0
million in 1999 from a loss of $0.2 million in 1998, an increase of $1.2
million. The increase was primarily due to the $1.0 million gain on sales of a
parcel of property and an office building in the U.S. in the fourth quarter of
1999.
Exchange gain (loss). The Company's foreign exchange gain in 1999 increased
to $3.3 million from an exchange loss of $0.4 million in 1998. The 1999 exchange
gain was primarily due to $3.7 million of exchange gains generated by Mexico,
partially offset by exchange losses in Europe of $0.4 million. In Mexico,
exchange gains during 1999 related primarily to the remeasurements and
repayments of U.S. dollar-denominated debt as the peso strengthened against the
dollar. During 1998, the U.S. dollar strengthened substantially against the
Mexican peso. This would normally have resulted in an exchange loss for the
Company due to the large amount of U.S. dollar-denominated debt at Jafra S.A.
However, as Mexico was considered to be a hyperinflationary economy during 1998,
the U.S. dollar was the functional currency of the Mexican subsidiary.
Accordingly, gains and losses on the remeasurement of such debt were not
included as a component of net income in 1998.
Interest expense. During 1999, the Company incurred $16.9 million of
interest expense (including amortization of certain deferred financing fees)
related to the debt incurred in conjunction with the Acquisition. Prior to the
Acquisition, the Company was not leveraged, and accordingly, the 1998 expense
included only eight months of Acquisition-related interest expense. During 1999,
the Company obtained a Consent and Waiver to the Senior Credit Agreement that
allowed the Company to repurchase the Notes in the open market from time to
time, up to an aggregate amount of $25.0 million, and the Company repurchased a
portion of its Notes with a face value of $14.0 million prior to maturity. In
the first quarter of year 2000 the Company repurchased and retired additional
Notes with a face value of $10.8 million prior to maturity. The repurchased
Notes were replaced with lower cost debt under the Revolving Credit Facility.
Income tax expense. Income tax expense increased to $10.9 million in 1999
from $4.6 million in 1998, an increase of $6.3 million. The increased income tax
expense for 1999 is primarily the result of higher taxable income generated by
the Company's Mexican subsidiary in 1999 as compared to 1998. In 1999, the
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Company's effective tax rate was 67.7%, while in 1998, the Company had a 657%
effective tax rate due to valuation allowances recorded against operating losses
in the U.S. and Europe. In 1999, the Company was able to utilize a portion of
operating losses previously recorded in the U.S., and the Company expects its
effective tax rate to decrease in year 2000 due to the ability to utilize
additional net operating losses in the U.S.
Net income (loss). Net income increased to $4.6 million in 1999 from a net
loss of $3.9 million in 1998, an increase of $8.5 million. The increase was
primarily due to a $39.8 million increase in gross profit, a $3.7 million
increase in exchange gains, and a $1.2 million increase in loss (gain) on sale
of assets, partially offset by a $19.1 million increase in SG&A expenses, the
$4.8 million restructuring and impairment charges incurred in 1999, a $5.5
million increase in interest expense resulting from the Acquisition, a $6.3
million increase in income tax expense, and a $0.6 million extraordinary loss,
net of tax, on early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Acquisition was consummated on April 30, 1998. As part of the financing
for the Acquisition, $100.0 million of Notes were issued, $41.5 million of
borrowings were initially drawn down under the Senior Credit Agreement ($25.0
million under the Term Loan Facility and $16.5 million under the Revolving
Credit Facility), and $82.9 million of cash was contributed as an equity
investment by CD&R Fund V, certain members of management, certain directors and
other persons. The purchase price for the Jafra Business, after final
adjustments determined in 1999, was approximately $212.4 million (excluding
$12.0 million of financing fees and expenses), consisting of $202.5 million in
cash and $9.9 million of Acquisition fees.
The Company's liquidity needs arise primarily from principal and interest
payments under the Notes, the Term Loan Facility and the Revolving Credit
Facility. The Notes represent several obligations of Jafra Cosmetics
International, Inc. ("JCI") and Jafra Cosmetics International, S.A. de C.V.
("Jafra S.A.") in the initial amount of $60 million and $40 million
(subsequently reduced in 1999 and 2000 by the repurchases described below),
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.
Borrowings under the Senior Credit Agreement are payable in quarterly
installments of principal and interest through April 30, 2004. Scheduled term
loan principal payments under the Term Loan Facility will be approximately $4.5
million, $5.5 million, $6.5 million, and $2.5 million for each of the years from
2001 through 2004, respectively. Borrowings under the Revolving Credit Facility
($14.5 million as of December 31, 2000) 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 1.625% or an alternate base rate (the higher of the prime
rate or federal funds rate plus 0.5%, plus an applicable margin not to exceed
0.625%). The interest rates in effect at December 31, 2000 ranged from
approximately 8.1% to approximately 8.3% for the LIBOR-based borrowings, and the
rate for the prime-based borrowings was approximately 10.1%. Borrowings under
the Senior Credit Agreement are secured by substantially all of the assets of
JCI and Jafra S.A. Interest expense in 2000 was $15.7 million, including
approximately $1.4 million of non-cash amortization of deferred financing fees.
During 2000, cash paid for interest was approximately $15.0 million.
Both the indenture (the "Indenture"), dated as of April 30, 1998, under
which the Notes were issued, and the Senior Credit Agreement contain certain
covenants that limit the Company's ability to incur additional indebtedness, pay
cash dividends and make certain other payments. The Indenture and the Senior
Credit Agreement 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. As of December 31, 2000, the Company had two irrevocable
standby letters of credit outstanding under the Revolving Credit Facility,
totaling $1.8 million.
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, JCI and Jafra S.A. 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.
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A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement allows the Company to repurchase the Notes in the open market from
time to time, with the aggregate purchase prices for all such Notes repurchased
not to exceed $25.0 million. During the fourth quarter of 1999, the Company
repurchased and retired Notes with a face value of $14.0 million prior to
maturity. In the first quarter of year 2000, the Company repurchased and retired
additional Notes with a face value of $10.8 million prior to maturity. The
repurchased debt was replaced with debt under the Revolving Credit Facility
which currently has a lower effective interest rate than the Notes.
The Company believes, but no assurance can be given, 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 year.
OUTSOURCING OF MANUFACTURING FUNCTIONS
The Company and the Contractor entered into a manufacturing agreement,
dated as of June 10, 1999, (the "Manufacturing Agreement"). Subject to the terms
and conditions of the Manufacturing Agreement, the Contractor has agreed to
manufacture all of the Company's requirements for certain cosmetic and skin care
products for an initial term of five years. Following the expiration of the
initial five-year term, the Manufacturing Agreement will be automatically
extended for additional one-year terms unless terminated by six months' prior
written notice by either party. The Manufacturing Agreement provides for price
renegotiations by the Contractor if the Company's quarterly or annual purchase
volume falls below specified minimums. In addition, the Company is obligated to
purchase materials acquired by the Contractor based upon product forecasts
provided by the Company if the Contractor is unable to sell such materials to a
third party. There have been no such repurchases to date. The Contractor is
solely responsible for obtaining the inventories, manufacturing the inventories
at its current location in Chino, California, complying with applicable laws and
regulations, and performing quality assurance functions.
In connection with the Company's 1999 restructuring activities related to
the closure and outsourcing of its U.S. product manufacturing functions as
discussed in Note 10 to the consolidated financial statements, certain fixed
assets and inventories were sold to the Contractor in exchange for secured
promissory notes. The promissory note for the fixed assets was for an amount of
approximately $1.5 million, carried an annual interest rate of 8%, and commenced
payments on January 1, 2000. The promissory note for inventories of
approximately $2.2 million was non-interest bearing, and commenced payments on
October 1, 1999. At December 31, 1999, approximately $2.1 million of notes from
the Contractor (reflected at present value, net of discount), as well as $0.5
million of unsecured accounts receivable, were included in receivables and
approximately $1.0 million of notes, representing the non-current portion of the
fixed asset notes from the Contractor, were included in other assets in the
accompanying consolidated balance sheets. The note for the inventories was
repaid in October 2000 and the note for the fixed assets was repaid in December
2000.
During the fourth quarter of 2000, the Contractor obtained $1.0 million of
advances from the Company in exchange for an unsecured promissory note. The note
bears interest at an annual rate of 9% and is payable in monthly installments
commencing on February 15, 2001. At December 31, 2000, approximately $0.9
million of the note was included in receivables and approximately $0.1 million
of the note was included in other assets in the accompanying consolidated
balance sheets.
RESTRUCTURING ACTIVITIES
During 2000, the Company paid out approximately $2.0 million in charges
related to restructuring activities. Approximately $1.0 million of the payments
were for amounts accrued in 1999, consisting primarily of severance payments
relating to the 1999 outsourcing of U.S. product manufacturing functions and
certain other restructuring activities in Europe. An additional amount of
approximately $1.0 million was paid relating to year 2000 repositioning
activities in Europe, and consisted primarily of severance costs. The Company
anticipates that substantially all of the remaining restructuring costs of
approximately $0.7 million will be paid by the end of the third quarter of 2001.
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CASH FLOWS
Net cash provided by operating activities was $32.5 million in 2000,
consisting of $23.2 million provided by net income adjusted for depreciation,
amortization, and other non-cash items included in net income and $9.3 million
provided by changes in operating assets and liabilities. The significant
elements of the net cash provided by changes in operating assets and liabilities
in 2000 were an increase of $12.1 million in accounts payable and a reduction in
prepaid income taxes of $12.2 million, partially offset by an increase in
inventories of $7.9 million and an increase in accounts receivable of $4.6
million. Net cash used by operating activities was $1.6 million in 1999,
consisting of $20.7 million used by changes in operating assets and liabilities
and $19.1 million provided by net income adjusted for depreciation,
amortization, and other non-cash items included in net income. The significant
elements of the net cash used by changes in operating assets and liabilities in
1999 were an increase in prepaid income taxes of $8.2 million, a reduction of
accounts payable and accrued liabilities of $5.9 million, an increase in
accounts receivable of $3.7 million, and an increase in prepaid assets of $3.0
million.
Net cash used in investing activities was $7.2 million in 2000, compared to
$3.1 million in 1999, an increase of $4.1 million. In 2000, investing activities
consisted primarily of capital expenditures. In 1999, net cash used in investing
activities consisted of capital expenditures of $5.8 million, payments of
previously accrued Acquisition fees of $1.9 million and miscellaneous items
totaling $1.0 million, partially offset by proceeds from the sales of a parcel
of property and an office building of $5.6 million.
Capital expenditures in 2001 are expected to be approximately $12.0
million, comprised of approximately $6.1 million for information technology,
$3.2 million for production equipment and $2.7 million for space and facilities.
These capital expenditures will be funded by cash from operations or borrowings
under the revolving credit facility.
Net cash used in financing activities was $23.5 million in 2000 compared to
$7.4 million in 1999, an increase of $16.1 million. In 2000, the Company paid
$10.6 million for repurchases of subordinated debt with a face value of $10.8
million, made net repayments of $10.5 million under the revolving credit
facility, and made principal repayments of $3.5 million under the term loan
facility. These debt repayment activities were partially offset by net proceeds
of $0.8 million for issuances of common stock, net of repurchases, and net
proceeds of $0.3 million from bank debt. In 1999, cash used in financing
activities consisted primarily of $13.5 million for the repurchase of
subordinated debt with a face value of $14.0 million and $2.5 million for
principal repayments under the term loan facility, partially offset by net
borrowings under the revolving credit facility of $8.5 million and net proceeds
of $0.1 million for issuances of common stock.
The effect of exchange rate changes on cash was $0.8 million for 2000
relating to fluctuations in the exchange rate of the peso and European
currencies, primarily the deutschmark. The effect of exchange rate changes on
cash was $1.4 million for 1999, relating primarily to fluctuations in the
exchange rate of the peso.
FOREIGN OPERATIONS
Sales outside of the United States aggregated 77%, 76%, and 70% of the
Company's total net sales for the fiscal years 2000, 1999, and 1998,
respectively. In addition, as of December 31, 2000, international subsidiaries
comprised approximately 75% of the Company's consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. During December 1999, the Company implemented a hedging program
to protect against potential devaluation of the Mexican peso. The Company
purchases forward contracts selling Mexican pesos and buying U.S. dollars based
upon forward exchange rates. These contracts are marked-to-market each month and
the fair value of the contracts is included in current assets and liabilities,
with the offsetting gain or loss included in exchange gain (loss) in the
accompanying consolidated statements of operations. In 2000, the net loss on
forward exchange contracts was $10.0 million, while in 1999 there was a $0.2
million gain as the positions were only outstanding for a short period of time.
The Company's subsidiary in Mexico, Jafra S.A., generated approximately
62.2% of the Company's net sales for 2000, compared to 58.8% for 1999,
substantially all of which were denominated in Mexican pesos.
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During 2000, the peso strengthened against the dollar. Net sales for 2000 would
have decreased by $2.3 million, or 1.2%, from reported amounts if average
exchange rates in 2000 remained the same as in 1999.
Mexico has experienced periods of high inflation in the past. During 1998,
Jafra S.A.'s functional currency was the U.S. dollar because Mexico was
considered to be a hyperinflationary economy during that period. As of January
1, 1999, Mexico was no longer considered a hyperinflationary economy, and from
that date forward, the Company has accounted for its Mexican operations using
the peso as its functional currency. Because the functional currency in Mexico
is no longer the U.S. dollar, gains and losses of remeasuring such debt to the
U.S. dollar from the peso are now included as a component of net income. The
remeasurement of U.S. dollar denominated-debt resulted in an unrealized exchange
loss of $0.7 million in 2000. Jafra S.A. had $37.6 million of U.S. dollar
denominated third party debt and $20.1 million of U.S. dollar-denominated
intercompany debt as of December 31, 2000.
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 to 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 is currently identifying the impact the euro will have on its
information systems throughout Europe. The Company has identified that its
European commercial system will not support the euro, and that modifications are
required in order to adapt the commercial system to support the euro. The
Company plans to begin modifying its system in the second quarter of 2001,
expects to complete the necessary modifications by the end of 2001, and does not
expect to incur significant expenses in achieving a euro-compliant system. The
Company does not expect the introduction of the euro to materially adversely
affect its business, financial condition, or results of operations.
BUSINESS TRENDS AND INITIATIVES
The Company has experienced significant sales growth and an increased
concentration of sales in Mexico over the last three years, due primarily to
increases in the number of consultants. In 2000, the Company's Mexican
subsidiary generated 62% of the Company's consolidated net sales, compared to
48% for 1998. Sales growth in Mexico during 1998 and 1999 was over 40% per year
in local currency, but slowed to a growth rate of 13% in local currency in 2000.
Assuming a continued stable economic environment, the Company expects to
continue to grow its revenues and representative base in Mexico, but at rates in
the range of 10-12% per year.
The Company is employing a strategy to leverage diversification through
growth in other markets besides Mexico. Late in 2000, the U.S. subsidiary took a
strategic step to recognize the distinct elements of its General and Hispanic
customer groups, and appointed separate General Managers for these distinct
business divisions. Each of these divisions plans to implement programs tailored
to the specific needs of its customers in 2001, and U.S. sales growth is
expected to be in the high single digits.
Net sales in Europe for 2000 declined at a rate of approximately 19% from
the comparable period of the prior year, primarily due to declines in both the
number and productivity of consultants, along with an unfavorable exchange rate
impact. European sales have declined from approximately 16% of the Company's
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business in 1998 to approximately 8% of the Company's business in 2000. While no
assurance can be given, the Company expects to achieve approximately the same
level of European sales in year 2001 as was achieved in 2000, but at higher
operating profit as a result of the repositioning and restructuring activities
undertaken during 2000. See "-- Results of Operations".
During 1999 and 2000, the Company has made significant investments in new
markets in South America. Sales in the South American region grew by over 20% in
2000 and are expected to continue to grow at even higher rates as the new
markets continue to develop. In 2000, net sales generated by subsidiaries in the
South American region were approximately 6% of consolidated net sales, but the
Company expects the region to contribute approximately 9% of consolidated sales
for 2001.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the
Company's consolidated financial statements and other statements of historical
fact) are forward-looking statements, including, without limitation, (i) the
statements in "Business -- Strategy" concerning (a) the Company's belief that
the senior management team will continue to provide the dynamic leadership
required to attract new consultants and managerial talent, inspire new and
existing consultants to greater productivity and execute the Company's new
market development strategy; (b) the Company's plans to expand its consultant
base in developed markets and to increase consultant productivity; (c) the
Company's plans to continuously introduce new and enhanced products based on
technological advances and consumer demand; (d) the Company's belief that its
existing distribution and manufacturing capabilities provide a strong platform
for the Company to expand into and within new and developing markets and thereby
diversify its revenue base; (e) the Company's intention to focus its expansion
efforts in new and developing markets; (f) the Company's plan to enhance its use
of the Internet including by enabling U.S. consultants to submit orders and
payments electronically and its belief that use of the Internet by its
consultants will result in better service to customers at a lower cost and
increase the overall satisfaction level of its consultants; and (g) the
Company's plans to continue to improve operating efficiency through
cost-cutting, better inventory management, and streamlining of marketing efforts
and product lines; the Company's plan to place greater marketing focus on
certain types of "limited life" products and its belief that the focus on these
products will lead to a faster level of inventory turns and a reduced investment
in inventories; (ii) the statements in "Business -- Products" concerning (a) the
Company's plan to launch a major redesign of the Color line at the end of 2001,
(b) the Company's plans to launch a new product containing retinol in capsule
form in mid-2001, (c) the Company's plan to introduce two new global fragrances,
one fragrance for the Mexico market, and up to six new fragrances in Brazil in
2001, (d) the Company's plans to launch fitness and well-being body care
products for use in conjunction with exercise and leisure activities in 2001;
(iii) the statement in "Business -- International Operations" that the Company
intends to increase revenues in markets other than Mexico in order to diversify
its revenue base and to minimize any adverse impact that a downturn in the
Mexican economy may have on the Company; (iv) the statement in
"Business -- Manufacturing" that goods and raw materials used in the Company's
products generally are available or can be obtained to Company specifications
from more than one potential supplier; (v) the statement in
"Business -- Distribution" that management believes its facilities are adequate
to meet demand in its existing markets for the foreseeable future; (vi) the
statements in "Business -- Management Information Systems" concerning (a) the
Company's expectation that the remainder of its e-commerce system is expected to
be implemented in the second quarter of 2001; (b) the Company's expectations
that during 2001, European information systems will be modified to support a
streamlined European organization and to achieve compliance with the euro, (c)
the Company's expectation that during 2001, a new business system will be
implemented in Brazil to enhance financial and inventory management, (d) the
Company's belief that commercial systems currently existing in its major markets
are adequate to support its business activities for the next two to three years,
and (e) the Company's expectation that a new commercial system will be
implemented globally in a phased approach beginning in the latter part of 2001
and continuing to 2004; (vii) the statement in "Business -- Environmental
Matters" that the Company believes that environmental laws and regulations will
not have a material adverse effect on its capital expenditures, earnings or
competitive position; (viii) other statements as to management's or the
Company's expectations, intentions and beliefs presented in "Business"; (ix) the
statement in "Properties" that the Company's properties are suitable to
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meet its anticipated requirements; (x) the statement in "Legal Proceedings" that
the Company believes that the resolution of the routine legal matters in which
it is involved will not have a material adverse effect on the Company's
business, financial condition or results of operations; (xi) the statement in
"-- Liquidity and Capital Resources" that the Company believes that it will have
sufficient liquidity to meet its cash requirements and working capital needs
over the next year, (xii) the statement in "-- Cash Flows" that the Company
expects capital expenditures in 2001 to be approximately $12.0 million, (xiii)
the statements in "-- European Economic and Monetary Union" concerning the
Company's expectations that (a) use of the euro by the Company or its
consultants will not be significant and (b) the introduction of the euro will
not materially adversely affect its business, financial condition or results of
operations; (xiv) the statements in "-- Business Trends and Initiatives" that
(a) assuming a continued stable economic environment, the Company expects to
continue to grow its revenues and representative base in Mexico, but at rates in
the range of 10 - 12% per year, (b) the Company's plans to implement programs
tailored to the specific needs of the customers of each of the U.S. divisions in
2001; (c) the Company's expectation that U.S. sales growth will be in the high
single digits in 2001; (d) the Company's expectation that sales in Europe in
2001 will be approximately the same level as in 2000, but at a higher operating
profit, and (e) the Company's expectation that its percentage of net sales in
South America will increase to approximately 9% of consolidated sales for 2001
and (xv) other statements as to management's or the Company's expectations or
beliefs presented in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements are based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. The
following important factors, and those important factors described elsewhere in
this report (including, without limitation, those discussed in
"Business -- Strategy," "-- International Operations," "-- Distribution,"
"-- Manufacturing," "-- Management Information Systems," "-- Environmental
Matters," "Properties," "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations," "-- Liquidity and Capital Resources," "-- Foreign Operations,"
"-- European Economic and Monetary Union" and "-- Business Trends and
Initiatives"), or in other Securities and Exchange Commission filings, could
affect (and in some cases have affected) the Company's actual results and could
cause such results to differ materially from estimates or expectations reflected
in such forward-looking statements:
- The Company's high degree of leverage could have important consequences
to the Company, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds
available to the Company for other purposes; (iii) certain of the
Company's borrowings will be at variable rates of interest, which could
cause the Company to be vulnerable to increases in interest rates and
(iv) the Company may be more vulnerable to economic downturns and be
limited in its ability to withstand competitive pressures.
- The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness, and to comply with the
covenants and restrictions contained in the instruments governing such
indebtedness, will depend on its financial and operating performance,
which, in turn, is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors beyond
its control, including operating difficulties, increased operating costs,
market cyclicality, product prices, the response of competitors,
regulatory developments, and delays in implementing strategic projects.
- The Company's ability to meet its debt service and other obligations will
depend in significant part on the extent to which the Company can
implement successfully its business strategy. The components of the
Company's strategy are subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
control of the Company.
23
26
- The Company's ability to conduct and expand its business outside the
United States and the amount of 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. 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.
- The direct selling cosmetics and personal care products business is
highly competitive. 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 with
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.
- 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.
- The Company is subject to or affected by governmental regulations
concerning, among other things, (i) product formulation, (ii) product
claims and advertising, whether made by the Company or its consultants,
(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 or safety or food and
drug regulations could delay or prevent the introductions 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.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not intend to review or revise any particular
forward-looking statement referenced in this report in light of future events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks arising from transactions in
the normal course of its business, and from debt incurred in connection with the
Acquisition. Such risk is principally associated with interest rate and foreign
exchange fluctuations, as well as changes in the Company's credit standing.
During the fourth quarter of 2000, the Company received upgraded Company credit
ratings from both S&P and Moody's, to current ratings of B+ and B2,
respectively.
24
27
INTEREST RATE RISK
The Company has U.S. dollar denominated debt obligations in both the United
States and Mexico that have fixed and variable interest rates and mature on
various dates. The tables below present principal cash flows and related
interest rates by fiscal year of maturity:
DEBT OBLIGATION INFORMATION AT DECEMBER 31, 2000
(AMOUNTS IN U.S. DOLLARS IN 000'S)
EXPECTED YEAR OF MATURITY FAIR VALUE
---------------------------------------------------------------- DECEMBER 31,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000(1)
------ ------ ------ ------- ---- ---------- ------- ------------
Senior Subordinated Notes, Term Loan,
and Revolving Credit Facility
Fixed Rate (US$)................. $75,180 $75,180 $77,435
Average Interest Rate............ 11.75%
Variable Rate (US$).............. $4,846 $5,500 $6,500 $17,000 -- -- 33,846 33,846
Average Interest Rate............ 8.95% 8.13% 8.13% 8.29% -- --
DEBT OBLIGATION INFORMATION AT DECEMBER 31, 1999
(AMOUNTS IN U.S. DOLLARS IN 000'S)
EXPECTED YEAR OF MATURITY FAIR VALUE
------------------------------------------------------------------ DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999(1)
------ ------ ------ ------ ------- ---------- ------- ------------
Senior Subordinated Notes, Term
Loan, and Revolving Credit
Facility
Fixed Rate (US$).................. $86,000 $86,000 $83,850
Average Interest Rate............. 11.75%
Variable Rate (US$)............... $3,500 $4,500 $5,500 $6,500 $27,500 -- 47,500 47,500
Average Interest Rate............. 8.89% 8.89% 8.89% 8.89% 8.89% --
- ---------------
(1) The Company's estimate of the fair value of its Senior Subordinated Notes at
December 31, 2000 was based on discussions with one of the Company's largest
bondholders, and an analysis of current market interest rates and the
Company's credit rating. The Company's estimate of the fair value of its
Senior Subordinated Notes at December 31, 1999 was based upon quoted market
prices. As the Company's Revolving Credit Facilities and the Term Loan are
variable rate debt, and the interest rate spread paid by the Company is
adjusted for changes in certain financial ratios of the Company, the fair
value of the Revolving Credit Facilities and the Term Loan approximated
their carrying amounts at December 31, 2000 and 1999.
FOREIGN CURRENCY RISK
The Company operates globally, with manufacturing facilities in Mexico and
distribution facilities in various locations around the world. All intercompany
product sales are denominated in U.S. dollars. In addition, 77% of the Company's
2000 revenue was generated in countries with a functional currency other than
the U.S. dollar. As a result, the Company's earnings and cash flows are exposed
to fluctuations in foreign currency exchange rates.
The Company may reduce its primary market exposures to fluctuations in
foreign exchange rates and hedge contractual foreign currency cash flows or
obligations (including third-party and intercompany foreign currency
transactions) by creating offsetting positions through the use of forward
exchange contracts. The Company regularly monitors its foreign currency
exposures and ensures that contract amounts do not exceed the amounts of the
underlying exposures. The Company does not use derivative financial instruments
for trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The tables below describe the forward contracts that were outstanding at
December 31, 2000 and 1999 (dollar amounts in thousands). These foreign currency
forward contracts do not qualify as hedging
25
28
transactions under the current accounting definitions and, accordingly, have
been marked-to-market through income.
DECEMBER 31, 2000:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............... $ 6,980 1/26/01 10.12 $ 6,679
Buy US Dollar/sell Mexican Peso............... 7,500 2/26/01 10.20 7,187
Buy US Dollar/sell Mexican Peso............... 7,529 3/30/01 10.36 7,162
Buy US Dollar/sell Mexican Peso............... 5,915 4/30/01 10.48 5,607
Buy US Dollar/sell Mexican Peso............... 2,828 5/31/01 10.61 2,670
Buy US Dollar/sell Mexican Peso............... 3,907 6/29/01 10.24 3,861
Buy US Dollar/sell Mexican Peso............... 2,618 7/31/01 10.31 2,588
Buy US Dollar/sell Mexican Peso............... 11,816 8/31/01 10.32 11,804
Buy US Dollar/sell Mexican Peso............... 12,125 9/28/01 10.39 12,119
Buy US Dollar/sell Mexican Peso............... 2,336 10/30/01 10.70 2,290
Buy US Dollar/sell Mexican Peso............... 10,275 10/31/01 10.71 10,078
Buy US Dollar/sell Mexican Peso............... 2,878 11/30/01 10.43 2,934
Buy US Dollar/sell Mexican Peso............... 4,110 12/27/01 10.71 4,120
------- -------
$80,817 $79,099
======= =======
DECEMBER 31, 1999:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............... $ 3,658 3/31/00 9.671 $ 3,690
Buy US Dollar/sell Mexican Peso............... 3,822 4/28/00 9.770 3,856
Buy US Dollar/sell Mexican Peso............... 2,885 5/31/00 9.900 2,907
Buy US Dollar/sell Mexican Peso............... 3,937 6/30/00 10.008 3,967
Buy US Dollar/sell Mexican Peso............... 1,947 7/31/00 10.118 1,962
Buy US Dollar/sell Mexican Peso............... 2,988 8/31/00 10.223 3,010
Buy US Dollar/sell Mexican Peso............... 3,818 9/29/00 10.326 3,846
Buy US Dollar/sell Mexican Peso............... 3,593 10/31/00 10.438 3,617
Buy US Dollar/sell Mexican Peso............... 2,814 11/30/00 10.548 2,829
------- -------
$29,462 $29,684
======= =======
- ---------------
(1) The "Forward Position in U.S. Dollars" and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized loss
of $1,718,000 at December 31, 2000 and an unrealized gain of $222,000 at
December 31, 1999, represents the carrying value of the forward contracts
(which approximates fair value) and has been recorded as a liability and an
asset in the accompanying consolidated balance sheets as of December 31,
2000 and 1999, respectively.
Prior to entering into foreign currency exchange contracts, the Company
evaluates the counter parties' credit ratings. Credit risk represents the
accounting loss that would be recognized at the reporting date if counter
parties failed to perform as contracted. The Company does not currently
anticipate non-performance by such counter parties.
26
29
Based upon the $80.8 million of outstanding forward contracts at December
31, 2000, if the peso to U.S. dollar exchange rate strengthened by 10%, a $14.4
million foreign currency loss on the settlement of forward contracts would
result. However, gains would be realized on the Company's underlying hedged
transactions.
The Company's Mexican subsidiary, Jafra S.A., had U.S. dollar denominated
debt of $57.7 million and $84.9 million at December 31, 2000 and 1999,
respectively. During 2000, the value of the peso to the U.S. dollar decreased by
1.8%, and Jafra S.A. incurred a $0.7 million foreign currency transaction loss
related to the remeasurement and repayment of U.S. dollar denominated debt.
Based upon the $57.7 million of outstanding debt at December 31, 2000, a
10% decline in the peso to U.S. dollar exchange rate would result in a $5.8
million foreign currency transaction loss.
27
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS -- CDRJ INVESTMENTS (LUX) S.A. AND
SUBSIDIARIES
PAGE
----
Independent Auditors' Report................................ 29
Consolidated Balance Sheets -- As of December 31, 2000 and
1999...................................................... 30
Consolidated Statements of Operations -- For the years ended
December 31, 2000 and 1999, the eight-month period ended
December 31, 1998, and the four-month period ended April
30, 1998.................................................. 31
Consolidated Statements of Stockholders' Equity -- For the
years ended December 31, 2000 and 1999, the eight-month
period ended December 31, 1998, and the four-month period
ended April 30, 1998...................................... 32
Consolidated Statements of Cash Flows -- For the years ended
December 31, 2000 and 1999, the eight-month period ended
December 31, 1998, and the four-month period ended April
30, 1998.................................................. 33
Notes to Consolidated Financial Statements.................. 35
FINANCIAL STATEMENTS -- JAFRA COSMETICS INTERNATIONAL, INC.
Independent Auditors' Report.............................. 57
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 58
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 59
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 2000 and 1999, the eight-month
period ended December 31, 1998, and the four-month
period ended April 30, 1998............................ 60
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 61
Notes to Consolidated Financial Statements................ 62
FINANCIAL STATEMENTS -- JAFRA COSMETICS INTERNATIONAL, S.A.
DE C.V.
Independent Auditors' Report.............................. 80
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 81
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 82
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000 and 1999, the eight-month
period ended December 31, 1998, and the four-month
period ended April 30, 1998............................ 83
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 84
Notes to Consolidated Financial Statements................ 85
Schedule II -- Valuation and Qualifying Accounts............ 97
28
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CDRJ Investments (Lux) S.A.
Luxembourg
We have audited the accompanying consolidated balance sheets of CDRJ
Investments (Lux) S.A. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 2000 and 1999 and the eight-month
period ended December 31, 1998 and the combined statements of operations,
divisional equity, and cash flows of Jafra Cosmetics International (the
"Predecessor") for the four-month period ended April 30, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CDRJ
Investments (Lux) S.A. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years ended
December 31, 2000 and 1999 and the eight-month period ended December 31, 1998
and the combined results of operations and cash flows of the Predecessor for the
four-month period ended April 30, 1998 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
March 22, 2001
Los Angeles, California
29
32
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 5,838 $ 4,906
Receivables, less allowances for doubtful accounts of
$3,553 in 2000 and $3,087 in 1999...................... 35,919 31,277
Inventories............................................... 38,146 30,290
Prepaid income taxes...................................... 1,869 13,875
Prepaid expenses and other current assets (including
value-added tax receivables of $5,329 in 2000 and
$6,053 in 1999)........................................ 10,296 8,608
-------- --------
Total current assets.............................. 92,068 88,956
Property and equipment, net................................. 51,448 50,607
Other assets:
Goodwill, net............................................. 72,260 75,323
Trademarks, net........................................... 49,375 51,605
Deferred financing fees and other, net.................... 11,793 11,886
-------- --------
Total............................................. $276,944 $278,377
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of long-term
debt................................................... $ 4,846 $ 3,500
Accounts payable.......................................... 27,988 15,005
Accrued liabilities....................................... 34,223 33,424
Income taxes payable...................................... 426 276
Deferred income taxes..................................... 5,391 2,587
-------- --------
Total current liabilities......................... 72,874 54,792
Long-term debt.............................................. 104,180 130,000
Deferred income taxes....................................... 16,357 15,731
Other long-term liabilities................................. 2,366 2,060
-------- --------
Total liabilities................................. 195,777 202,583
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, par value $2.00; authorized, 1,020,000
shares; issued and outstanding, 834,293 shares in 2000
and 830,659 shares in 1999............................. 1,669 1,661
Additional paid-in capital................................ 82,194 81,381
Retained earnings (deficit)............................... 2,942 (3,393)
Accumulated other comprehensive loss...................... (5,572) (3,855)
-------- --------
81,233 75,794
Less treasury stock, at cost, 316 shares.................. (66) --
-------- --------
Total stockholders' equity........................ 81,167 75,794
-------- --------
Total............................................. $276,944 $278,377
======== ========
See accompanying notes to consolidated financial statements.
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33
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Net sales............................... $324,140 $299,165 $176,210 $79,920
Cost of sales........................... 79,559 82,239 56,324 22,666
-------- -------- -------- -------
Gross profit....................... 244,581 216,926 119,886 57,254
Selling, general and administrative
expenses.............................. 199,473 183,549 112,643 51,813
Restructuring and impairment charges.... 2,626 4,812 -- --
Loss (gain) on sale of assets........... 150 (1,043) 150 --
-------- -------- -------- -------
Income from operations............. 42,332 29,608 7,093 5,441
Other income (expense):
Exchange (loss) gain.................. (11,652) 3,330 (1,742) 1,376
Interest (expense) income, net........ (15,659) (16,888) (11,431) 78
Other income (expense), net........... 1,563 24 (201) 104
-------- -------- -------- -------
Income (loss) before income taxes and
extraordinary item.................... 16,584 16,074 (6,281) 6,999
Income tax expense...................... 9,934 10,874 1,760 2,899
-------- -------- -------- -------
Income (loss) before extraordinary
item.................................. 6,650 5,200 (8,041) 4,100
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $195 in 2000 and $177
in 1999............................... 315 552 -- --
-------- -------- -------- -------
Net income (loss)....................... $ 6,335 $ 4,648 $ (8,041) $ 4,100
======== ======== ======== =======
See accompanying notes to consolidated financial statements.
31
34
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARES)
PREDECESSOR
FOUR
EIGHT MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
----------------- ----------------- ----------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT AMOUNT
------- ------- ------- ------- ------- ------- -----------
COMMON STOCK:
Balance, beginning of period....................... 830,659 $ 1,661 829,940 $ 1,660 -- -- $ 49,567
Common stock issued upon formation of -- -- -- -- -- -- --
CDRJ Investments (Lux) S.A., April 30, 1998...... -- -- -- -- 789,503 $ 1,579 --
Issuance of common stock........................... 3,634 8 719 1 40,437 81 --
------- ------- ------- ------- ------- ------- --------
Balance, end of period............................. 834,293 1,669 830,659 1,661 829,940 1,660 49,567
------- ------- ------- ------- ------- ------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period....................... 81,381 81,275 -- 4,564
Common stock issued upon formation of -- -- -- --
CDRJ Investments (Lux) S.A., April 30, 1998...... -- -- 77,371 --
Issuance of common stock........................... 813 106 3,904 --
------- ------- ------- ------- ------- ------- --------
Balance, end of period............................. 82,194 81,381 81,275 4,564
------- ------- ------- ------- ------- ------- --------
RETAINED EARNINGS (DEFICIT):
Balance, beginning of year......................... (3,393) (8,041) -- 77,513
Net income (loss).................................. 6,335 4,648 (8,041) 4,100
Net loss for foreign subsidiaries due to -- -- --
change in reporting period (unaudited)........... -- -- -- (1,197)
Dividends paid to Gillette......................... -- -- -- (20,990)
Capital contributions by Gillette.................. -- -- -- 31,735
------- ------- ------- ------- ------- ------- --------
Balance, end of period............................. 2,942 (3,393) (8,041) 91,161
------- ------- ------- ------- ------- ------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of year......................... (3,855) 547 -- (54,340)
Currency translation adjustments................... (1,717) (4,402) 547 (333)
------- ------- ------- ------- ------- ------- --------
Balance, end of period............................. (5,572) (3,855) 547 (54,673)
------- ------- ------- ------- ------- ------- --------
TREASURY STOCK, AT COST:
Balance, beginning of year......................... -- -- -- -- -- -- --
Purchases of treasury stock........................ 948 (199) 2,317 (346) -- -- --
Exercise of stock options.......................... (158) 33 (579) 86 --
Issuances of common stock.......................... (474) 100 (1,738) 260 -- -- --
------- ------- ------- ------- ------- ------- --------
Balance, end of period............................. 316 (66) -- -- -- -- --
------- ------- -------
Total Stockholders' Equity................... 834,609 $81,167 830,659 $75,794 829,940 $75,441 $ 90,619
======= ======= ======= ======= ======= ======= ========
COMPREHENSIVE INCOME (LOSS):
Net income (loss).................................. $ 6,335 $ 4,648 $(8,041) $ 4,100
Currency translation adjustments................... (1,717) (4,402) 547 (333)
------- ------- -------
Total Comprehensive Income (Loss)............ $ 4,618 $ 246 $(7,494) $ 3,767
======= ======= =======
- ---------------
(1) Stockholders' equity of the Predecessor represents the combined
stockholders' equity and divisional equity of the Predecessor entities.
See accompanying notes to consolidated financial statements.
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35
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR
-----------
YEARS ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
------------------- DECEMBER 31, APRIL 30,
2000 1999 1998 1998
-------- -------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 6,335 $ 4,648 $ (8,041) $ 4,100
Extraordinary loss on early extinguishment of debt,
net of taxes........................................ 315 552 -- --
-------- -------- --------- --------
Income (loss) before extraordinary item................. 6,650 5,200 (8,041) 4,100
Adjustments to reconcile income (loss) before
extraordinary item to net cash provided by (used in)
operating activities:
Loss (gain) on sale of property and equipment......... 150 (1,043) 150 --
Depreciation and amortization......................... 7,632 7,119 5,089 1,363
Amortization of deferred financing fees............... 1,430 1,832 1,407 --
Asset impairment charge............................... 1,019 1,084 -- --
Unrealized foreign exchange loss (gain)............... 2,918 (2,377) -- --
Deferred income taxes................................. 3,430 7,320 4,516 375
Changes in operating assets and liabilities:
Receivables, net.................................... (4,578) (3,686) (4,095) (2,063)
Inventories......................................... (7,856) 613 5,260 (512)
Prepaid expenses and other current assets........... (1,688) (2,960) (2,313) (7,457)
Other assets........................................ (927) (1,182) (760) 3,948
Accounts payable and accrued liabilities............ 12,065 (5,904) 19,699 (7,144)
Income taxes payable/prepaid........................ 12,156 (8,198) (2,878) (247)
Other long-term liabilities......................... 57 627 80 (408)
-------- -------- --------- --------
Net cash provided by (used in) operating
activities..................................... 32,458 (1,555) 18,114 (8,045)
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Jafra Business, net of cash received of
$2,339................................................ -- -- (187,226) --
Withholding taxes on purchase price..................... -- -- (12,929) --
Payments of previously accrued Acquisition fees......... -- (1,856) (7,542) --
Proceeds from sale of property and equipment............ 675 5,551 2,917 8,811
Purchases of property and equipment..................... (7,105) (5,798) (6,367) (6,124)
Other................................................... (760) (991) -- (97)
-------- -------- --------- --------
Net cash provided by (used in) investing
activities..................................... (7,190) (3,094) (211,147) 2,590
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance (repurchase) of subordinated debt.............. (10,597) (13,490) 100,000 --
Borrowings (repayments) under term loan facility........ (3,500) (2,500) 25,000 --
Net borrowings (repayments) under revolving credit
facility.............................................. (10,500) 8,500 16,500 --
Net proceeds from bank debt............................. 346 -- -- --
Capital contributions by Gillette....................... -- -- -- 5,013
Transactions with Gillette and other divisions.......... -- -- -- (13,792)
Issuance of common stock................................ 954 457 82,707 --
Repurchase of common stock.............................. (199) (346) -- --
Deferred financing fees................................. -- -- (12,471) --
-------- -------- --------- --------
Net cash provided by (used in) financing
activities..................................... (23,496) (7,379) 211,736 (8,779)
-------- -------- --------- --------
Effect of exchange rate changes on cash................... (840) (1,424) (573) (333)
Effect of accounting calendar change on cash.............. -- -- -- 6,276
-------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents...... 932 (13,452) 18,130 (8,291)
Cash and cash equivalents at beginning of period.......... 4,906 18,358 228 10,231
-------- -------- --------- --------
Cash and cash equivalents at end of period................ $ 5,838 $ 4,906 $ 18,358 $ 1,940
======== ======== ========= ========
(Continued)
33
36
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
PREDECESSOR
-----------
YEARS ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
------------------- DECEMBER 31, APRIL 30,
2000 1999 1998 1998
-------- -------- ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest.............................................. $ 15,027 $ 16,656 $ 8,301 $ 501
Income taxes.......................................... (5,652) 10,541 4,402 4,135
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In connection with the Acquisition at April 30, 1998,
certain intercompany balances between Gillette and the
Predecessor were forgiven. These amounts were
accounted for as direct contributions to (reductions
from) equity:
Intercompany accounts payable......................... $ -- $ -- $ -- $ 26,722
Intercompany accounts receivable...................... -- -- -- (20,990)
During 1999, the Company sold inventories with a book value of
approximately $2.3 million and equipment with a net book value of approximately
$3.8 million to a third party contractor in connection with a manufacturing
outsourcing agreement, in exchange for notes receivable with present values of
$2.1 million and $1.5 million, respectively (see Note 14). The resulting loss of
approximately $2.5 million was recorded as a charge against the restructuring
accrual established in connection with the Acquisition.
See accompanying notes to consolidated financial statements.
34
37
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme (the "Parent"),
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 and into 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 accompanying consolidated financial statements as of and for the years
ended December 31, 2000 and 1999 and for the eight-month period ended December
31, 1998 reflect the operations of the Parent and its subsidiaries. The
accompanying combined financial statements for the four months ended April 30,
1998 reflect the operations of the Jafra Business prior to the Acquisition and
are referred to as the "Predecessor" operations. All significant intercompany or
interdivisional accounts and transactions between entities comprising the Jafra
Business have been eliminated in consolidation and combination.
The combined financial statements of the Predecessor included the following
subsidiaries and divisions of 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 Jafra-related operations of Gillette affiliates
in Austria, Argentina, Colombia and Venezuela; and the assets related to the
Jafra intellectual property, formerly held by Gillette, that are used in the
Jafra Business.
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 consolidated
financial statements of the Company are not directly comparable to those of the
Predecessor.
In 1998, the Predecessor changed the reporting period for the foreign
operations 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 Predecessor's foreign operations from November 30, 1997 to
December 31, 1997.
The purchase price for the Jafra Business was approximately $212.4 million
(excluding $12.0 million of financing fees and expenses), consisting of $202.5
million in cash ($2.5 million of which was determined and paid subsequent to the
Acquisition date) and $9.9 million of Acquisition fees. The $202.5 million cash
purchase price included $187.1 million paid by the Company directly to Gillette
in cash at the closing date, (net of cash of $2.3 million received as part of
the Acquisition), and $12.9 million of withholding taxes paid by
35
38
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 their
respective fair values at the date of Acquisition based on valuations and other
studies. The following sets forth the purchase price allocation (amounts in
millions):
Net tangible assets acquired (net of liabilities assumed of
$38.2 million)............................................ $ 69.0
Allocation of excess purchase price:
Property and equipment.................................... 18.4
Accrued income taxes...................................... 0.9
Deferred income tax liability............................. (0.8)
Accrual of restructuring/rationalization costs (Note
10).................................................... (4.4)
Inventories............................................... (2.4)
Trademarks................................................ 53.8
Goodwill.................................................. 77.9
------
Total............................................. $212.4
======
DESCRIPTION OF BUSINESS
The Company is an international manufacturer and marketer of premium skin
and body care products, color cosmetics, fragrances, and other personal care
products. The Company markets its products primarily in 16 countries, 15 outside
the United States, and a number of additional countries through distributors,
through a direct selling, multilevel distribution system comprised of
self-employed salespersons (known as "consultants").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash, time
deposits and all highly liquid debt instruments purchased with a maturity of
three months or less.
Inventories. Inventories are stated at the lower of cost, as determined by
the first-in, first-out basis, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is provided for over the estimated useful
lives of the respective assets using the straight-line method. Estimated useful
lives are 40 years for buildings and improvements and 5 to 15 years for
machinery and equipment. 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 and
trademarks, which are amortized using the straight-line method. Goodwill and
trademarks resulting from the Company's acquisition of the Jafra Business from
Gillette are being amortized over a period of 40 years, while the Predecessor's
goodwill was amortized generally over a period of 37.5 years. Accumulated
amortization of goodwill and trademarks at
36
39
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000 was $5,114,000 and $3,724,000, respectively. Accumulated
amortization of goodwill and trademarks at December 31, 1999 was $3,160,000 and
$2,303,000, respectively.
Deferred Financing Costs. In connection with the acquisition of the Jafra
Business, the Company incurred approximately $12.0 million of costs related to
the 11.75% Senior Subordinated Notes due 2008 (the "Notes"), the Revolving
Credit Facility and the Term Loan Facility (see Note 6). Such costs are being
amortized on a basis that approximates the interest method over the expected
term of the related debt. Accumulated amortization at December 31, 2000 and 1999
was $3,998,000 and $2,887,000, respectively.
Impairment of Long-Lived Assets and Enterprise Goodwill. Long-lived assets
and enterprise goodwill are reviewed for impairment, based on undiscounted cash
flows, whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If this review indicates that the
carrying amount of the long-lived assets and goodwill is not recoverable, the
Company will recognize an impairment loss, measured by the future discounted
cash flow method (see Note 10).
Foreign Currency Forward Contracts. During 2000 and 1999, the Company
entered into foreign currency forward contracts to reduce the effect of adverse
exchange rate fluctuations in Mexico. As a matter of policy, the Company does
not hold or issue foreign currency forward contracts for trading or speculative
purposes. These contracts have been marked-to-market each month based upon the
change in the spot rate from the date of contract inception to the balance sheet
date. The premium on such contracts is amortized to expense over the life of the
contracts. The carrying value of the contracts is included in current assets and
liabilities, with the offsetting gain or loss included in exchange (loss) gain
in the accompanying consolidated statements of operations. At December 31, 2000
and 1999, the Company included $1,718,000 in accrued liabilities and $222,000 in
prepaid expenses and other current assets, respectively, in the accompanying
consolidated balance sheets.
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the short-term maturities of these instruments. The fair value of the
Notes at December 31, 2000 was $77,435,000, based upon discussions with one of
the Company's largest bondholders and an analysis of current market interest
rates and the Company's credit rating. The fair value of the Notes at December
31, 1999 was $83,850,000, based on quoted market prices. As the Company's
Revolving Credit Facilities and the Term Loan are variable rate debt, and the
interest rate spread paid by the Company is adjusted for changes in certain
financial ratios of the Company, the fair value of the Revolving Credit
Facilities and the Term Loan approximated their carrying amounts at December 31,
2000 and 1999. The fair value of the Company's forward currency contracts at
December 31, 2000 and 1999 closely approximates the carrying value, as such
contracts are marked-to-market based upon changes in the spot rate from the date
of contract inception to the balance sheet date.
Research and Development. Research and development costs are expensed as
incurred. Total research and development expense aggregated $1,901,000,
$2,130,000, $1,902,000, and $1,185,000 for the years ended December 31, 2000 and
1999, the eight months ended December 31, 1998, and the four months ended April
30, 1998, respectively.
Income Taxes. The Company accounts for income taxes under the balance sheet
approach that requires the recognition of deferred income tax assets and
liabilities for the expected future consequences of events that have been
recognized in the Company's financial statements or income tax returns.
Management provides a valuation allowance for deferred income tax assets when it
is more likely than not that a portion of such deferred income tax assets will
not be realized.
Foreign Currency Translation. The functional currency for foreign
subsidiaries is generally the local currency. Assets and liabilities of such
foreign subsidiaries are translated into U.S. dollars at current exchange rates,
and related revenues and expenses are translated at average exchange rates in
effect during the period. Resulting translation adjustments are recorded as a
component of other comprehensive income. Financial
37
40
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
results of foreign subsidiaries in countries with highly inflationary economies
are translated using a combination of current and historical exchange rates and
any translation adjustments are included in net earnings, along with all
transaction gains and losses for the period.
During 1998, Jafra S.A.'s functional currency was the U.S. dollar because
Mexico was considered to be a hyperinflationary economy during that period. As
of January 1, 1999, Mexico was no longer considered a hyperinflationary economy,
and from that date forward, the Company has accounted for its Mexican operations
using the peso as its functional currency.
Approximately 77%, 76%, and 70% of the Company's net sales for the years
ended December 31, 2000, 1999, and 1998, respectively, were generated by
operations located outside of the United States. Mexico is the Company's largest
foreign operation, accounting for 62%, 59%, and 48% of the Company's net sales
for the years ended December 31, 2000, 1999, and 1998, respectively. As such,
the Company's results of operations are subject to fluctuations in the exchange
rate of the Mexican peso to the U.S. dollar. Mexico has historically experienced
periods of hyperinflation, and the value of the peso has been subject to
significant fluctuations with respect to the U.S. dollar.
Additionally, Jafra S.A. had outstanding U.S. dollar denominated debt of
$57.7 million and $84.9 million at December 31, 2000 and 1999, respectively.
This debt is remeasured at each reporting date, subjecting the Company to
additional foreign exchange risk.
New Accounting Standards. Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, will be required to be recorded on the balance
sheet at fair value. If the derivative is designated in a fair-value hedge, the
changes in the fair value of the derivative and the underlying hedged item will
be recognized concurrently in earnings. If the derivative is designated in a
cash-flow hedge, changes in the fair value of the derivative will be recorded in
other comprehensive income ("OCI") and will be recognized in the statement of
operations when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized concurrently in earnings.
The Company expects that in the first quarter of 2001, it will record a
gain of approximately $250,000 (net of a tax effect of $100,000) as a cumulative
transition adjustment to earnings relating to derivatives not designated as
hedges prior to adoption of SFAS 133. This amount represents the difference
between the carrying value and the fair value of such instruments at January 1,
2001. See Note 15 for a discussion of the on-going impact that SFAS 133 is
expected to have on the Company's financial statements.
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
all prior periods to reflect shipping and handling fees, previously reported as
reductions to selling, general and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The amounts that have been
reclassified as net sales are $8,715,000, $5,191,000 and $2,638,000 for the year
ended December 31, 1999, the eight-month period ended December 31, 1998, and the
four-month period ended April 30, 1998, respectively. Shipping and handling
costs are included in selling, general and administrative expenses.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying accounting principles generally accepted in the
38
41
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
United States of America to selected revenue recognition issues. SAB 101, as
amended, was implemented on October 1, 2000 and did not have a material impact
on the Company's consolidated financial statements.
(3) INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
------- -------
Raw materials and supplies............................... $ 6,751 $ 7,905
Finished goods........................................... 31,395 22,385
------- -------
Total inventories........................................ $38,146 $30,290
======= =======
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2000 and
1999 (in thousands):
2000 1999
------- -------
Land..................................................... $17,224 $17,418
Buildings................................................ 17,089 16,777
Machinery and equipment.................................. 25,438 21,511
------- -------
59,751 55,706
Less accumulated depreciation............................ 8,303 5,099
------- -------
Property and equipment, net.............................. $51,448 $50,607
======= =======
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 2000 and 1999
(in thousands):
2000 1999
------- -------
Sales promotion and commissions.......................... $14,598 $11,856
Accrued restructuring charges (Note 10).................. 699 1,105
Accrued interest......................................... 1,512 1,717
Compensation and other benefit accruals.................. 5,326 8,121
State and local sales taxes and other taxes.............. 4,365 3,262
Other.................................................... 7,723 7,363
------- -------
$34,223 $33,424
======= =======
39
42
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT
Debt consists of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
-------- --------
Subordinated Notes, unsecured, interest payable
semi-annually at 11.75%, due in 2008................. $ 75,180 $ 86,000
Term Loan, principal and interest due in quarterly
installments through April 30, 2004, interest rates
of 8.1% and 8.6% at December 31, 2000 and 1999,
respectively......................................... 19,000 22,500
Revolving Loan, due April 30, 2004, weighted average
interest rates of 8.3% and 9.1% at December 31, 2000
and 1999, respectively............................... 14,500 25,000
Term Loan, principal and interest due in monthly
installments through August 16, 2001, interest rate
of 19.6% at December 31, 2000........................ 346 --
-------- --------
Total debt............................................. 109,026 133,500
Less current maturities................................ (4,846) (3,500)
-------- --------
Long-term debt......................................... $104,180 $130,000
======== ========
The Company's long-term debt matures as follows (in thousands): $4,500 in
2001, $5,500 in 2002, $6,500 in 2003, $17,000 in 2004, $0 in 2005 and $75,180
thereafter. In addition, Jafra S.A. entered into a one-year loan and borrowed
the peso equivalent of $519,000 on August 16, 2000 at an interest rate of 19.6%.
Principal and interest payments are due monthly through August 16, 2001. The
remaining balance at December 31, 2000 of $346,000 is classified as short-term
debt in the accompanying consolidated balance sheet.
On April 30, 1998, JCI and Jafra S.A. borrowed $125 million by issuing $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes") pursuant to an Indenture dated April 30, 1998 (the "Indenture") and $25
million under a Senior Credit Agreement.
At the date of issuance, the Notes represented the several obligations 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 of JCI and Jafra S.A. 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. 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 Austria, Germany,
Italy, the Netherlands, Poland, and Switzerland; its indirect South American
subsidiaries in Argentina, Brazil, Chile, Colombia, Peru, and Venezuela; and its
indirect subsidiaries in the Dominican Republic and Thailand. All guarantor and
nonguarantor entities are either direct or indirect wholly owned subsidiaries of
the Parent. The Notes were registered in a registered exchange offer, effective
as of January 25, 1999, under the Securities Act of 1933, as amended.
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, JCI and Jafra S.A. 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.
40
43
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement, as described below, allows the Company to repurchase the Notes in the
open market from time to time, with the aggregate purchase price for all such
Notes repurchased not to exceed $25 million. During 2000, the Company retired
Notes of JCI and Jafra S.A., prior to maturity, with a face value of $6.5
million and $4.3 million, respectively. The debt repurchases in 2000 resulted in
an extraordinary loss of $315,000, net of an income tax benefit of $195,000.
During 1999, the Company retired Notes of JCI and Jafra S.A., prior to maturity,
with a face value of $8.4 million and $5.6 million, respectively. The debt
repurchases in 1999 resulted in an extraordinary loss of $552,000, net of an
income tax benefit of $177,000. In connection with the early retirement of the
Notes as described above, a portion of the unamortized deferred financing costs
was written off and included in the determination of the extraordinary loss on
early extinguishment of debt. Total amounts that were written off during 2000
and 1999 were $733,000 and $1,239,000, respectively.
In addition, JCI and Jafra S.A. 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 and a Term Loan Facility of $25 million. Borrowings under the Term Loan
Facility are payable in quarterly installments of principal and interest over 6
years through April 30, 2004. 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 1.625% or an
alternate base rate (the higher of the prime rate or federal funds rate plus
0.5%, plus an applicable margin not to exceed 0.625%). The interest rates in
effect at December 31, 2000 ranged from approximately 8.1% to approximately 8.3%
for the LIBOR-based borrowings and the rate for the prime-based borrowings was
approximately 10.1%. Borrowings under the Senior Credit Agreement are secured by
substantially all of the assets of JCI and Jafra S.A.
Both the Indenture and the Senior Credit Agreement 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.
As of December 31, 2000, the Company had two irrevocable standby letters of
credit outstanding, totaling $1.8 million. These letters of credit, expiring on
April 30, 2004, collateralize the Company's obligation to a third party in
connection with certain lease agreements. The fair value of these letters of
credit approximates their contract value.
(7) INCOME TAXES
The Company's income (loss) before income taxes consists of the following
(amounts in thousands):
PREDECESSOR
------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item:
United States................................. $ 9,741 $10,917 $(4,542) $ (601)
Foreign....................................... 6,843 5,157 (1,739) 7,600
------- ------- ------- ------
$16,584 $16,074 $(6,281) $6,999
======= ======= ======= ======
41
44
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actual income tax expense differs from the "expected" tax expense (computed
by applying the U.S. federal corporate rate of 35% to income before income
taxes) as a result of the following:
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------- -----------
Provision for income taxes at federal
statutory rate........................ $5,804 $ 5,626 $(2,198) $2,450
Foreign income subject to tax other than
at federal statutory rate............. 2,339 2,475 36 (136)
Foreign tax credits..................... (1,724) (1,784) -- --
State income taxes...................... 243 171 -- --
Valuation allowance -- domestic......... (616) 657 2,017 160
Valuation allowance -- foreign.......... 3,794 3,879 2,075 252
Other................................... 94 (150) (170) 173
------ ------- ------- ------
Income tax expense...................... $9,934 $10,874 $ 1,760 $2,899
====== ======= ======= ======
The Predecessor's income was included in Gillette's consolidated U.S.
income tax return. For financial reporting purposes, the Predecessor has
provided income taxes on a separate-company basis. The components of the
provision for income taxes are as follows (in thousands):
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Current:
Federal................................ $ 72 $ 60 $ -- $ --
------ ------- ------- ------
Foreign:
Mexico.............................. 6,086 3,275 (2,511) 2,524
Europe.............................. 49 99 (245) --
Other............................... 54 30 -- --
------ ------- ------- ------
6,189 3,404 (2,756) 2,524
State.................................. 243 90 -- --
------ ------- ------- ------
Total current.................. 6,504 3,554 (2,756) 2,524
Deferred -- foreign...................... 2,539 7,320 4,516 375
Deferred -- domestic..................... 891 -- -- --
------ ------- ------- ------
Total deferred................. 3,430 7,320 4,516 375
Total income taxes on income (loss)
before income taxes and extraordinary
item................................... 9,934 10,874 1,760 2,899
Income tax benefit on early
extinguishment of debt................. (195) (177) -- --
------ ------- ------- ------
Total income tax expense................. $9,739 $10,697 $ 1,760 $2,899
====== ======= ======= ======
42
45
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of deferred income tax assets and deferred income tax
liabilities at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Deferred income tax assets:
Accounts receivable.................................. $ 741 $ 690
Net operating loss carryforward...................... 10,279 8,326
Disallowed interest expense.......................... 1,226 2,279
Accrued bonuses...................................... 833 1,933
Foreign tax credit carryforward...................... 1,700 991
Accrued sales promotion.............................. 3,677 2,958
Other accrued liabilities............................ 1,653 947
Other................................................ 3,846 2,103
-------- --------
Total deferred income tax assets............. 23,955 20,227
Less valuation allowance............................. (11,406) (8,880)
-------- --------
Net deferred income tax assets............... 12,549 11,347
Deferred income tax liabilities:
Transaction and deferred financing costs............. (694) (446)
Property and equipment............................... (2,344) (2,228)
Trademark and goodwill............................... (19,046) (19,193)
Inventories.......................................... (9,684) (7,585)
Other................................................ (2,529) (213)
-------- --------
Total deferred income tax liabilities
(34,297) (29,665)
-------- --------
Net deferred income tax liabilities.......... $(21,748) $(18,318)
======== ========
As discussed in Note 2 -- Foreign Currency Translation, the Company's
Mexican subsidiary changed its functional currency from the U.S. dollar to the
Mexican peso effective January 1, 1999. As a result, approximately $2.0 million
of deferred income tax liabilities associated with temporary income tax
differences that arose from the change in functional currency were reflected as
an adjustment to the cumulative translation component of stockholders' equity.
In addition, during 1999, the Company's Mexican subsidiary recorded a deferred
income tax asset related to certain temporary differences incurred in connection
with the Acquisition. The resulting deferred income tax asset of approximately
$400,000 was reflected as an adjustment to goodwill.
The Company records a valuation allowance on the deferred income tax assets
to reduce the total to an amount that management believes is more likely than
not to be realized. The valuation allowances at December 31, 2000 and 1999 are
based upon the Company's estimates of the future realization of deferred income
tax assets. Valuation allowances at December 31, 2000 and 1999 were provided
principally to offset operating loss carryforwards and foreign tax credit
carryforwards of the Company's U.S., European and South American subsidiaries.
At December 31, 2000, the Company's deferred income tax assets for
carryforwards totaled $11,979,000, comprised of U.S. foreign tax credits of
$1,700,000 and tax loss carryforwards of the U.S. and certain foreign
subsidiaries of $10,279,000. These deferred income tax assets were reduced by a
valuation allowance of $11,406,000. The tax loss carryforwards expire in varying
amounts between 2001 and 2010. Realization of the income tax carryforwards is
dependent on generating sufficient taxable income prior to expiration of the
carryforwards. Although realization is not assured, management believes it is
more likely than not that the net carrying value of the income tax carryforwards
will be realized.
43
46
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company intends to reinvest the undistributed earnings of the Mexican
subsidiary, and accordingly, no deferred income taxes have been provided on
these earnings.
(8) BENEFIT PLANS
PREDECESSOR PLANS
Prior to the Company's acquisition of the Jafra Business, the Predecessor
participated in The Gillette Company Retirement Plan (the "Plan") which was a
defined benefit pension plan covering substantially all of Gillette's domestic
employees. Benefits were based on age, years of service and the level of
compensation during the final years of employment. Gillette's funding policy was
to contribute annually to the Plan the amount necessary to meet the minimum
funding standards established by the Employee Retirement Income Security Act.
The Predecessor's share of this pension plan expense was $261,000 for the four
months ended April 30, 1998. The Predecessor's share of pension expense was
based on the Predecessor's payroll covered by the Plan as a percentage of total
payroll covered by the Plan.
The Predecessor also participated in Gillette's plans which provided
certain health care and life insurance benefits to retired employees.
Substantially all of the Predecessor's employees became eligible for these
benefits upon retirement. The Predecessor's share of this other postretirement
benefit plan expense was $37,000 for the four months ended April 30, 1998.
COMPANY PLANS
Certain employees of the Company's German subsidiary participate in a
defined benefit pension plan covering key employees (the "Germany Plan").
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 Company recognized pension income of $18,000 for the year ended
December 31, 2000 due to the departure of certain employees. The total pension
expense was $43,000 for the year ended December 31, 1999, $11,000 for the eight
months ended December 31, 1998, and $129,000 for the four months ended April 30,
1998.
Under Mexican labor laws, employees of Jafra S.A. 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
subsidiary in which they are employed. Total expense under these programs was
$345,000 and $391,000 for the years ended December 31, 2000 and 1999,
respectively. No expense was incurred in 1998. The total liability was
approximately $539,000 and $782,000 at December 31, 2000 and 1999, and is
classified as a current liability in the accompanying consolidated balance
sheets.
The Company's U.S. subsidiary has an employee savings plan which permits
participants to make voluntary contributions by salary reductions pursuant to
section 401(k) of the Internal Revenue Code, which allowed employees to defer up
to 15% of their total compensation, subject to statutory limitations. On January
1, 2001, the maximum employee deferral rate under this program was increased to
20%, subject to statutory limitations. Employee contributions of up to 10% of
compensation are matched by the Company at the rate of 50 cents per dollar.
Employees do not vest in the Company contribution until they have reached two
years of service, at which time they become fully vested. The Company's expense
under this program was $620,000, $628,000, and $420,000 for the years ended
December 31, 2000 and 1999 and the eight months ended December 31, 1998,
respectively.
The Company's U.S. subsidiary also has supplemental excess benefit savings
plans which permitted participants to make voluntary contributions of up to 15%
of their total compensation. On January 1, 2001, participants became eligible to
make voluntary contributions of up to 20% of their total compensation.
44
47
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee contributions are matched on the same basis as under the employee
savings plan, and the vesting provisions are the same. The Company's expense
under this program was $213,000, $179,000, and $17,000 for the years ended
December 31, 2000 and 1999 and the eight months ended December 31, 1998,
respectively. Employee and employer contributions under such plan are placed
into a "rabbi" trust exclusively for the uses and purposes of plan participants
and general creditors of the Company. The Company has recorded an asset and the
related liability in the accompanying consolidated balance sheets of $1,472,000
and $711,000 at December 31, 2000 and 1999, respectively.
(9) RELATED PARTY TRANSACTIONS
In 1998, CD&R received a fee of $2.7 million, half of which was recorded as
a direct acquisition cost and half of which was capitalized as deferred
financing fees, for providing services related to the structuring,
implementation and consummation of the Acquisition. 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 or until the termination by either party with 30 days notice, CD&R
will receive an annual fee (and reimbursement of out-of-pocket expenses) for
providing advisory, management consulting and monitoring services to the
Company. The annual fee was originally $500,000 and as of January 1, 1999, was
reduced to $400,000. The Company and CD&R are currently discussing a proposed
amendment to the consulting agreement. As proposed, the amendment would provide
for an annual fee of $1,000,000, retroactive to January 1, 2001, for ongoing
services provided to the Company. As required by the terms of the Company's
lending arrangements, such fees are determined by arm's-length negotiation and
are believed by the Company to be reasonable. In addition, the proposed
amendment adds to CD&R's services under the agreement financial advisory,
investment banking and similar services with respect to future proposals for an
acquisition, merger, recapitalization, or other similar transaction directly or
indirectly involving the Company or any of its subsidiaries. The fee for such
additional services in connection with future transactions would be an amount
equal to 1% of the transaction value for the transaction to which such fee
relates. Such transaction fees may be increased upon approval of a majority of
the members of the Company's Board of Directors who are not employees of the
Company, CD&R or any affiliate of CD&R. The proposed amendment also provides
that if any employee of CD&R is appointed to an executive management position
(or a position of comparable responsibility) in the Company or any of its
subsidiaries, the annual fee will be increased by an amount to be determined by
CD&R, the amount of such increase not to exceed 100% of the existing annual fee
in effect at that time. The proposed amendment has been approved by the
Company's Board of Directors. The CD&R fees incurred during the years ended
December 31, 2000 and 1999 and the eight months ended December 31, 1998 were
$400,000, $400,000 and $333,000, respectively.
In addition, certain officers and directors of CD&R or its affiliates serve
as directors of the Company. In 1999, certain directors purchased an aggregate
of 1,667 shares of Company common stock. During 1999, the Company engaged
Guidance Solutions ("Guidance"), a corporation in which an investment fund
managed by CD&R has an investment, to develop its e-commerce systems. Under the
agreement entered into by the Company and Guidance, the Company agreed to pay
fees of approximately $2.0 million to Guidance in connection with planning,
defining, designing and consulting services performed. During the years ended
December 31, 2000 and 1999, the Company paid fees to Guidance of $1,798,000 and
$389,000, respectively. The Company terminated its agreement with Guidance and
executed a settlement and mutual release agreement effective September 30, 2000.
Upon execution of this agreement in October of 2000, Guidance paid the Company
$25,000 and agreed to pay the Company an aggregate additional sum of $475,000,
payable in quarterly installments plus interest at 9.5% per annum, beginning in
January 2001.
Members of management financed a portion of the cash purchase price of the
shares of Company 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
45
48
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guaranteed up to 75% of the purchase price for the shares of Company common
stock purchased by each such member of management.
In April of 1998, the Predecessor 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 Predecessor. Prior to the closing
date of the Acquisition, intercompany accounts receivable and accounts payable
between Predecessor 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 Predecessor prior to the
Acquisition. The predecessor management believes the amounts and methods of
allocation were reasonable and approximated actual services provided. The
allocations were based principally upon a formula using the percentage of
revenues of the Predecessor to the total consolidated revenues of Gillette. The
predecessor management performed regular reviews of the allocated costs and
determined that the cost of these services to the Predecessor, 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 $748,000
for the four months ended April 30, 1998. 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 years ended December 31, 2000 and
1999 and the eight months ended December 31, 1998.
Interest was charged and earned on intercompany receivables and payables
between Gillette and the Predecessor at the LIBOR rate prior to the Acquisition.
The total related interest expense was $152,000 for the four months ended April
30, 1998, and is included in interest, net, in the accompanying consolidated
statements of operations.
The Predecessor recognized profit on the sale of inventory to Gillette of
$157,000 for the four months ended April 30, 1998.
Gillette acted as a cash manager for the Predecessor prior to the
Acquisition. As such, balances due to/from Gillette and other divisions
consisted of amounts related to this and to the above transactions.
(10) RESTRUCTURING AND IMPAIRMENT CHARGES AND RELATED ACCRUALS
Current Year Restructuring and Impairment Charges. In 2000, the Company
recorded approximately $1.6 million of restructuring charges and approximately
$1.0 million of asset impairment charges. The restructuring charges of
approximately $1.6 million related to the Company's repositioning activities in
Europe, and consisted primarily of severance costs. As of December 31, 2000,
payments of approximately $1.0 million have been made for these charges. The
Company anticipates that substantially all of the remaining restructuring costs
of approximately $0.6 million will be paid in 2001. The asset impairment charges
of $1.0 million consisted of approximately $0.3 million related to the Company's
repositioning activities in Europe and approximately $0.7 million relating to
the write-down of certain capitalized computer software costs in the United
States.
Prior Year Restructuring and Impairment Charges. In 1999, the Company
recorded approximately $3.7 million of restructuring charges and approximately
$1.1 million of asset impairment charges. The restructuring charges consisted of
approximately $2.7 million of charges related to the outsourcing of the
Company's U.S. product manufacturing functions, and approximately $1.0 million
of other restructuring activities in the U.S., Europe and Mexico. Substantially
all of the charges related to severance costs. As the terms of such severance
were not communicated to the affected employees until subsequent to the one-year
anniversary of the Acquisition, such costs were expensed during 1999. As of
December 31, 2000, payments of approximately $3.6 million have been made for
these charges. The Company anticipates that substantially all of the remaining
restructuring costs of approximately $0.1 million will be paid in the first
quarter of 2001.
46
49
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also in 1999, the Company recognized an asset impairment charge of
approximately $1.1 million relating to long-lived assets (goodwill and
trademarks) owned by its German subsidiary ("Jafra Germany"). In the fourth
quarter of 1999, concurrent with the Company's annual business planning process,
the Company recognized that sales levels in Jafra Germany had declined more than
anticipated since the Acquisition. The Company performed an impairment review
and concluded that Jafra Germany's future undiscounted cash flows were below the
carrying value of its related long-lived assets. Accordingly, the Company
recorded a non-cash impairment loss of approximately $1.1 million to adjust the
carrying values of Jafra Germany's goodwill and trademarks to their estimated
fair values, which were determined based on anticipated future cash flows
discounted at a rate commensurate with Jafra Germany's weighted average cost of
capital.
Acquisition Accrual. In connection with the Acquisition in 1998, the
Company initially recorded a $4.0 million accrual for restructuring and
rationalization costs (the "Acquisition Accrual"). This accrual related to the
planned realignment of the Company's operations subsequent to the Acquisition,
and included approximately $2.9 million of severance costs and $1.1 million of
costs primarily relating to closure and/or relocation of certain distribution
facilities. As of the consummation of the Acquisition, senior management began
formulating a plan to close certain distribution facilities and involuntarily
terminate certain employees.
Prior to April 30, 1999 (the one year anniversary of the Acquisition), the
Company finalized plans related to the closure of certain worldwide facilities,
principally the closure and outsourcing of the U.S. product manufacturing
functions. These restructuring plans included the transfer of certain inventory
and the sale of fixed assets at a loss to a third party contractor (the
"Contractor") (see Note 14). The total finalized cost of the Acquisition Accrual
was approximately $4.4 million, and resulted in a net increase to goodwill of
approximately $0.4 million in 1999. The components of the Acquisition Accrual
are summarized as follows (in thousands):
Disposal of fixed assets.................................... $2,336
Severance................................................... 1,724
Lease termination costs..................................... 197
Other....................................................... 150
------
$4,407
======
In the eight months ended December 31, 1998, approximately $0.7 million of
severance costs and $0.1 million of facilities closure costs were paid and
charged against the Acquisition Accrual. During 1999, all of the remaining
components of the Acquisition Accrual were incurred. At December 31, 1999, there
was no remaining liability related to the Acquisition Accrual.
Non-recurring Charges Prior to the Acquisition. In 1997, the Predecessor
incurred net non-recurring reorganization charges of $0.4 million, comprised of
reorganization costs of $3.5 million, which were offset by recovery through
litigation of $2.3 million of costs relating to an improper installation of
certain proprietary computer systems, and a gain of $0.8 million on the sale of
a facility which had previously been written off. At the end of 1997, the
remaining liability relating to these reorganization activities was
approximately $0.3 million. During the four-month period ended April 30, 1998,
the entire remaining liability was paid, including eight planned employee
terminations at a cost of $140,000 and lease costs of $150,000.
47
50
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As discussed above, the components of the additions and/or adjustments to
the aforementioned accruals include severance, lease costs, fixed asset
disposals, and other exit costs, and are summarized as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Additions -- charges to income:
Severance................................... $1,210 $ 3,502 $ --
Lease costs................................. 295 57 --
Other....................................... 102 169 --
------ ------- ------
Total additions..................... 1,607 3,728 --
Acquisition Accrual:
Severance................................... -- (1,176) 2,900
Fixed asset disposals....................... -- 2,336 --
Lease costs................................. -- (903) 1,100
Other....................................... -- 150 --
------ ------- ------
Acquisition Accrual, net................. -- 407 4,000
------ ------- ------
$1,607 $ 4,135 $4,000
====== ======= ======
A rollforward of the activity of the restructuring accruals is summarized
as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Opening balance............................... $ 1,105 $ 3,162 $ --
Additions..................................... 1,607 3,728 4,000
Adjustment to goodwill balance................ -- 407 --
Charges against reserves...................... (2,013) (6,192) (838)
------- ------- ------
Ending balance................................ $ 699 $ 1,105 $3,162
======= ======= ======
The remaining costs at each year-end included in the restructuring accrual
are summarized as follows (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Severance..................................... $385 $1,105 $2,154
Lease costs and other......................... 314 -- 1,008
---- ------ ------
$699 $1,105 $3,162
==== ====== ======
48
51
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal component of the restructuring accruals is severance. A
summary of the severance activity is as follows (dollar amounts in thousands):
YEAR ENDED YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------- ------------------
# OF # OF # OF
EMPLOYEES AMOUNT EMPLOYEES AMOUNT EMPLOYEES AMOUNT
--------- ------- --------- ------- --------- ------
Opening balance........................ 43 $ 1,105 47 $ 2,154 -- $ --
Planned terminations................... 35 1,210 104 3,502 85 2,900
Adjustment to planned terminations..... -- -- (39) (1,176) -- --
Actual terminations.................... (62) (1,930) (69) (3,375) (38) (746)
--- ------- --- ------- --- ------
Ending balance......................... 16 $ 385 43 $ 1,105 47 $2,154
=== ======= === ======= === ======
Eight planned employee terminations as of December 31, 1997 occurred during
the four-month period ended April 30, 1998, at a total cost of $140,000.
(11) FINANCIAL REPORTING FOR BUSINESS SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operations and major
customers.
The Company's business is comprised of one industry segment, direct
selling, with worldwide operations. The Company is organized into geographical
business units that each sell the full line of Jafra cosmetics, skin care, body
care, fragrances, and other products. Jafra has three reportable business
segments: Mexico, the United States, and Europe. Business results for
subsidiaries in South America, the Dominican Republic, and Thailand are combined
and included in the following table under the caption "All Others".
The Jafra Mexico business segment information for the four months ended
April 30, 1998 includes the accounts of Grupo Jafra and all of its subsidiaries,
which merged with and into Jafra S.A. following the Acquisition, as well certain
assets and the related operating profit of Gillette entities used in the Jafra
Business in Mexico. 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 business segment information for the four
months ended April 30, 1998 includes only the carved out business segment
information related to the Jafra Business of the South American entities, and is
presented in the column denoted "All Others."
The accounting policies used to prepare the information reviewed by the
Company's chief operating decision makers are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on segment operating income, excluding reorganization and restructuring
charges, unusual gains and losses, and amortization of goodwill and intangibles.
Consistent with the information reviewed by the Company's chief operating
decision makers, corporate costs, foreign exchange gains and losses, interest
expense, other nonoperating income or expense, and income taxes are not
allocated to operating segments. The effects of intersegment sales (net sales
and related gross profit) are excluded from the computation of segment operating
income.
49
52
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CORPORATE,
UNITED ALL TOTAL UNALLOCATED CONSOLIDATED
STATES MEXICO EUROPE OTHERS SEGMENTS AND OTHER TOTAL
-------- -------- ------- ------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
Net sales........................ $ 74,681 $201,724 $27,025 $20,710 $324,140 -- $324,140
Operating profit (loss).......... 10,709 64,364 247 (6,044) 69,276 $(26,944) 42,332
Depreciation and amortization.... 2,111 4,231 905 385 7,632 -- 7,632
Capital expenditures............. 3,662 2,262 109 1,072 7,105 -- 7,105
Segment assets................... 68,843 177,086 18,254 13,165 277,348 (404) 276,944
YEAR ENDED DECEMBER 31, 1999
Net sales........................ 74,120 175,930 33,131 15,984 299,165 -- 299,165
Operating profit (loss).......... 9,737 47,797 (954) (3,005) 53,575 (23,967) 29,608
Depreciation and amortization.... 2,569 3,276 1,022 252 7,119 -- 7,119
Capital expenditures............. 1,838 2,622 586 752 5,798 -- 5,798
Segment assets................... 68,992 179,606 19,520 9,443 277,561 816 278,377
EIGHT MONTHS ENDED DECEMBER 31,
1998
Net sales........................ 52,969 85,140 27,655 10,446 176,210 -- 176,210
Operating profit (loss).......... 8,700 23,783 (1,028) (1,782) 29,673 (22,580) 7,093
Depreciation and amortization.... 2,556 1,810 672 51 5,089 -- 5,089
Capital expenditures............. 3,807 2,052 333 175 6,367 -- 6,367
Segment assets................... 108,386 138,774 19,144 8,995 275,299 13,335 288,634
FOUR MONTHS ENDED APRIL 30, 1998
Net sales........................ 24,752 36,903 13,295 4,970 79,920 -- 79,920
Operating profit (loss).......... 3,883 8,954 306 (128) 13,015 (7,574) 5,441
Depreciation and amortization.... 740 275 236 112 1,363 -- 1,363
Capital expenditures............. 528 5,354 242 -- 6,124 -- 6,124
Segment assets................... 38,496 64,571 16,479 800 120,346 (484) 119,862
50
53
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional business segment information regarding product lines is as
follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
SALES BY PERCENTAGE SALES BY PERCENTAGE SALES BY PERCENTAGE
PRODUCT LINE OF TOTAL PRODUCT LINE OF TOTAL PRODUCT LINE OF TOTAL
($ IN MILLIONS) SALES ($ IN MILLIONS) SALES ($ IN MILLIONS) SALES
--------------- ---------- --------------- ---------- --------------- ----------
Skin Care................. $ 65.8 21.0% $ 60.9 21.0% $ 58.4 23.5%
Color Cosmetics........... 82.4 26.2 81.3 28.0 70.9 28.6
Fragrances................ 103.7 33.0 76.4 26.3 47.3 19.1
Personal Care............. 29.6 9.4 35.6 12.2 46.5 18.7
Other(1).................. 32.6 10.4 36.3 12.5 25.2 10.1
------ ----- ------ ----- ------ -----
Subtotal before shipping
and handling fees.... 314.1 100.0% 290.5 100.0% 248.3 100.0%
===== ===== =====
Shipping and handling
fees.................... 10.0 8.7 7.8
------ ------ ------
Total........... $324.1 $299.2 $256.1
====== ====== ======
- ---------------
(1) Includes sales aids (party hostess gifts, demonstration products, etc.) and
promotional materials.
(12) 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 2005. Future minimum lease payments
under noncancelable operating leases as of December 31, 2000 are (in thousands):
2001....................................................... $ 5,926
2002....................................................... 5,714
2003....................................................... 5,564
2004....................................................... 5,546
2005....................................................... 5,895
-------
$28,645
=======
Rental expense was $5,953,000, $3,610,000, $1,973,000, and $951,000 for the
years ended December 31, 2000 and 1999, the eight months ended December 31,
1998, and the four months ended April 30, 1998, respectively.
Other income for 2000 included approximately $1.4 million of income related
to a recovery of the effect of inflation upon accounts receivable due from the
Mexican government.
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 operations.
51
54
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) MANAGEMENT INCENTIVE ARRANGEMENTS
COMPANY PLAN
Effective as of the closing of the Acquisition, the Company adopted a stock
incentive plan (the "Stock Incentive Plan"), which provides 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. The Company reserved 156,423 shares for issuance under the
Stock Incentive Plan, and as of December 31, 2000, 42,026 shares and 84,052
options were outstanding. A summary of the status and activity of shares
purchased under the Stock Incentive Plan is as follows:
NUMBER OF PRICE
SHARES PER SHARE
--------- ---------
Shares purchased in 1998............................... 39,340 $100
-------
Shares outstanding at December 31, 1998................ 39,340
Shares purchased in 1999............................... 790 150
Options exercised in 1999.............................. 579 100
Shares repurchased in 1999............................. (2,317) 150
-------
Shares outstanding at December 31, 1999................ 38,392
Shares purchased in 2000............................... 4,424 206
Options exercised in 2000.............................. 158 100
Shares repurchased in 2000............................. (948) $210
-------
Shares outstanding at December 31, 2000................ 42,026
=======
The purchase price of shares purchased in 1998 and 1999 and sold in 1999
and 2000 represented the estimated fair value at the respective dates of
purchase and sale. In 2000, 316 shares were purchased at a price below fair
value, and the Company recognized compensation expense of approximately $19,000.
Under certain circumstances, the management stockholders can require the Company
to repurchase their shares, subject to a holding period of at least seven months
from the date such shares were acquired, for an amount not to exceed fair value.
During 1999 and 2000, the Company repurchased 2,317 and 948 of such shares,
respectively.
In connection with the purchase of common stock of the Parent, certain
members of senior management were granted options to purchase two additional
shares of common stock for each share purchased at an exercise price equal to
the fair value at the date of grant. The options have a life of ten years from
the date of grant. Fifty percent of the options granted are expected to vest in
three equal installments on each of the first three anniversaries of the date of
grant, subject to the continuous employment of the grantee ("Option Type 1").
The remaining fifty percent of the options become vested as follows, subject to
the continuous employment of the grantee: (a) up to one-third of the options
become vested as of each of the first three anniversaries of the date of grant
if the Company achieves at least 85% of its EBITDA target for the immediately
preceding fiscal year, (b) if less than one-third of the total number of options
shall have become vested as provided in clause (a) above, the portion that has
not become so vested shall become vested as of the first day of the fiscal year
following the fiscal year, if any, that the Company achieves its cumulative
EBITDA target, and (c) any options that do not become vested as provided above
will become vested on the ninth
52
55
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
anniversary of the date of grant ("Option Type 2"). A summary of the status and
activity of the options under the Stock Incentive Plan is as follows:
2000 1999 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year............................ 76,784 $101.03 78,680 $100.00 -- --
Granted........................... 8,848 205.71 1,580 150.00 78,680 $100.00
Exercised......................... (158) 100.00 (579) 100.00 -- --
Canceled.......................... (1,422) 122.22 (2,897) 100.00 -- --
------ ------ ------
Outstanding at year-end........... 84,052 111.69 76,784 101.03 78,680 100.00
====== ====== ======
Options exercisable at year-end... 37,655 $100.70 12,534 $100.00 -- --
Options available for grant....... 19,493 -- 26,919 -- 25,602 --
The following table summarizes information about options outstanding as of
December 31, 2000:
OUTSTANDING EXERCISABLE
----------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF OPTIONS LIFE (YRS.) PRICE OF OPTIONS PRICE
- -------- ---------- ----------- -------- ---------- --------
$100.00 74,256 7.75 $100.00 37,128 $100.00
$150.00 1,580 8.92 150.00 527 $150.00
$210.00 8,216 9.61 210.00 -- --
------ ---- ------- ------ -------
84,052 7.95 $111.69 37,655 $100.70
====== ======
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for these options. As the options were granted with exercise prices
equal to the fair value at the date of grant, no compensation cost was
recognized by the Company upon issuance of such options. The fair value of each
option granted by the Company was estimated using the minimum value option
pricing model. The assumptions used in this pricing model and the weighted
average fair value of options granted during 2000, 1999 and 1998 are summarized
as follows:
2000 1999 1998
---------------- ---------------- ----------------
OPTION OPTION OPTION OPTION OPTION OPTION
TYPE 1 TYPE 2 TYPE 1 TYPE 2 TYPE 1 TYPE 2
------ ------ ------ ------ ------ ------
Risk-free interest rate.............. 6.30% 6.30% 6.03% 6.03% 4.20% 4.20%
Expected option life (in years)...... 5.0 7.0 5.0 9.0 5.0 9.0
Expected volatility.................. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected dividend yield.............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Weighted average fair value per
option............................. $56.00 $73.97 $38.55 $62.12 $18.88 $31.39
53
56
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMPENSATION COST
Had the Company recorded compensation cost based on the fair value of
options granted at the grant date, as prescribed by FASB Statement No. 123, pro
forma net income (loss) would have been as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Net income (loss), as reported............... $6,335 $4,648 $(8,041)
Pro forma compensation cost.................. 680 677 148
------ ------ -------
Pro forma net income (loss).................. $5,655 $3,971 $(8,189)
====== ====== =======
EMPLOYMENT AGREEMENTS
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.
(14) MANUFACTURING AGREEMENT
The Company and the Contractor entered into a manufacturing agreement,
dated as of June 10, 1999, (the "Manufacturing Agreement"). Subject to the terms
and conditions of the Manufacturing Agreement, the Contractor has agreed to
manufacture all of the Company's requirements for certain cosmetic and skin care
products for an initial term of five years. Following the expiration of the
initial five-year term, the Manufacturing Agreement will be automatically
extended for additional one-year terms unless terminated by six months' prior
written notice by either party. The Manufacturing Agreement provides for price
renegotiations by the Contractor if the Company's quarterly or annual purchase
volume falls below specified minimums. In addition, the Company is obligated to
purchase materials acquired by the Contractor based upon product forecasts
provided by the Company if the Contractor is unable to sell such materials to a
third party. There have been no such repurchases to date. The Contractor is
solely responsible for obtaining the inventories, manufacturing the inventories
at its current location in Chino, California, complying with applicable laws and
regulations, and performing quality assurance functions.
In connection with the Company's 1999 restructuring activities related to
the closure and outsourcing of its U.S. product manufacturing functions as
discussed in Note 10, certain fixed assets and inventories were sold to the
Contractor in exchange for secured promissory notes. The promissory note for the
fixed assets was for an amount of approximately $1.5 million, carried an annual
interest rate of 8%, and commenced payments on January 1, 2000. The promissory
note for inventories of approximately $2.2 million was non-interest bearing, and
commenced payments on October 1, 1999. At December 31, 1999, approximately $2.1
million of notes from the Contractor (reflected at present value, net of
discount), as well as $0.5 million of unsecured accounts receivable, were
included in receivables and approximately $1.0 million of notes, representing
the non-current portion of the fixed asset notes from the Contractor, were
included in other assets in the accompanying consolidated balance sheets. The
note for the inventories was repaid in October 2000 and the note for the fixed
assets was repaid in December 2000.
During the fourth quarter of 2000, the Contractor obtained $1.0 million of
advances from the Company in exchange for an unsecured promissory note. The note
bears interest at an annual rate of 9% and is payable in monthly installments
commencing on February 15, 2001. At December 31, 2000, approximately $0.9
million of the note was included in receivables and approximately $0.1 million
of the note was included in other assets in the accompanying consolidated
balance sheets.
54
57
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) FOREIGN CURRENCY FORWARD CONTRACTS
In 2000 and 1999, the Company entered into foreign currency forward
contracts in Mexican pesos to reduce the effect of adverse exchange rate
fluctuations in Mexico. The outstanding foreign currency forward contracts at
December 31, 2000 and 1999 had notional values of $80,817,000 and $29,462,000,
respectively. The contracts outstanding at December 31, 2000 mature in 2001
while the contracts outstanding at December 31, 1999 matured in 2000. Notional
amounts do not quantify market or credit exposure or represent assets or
liabilities of the Company, but are used in the calculation of cash settlements
under the contracts. The tables below describe the forward contracts that were
outstanding at December 31, 2000 and 1999 (in thousands):
DECEMBER 31, 2000:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............... $ 6,980 1/26/01 10.12 $ 6,679
Buy US Dollar/sell Mexican Peso............... 7,500 2/26/01 10.20 7,187
Buy US Dollar/sell Mexican Peso............... 7,529 3/30/01 10.36 7,162
Buy US Dollar/sell Mexican Peso............... 5,915 4/30/01 10.48 5,607
Buy US Dollar/sell Mexican Peso............... 2,828 5/31/01 10.61 2,670
Buy US Dollar/sell Mexican Peso............... 3,907 6/29/01 10.24 3,861
Buy US Dollar/sell Mexican Peso............... 2,618 7/31/01 10.31 2,588
Buy US Dollar/sell Mexican Peso............... 11,816 8/31/01 10.32 11,804
Buy US Dollar/sell Mexican Peso............... 12,125 9/28/01 10.39 12,119
Buy US Dollar/sell Mexican Peso............... 2,336 10/30/01 10.70 2,290
Buy US Dollar/sell Mexican Peso............... 10,275 10/31/01 10.71 10,078
Buy US Dollar/sell Mexican Peso............... 2,878 11/30/01 10.43 2,934
Buy US Dollar/sell Mexican Peso............... 4,110 12/27/01 10.71 4,120
------- -------
$80,817 $79,099
======= =======
DECEMBER 31, 1999:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............... $ 3,658 3/31/00 9.671 $ 3,690
Buy US Dollar/sell Mexican Peso............... 3,822 4/28/00 9.770 3,856
Buy US Dollar/sell Mexican Peso............... 2,885 5/31/00 9.900 2,907
Buy US Dollar/sell Mexican Peso............... 3,937 6/30/00 10.008 3,967
Buy US Dollar/sell Mexican Peso............... 1,947 7/31/00 10.118 1,962
Buy US Dollar/sell Mexican Peso............... 2,988 8/31/00 10.223 3,010
Buy US Dollar/sell Mexican Peso............... 3,818 9/29/00 10.326 3,846
Buy US Dollar/sell Mexican Peso............... 3,593 10/31/00 10.438 3,617
Buy US Dollar/sell Mexican Peso............... 2,814 11/30/00 10.548 2,829
------- -------
$29,462 $29,684
======= =======
- ---------------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized loss
of $1,718,000 at December 31, 2000 and an unrealized
55
58
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
gain of $222,000 at December 31, 1999, represents the carrying value of the
forward contracts (which approximates fair value) and has been recorded as a
liability and an asset in the accompanying consolidated balance sheets as of
December 31, 2000 and 1999, respectively.
Prior to entering into foreign currency exchange contracts, the Company
evaluates the counter parties' credit ratings. Credit risk represents the
accounting loss that would be recognized at the reporting date if counter
parties failed to perform as contracted. The Company does not currently
anticipate non-performance by such counter parties.
The derivative instruments utilized by the Company did not qualify for
hedge accounting under the applicable accounting standards prior to adoption of
SFAS 133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the accompanying
consolidated statements of operations for the years ended December 31, 2000 and
1999. Effective January 1, 2001 the Company will adopt SFAS 133. Under SFAS 133,
the Company's current mark-to-market accounting treatment will continue to be
applied to certain of the Company's derivative instruments. However, under SFAS
133, the Company's use of forward contracts to hedge certain forecasted non-
functional currency cash flows will now qualify for hedge accounting. Unrealized
gains and losses from such derivative instruments arising subsequent to January
1, 2001 will be deferred as a separate component of other comprehensive income,
and will be recognized in income at the same time that the underlying hedged
exposure is recognized in income.
(16) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2000, the Company recorded certain adjustments
related to changes in cost accounting estimates, which resulted in an increase
to cost of sales of approximately $3 million.
56
59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Jafra Cosmetics International, Inc.
Westlake Village, California
We have audited the accompanying consolidated balance sheets of Jafra
Cosmetics International, Inc. (the "Company"), an indirect, wholly owned
subsidiary of CDRJ Investments (Lux) S.A. and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the years ended December 31, 2000 and
1999 and the eight-month period ended December 31, 1998 and the combined
statements of operations, stockholder's equity, and cash flows of 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, and Jafra Cosmetics A.G., a Swiss company
(collectively referred to as "the Predecessor") for the four-month period ended
April 30, 1998. Our audits also included the financial statements schedule
listed in the Index at Item 14(a)(2). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Jafra Cosmetics
International, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the year ended December 31,
2000 and 1999 and the eight-month period ended December 31, 1998 and the
combined results of operations and cash flows of the Predecessor for the
four-month period ended April 30, 1998 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
March 22, 2001
Los Angeles, California
57
60
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 3,382 $ 3,026
Receivables, less allowances for doubtful accounts of $536
in 2000 and
$800 in 1999........................................... 6,730 7,910
Inventories............................................... 9,455 7,168
Receivables from affiliates............................... 5,078 6,087
Prepaid expenses and other current assets................. 2,398 1,975
-------- --------
Total current assets.............................. 27,043 26,166
Property and equipment, net................................. 20,144 19,283
Other assets:
Goodwill, net............................................. 39,542 41,115
Notes receivable from affiliates.......................... 27,182 41,970
Deferred financing fees, net.............................. 3,632 4,724
Other..................................................... 3,599 3,287
-------- --------
Total............................................. $121,142 $136,545
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,500 $ 2,000
Accounts payable.......................................... 6,552 4,428
Accrued liabilities....................................... 11,988 16,111
Income taxes payable...................................... 393 241
Deferred income taxes..................................... 343 --
Payables to affiliates.................................... 2,305 1,378
-------- --------
Total current liabilities......................... 24,081 24,158
Long-term debt.............................................. 68,608 87,600
Deferred income taxes....................................... 548 --
Other long-term liabilities................................. 2,367 2,459
-------- --------
Total liabilities................................. 95,604 114,217
-------- --------
Commitments and contingencies............................... -- --
Stockholder's equity:
Common stock, par value $.01; authorized, issued and
outstanding, 1,000 shares in 2000 and 1999............. -- --
Additional paid-in capital................................ 39,649 38,749
Retained deficit.......................................... (11,888) (14,102)
Accumulated other comprehensive loss...................... (2,223) (2,319)
-------- --------
Total stockholder's equity........................ 25,538 22,328
-------- --------
Total............................................. $121,142 $136,545
======== ========
See accompanying notes to consolidated financial statements.
58
61
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Net sales............................... $117,270 $121,466 $88,517 $44,532
Cost of sales........................... 36,063 42,839 33,095 17,818
-------- -------- ------- -------
Gross profit....................... 81,207 78,627 55,422 26,714
Selling, general and administrative
expenses.............................. 88,202 89,234 62,359 28,873
Management fee income from affiliates... (8,141) (5,048) (3,942) (1,926)
Restructuring and impairment charges.... 2,392 4,575 -- --
Loss (gain) on sale of assets........... 147 (1,043) 150 --
-------- -------- ------- -------
Loss from operations............... (1,393) (9,091) (3,145) (233)
Other income (expense):
Royalty income from affiliates, net... 14,620 17,838 -- --
Exchange (loss) gain.................. (178) (421) 57 (4)
Interest, net......................... (7,564) (10,323) (6,868) (279)
Other, net............................ 9 (76) 86 (946)
-------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item.................... 5,494 (2,073) (9,870) (1,462)
Income tax expense (benefit)............ 3,075 2,108 (245) 375
-------- -------- ------- -------
Income (loss) before extraordinary
item.................................. 2,419 (4,181) (9,625) (1,837)
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $120 in 2000 and $0 in
1999.................................. 205 296 -- --
-------- -------- ------- -------
Net income (loss)....................... $ 2,214 $ (4,477) $(9,625) $(1,837)
======== ======== ======= =======
See accompanying notes to consolidated financial statements.
59
62
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT FOR SHARES)
FOUR
EIGHT MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
----------------- ----------------- ---------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT AMOUNT
------ -------- ------ -------- ------ ------- ---------
CAPITAL STOCK:
Balance, beginning of period........ 1,000 -- 1,000 -- -- -- 29,641
Capital stock issued in conjunction
with the Acquisition on April 30,
1998............................. -- -- -- -- 1,000 -- --
----- -------- ----- -------- ----- ------- --------
Balance, end of period.............. 1,000 -- 1,000 -- 1,000 -- 29,641
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period........ $ 38,749 $ 38,374 -- --
Capital stock issued in conjunction
with the Acquisition on April 30,
1998............................. -- -- $38,374 --
Gain on sale of trademark to
affiliate........................ -- 375 -- --
Capital contributions by parent..... 900 -- -- --
----- -------- ----- -------- ----- ------- --------
Balance, end of period.............. 39,649 38,749 38,374 --
ACCUMULATED DEFICIT:
Balance, beginning of year.......... (14,102) (9,625) -- (3,249)
Net income (loss)................... 2,214 (4,477) (9,625) (1,837)
Dividends paid to Gillette.......... -- -- -- (20,990)
Capital contributions by Gillette... -- -- -- 26,000
----- -------- ----- -------- ----- ------- --------
Balance, end of year................ (11,888) (14,102) (9,625) (76)
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS):
Balance, beginning of year.......... (2,319) 896 -- (2,379)
Currency translation adjustments.... 96 (3,215) 896 364
----- -------- ----- -------- ----- ------- --------
Balance, end of year................ (2,223) (2,319) 896 (2,015)
----- -------- ----- -------- ----- ------- --------
TOTAL STOCKHOLDER'S EQUITY............ 1,000 $ 25,538 1,000 $ 22,328 1,000 $29,645 27,550
===== ======== ===== ======== ===== ======= ========
COMPREHENSIVE INCOME (LOSS):
Net income (loss)................... $ 2,214 $ (4,477) $(9,625) $ (1,837)
Currency translation adjustments.... 96 (3,215) 896 364
----- -------- ----- -------- ----- ------- --------
TOTAL COMPREHENSIVE INCOME
(LOSS).................... $ 2,310 $ (7,692) $(8,729) $ (1,473)
===== ======== ===== ======== ===== ======= ========
- ---------------
(1) Stockholder's equity of the Predecessor represents the combined
stockholders' equity and divisional equity of the Predecessor entities.
See accompanying notes to consolidated financial statements.
60
63
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR
-----------
YEARS ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
------------------- DECEMBER 31, APRIL 30,
2000 1999 1998 1998
-------- -------- ------------ -----------
Cash flows from operating activities:
Net income (loss)....................................... $ 2,214 $ (4,477) $ (9,625) $(1,837)
Extraordinary loss on early extinguishment of debt, net
of taxes.............................................. 205 296 -- --
-------- -------- --------- -------
Income (loss) before extraordinary item................. 2,419 (4,181) (9,625) (1,837)
Adjustments to reconcile income (loss) before
extraordinary item to net cash provided by (used in)
operating activities:
Loss (gain) on sale of property and equipment......... 147 (1,043) 150 --
Depreciation and amortization......................... 3,014 3,606 3,228 976
Amortization of deferred financing fees............... 633 840 731 --
Asset impairment charge............................... 1,019 1,084 -- --
Unrealized foreign exchange loss (gain)............... 249 -- -- --
Deferred income taxes................................. 891 -- -- --
Changes in operating assets and liabilities:
Receivables, net.................................... 1,244 5,453 (768) 89
Inventories......................................... (2,287) 8,213 2,744 1,004
Prepaid expenses and other current assets........... (422) 62 (374) 483
Intercompany receivables and payables............... 1,936 (14,403) -- --
Other assets........................................ 841 (315) (194) (413)
Accounts payable and accrued liabilities............ (1,999) (4,282) 588 (5,531)
Income taxes payable/prepaid........................ 272 (721) (265) (882)
Other long-term liabilities......................... (341) 897 110 (388)
-------- -------- --------- -------
Net cash provided by (used in) operating
activities..................................... 7,616 (4,790) (3,675) (6,499)
-------- -------- --------- -------
Cash flows from investing activities:
Purchase of Jafra Business.............................. -- -- (103,782) --
Payments of previously accrued Acquisition fees......... -- (1,856) (4,685) --
Proceeds from sale of property and equipment............ 92 5,551 2,917 --
Purchases of property and equipment..................... (4,418) (2,355) (4,140) (770)
Other................................................... (760) (711) -- --
-------- -------- --------- -------
Net cash provided by (used in) investing
activities..................................... (5,086) 629 (109,690) (770)
-------- -------- --------- -------
Cash flows from financing activities:
Issuance (repurchase) of subordinated debt.............. (6,358) (8,094) 60,000 --
Borrowings (repayments) under term loan facility........ (2,000) (1,500) 15,000 --
Net borrowings (repayments) under revolving credit
facility.............................................. (10,000) 13,000 11,500 --
Capital contributions by Parent......................... 900 -- 38,374 --
Transactions with affiliates............................ 14,788 -- -- 6,138
Deferred financing fees................................. -- -- (6,832) --
-------- -------- --------- -------
Net cash provided by (used in) financing
activities..................................... (2,670) 3,406 118,042 6,138
-------- -------- --------- -------
Effect of exchange rate changes on cash................... 496 (496) (576) 364
Effect of accounting calendar change on cash.............. -- -- -- (82)
-------- -------- --------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 356 (1,251) 4,101 (849)
Cash and cash equivalents at beginning of period.......... 3,026 4,277 176 2,129
-------- -------- --------- -------
Cash and cash equivalents at end of period................ $ 3,382 $ 3,026 $ 4,277 $ 1,280
======== ======== ========= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 9,669 $ 10,100 $ 4,809 $ --
Income taxes.......................................... $ 2,154 $ 1,907 $ -- $ --
See accompanying notes to consolidated financial statements.
61
64
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
Jafra Cosmetics International, Inc., a Delaware corporation ("JCI") is a
wholly owned subsidiary of CDRJ North Atlantic (Lux) S.a.r.L., a wholly owned
subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme (the
"Parent"). JCI, its subsidiaries, 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"). 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 and into JCI, with JCI
as the surviving entity, and (ii) indirect subsidiaries of JCI purchased the
stock of Gillette subsidiaries conducting the Jafra Business in Germany, Italy,
the Netherlands and Switzerland and certain assets used in the Jafra Business in
Austria.
The accompanying consolidated financial statements as of and for the years
ended December 31, 2000 and 1999 and for the eight-month period ended December
31, 1998 reflect the operations of JCI and its subsidiaries (collectively, the
"Company"). The Company is an operating subsidiary in the United States, and
currently has operating subsidiaries in Austria, Germany, Italy, the
Netherlands, Switzerland, the Dominican Republic, and Thailand. The accompanying
combined financial statements for the four months ended April 30, 1998 reflect
the operations of the Jafra Business in the United States and Europe prior to
the Acquisition and are referred to as the "Predecessor" operations. All
significant intercompany accounts and transactions between entities comprising
the Company or Predecessor operations have been eliminated in consolidation and
combination.
The combined financial statements of the Predecessor include the accounts
of the following subsidiaries and divisions of 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; 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.
In connection with the Acquisition, JCI and an affiliated company, Jafra
S.A. (the indirect, wholly owned Mexican subsidiary of the Parent) issued $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes"). See Note 6. The Notes represent several obligations of JCI and Jafra
S.A., with each participating on a pro rata basis upon redemption. JCI and Jafra
S.A. have 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. As the cross-guarantee of JCI
and Jafra S.A. is subject to a 30-day standstill period, the Parent is filing
these separate financial statements of JCI as a schedule to its Annual Report on
Form 10-K for the year ended December 31, 2000.
Because of the debt financing incurred in connection with the Acquisition
and the adjustments made to allocate the excess of the aggregate purchase price
over the historical value of the net assets acquired, the accompanying
consolidated financial statements of the Company are not directly comparable to
those of the Predecessor.
In 1998, the Predecessor changed the reporting period for the foreign
operations 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 Predecessor's foreign operations from November 30, 1997 to
December 31, 1997.
62
65
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DESCRIPTION OF BUSINESS
The Company is an international marketer, and prior to June of 1999, was a
manufacturer of premium skin and body care products, color cosmetics,
fragrances, and other personal care products. The Company markets its products
primarily in the United States, but also through subsidiaries in Austria,
Germany, Italy, the Netherlands, Switzerland, the Dominican Republic and
Thailand and in a number of additional countries through distributors, through a
direct selling, multilevel distribution system comprised of self-employed
salespersons (known as "consultants").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash, time
deposits and all highly liquid debt instruments purchased with a maturity of
three months or less.
Inventories. Inventories are stated at the lower of cost, as determined by
the first-in, first-out basis, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is provided for over the estimated useful
lives of the respective assets using the straight-line method. Estimated useful
lives are 40 years for buildings and improvements and 5 to 15 years for
machinery and computer equipment. 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 using the straight-line method. Goodwill resulting from the
Company's acquisition of the Jafra Business from Gillette is being amortized
over a period of 40 years, while the Predecessor's goodwill was amortized
generally over a period of 37.5 years. Accumulated amortization of goodwill at
December 31, 2000 and 1999 was $2,868,000 and $1,895,000, respectively.
Deferred Financing Costs. In connection with the acquisition of the Jafra
Business, the Company incurred approximately $7.2 million of costs related to
the 11.75% Senior Subordinated Notes due 2008 (the "Notes"), the Revolving
Credit Facility and the Term Loan Facility (see Note 6). Such costs are being
amortized on a basis that approximates the interest method over the expected
term of the related debt. Accumulated amortization at December 31, 2000 and 1999
was $1,871,000 and $1,373,000, respectively.
Impairment of Long-Lived Assets and Goodwill. Long-lived assets and
goodwill are reviewed for impairment, based on undiscounted cash flows, whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If this review indicates that the carrying amount
of the long-lived assets and goodwill is not recoverable, the Company will
recognize an impairment loss, measured by the future discounted cash flow method
(see Note 10).
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the short-term maturities of these instruments. The fair value of the
Notes at December 31, 2000 was $46,461,000, based on discussions with one of the
Company's largest bondholders and an analysis of current market interest rates
and the Company's credit rating. The fair value of the Notes at December 31,
1999 was $50,310,000, based on quoted market prices. As the Company's Revolving
Credit Facilities and the Term Loan are variable rate debt, and the
63
66
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate spread paid by the Company is adjusted for changes in certain
financial ratios of the Company, the fair value of the Revolving Credit
Facilities and the Term Loan approximated their carrying amounts at December 31,
2000 and 1999.
Research and Development. Research and development costs are expensed as
incurred. Total research and development expense aggregated $1,901,000,
$2,130,000, $1,902,000, and $1,185,000 for the years ended December 31, 2000 and
1999, the eight months ended December 31, 1998, and the four months ended April
30, 1998, respectively. The portion of the above-identified research and
development expenses incurred by the Company and charged to Jafra S.A. as part
of the Company's management fee income (see Note 9) aggregated $978,000,
$942,000, $951,000, and $321,000 for the years ended December 31, 2000 and 1999,
the eight months ended December 31, 1998, and the four months ended April 30,
1998, respectively.
Income Taxes. The Company accounts for income taxes under the balance sheet
approach that requires the recognition of deferred income tax assets and
liabilities for the expected future consequences of events that have been
recognized in the Company's financial statements or income tax returns.
Management provides a valuation allowance for deferred income tax assets when it
is more likely than not that a portion of such deferred income tax assets will
not be realized. Income tax expense of the Company is computed on a
separate-company basis.
Foreign Currency Translation. The functional currency for foreign
subsidiaries is generally the local currency. Assets and liabilities of such
foreign subsidiaries are translated into U.S. dollars at current exchange rates,
and related revenues and expenses are translated at average exchange rates in
effect during the period. Resulting translation adjustments are recorded as a
component of other comprehensive income.
New Accounting Standards. Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS 133 effective January 1, 2001.
Management does not expect the adoption of SFAS 133 to have a significant impact
on the financial position, results of operations, or cash flows of the Company.
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
all prior periods to reflect shipping and handling fees, previously reported as
reductions to selling, general and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The amounts that have been
reclassified as net sales are $4,057,000, $2,751,000 and $1,389,000 for the year
ended December 31, 1999, the eight-month period ended December 31, 1998, and the
four-month period ended April 30, 1998, respectively. Shipping and handling
costs are included in selling, general and administrative expenses.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying accounting principles generally accepted in the United States of
America to selected revenue recognition issues. SAB 101, as amended, was
implemented on October 1, 2000 and did not have a material impact on the
Company's consolidated financial statements.
64
67
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
------ ------
Raw materials and supplies................................. $ 44 $ 158
Finished goods............................................. 9,411 7,010
------ ------
Total inventories.......................................... $9,455 $7,168
====== ======
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2000 and
1999 (in thousands):
2000 1999
------- -------
Land..................................................... $ 6,188 $ 6,188
Buildings................................................ 5,998 5,487
Machinery and equipment.................................. 11,997 10,403
------- -------
24,183 22,078
Less accumulated depreciation............................ 4,039 2,795
------- -------
Property and equipment, net.............................. $20,144 $19,283
======= =======
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 2000 and 1999
(in thousands):
2000 1999
------- -------
Sales promotion and commissions.......................... $ 3,553 $ 4,035
Accrued restructuring charges (Note 10).................. 516 1,105
Accrued interest......................................... 892 1,034
Compensation and other benefit accruals.................. 3,374 5,283
State and local sales taxes and other taxes.............. 846 1,305
Other.................................................... 2,807 3,349
------- -------
$11,988 $16,111
======= =======
(6) DEBT
Debt consists of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
------- -------
Subordinated Notes, unsecured, interest payable
semi-annually at 11.75%, due in 2008...................... $45,108 $51,600
Term Loan, principal and interest due in quarterly
installments through April 30, 2004, interest rates of
8.1% and 8.6% at December 31, 2000 and 1999,
respectively.............................................. 11,500 13,500
Revolving Loan, due April 30, 2004, weighted average
interest rates of 8.3% and 9.1% at December 31, 2000 and
1999, respectively........................................ 14,500 24,500
Total debt.................................................. 71,108 89,600
------- -------
Less current maturities..................................... (2,500) (2,000)
------- -------
Long-term debt.............................................. $68,608 $87,600
======= =======
65
68
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's long-term debt matures as follows (in thousands): $2,500 in
2001, $3,000 in 2002, $4,000 in 2003, $16,500 in 2004, $0 in 2005 and $45,108
thereafter.
On April 30, 1998, JCI and Jafra S.A. borrowed $125 million by issuing $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes") pursuant to an Indenture dated April 30, 1998 (the "Indenture") and $25
million under a Senior Credit Agreement.
At the date of issuance, the Notes represented several obligations 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.
JCI and Jafra S.A. are indirect, wholly owned subsidiaries of the Parent
and have 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 Company
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
Company's indirect subsidiaries in Austria, Germany, Italy, the Netherlands,
Switzerland, the Dominican Republic and Thailand, and the Parent's indirect
subsidiaries in Poland, Argentina, Brazil, Chile, Colombia, Peru, and Venezuela.
All guarantor and nonguarantor entities are either direct or indirect wholly
owned subsidiaries of the Parent. The Notes were registered in a registered
exchange offer, effective as of January 25, 1999, under the Securities Act of
1933, as amended.
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, JCI and Jafra S.A. 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.
A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement, as described below, allows JCI and Jafra S.A. to repurchase the Notes
in the open market from time to time, with the aggregate purchase price for all
such Notes repurchased not to exceed $25 million. During 2000, JCI retired
notes, prior to maturity, with a face value of $6.5 million. The debt
repurchases in 2000 resulted in an extraordinary loss of $205,000, net of an
income tax benefit of $120,000. During 1999, JCI retired Notes, prior to
maturity, with a face value of $8.4 million. The debt repurchases in 1999
resulted in an extraordinary loss of $296,000, with no income tax benefit. In
connection with the early retirement of the Notes as described above, a portion
of the unamortized deferred financing costs was written off and included in the
determination of the extraordinary loss on early extinguishment of debt. Total
amounts that were written off during 2000 and 1999 were $459,000 and $602,000,
respectively.
In addition, JCI and Jafra S.A. 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 and a Term Loan Facility of $25 million. Borrowings under the Term Loan
Facility are payable in quarterly installments of principal and interest over 6
years through April 30, 2004. 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 1.625% or an
alternate base rate (the higher of the prime rate or federal funds rate plus
0.5%, plus an applicable margin not to exceed 0.625%). The interest rates in
effect at December 31, 2000 ranged from approximately 8.1% to approximately 8.3%
for the LIBOR-based borrowings and approximately 10.1% for the prime-based
borrowings. Borrowings under the Senior Credit Agreement are secured by
substantially all of the assets of JCI and Jafra S.A.
66
69
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Both the Indenture and the Senior Credit Agreement 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 Parent to maintain certain financial ratios including a minimum
EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA
ratio.
As of December 31, 2000, the Company had one irrevocable standby letter of
credit outstanding, totaling $0.1 million. This letter of credit, expiring on
April 30, 2004, collateralizes the Company's obligation to a third party in
connection with certain lease agreements. The fair value of this letter of
credit approximates its contract value.
(7) INCOME TAXES
The Company's income (loss) before income taxes consists of the following
(amounts in thousands):
PREDECESSOR
------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Income (loss) before income
taxes and extraordinary item:
United States................. $ 9,741 $ 3,898 $(5,764) $ (451)
Foreign....................... (4,247) (5,971) (4,106) (1,011)
------- ------- ------- -------
$ 5,494 $(2,073) $(9,870) $(1,462)
======= ======= ======= =======
Actual income tax expense differs from the "expected" tax expense (computed
by applying the U.S. federal corporate rate of 35% to income before income
taxes) as a result of the following:
PREDECESSOR
------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Provision (benefit) for income
taxes at federal statutory
rate.......................... $ 1,922 $ (726) $(3,454) $(512)
Foreign income subject to tax
other than at federal
statutory rate, principally
withholding taxes............. 1,298 1,186 (655) --
Foreign tax credits............. (1,724) (1,784) -- --
State income taxes.............. 243 171 -- --
Valuation
allowance -- domestic......... (616) 657 2,017 160
Valuation
allowance -- foreign.......... 1,911 2,686 1,847 252
Other........................... 41 (82) -- 475
------- ------- ------- -----
Income tax expense.............. $ 3,075 $ 2,108 $ (245) $ 375
======= ======= ======= =====
67
70
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, the Predecessor has provided income taxes
on a separate-company basis. The components of the provision for income taxes
are as follows (in thousands):
PREDECESSOR
------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Current:
Federal....................... $ 72 $ 60 $ -- $ 1
------ ------ ----- ----
Foreign:
Foreign withholding
taxes.................... 1,820 1,859 -- --
Europe..................... 49 99 (245) 374
------ ------ ----- ----
1,869 1,958 (245) 374
State......................... 243 90 -- --
------ ------ ----- ----
Total current......... 2,184 2,108 (245) 375
Deferred -- foreign............. -- -- -- --
Deferred -- domestic............ 891 -- -- --
------ ------ ----- ----
Total deferred........ 891 -- -- --
Total income taxes on income
(loss) before income taxes and
extraordinary item............ 3,075 2,108 (245) 375
Income tax benefit on early
extinguishment of debt........ (120) -- -- --
------ ------ ----- ----
Total income tax
expense............. $2,955 $2,108 $(245) $375
====== ====== ===== ====
The components of deferred income tax assets and deferred income tax
liabilities at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
------- -------
Deferred income tax assets:
Accounts receivable....................................... $ -- $ 5
Net operating loss carryforward........................... 6,162 4,275
Disallowed interest expense............................... 1,226 2,279
Accrued bonuses........................................... 619 1,933
Transaction and deferred financing costs.................. -- 118
Foreign tax credit carryforward........................... 1,700 991
Other accrued liabilities................................. 244 --
Other..................................................... 1,266 61
------- -------
Total deferred income tax assets.................. 11,217 9,662
Less valuation allowance.................................. (7,862) (7,257)
------- -------
Net deferred income tax assets.................... 3,355 2,405
Deferred income tax liabilities:
Property and equipment.................................... (1,221) (438)
Trademark and goodwill.................................... (1,866) (1,245)
Inventories............................................... (851) (553)
Other..................................................... (308) (169)
------- -------
Total deferred income tax liabilities............. (4,246) (2,405)
------- -------
Net deferred income tax liabilities............... $ (891) $ --
======= =======
68
71
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company records a valuation allowance on the deferred income tax assets
to reduce the total to an amount that management believes is more likely than
not to be realized. The valuation allowances at December 31, 2000 and 1999 are
based upon the Company's estimates of the future realization of deferred income
tax assets. Valuation allowances at December 31, 2000 and 1999 were provided to
offset operating loss carryforwards of $6,162,000 and foreign tax credit
carryforwards of $1,700,000 resulting from the Company's U.S. and European
subsidiaries. These deferred income tax assets were reduced by a valuation
allowance of $7,862,000. The tax loss carryforwards expire in varying amounts
between 2001 and 2010. Realization of the income tax carryforwards is dependent
on generating sufficient taxable income prior to expiration of the
carryforwards.
(8) BENEFIT PLANS
PREDECESSOR PLANS
Prior to the Company's acquisition of the Jafra Business, the Predecessor
participated in The Gillette Company Retirement Plan (the "Plan") which was a
defined benefit pension plan covering substantially all of Gillette's domestic
employees. Benefits were based on age, years of service and the level of
compensation during the final years of employment. Gillette's funding policy was
to contribute annually to the Plan the amount necessary to meet the minimum
funding standards established by the Employee Retirement Income Security Act.
The pension plan expense allocated to the predecessor to the Parent and its
subsidiaries, including the Company, was $261,000 for the four months ended
April 30, 1998. The Predecessor's share of pension expense was based on the
Predecessor's payroll covered by the Plan as a percentage of total payroll
covered by the Plan.
The Predecessor also participated in Gillette's plans which provided
certain health care and life insurance benefits to retired employees.
Substantially all of the Predecessor's employees became eligible for these
benefits upon retirement. The Predecessor's share of this other postretirement
benefit plan expense allocated to the predecessor to the Parent and its
subsidiaries, including the Company, was $37,000 for the four months ended April
30, 1998.
COMPANY PLANS
Certain employees of the Company's German subsidiary participate in a
defined benefit pension plan covering key employees (the "Germany Plan").
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 Company recognized pension income of $18,000 for the year ended
December 31, 2000 due to the departure of certain employees. The total pension
expense was $43,000 for the year ended December 31, 1999, $11,000 for the eight
months ended December 31, 1998, and $129,000 for the four months ended April 30,
1998.
JCI has an employee savings plan which permits participants to make
voluntary contributions by salary reductions pursuant to section 401(k) of the
Internal Revenue Code, which allowed employees to defer up to 15% of their total
compensation, subject to statutory limitations. On January 1, 2001, the maximum
employee deferral rate under this program was increased to 20%, subject to
statutory limitations. Employee contributions of up to 10% of compensation are
matched by the Company at the rate of 50 cents per dollar. Employees do not vest
in the Company contribution until they have reached two years of service, at
which time they become fully vested. The Company's expense under this program
was $620,000, $628,000 and $420,000 for the years ended December 31, 2000 and
1999 and for the eight months ended December 31, 1998, respectively.
JCI also has supplemental excess benefit savings plans for certain senior
executives which permitted participants to make voluntary contributions of up to
15% of their total compensation. On January 1, 2001, participants became
eligible to make voluntary contributions of up to 20% of their total
compensation. Employee contributions are matched on the same basis as under the
employee savings plan, and the vesting
69
72
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions are the same. The Company's expense under this program was $ 213,000,
$179,000 and $17,000 for the years ended December 31, 2000 and 1999 and for the
eight months ended December 31, 1998, respectively. Employee and employer
contributions under such plan are placed into a "rabbi" trust exclusively for
the uses and purposes of plan participants and general creditors of the Company.
The Company has recorded an asset and the related liability in the accompanying
consolidated balance sheets of $1,472,000 and $711,000 at December 31, 2000 and
1999, respectively.
(9) RELATED PARTY TRANSACTIONS
The Company distributes skin and body products to other affiliates of the
Parent ("Affiliates"). Sales to Affiliates, primarily in Mexico and South
America, were $14,297,000, $14,318,000, $7,893,000, and $6,485,000 for the years
ended December 31, 2000 and 1999, the eight months ended December 31, 1998, and
the four months ended April 30, 1998. These sales were made at cost plus a
markup ranging from 0 to 11%.
In addition, the Company provides certain management services, such as
legal, accounting and treasury, management oversight, and other administrative
functions to Affiliates. The cost of these services is included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations. The Company charges out a portion of these management expenses to
its Affiliates based principally upon a formula using the percentage of revenues
of each affiliate to the total consolidated revenues of the Parent. The Company
believes the amounts and methods of allocations are reasonable and approximate
the cost of the actual services provided. The management fee income, which
consists of amounts billed to Affiliates in Mexico and South America, was
$8,141,000, $5,048,000, $3,942,000 and $1,926,000 for the years ended December
31, 2000 and 1999, for the eight months ended December 31, 1998, and for the
four months ended April 30, 1998.
Certain expenses were charged by Gillette to the Predecessor prior to the
Acquisition. The allocations were based principally upon a formula using the
percentage of revenues of the Predecessor to the total consolidated revenues of
Gillette. Such services included legal, trademark and patent support, internal
audit, and other administrative costs. Total related charges were $748,000 for
the four months ended April 30, 1998. 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 years ended December 31, 2000 and
1999 and the eight months ended December 31, 1998.
At the end of 1999, the Company sold U.S. trademarks with a net book value
of $20,125,000 and German trademarks with a net book value of $4,362,000 to
Jafra S.A for their respective estimated fair values of $20,500,000 and
$3,500,000. The excess of the sales price over the net book value of U.S.
trademarks of $375,000 was recorded as additional paid-in capital in the
accompanying consolidated statements of stockholder's equity. The excess of the
net book value of German trademarks over the sales price of $862,000 was
recorded as an impairment loss in the accompanying consolidated statements of
operations. Beginning in 2000, the Company is charged a royalty by Jafra S.A.
for the right to use the Jafra trademark in the United States and Europe. The
total royalty expense charged by Jafra S.A. to the Company for the year ended
December 31, 2000 was $1,126,000, and is offset against royalty income from
affiliates in the accompanying consolidated statements of operations.
The Company owns the worldwide rights to its multi-level sales know-how
(referred to as the "Jafra Way"). The Jafra Way was initially developed in the
United States for lineage, training, and compensation of consultants. Starting
in 1999, the Company charged Jafra S.A. a royalty for the use of the Jafra Way.
The royalty fees charged by the Company in 1999 were $17,838,000 and are based
upon a percentage of Jafra S.A.'s sales. The Company charged Jafra S.A. a
royalty fee of $15,746,000 for use of the Jafra Way for the year ended December
31, 2000.
70
73
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has granted loans to certain Affiliates at annual interest
rates ranging from 6% to 9%. Such loans are due to be repaid five years from the
date of grant, with no prepayment penalty. Notes receivable from Affiliates
consists primarily of amounts owed by Jafra S.A. as a result of the sale of U.S.
and German trademarks as discussed above, and amounts billed to Jafra S.A. in
connection with the Jafra Way royalty. In addition, the Company has made loans
to an indirect subsidiary of the Parent to fund certain of the Parent's
operations in South America. Net interest income from Affiliates, primarily
Jafra S.A., was $2,126,000 and $121,000 for the years ended December 31, 2000
and 1999, respectively. For the eight months ended December 31, 1998, the
Company incurred net interest expense of $15,000 on borrowings from Affiliates.
Interest income and expense relating to Affiliates is included in interest, net,
in the accompanying consolidated statements of operations. During the four
months ended April 30, 1998, interest was charged and earned on intercompany
receivables and payables between Gillette and the Predecessor at the LIBOR rate.
The total related interest was $152,000 for the four months ended April 30,
1998, and is included in interest, net, in the accompanying consolidated
statements of operations.
During 2000, the Parent contributed $900,000 of capital to the Company.
This capital was generated by issuances of common stock by the Parent, and was
used by the Company to pay down debt.
In 1998, CD&R received a fee of $2.7 million from the Parent for providing
services related to the structuring, implementation and consummation of the
Acquisition. 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 Parent, or until termination by
either party with 30 days notice, CD&R will receive an annual fee (and
reimbursement of out-of-pocket expenses) for providing advisory, management
consulting and monitoring services to the Parent and its subsidiaries. The
annual fee was originally $500,000 and as of January 1, 1999, was reduced to
$400,000. The Parent and CD&R are currently discussing a proposed amendment to
the consulting agreement. As proposed, the amendment would provide for an annual
fee of $1,000,000, retroactive to January 1, 2001, for ongoing services provided
to the Parent and its subsidiaries. As required by the terms of the Parent's
lending arrangements, such fees are determined by arm's-length negotiation and
are believed by the Parent to be reasonable. In addition, the proposed amendment
adds to CD&R's services under the agreement financial, advisory, investment
banking and similar services with respect to future proposals for an
acquisition, merger, recapitalization, or other similar transaction directly or
indirectly involving the Parent or any of its subsidiaries. The fee for such
additional services in connection with future transactions would be an amount
equal to 1% of the transaction value for the transaction to which the fee
relates. Such transaction fees may be increased upon approval of a majority of
the members of the Company's Board of Directors who are not employees of the
Company, CD&R or any affiliate of CD&R. The proposed amendment also provides
that if any employee of CD&R is appointed to an executive management position
(or a position of comparable responsibility) in the Company or any of its
subsidiaries, the annual fee will be increased by an amount to be determined by
CD&R, the amount of such increase not to exceed 100% of the existing annual fee
in effect at that time. The proposed amendment has been approved by the Parent's
Board of Directors. The CD&R fees incurred during the years ended December 31,
2000 and 1999 and the eight months ended December 31, 1998 were $400,000,
$400,000 and $333,000, respectively. These fees were recorded as selling,
general, and administrative expenses in the accompanying consolidated statements
of operations, and a portion of the fees was allocated to Affiliates as part of
the Company's management fee income from affiliates.
Certain officers and directors of CD&R or its affiliates serve as directors
of the Parent. During 1999, the Company engaged Guidance Solutions ("Guidance"),
a corporation in which an investment fund managed by CD&R has an investment, to
develop its e-commerce systems. Under the agreement entered into by both
parties, the Company agreed to pay fees of approximately $2.0 million to
Guidance in connection with planning, defining, designing and consulting
services performed. During the years ended December 31, 2000 and 1999, the
Company paid fees to Guidance of $1,798,000 and $389,000, respectively. A
portion of these amounts were allocated to the Company's Affiliates. The Company
terminated its agreement with Guidance
71
74
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and executed a settlement and mutual release agreement effective September 30,
2000. Upon execution of this agreement in October of 2000, Guidance paid the
Company $25,000 and agreed to pay the Company an aggregate additional sum of
$475,000, payable in quarterly installments plus interest at 9.5% per annum,
beginning in January 2001.
The Predecessor recognized profit on the sale of inventory to Gillette of
$157,000 for the four months ended April 30, 1998.
(10) RESTRUCTURING AND IMPAIRMENT CHARGES AND RELATED ACCRUALS
Current Year Restructuring and Impairment Charges. In 2000, the Company
recorded approximately $1.4 million of restructuring charges and approximately
$1.0 million of asset impairment charges. The restructuring charges of
approximately $1.4 million related to the Company's repositioning activities in
Europe, and consisted primarily of severance costs. As of December 31, 2000,
payments of approximately $1.0 million have been made for these charges. The
Company anticipates that substantially all of the remaining restructuring costs
of approximately $0.4 million will be paid in 2001. The asset impairment charges
of $1.0 million consisted of approximately $0.3 million related to the Company's
repositioning activities in Europe and approximately $0.7 million related to the
write-down of certain capitalized computer software costs in the United States.
Prior Year Restructuring and Impairment Charges. In 1999, the Company
recorded approximately $3.5 million of restructuring charges and approximately
$1.1 million of asset impairment charges. The restructuring charges consisted of
approximately $2.7 million of charges related to the outsourcing of the
Company's U.S. product manufacturing functions, and approximately $0.8 million
of other restructuring activities in the U.S. and Europe. Substantially all of
the charges related to severance costs. As the terms of such severance were not
communicated to the affected employees until subsequent to the one-year
anniversary of the Acquisition, such costs were expensed during 1999. As of
December 31, 2000, payments of approximately $3.4 million have been made for
these charges. Remaining restructuring costs of $0.1 million represent
contracted severance payments and will be paid in the first quarter of 2001.
Also in 1999, the Company recognized an asset impairment charge of
approximately $1.1 million related to long-lived assets (goodwill and
trademarks) owned by its German subsidiary ("Jafra Germany"). In the fourth
quarter of 1999, concurrent with the Company's annual business planning process,
the Company recognized that sales levels in Jafra Germany had declined more than
anticipated since the Acquisition. The Company performed an impairment review
and concluded that Jafra Germany's future undiscounted cash flows were below the
carrying value of its related long-lived assets. Accordingly, the Company
recorded a noncash impairment loss of approximately $1.1 million to adjust the
carrying values of Jafra Germany's goodwill and trademarks to their estimated
fair values, which were determined based on anticipated future cash flows
discounted at a rate commensurate with Jafra Germany's weighted average cost of
capital.
Acquisition Accrual. In connection with the Acquisition in 1998, the
Company initially recorded a $4.0 million accrual for restructuring and
rationalization costs (the "Acquisition Accrual"). This accrual related to the
planned realignment of the Company's operations subsequent to the Acquisition,
and included approximately $2.9 million of severance costs and $1.1 million of
costs primarily relating to closure and/or relocation of certain distribution
facilities. As of the consummation of the Acquisition, senior management began
formulating a plan to close certain distribution facilities and involuntarily
terminate certain employees.
Prior to April 30, 1999 (the one year anniversary of the Acquisition), the
Company finalized plans related to the closure of certain worldwide facilities,
principally the closure and outsourcing of the U.S. product manufacturing
functions. These restructuring plans included the transfer of certain inventory
and the sale of fixed assets at a loss to a third party contractor (the
"Contractor") (see Note 14). The total finalized cost of the Acquisition Accrual
was approximately $4.4 million, and resulted in a net increase to goodwill of
72
75
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.4 million in 1999. The components of the Acquisition Accrual
are summarized as follows (in thousands):
Disposal of fixed assets.................................... $2,336
Severance................................................... 1,724
Lease termination costs..................................... 197
Other....................................................... 150
------
$4,407
======
In the eight months ended December 31, 1998, approximately $0.7 million of
severance costs and $0.1 million of facilities closure costs were paid and
charged against the Acquisition Accrual. During 1999, all of the remaining
components of the Acquisition Accrual were incurred. At December 31, 1999, there
was no remaining liability related to the Acquisition Accrual.
As discussed above, the components of the additions and/or adjustments to
the aforementioned accruals include severance, lease costs, fixed asset
disposals, and other exit costs, and are summarized as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Additions -- charges to income:
Severance.................................. $1,170 $ 3,265 $ --
Lease costs................................ 170 57 --
Other 84 169 --
------ ------- ------
Total additions.................... 1,424 3,491 --
Acquisition Accrual:
Severance.................................. -- (1,176) 2,900
Fixed asset disposals...................... -- 2,336 --
Lease costs................................ -- (903) 1,100
Other...................................... -- 150 --
------ ------- ------
Acquisition Accrual, net........... -- 407 4,000
------ ------- ------
$1,424 $ 3,898 $4,000
====== ======= ======
A rollforward of the activity of the restructuring accruals is summarized
as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Opening balance.............................. $1,105 $3,162 $ --
Additions.................................... 1,424 3,491 4,000
Adjustment to goodwill balance............... -- 407 --
Charges against reserves..................... (2,013) (5,955) (838)
------ ------ ------
Ending balance..................... $ 516 $1,105 $3,162
====== ====== ======
73
76
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining costs at each year-end included in the restructuring accrual
are summarized as follows (in thousands):
DECEMBER 31,
------------------------
2000 1999 1998
---- ------ ------
Severance.................................................. $346 $1,105 $2,154
Lease costs................................................ 170 -- 1,008
---- ------ ------
$516 $1,105 $3,162
==== ====== ======
The principal component of the restructuring accruals is severance. A
summary of the severance activity is as follows (dollar amounts in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
NUMBER OF NUMBER OF NUMBER OF
EMPLOYEES AMOUNT EMPLOYEES AMOUNT EMPLOYEES AMOUNT
--------- ------- --------- ------- --------- ------
Opening balance......... 43 $ 1,105 47 $ 2,154 -- $ --
Planned terminations.... 29 1,170 101 3,265 85 2,900
Adjustment to planned
terminations.......... -- -- (39) (1,176) -- --
Actual terminations..... (62) (1,929) (66) (3,138) (38) (746)
--- ------- --- ------- --- ------
Ending
balance..... 10 $ 346 43 $ 1,105 47 $2,154
=== ======= === ======= === ======
(11) FINANCIAL REPORTING FOR BUSINESS SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operations and major
customers.
The Company's business is comprised of one industry segment, direct
selling, with worldwide operations, principally in the United States and Europe.
The Company is organized into geographical business units that each sell the
full line of Jafra cosmetics, skin care, body care, fragrances, and other
products. The Company has two reportable business segments: the United States,
and Europe. Business results for subsidiaries in the Dominican Republic and
Thailand are combined and included in the following table under the caption "All
Others".
The accounting policies used to prepare the information reviewed by the
Company's chief operating decision makers are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on segment operating income, excluding reorganization and restructuring
charges, unusual gains and losses, and amortization of goodwill and intangibles.
Consistent with the information reviewed by the Company's chief operating
decision makers, corporate costs, foreign exchange gains and losses, interest
expense, other nonoperating income or expense, and income taxes are not
allocated to operating segments. The effects of intersegment sales (net sales
and related gross profit) are excluded from the computation of segment operating
income. Gross profit from Affiliates (primarily in Mexico and South
74
77
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
America) is included in the following table under the caption "Corporate,
Unallocated and Other". Segment assets exclude notes and accounts receivable
from Affiliates.
CORPORATE,
UNITED ALL TOTAL UNALLOCATED CONSOLIDATED
DOLLARS IN THOUSANDS STATES EUROPE OTHERS SEGMENTS AND OTHER TOTAL
-------------------- -------- ------- ------ -------- ----------- ------------
Year ended December 31, 2000
Net sales........................... $ 74,681 $26,823 $1,469 $102,973 $ 14,297 $117,270
Operating profit (loss)............. 10,709 876 (790) 10,795 (12,188) (1,393)
Depreciation and amortization....... 2,111 883 20 3,014 -- 3,014
Capital expenditures................ 3,662 90 666 4,418 -- 4,418
Segment assets...................... 68,843 17,650 2,102 88,595 287 88,882
Year ended December 31, 1999
Net sales........................... 74,120 33,028 -- 107,148 14,318 121,466
Operating profit (loss)............. 9,737 (302) -- 9,435 (18,526) (9,091)
Depreciation and amortization....... 2,569 1,014 -- 3,583 23 3,606
Capital expenditures................ 1,838 517 2,355 -- 2,355
Segment assets...................... 68,992 19,203 -- 88,195 293 88,488
Eight months ended December 31, 1998
Net sales........................... 52,969 27,655 -- 80,624 7,893 88,517
Operating profit (loss)............. 8,700 (1,028) -- 7,672 (10,817) (3,145)
Depreciation and amortization....... 2,556 672 -- 3,228 -- 3,228
Capital expenditures................ 3,807 333 -- 4,140 -- 4,140
Segment assets...................... 108,386 19,144 -- 127,530 13,335 140,865
Four months ended April 30, 1998
Net sales........................... 24,752 13,295 -- 38,047 6,485 44,532
Operating profit (loss)............. 3,883 306 -- 4,189 (4,422) (233)
Depreciation and amortization....... 740 236 -- 976 -- 976
Capital expenditures................ 528 242 -- 770 -- 770
Segment assets...................... 38,496 16,479 -- 54,975 (484) 54,491
Additional business segment information regarding product lines is as
follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
SALES BY OF TOTAL SALES BY OF TOTAL SALES BY OF TOTAL
PRODUCT LINE SALES PRODUCT LINE SALES PRODUCT LINE SALES
--------------- ---------- --------------- ---------- --------------- ----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
Skin Care................. $ 34.3 34.9% $ 34.5 33.5% $ 37.6 32.8%
Color Cosmetics........... 17.9 18.2 18.9 18.3 21.6 18.8
Fragrances................ 20.5 20.9 14.2 13.8 13.2 11.6
Personal Care............. 12.0 12.2 20.0 19.4 22.6 19.7
Other(1).................. 13.6 13.8 15.5 15.0 19.6 17.1
------ ----- ------ ----- ------ -----
Subtotal before
shipping and
handling fees and
sales to
Affiliates......... 98.3 100.0% 103.1 100.0% 114.6 100.0%
===== ===== =====
Shipping and handling
fees.................... 4.7 4.0 4.0
Sales to Affiliates....... 14.3 14.4 14.4
------ ------ ------
Total........... $117.3 $121.5 $133.0
====== ====== ======
75
78
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Includes sales aids (party hostess gifts, demonstration products, etc.) and
promotional materials.
(12) 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 2005. Future minimum lease payments
under noncancelable operating leases as of December 31, 2000 are (in thousands):
2001........................................................ $1,748
2002........................................................ 1,167
2003........................................................ 675
2004........................................................ 273
2005........................................................ 150
------
$4,013
======
Rental expense was $1,617,000, $1,630,000, $1,328,000 and $676,000 for the
years ended December 31, 2000 and 1999, the eight months ended December 31,
1998, and the four months ended April 30, 1998, respectively.
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 operations.
(13) MANAGEMENT INCENTIVE ARRANGEMENTS
COMPANY PLAN
Effective as of the closing of the Acquisition, the Parent adopted a stock
incentive plan (the "Stock Incentive Plan"), which provides 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. The Parent reserved 156,423 shares for issuance under the Stock
Incentive Plan, and as of December 31, 2000, 42,026 shares and 84,052 options
are outstanding. A summary of the status and activity of shares purchased under
the Stock Incentive Plan is as follows:
NUMBER OF PRICE
SHARES PER SHARE
--------- ---------
Shares purchased in 1998............................... 39,340 $100
------
Shares outstanding at December 31, 1998................ 39,340
Shares purchased in 1999............................... 790 150
Options exercised in 1999.............................. 579 100
Shares repurchased in 1999............................. (2,317) 150
------
Shares outstanding at December 31, 1999................ 38,392
Shares purchased in 2000............................... 4,424 206
Options exercised in 2000.............................. 158 100
Shares repurchased in 2000............................. (948) $210
------
Shares outstanding at December 31, 2000................ 42,026
======
The purchase price of shares purchased in 1998 and 1999 and sold in 1999
and 2000 represented the estimated fair value at the respective dates of
purchase and sale. In 2000, 316 shares were purchased at a price below fair
value, and the Company recognized compensation expense of approximately $19,000.
Under certain circumstances, the management stockholders can require the Company
to repurchase their shares, subject to a
76
79
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holding period of at least seven months from the date such shares were acquired,
for an amount not to exceed fair value. During 1999 and 2000, the Company
repurchased 2,317 and 948 of such shares, respectively.
In connection with the purchase of common stock of the Parent, certain
members of senior management were granted options to purchase two additional
shares of common stock for each share purchased at an exercise price equal to
the fair value at the date of grant. The option activity presented herein
includes options granted to one employee of Jafra S.A. Such activity is
insignificant to the Company's financial statements. The options have a life of
ten years from the date of grant. Fifty percent of the options granted are
expected to vest in three equal installments on each of the first three
anniversaries of the date of grant, subject to the continuous employment of the
grantee ("Option Type 1"). The remaining fifty percent of the options become
vested as follows, subject to the continuous employment of the grantee: (a) up
to one-third of the options become vested as of each of the first three
anniversaries of the date of grant if the Company achieves at least 85% of its
EBITDA target for the immediately preceding fiscal year, (b) if less than
one-third of the total number of options shall have become vested as provided in
clause (a) above, the portion that has not become so vested shall become vested
as of the first day of the fiscal year following the fiscal year, if any, that
the Company achieves its cumulative EBITDA target, and (c) any options that do
not become vested as provided above will become vested on the ninth anniversary
of the date of grant ("Option Type 2"). A summary of the status and activity of
the options under the Stock Incentive Plan is as follows:
2000 1999 1998
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of year....... 76,784 $101.03 78,680 $100.00 -- --
Granted................................ 8,848 205.71 1,580 150.00 78,680 $100.00
Exercised.............................. (158) 100.00 (579) 100.00 -- --
Canceled............................... (1,422) 122.22 (2,897) 100.00 -- --
------ ------ ------
Outstanding at year-end................ 84,052 111.69 76,784 101.03 78,680 100.00
====== ====== ======
Options exercisable at year-end........ 37,655 $100.70 12,534 $100.00 -- --
Options available for grant............ 19,493 -- 26,919 -- 25,602 --
The following table summarizes information about options outstanding as of
December 31, 2000:
OUTSTANDING EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF OPTIONS LIFE (YRS.) PRICE OF OPTIONS PRICE
- -------- ---------- ----------- -------- ---------- --------
$100.00 74,256 7.75 $100.00 37,128 $100.00
$150.00 1,580 8.92 150.00 527 150.00
$210.00 8,216 9.61 210.00 -- --
------ ---- ------- ------ -------
84,052 7.95 $111.69 37,655 $100.70
====== ======
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for these options. As the options were granted with exercise prices
equal to the fair value at the date of grant, no compensation cost was
recognized by the Company upon issuance of such options. The fair value of each
option granted by the Company was estimated using the minimum value option
pricing model. The assumptions used in this
77
80
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pricing model and the weighted average fair value of options granted during
2000, 1999 and 1998 are summarized as follows:
2000 1999 1998
--------------- --------------- ---------------
OPTION OPTION OPTION OPTION OPTION OPTION
TYPE 1 TYPE 2 TYPE 1 TYPE 2 TYPE 1 TYPE 2
------ ------ ------ ------ ------ ------
Risk-free interest rate................... 6.30% 6.30% 6.03% 6.03% 4.20% 4.20%
Expected option life (in years)........... 5.0 7.0 5.0 9.0 5.0 9.0
Expected volatility....................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected dividend yield................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Weighted average fair value per option.... $56.00 $73.97 $38.55 $62.12 $18.88 $31.39
PRO FORMA COMPENSATION COST
Had the Company recorded compensation cost based on the fair value of
options granted at the grant date, as prescribed by FASB Statement No. 123, pro
forma net income (loss) would have been as follows (in thousands):
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ -------------
Net income (loss), as reported............... $2,214 $(4,477) $(9,625)
Pro forma compensation cost.................. 609 631 138
------ ------- -------
Pro forma net income (loss).................. $1,605 $(5,108) $(9,763)
====== ======= =======
EMPLOYMENT AGREEMENTS
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.
(14) MANUFACTURING AGREEMENT
The Company and the Contractor entered into a manufacturing agreement,
dated as of June 10, 1999, (the "Manufacturing Agreement"). Subject to the terms
and conditions of the Manufacturing Agreement, the Contractor has agreed to
manufacture all of the Company's requirements for certain cosmetic and skin care
products for an initial term of five years. Following the expiration of the
initial five-year term, the Manufacturing Agreement will be automatically
extended for additional one-year terms unless terminated by six months' prior
written notice by either party. The Manufacturing Agreement provides for price
renegotiations by the Contractor if the Company's quarterly or annual purchase
volume falls below specified minimums. In addition, the Company is obligated to
purchase materials acquired by the Contractor based upon product forecasts
provided by the Company if the Contractor is unable to sell such materials to a
third party. There have been no such repurchases to date. The Contractor is
solely responsible for obtaining the inventories, manufacturing the inventories
at its current location in Chino, California, complying with applicable laws and
regulations, and performing quality assurance functions.
In connection with the Company's 1999 restructuring activities related to
the closure and outsourcing of its U.S. product manufacturing functions as
discussed in Note 10, certain fixed assets and inventories were sold to the
Contractor in exchange for secured promissory notes. The promissory note for the
fixed assets was for an amount of approximately $1.5 million, carried an annual
interest rate of 8%, and commenced payments on January 1, 2000. The promissory
note for inventories of approximately $2.2 million was non-interest bearing, and
commenced payments on October 1, 1999. At December 31, 1999, approximately $2.1
million of notes from the Contractor (reflected at present value, net of
discount), as well as $0.5 million of unsecured
78
81
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts receivable, were included in receivables and approximately $1.0 million
of notes, representing the non-current portion of the fixed asset notes from the
Contractor, were included in other assets in the accompanying consolidated
balance sheets. The note for the inventories was repaid as of October 2000 and
the note for the fixed assets was repaid in December 2000.
During the fourth quarter of 2000, the Contractor obtained $1.0 million of
advances from the Company in exchange for an unsecured promissory note. The note
bears interest at an annual rate of 9% and is payable in monthly installments
commencing on February 15, 2001. At December 31, 2000, approximately $0.9
million of the note was included in receivables and approximately $0.1 million
of the note was included in other assets in the accompanying consolidated
balance sheets.
79
82
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Jafra Cosmetics International, S.A. de C.V.
Mexico City, Mexico D.F.
We have audited the accompanying consolidated balance sheets of Jafra
Cosmetics International, S.A. de C.V. (the "Company"), an indirect, wholly owned
subsidiary of CDRJ Investments (Lux) S.A. and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2000 and
1999 and the eight-month period ended December 31, 1998 and the combined
statements of operations, stockholders' equity, and cash flows of Grupo Jafra,
S.A. de C.V. and affiliated Gillette Company entities, which were combined to
form the predecessor as described in Note 2 to the financial statements ("the
Predecessor"), for the four-month period ended April 30, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years ended December 31, 2000 and 1999 and the eight-month
period ended December 31, 1998 and the combined results of operations and cash
flows of the Predecessor for the four-month period ended April 30, 1998 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
March 22, 2001
Mexico City, Mexico
80
83
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 561 $ 3
Receivables, less allowances for doubtful accounts of
$2,117 in 2000 and $1,956 in 1999...................... 26,712 21,454
Inventories............................................... 25,149 19,513
Receivables from affiliates............................... 4,679 2,599
Prepaid income taxes...................................... 1,846 13,525
Value-added tax receivables............................... 5,146 5,279
Prepaid expenses and other current assets................. 1,948 930
-------- --------
Total current assets.............................. 66,041 63,303
Property and equipment, net................................. 30,402 30,562
Other assets:
Goodwill, net............................................. 31,550 32,960
Trademarks, net........................................... 49,082 51,280
Deferred financing fees, net.............................. 1,983 3,082
Other..................................................... 2,707 1,018
-------- --------
Total............................................. $181,765 $182,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of long-term
debt................................................... $ 2,346 $ 1,500
Accounts payable.......................................... 20,266 10,086
Accrued liabilities....................................... 20,735 16,264
Payables to affiliates.................................... 2,140 2,494
Deferred income taxes..................................... 5,048 2,587
-------- --------
Total current liabilities......................... 50,535 32,931
Long-term debt.............................................. 35,572 42,400
Deferred income taxes....................................... 15,809 15,731
Notes payable to affiliates................................. 20,093 41,006
-------- --------
Total liabilities................................. 122,009 132,068
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Series B common stock, no par value; authorized, issued
and outstanding, 151 shares in 2000 and 1999........... -- --
Additional paid-in capital................................ 34,184 34,184
Retained earnings......................................... 27,030 16,262
Accumulated other comprehensive loss...................... (1,458) (309)
-------- --------
Total stockholders' equity........................ 59,756 50,137
-------- --------
Total............................................. $181,765 $182,205
======== ========
See accompanying notes to consolidated financial statements.
81
84
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Net sales............................... $212,263 $183,158 $85,587 $36,937
Cost of sales........................... 61,208 55,323 26,050 10,018
-------- -------- ------- -------
Gross profit.......................... 151,055 127,835 59,537 26,919
Selling, general and administrative
expenses.............................. 92,899 80,234 42,946 19,456
Management fee expense from affiliate... 8,164 5,293 3,742 1,926
-------- -------- ------- -------
Income from operations................ 49,992 42,308 12,849 5,537
Other income (expense):
Royalty expense to affiliates, net.... (14,811) (17,965) -- --
Exchange (loss) gain.................. (11,295) 3,748 (1,799) 1,396
Interest (expense) income, net........ (7,789) (6,803) (4,841) 403
Other, net............................ 1,586 53 (348) 992
-------- -------- ------- -------
Income before income taxes and
extraordinary item.................... 17,683 21,341 5,861 8,328
Income tax expense...................... 6,805 8,736 1,948 2,524
-------- -------- ------- -------
Income before extraordinary item........ 10,878 12,605 3,913 5,804
Extraordinary loss on early
extinguishment of debt, net of income
tax benefit of $75 in 2000 and $177 in
1999.................................. 110 256 -- --
-------- -------- ------- -------
Net income.............................. $ 10,768 $ 12,349 $ 3,913 $ 5,804
======== ======== ======= =======
See accompanying notes to consolidated financial statements.
82
85
JAFRA COSMETICS S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARES)
FOUR
MONTHS
EIGHT MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED APRIL
DECEMBER 31, DECEMBER 31, DECEMBER 31, 30,
2000 1999 1998 1998
---------------- ---------------- ---------------- --------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT AMOUNT
------ ------- ------ ------- ------ ------- --------
CAPITAL STOCK:
Balance, beginning of period.................... 151 -- 151 -- -- -- $ 3,811
Capital stock issued in conjunction............. -- -- -- -- -- -- --
with the Acquisition on April 30, 1998........ -- -- -- -- 151 -- --
--- ------- --- ------- --- ------- --------
Balance, end of period.......................... 151 -- 151 -- 151 -- $ 3,811
--- ------- --- ------- --- ------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period.................... $34,184 $34,184 -- --
Capital stock issued in conjunction............. -- -- -- --
with the Acquisition on April 30, 1998........ -- -- $34,184 --
--- ------- --- ------- --- ------- --------
Balance, end of period.......................... $34,184 $34,184 $34,184 --
--- ------- --- ------- --- ------- --------
RETAINED EARNING:
Balance, beginning of year...................... $16,262 $ 3,913 -- $ 92,379
Net income...................................... 10,768 12,349 $ 3,913 5,804
Capital contributions by Gillette............... -- -- -- 4,091
--- ------- --- ------- --- ------- --------
Balance, end of year............................ $27,030 $16,262 $ 3,913 $102,274
--- ------- --- ------- --- ------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year...................... $ (309) -- -- $(52,709)
Currency translation adjustments................ (1,149) $ (309) -- --
--- ------- --- ------- --- ------- --------
Balance, end of year............................ $(1,458) $ (309) -- $(52,709)
--- ------- --- ------- --- ------- --------
Total Stockholders' Equity................ 151 $59,756 151 $50,137 151 $38,097 $ 53,376
=== ======= === ======= === ======= ========
COMPREHENSIVE INCOME:
Net income...................................... $10,768 $12,349 $ 3,913 $ 5,804
Currency translation adjustments................ (1,149) (309) -- --
--- ------- --- ------- --- ------- --------
Total Comprehensive Income................ $ 9,619 $12,040 $ 3,913 $ 5,804
=== ======= === ======= === ======= ========
- ---------------
(1) Stockholder's equity of the Predecessor represents the combined
stockholders' equity and divisional equity of the Predecessor entities.
See accompanying notes to consolidated financial statements.
83
86
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR
-----------
FOUR
YEARS ENDED EIGHT MONTHS MONTHS
DECEMBER 31, ENDED ENDED
-------------------- DECEMBER 31, APRIL 30,
2000 1999 1998 1998
-------- -------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 10,768 $ 12,349 $ 3,913 $ 5,804
Extraordinary loss on early extinguishment of debt, net of
taxes................................................... 110 256 -- --
-------- -------- -------- --------
Income before extraordinary item.......................... 10,878 12,605 3,913 5,804
Adjustments to reconcile income before extraordinary item
to net cash provided by (used in) operating activities:
Loss on sale of property and equipment.................. -- -- 26 --
Depreciation and amortization........................... 4,231 3,276 1,810 275
Amortization of deferred financing fees................. 797 992 676 --
Unrealized foreign exchange loss (gain)................. 2,669 (2,377) -- --
Deferred income taxes................................... 2,539 7,320 4,460 --
Changes in operating assets and liabilities:
Receivables, net...................................... (5,699) (8,800) (2,465) (1,885)
Inventories........................................... (6,047) (6,829) 2,117 (7,619)
Prepaid expenses and other current assets............. (1,005) (3,560) (904) (7,609)
Intercompany receivables and payables................. 15 7,005 -- --
Other assets.......................................... (1,728) (779) (4,895) 6,016
Accounts payable and accrued liabilities.............. 13,581 (107) 10,155 (1,227)
Income taxes payable/prepaid.......................... 11,667 (7,107) 1,334 (1,180)
Other long-term liabilities........................... -- -- (1,946) --
-------- -------- -------- --------
Net cash provided by (used in) operating
activities........................................ 31,898 1,639 14,281 (7,425)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Jafra Business................................ -- -- (78,105) --
Withholding taxes on purchase price....................... -- -- (12,800) --
Payments of previously accrued Acquisition fees........... -- -- (2,857) --
Proceeds from sale of property and equipment.............. -- -- -- 5,900
Purchases of property and equipment....................... (2,262) (2,622) (2,052) (5,354)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities........................................ (2,262) (2,622) (95,814) 546
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance (repurchase) of subordinated debt................ (4,239) (5,398) 40,000 --
Borrowings (repayments) under term loan facility.......... (1,500) (1,000) 10,000 --
Net borrowings (repayments) under revolving credit
facility................................................ (500) (4,500) 5,000 --
Other bank debt........................................... 346 -- -- --
Capital contributions by Parent........................... -- -- 34,184 --
Capital contributions by Gillette......................... -- -- -- 4,091
Transactions with affiliates.............................. (22,946) 9,320 (10,323)
Deferred financing fees................................... -- -- (4,926) --
-------- -------- -------- --------
Net cash provided by (used in) financing
activities........................................ (28,839) (10,898) 93,578 (6,232)
-------- -------- -------- --------
Effect of exchange rate changes on cash..................... (239) (161) (181)
Effect of accounting calendar change on cash................ -- -- -- 6,358
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 558 (12,042) 12,045 (6,934)
Cash and cash equivalents at beginning of period............ 3 12,045 -- 7,458
-------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 561 $ 3 $ 12,045 $ 524
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest................................................ $ 5,652 $ 6,526 $ 3,490 $ --
Income taxes............................................ $ (7,401) $ 10,373 $ 4,377 $ --
See accompanying notes to consolidated financial statements.
84
87
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
Jafra Cosmetics International, S.A. de C.V., a sociedad anomina de capital
variable organized under the laws of the United Mexican States ("Jafra S.A.") is
owned by five indirect wholly owned subsidiaries of CDRJ Investments (Lux) S.A.,
a Luxembourg societe anonyme (the "Parent"). Jafra S.A., its subsidiaries, 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"). On April 30, 1998, pursuant to an acquisition
agreement (the "Acquisition Agreement") between the Parent, certain of its
subsidiaries and Gillette, 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.
The accompanying consolidated financial statements as of and for the years
ended December 31, 2000 and 1999 and for the eight-month period ended December
31, 1998 reflect the operations of Jafra S.A. and its subsidiaries
(collectively, the "Company"). The accompanying combined financial statements
for the four months ended April 30, 1998 reflect the operations of the Jafra
Business in Mexico prior to the Acquisition and are referred to as the
"Predecessor" operations. All significant intercompany accounts and transactions
between entities comprising the Company or the Predecessor have been eliminated
in consolidation and combination.
The combined financial statements of the Predecessor include the accounts
of the following subsidiaries and divisions of Gillette: Grupo Jafra and its
subsidiaries, together with certain operating assets and the related operating
profit of Gillette Braun (the "Braun Assets") used in the Jafra Business in
Mexico, and the assets related to the Jafra intellectual properties, formerly
held by Gillette, that are used in the Jafra Business in Mexico.
In connection with the Acquisition, Jafra S.A. and an affiliated company,
JCI (the indirect, wholly owned United States subsidiary of the Parent) issued
$100 million aggregate principal amount of 11.75% Subordinated Notes due 2008
(the "Notes"). See Note 6. The Notes represent several obligations of Jafra S.A.
and JCI, with each participating on a pro rata basis upon redemption. Jafra S.A.
and JCI have 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. As the
cross-guarantee of Jafra S.A. and JCI is subject to a 30-day standstill period,
the Parent is filing these separate financial statements of Jafra S.A. as a
schedule to its Annual Report on Form 10-K for the year ended December 31, 2000.
Because of the debt financing incurred in connection with the Acquisition
and the adjustments made to allocate the excess of the aggregate purchase price
over the historical value of the net assets acquired, the accompanying
consolidated financial statements of the Company are not directly comparable to
those of the Predecessor.
In 1998, the Predecessor changed the reporting period for the foreign
operations 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 Predecessor's foreign operations from November 30, 1997 to
December 31, 1997.
DESCRIPTION OF BUSINESS
The Company is a marketer of premium skin and body care products, color
cosmetics, fragrances, and other personal care products in Mexico through a
direct selling, multilevel distribution system comprised of self-employed
salespersons (known as "consultants"). In addition, the Company manufactures
color cosmet-
85
88
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ics and fragrance products for its own use as well as for distribution to the
international subsidiaries of the Parent (referred to herein as the
"Affiliates").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash, time
deposits and all highly liquid debt instruments purchased with a maturity of
three months or less.
Inventories. Inventories are stated at the lower of cost, as determined by
the first-in, first-out basis, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is provided for over the estimated useful
lives of the respective assets using the straight-line method. Estimated useful
lives are 20 years for buildings and improvements and 5 to 10 years for
machinery and equipment. 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 and
trademarks, which are amortized using the straight-line method. Goodwill and
trademarks resulting from the Company's acquisition of the Jafra Business from
Gillette are being amortized over a period of 40 years, while the Predecessor's
goodwill was amortized generally over a period of 37.5 years. Accumulated
amortization of goodwill and trademarks at December 31, 2000 was $2,154,000 and
$2,475,000, respectively. Accumulated amortization of goodwill and trademarks at
December 31, 1999 was $1,336,000 and $1,233,000, respectively.
Deferred Financing Costs. In connection with the acquisition of the Jafra
Business, the Company incurred approximately $4.8 million of costs related to
the 11.75% Senior Subordinated Notes due 2008 (the "Notes"), the Revolving
Credit Facility and the Term Loan Facility (see Note 6). Such costs are being
amortized on a basis that approximates the interest method over the expected
term of the related debt. Accumulated amortization at December 31, 2000 and 1999
was $2,127,000 and $1,514,000, respectively.
Impairment of Long-Lived Assets and Goodwill. Long-lived assets and
goodwill are reviewed for impairment, based on undiscounted cash flows, whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If this review indicates that the carrying amount
of the long-lived assets and goodwill is not recoverable, the Company will
recognize an impairment loss, measured by the future discounted cash flow
method.
Foreign Currency Forward Contracts. During 2000 and 1999, the Company
entered into foreign currency forward contracts to reduce the effect of adverse
exchange rate fluctuations in the exchange rate of the Mexican peso to the U.S.
dollar. As a matter of policy, the Company does not hold or issue foreign
currency forward contracts for trading or speculative purposes. These contracts
have been marked-to-market each month based upon the change in the spot rate
from the date of contract inception to the balance sheet date. The premium on
such contracts is amortized to expense over the life of the contracts. The
carrying value of the contracts is included in current assets and liabilities,
with the offsetting gain or loss included in exchange (loss) gain in the
accompanying consolidated statements of operations. At December 31, 2000 and
1999, the Company included $1,718,000 in accrued liabilities and $222,000 in
prepaid expenses and other current assets, respectively, in the accompanying
consolidated balance sheets.
86
89
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the short-term maturities of these instruments. The fair value of the
Notes at December 31, 2000 was $30,974,000, based upon discussions with one of
the Company's largest bondholders and an analysis of current market interest
rates and the Company's credit rating. The fair value of the Notes at December
31, 1999 was $33,540,000, based on quoted market prices. As the Company's
Revolving Credit Facilities and the Term Loan are variable rate debt, and the
interest rate spread paid by the Company is adjusted for changes in certain
financial ratios of the Company, the fair value of the Revolving Credit
Facilities and the Term Loan approximated their carrying amounts at December 31,
2000 and 1999. The fair value of the Company's forward currency contracts at
December 31, 2000 and 1999 closely approximates the carrying value, as such
contracts are marked-to-market based upon changes in the spot rate from the date
of contract inception to the balance sheet date.
Income Taxes. The Company accounts for income taxes under the balance sheet
approach that requires the recognition of deferred income tax assets and
liabilities for the expected future consequences of events that have been
recognized in the Company's financial statements or income tax returns.
Management provides a valuation allowance for deferred income tax assets when it
is more likely than not that a portion of such deferred income tax assets will
not be realized. Income tax expense of the Company is computed on a
separate-company basis.
Foreign Currency Translation. The functional currency for the Company from
January 1, 1999 through December 31, 2000 is the Mexican peso. For presentation
purposes, assets and liabilities are translated into U.S. dollars at current
exchange rates, and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation adjustments
are recorded as a component of other comprehensive income. During 1998, the
Company's functional currency was the U.S. dollar because Mexico was considered
to be a hyperinflationary economy. As of January 1, 1999, Mexico was no longer
considered a hyperinflationary economy, and from that date forward, the Company
has accounted for its operations using the peso as its functional currency.
Mexico has historically experienced periods of hyperinflation, and the
value of the peso has been subject to significant fluctuations with respect to
the U.S. dollar. The Company had outstanding U.S. dollar denominated debt of
$57.7 million and $84.9 million at December 31, 2000 and 1999, respectively.
This debt is remeasured at each reporting date, subjecting the Company to
additional foreign exchange risk.
New Accounting Standards. Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, will be required to be recorded on the balance
sheet at fair value. If the derivative is designated in a fair-value hedge, the
changes in the fair value of the derivative and the underlying hedged item will
be recognized concurrently in earnings. If the derivative is designated in a
cash-flow hedge, changes in the fair value of the derivative will be recorded in
other comprehensive income ("OCI") and will be recognized in the statement of
operations when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized concurrently in earnings.
The Company expects that in the first quarter of 2001, it will record a
gain of approximately $250,000 (net of a tax effect of $100,000) as a cumulative
transition adjustment to earnings related to derivatives not designated as
hedges prior to adoption of SFAS 133. This amount represents the difference
between the carrying value and the fair value of such instruments at January 1,
2001. See Note 13 for a discussion of the on-going impact that SFAS 133 is
expected to have on the Company's financial statements.
87
90
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
all prior periods to reflect shipping and handling fees, previously reported as
reductions to selling, general and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The amounts that have been
reclassified as net sales are $4,400,000, $2,303,000 and $1,181,000 for the year
ended December 31, 1999, the eight-month period ended December 31, 1998, and the
four-month period ended April 30, 1998, respectively. Shipping and handling
costs are included in selling, general and administrative expenses.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying accounting principles generally accepted in the United States of
America to selected revenue recognition issues. SAB 101, as amended, was
implemented on October 1, 2000 and did not have a material impact on the
Company's consolidated financial statements.
(3) INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
------- -------
Raw materials and supplies............................... $ 6,443 $ 7,446
Finished goods........................................... 18,706 12,067
------- -------
Total inventories........................................ $25,149 $19,513
======= =======
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2000 and
1999 (in thousands):
2000 1999
------- -------
Land..................................................... $11,036 $11,230
Buildings................................................ 11,091 11,290
Machinery and equipment.................................. 12,146 10,170
------- -------
34,273 32,690
Less accumulated depreciation............................ 3,871 2,128
------- -------
Property and equipment, net.............................. $30,402 $30,562
======= =======
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 2000 and 1999
(in thousands):
2000 1999
------- -------
Sales promotion and commissions.......................... $10,894 $ 7,696
Accrued interest......................................... 620 683
Compensation and other benefit accruals.................. 1,695 2,584
State and local sales taxes and other taxes.............. 3,001 1,793
Other.................................................... 4,525 3,508
------- -------
$20,735 $16,264
======= =======
88
91
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT
Debt consists of the following at December 31, 2000 and 1999 (in
thousands):
2000 1999
------- -------
Subordinated Notes, unsecured, interest payable
semi-annually at 11.75%, due in 2008...................... $30,072 $34,400
Term Loan, principal and interest due in quarterly
installments through April 30, 2004, interest rates of
8.1% and 8.6% at December 31, 2000 and 1999,
respectively.............................................. 7,500 9,000
Revolving Loan, repaid in 2000, weighted average interest
rate of 9.9% at December 31, 1999......................... -- 500
Term Loan, principal and interest due in monthly
installments through August 16, 2001, interest rate of
19.6% at December 31, 2000................................ 346 --
------- -------
Total debt.................................................. 37,918 43,900
Less current maturities..................................... (2,346) (1,500)
------- -------
Long-term debt.............................................. $35,572 $42,400
======= =======
Jafra S.A.'s long-term debt matures as follows (in thousands): $2,000 in
2001, $2,500 in 2002, $2,500 in 2003, $500 in 2004, $0 in 2005 and $30,072
thereafter. In addition, Jafra S.A. entered into a one-year loan and borrowed
the peso equivalent of $519,000 on August 16, 2000 at an interest rate of 19.6%.
Principal and interest payments are due monthly through August 16, 2001. The
remaining balance at December 31, 2000 of $346,000 is classified as short-term
debt in the accompanying consolidated balance sheet.
On April 30, 1998, Jafra S.A. and JCI borrowed $125 million by issuing $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes") pursuant to an Indenture dated April 30, 1998 (the "Indenture") and $25
million under a Senior Credit Agreement.
At the date of issuance, the Notes represented several obligations of Jafra
S.A. and JCI in the amount of $40 million and $60 million, respectively,
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.
Jafra S.A. and JCI are indirect, wholly owned subsidiaries of the Parent
and have 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. 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. 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. The nonguarantor entities are the Parent's
indirect European subsidiaries in Austria, Germany, Italy, the Netherlands,
Poland, and Switzerland; its indirect South American subsidiaries in Argentina,
Brazil, Chile, Colombia, Peru, and Venezuela; and its indirect subsidiaries in
the Dominican Republic and Thailand. All guarantor and nonguarantor entities are
either direct or indirect wholly owned subsidiaries of the Parent. The Notes
were registered in a registered exchange offer, effective as of January 25,
1999, under the Securities Act of 1933, as amended.
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, Jafra S.A. and JCI 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.
89
92
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement, as described below, allows Jafra S.A. and JCI to repurchase the Notes
in the open market from time to time, with the aggregate purchase price for all
such Notes repurchased not to exceed $25 million. During 2000, Jafra S.A.
retired notes, prior to maturity, with a face value of $4.3 million. The debt
repurchases in 2000 resulted in an extraordinary loss of $110,000, net of an
income tax benefit of $75,000. During 1999, Jafra S.A. retired Notes, prior to
maturity, with a face value of $5.6 million. The debt repurchases in 1999
resulted in an extraordinary loss of $256,000, net of an income tax benefit of
$177,000. In connection with the early retirement of the Notes as described
above, a portion of the unamortized deferred financing costs was written off and
included in the determination of the extraordinary loss on early extinguishment
of debt. Total amounts that were written off during 2000 and 1999 were $274,000
and $637,000, respectively.
In addition, Jafra S.A. and JCI 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 and a Term Loan Facility of $25 million. Borrowings under the Term Loan
Facility are payable in quarterly installments of principal and interest over 6
years through April 30, 2004. 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 1.625% or an
alternate base rate (the higher of the prime rate or federal funds rate plus
0.5%, plus an applicable margin not to exceed 0.625%). The interest rates in
effect at December 31, 2000 ranged from approximately 8.1% to approximately 8.3%
for the LIBOR-based borrowings and approximately 10.1% for the prime-based
borrowings. Borrowings under the Senior Credit Agreement are secured by
substantially all of the assets of Jafra S.A. and JCI.
Both the Indenture and the Senior Credit Agreement 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 Parent to maintain certain financial ratios including a minimum
EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA
ratio.
As of December 31, 2000, Jafra S.A. had one irrevocable standby letter of
credit outstanding, totaling $1.7 million. This letter of credit, expiring on
April 30, 2004, collateralizes the Company's obligation to a third party in
connection with certain lease agreements. The fair value of this letter of
credit approximates its contract value.
(7) INCOME TAXES
Actual income tax expense differs from the "expected" tax expense (computed
by applying the Mexican federal corporate rate of 35% to income before income
taxes) as a result of the following:
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Provision for income taxes at statutory
rate.................................. $6,189 $7,469 $2,052 $2,915
Permanent differences, principally
effect of inflation upon taxable
income................................ 616 1,267 36 (136)
Other................................... -- -- (140) (255)
------ ------ ------ ------
Income tax expense...................... $6,805 $8,736 $1,948 $2,524
====== ====== ====== ======
90
93
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For financial reporting purposes, the Predecessor has provided income taxes
on a separate-company basis. The components of the provision for income taxes
are as follows (in thousands):
PREDECESSOR
-----------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
2000 1999 1998 1998
------------ ------------ ------------ -----------
Current................................. $4,266 $1,416 $(2,512) $2,524
Deferred................................ 2,539 7,320 4,460 --
------ ------ ------- ------
Total income taxes on income before
income taxes and extraordinary item... 6,805 8,736 1,948 2,524
Income tax benefit on early
extinguishment of debt................ (75) (177) -- --
------ ------ ------- ------
Total income tax expense...... $6,730 $8,559 $ 1,948 $2,524
====== ====== ======= ======
The components of deferred income tax assets and deferred income tax
liabilities at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Deferred income tax assets:
Accounts receivable.................................. $ 741 $ 685
Net operating loss carryforward of subsidiaries...... 573 2,428
Accrued bonuses...................................... 214 --
Accrued sales promotion.............................. 3,677 2,958
Other accrued liabilities............................ 1,409 947
Other................................................ 2,579 2,042
-------- --------
Total deferred income tax assets............. 9,193 9,060
Deferred income tax liabilities:
Transaction and deferred financing costs............. (694) (563)
Property and equipment............................... (1,123) (1,790)
Trademark and goodwill............................... (17,181) (17,948)
Inventories.......................................... (8,833) (7,032)
Other................................................ (2,219) (45)
-------- --------
Total deferred income tax liabilities........ (30,050) (27,378)
-------- --------
Net deferred income tax liabilities.......... $(20,857) $(18,318)
======== ========
As discussed in Note 2 -- Foreign Currency Translation, the Company changed
its functional currency from the U.S. dollar to the Mexican peso effective
January 1, 1999. As a result, approximately $2.0 million of deferred income tax
liabilities associated with temporary income tax differences that arose from the
change in functional currency were reflected as an adjustment to the cumulative
translation component of stockholders' equity. In addition, during 1999, the
Company recorded a deferred income tax asset related to certain temporary
differences incurred in connection with the Acquisition. The resulting deferred
income tax asset of approximately $400,000 was reflected as an adjustment to
goodwill.
At December 31, 2000, the Company's deferred income tax assets included
$573,000 for an operating loss carryforward. Although realization is not
assured, management believes it is more likely than not that the net carrying
value of the income tax loss carryforward will be realized.
91
94
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) BENEFIT PLANS
Under Mexican labor laws, employees of the Company 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
subsidiary in which they are employed. Total expense under these programs was
$345,000 and $391,000 for the years ended December 31, 2000 and 1999,
respectively. No expense was incurred in 1998. The total liability was
approximately $539,000 and $782,000 at December 31, 2000 and 1999, and is
classified as a current liability in the accompanying consolidated balance
sheets.
(9) RELATED PARTY TRANSACTIONS
Since January 1, 1999, the Company has manufactured and distributed color
cosmetics and fragrance products to other affiliates of the Parent
("Affiliates"). Sales to Affiliates, primarily in the United States and Germany,
were $10,538,000, and $7,228,000 for the years ended December 31, 2000 and 1999.
These sales were made at cost plus a markup ranging from 0 to 11%. During 1998,
the Parent contracted with a manufacturing subsidiary of Gillette for the
manufacture of color cosmetics and fragrance products. As such, sales by the
Company to Affiliates during 1998 were nominal.
In addition, the Company is provided with certain management services, such
as legal, accounting and treasury, management oversight, and other
administrative functions from an Affiliate. The cost of these services is
included in management fee expense from affiliate in the accompanying
consolidated statements of operations. JCI charges out a portion of these
management expenses to its Affiliates based principally upon a formula using the
percentage of revenues of each affiliate to the total consolidated revenues of
the Parent. JCI believes the amounts and methods of allocations are reasonable
and approximate the cost of the actual services provided. The management fee
expense charged by JCI and the Predecessor to the Company was $8,164,000,
$5,293,000, $3,742,000 and $1,926,000 for the years ended December 31, 2000 and
1999, for the eight months ended December 31, 1998, and for the four months
ended April 30, 1998.
At the end of 1999, Jafra S.A. purchased U.S. trademarks with a net book
value of $20,125,000 and German trademarks with a net book value of $4,362,000
from JCI and Jafra Germany (the German subsidiary of the Parent) for their
respective estimated fair values of $20,500,000 and $3,500,000. Beginning in
2000, Jafra S.A. charged JCI and Jafra Germany a royalty for the right to use
the Jafra trademark in the United States and Europe. The total royalty income
charged by Jafra S.A. to JCI and Jafra Germany for the year ended December 31,
2000 was $1,126,000, and is offset against royalty expense to affiliates in the
accompanying consolidated statements of operations.
JCI owns the worldwide rights to its multi-level sales know-how (referred
to as the "Jafra Way"). The Jafra Way was initially developed in the United
States for lineage, training, and compensation of consultants. Starting in 1999,
JCI charged Jafra S.A. a royalty for the use of the Jafra Way. The royalty fees
charged by JCI in 1999 were $17,838,000 and are based on a percentage of Jafra
S.A.'s sales. JCI charged Jafra S.A. a royalty expense of $15,746,000 for use of
the Jafra Way for the year ended December 31, 2000.
The Company has obtained loans from certain Affiliates at annual interest
rates ranging from 6% to 9%. Such loans are due to be repaid five years from the
date of grant, with no prepayment penalty. Notes payable to affiliates consist
primarily of amounts owed by Jafra S.A. as a result of the purchase of U.S. and
German trademarks discussed above, and amounts billed to Jafra S.A. in
connection with the Jafra Way royalty. Net interest expense to Affiliates,
primarily JCI, was $1,780,000, $227,000 and $150,000 for the years ended
December 31, 2000 and 1999, and for the eight months ended December 31, 1998.
Interest income and expense relating to Affiliates is included in interest, net,
in the accompanying consolidated statements of operations. During the four
months ended April 30, 1998, interest was charged and earned on intercompany
receivables and payables between Gillette and the Predecessor at the LIBOR rate.
The total related interest
92
95
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income was $152,000 for the four months ended April 30, 1998, and is included in
interest, net, in the accompanying consolidated statements of operations.
In April of 1998, the Predecessor 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 Predecessor. Prior to the closing
date of the Acquisition, intercompany accounts receivable and accounts payable
between Predecessor entities and Gillette were forgiven, and as such were
accounted for as direct reductions from (additions to) equity, respectively.
(10) FINANCIAL REPORTING FOR BUSINESS SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operations and major
customers. The Parent's business is comprised of one industry segment, direct
selling, with worldwide operations. The Parent is organized into geographical
business units that each sell the full line of Jafra cosmetics, skin care, body
care, fragrances, and other products. The Company is one of the Parent's
reportable business segments, and as such, the only additional business segment
information presented is the following breakdown of sales by product lines:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
SALES BY OF TOTAL SALES BY OF TOTAL SALES BY OF TOTAL
PRODUCT LINE SALES PRODUCT LINE SALES PRODUCT LINE SALES
--------------- ---------- --------------- ---------- --------------- ----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
Color Cosmetics........... $ 60.8 30.9% $ 59.2 34.5% $ 45.5 38.4%
Skin Care................. 25.7 13.0 22.2 12.9 15.6 13.1
Fragrances................ 79.6 40.4 59.6 34.8 34.1 28.8
Personal Care............. 14.7 7.5 13.4 7.8 14.1 11.9
Other(1).................. 16.1 8.2 17.2 10.0 9.3 7.8
------ ----- ------ ----- ------ -----
Subtotal before shipping
and handling fees and
sales to
Affiliates........... 196.9 100.0% 171.6 100.0% 118.6 100.0%
===== ===== =====
Shipping and handling
fees.................... 4.9 4.4 3.4
Sales to Affiliates....... 10.5 7.2 0.5
------ ------ ------
Total........... $212.3 $183.2 $122.5
====== ====== ======
- ---------------
(1) Includes sales aids (party hostess gifts, demonstration products, etc.) and
promotional materials.
(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 2005. Future minimum lease payments
under noncancelable operating leases as of December 31, 2000 are (in thousands):
2001....................................................... $ 3,933
2002....................................................... 4,324
2003....................................................... 4,708
2004....................................................... 5,124
2005....................................................... 5,585
-------
$23,674
=======
93
96
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rental expense was $3,624,000, $1,203,000, $237,000 and $94,000 for the
years ended December 31, 2000 and 1999, the eight months ended December 31,
1998, and the four months ended April 30, 1998, respectively.
Other income for 2000 included approximately $1.4 million of income related
to a recovery of the effect of inflation upon accounts receivable due from the
Mexican government.
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 operations.
(12) MANAGEMENT INCENTIVE ARRANGEMENTS
Effective as of the closing of the Acquisition, the Company's parent
adopted a stock incentive plan (the "Stock Incentive Plan"), which provides for
the sale 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 to
members of senior management of certain of the Parent's subsidiaries. One
employee of the Company participates in the Stock Incentive Plan. This employee
currently holds 3,476 shares of the Parent's stock, and holds options to
purchase an additional 6,952 shares. The activity related to this employee's
holdings under the Stock Incentive Plan is not significant to the Company. The
Company applies APB Opinion No. 25 and related interpretations in accounting for
these options. As the options were granted with exercise prices equal to the
fair value at the date of grant, no compensation expense was recognized by the
Company upon issuance of such options.
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.
(13) FOREIGN CURRENCY FORWARD CONTRACTS
In 2000 and 1999, the Company entered into foreign currency forward
contracts in Mexican pesos to reduce the effect of adverse exchange rate
fluctuations in the exchange rate of the Mexican peso to the U.S. dollar. The
outstanding foreign currency forward contracts at December 31, 2000 and 1999 had
notional values of $80,817,000 and $29,462,000, respectively. The contracts
outstanding at December 31, 2000 mature in 2001 while the contracts outstanding
at December 31, 1999 matured in 2000. Notional amounts do not quantify market or
credit exposure or represent assets or liabilities of the Company, but are used
in the calculation of
94
97
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash settlements under the contracts. The tables below describe the forward
contracts that were outstanding at December 31, 2000 and 1999 (in thousands):
DECEMBER 31, 2000:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............... $ 6,980 1/26/01 10.12 $ 6,679
Buy US Dollar/sell Mexican Peso............... 7,500 2/26/01 10.20 7,187
Buy US Dollar/sell Mexican Peso............... 7,529 3/30/01 10.36 7,162
Buy US Dollar/sell Mexican Peso............... 5,915 4/30/01 10.48 5,607
Buy US Dollar/sell Mexican Peso............... 2,828 5/31/01 10.61 2,670
Buy US Dollar/sell Mexican Peso............... 3,907 6/29/01 10.24 3,861
Buy US Dollar/sell Mexican Peso............... 2,618 7/31/01 10.31 2,588
Buy US Dollar/sell Mexican Peso............... 11,816 8/31/01 10.32 11,804
Buy US Dollar/sell Mexican Peso............... 12,125 9/28/01 10.39 12,119
Buy US Dollar/sell Mexican Peso............... 2,336 10/30/01 10.70 2,290
Buy US Dollar/sell Mexican Peso............... 10,275 10/31/01 10.71 10,078
Buy US Dollar/sell Mexican Peso............... 2,878 11/30/01 10.43 2,934
Buy US Dollar/sell Mexican Peso............... 4,110 12/27/01 10.71 4,120
------- -------
$80,817 $79,099
======= =======
DECEMBER 31, 1999:
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso............. $ 3,658 3/31/00 9.671 $ 3,690
Buy US Dollar/sell Mexican Peso............. 3,822 4/28/00 9.770 3,856
Buy US Dollar/sell Mexican Peso............. 2,885 5/31/00 9.900 2,907
Buy US Dollar/sell Mexican Peso............. 3,937 6/30/00 10.008 3,967
Buy US Dollar/sell Mexican Peso............. 1,947 7/31/00 10.118 1,962
Buy US Dollar/sell Mexican Peso............. 2,988 8/31/00 10.223 3,010
Buy US Dollar/sell Mexican Peso............. 3,818 9/29/00 10.326 3,846
Buy US Dollar/sell Mexican Peso............. 3,593 10/31/00 10.438 3,617
Buy US Dollar/sell Mexican Peso............. 2,814 11/30/00 10.548 2,829
------- -------
$29,462 $29,684
======= =======
- ---------------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized loss
of $1,718,000 at December 31, 2000 and an unrealized gain of $222,000 at
December 31, 1999, represents the carrying value of the forward contracts
(which approximates fair value) and has been recorded as a liability and an
asset in the accompanying consolidated balance sheets as of December 31,
2000 and 1999, respectively.
Prior to entering into foreign currency exchange contracts, the Company
evaluates the counter parties' credit ratings. Credit risk represents the
accounting loss that would be recognized at the reporting date if
95
98
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
counter parties failed to perform as contracted. The Company does not currently
anticipate non-performance by such counter parties.
The derivative instruments utilized by the Company did not qualify for
hedge accounting under the applicable accounting standards prior to adoption of
SFAS 133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the accompanying
consolidated statements of operations for the years ended December 31, 2000 and
1999. Effective January 1, 2001 the Company will adopt SFAS 133. Under SFAS 133,
the Company's current mark-to-market accounting treatment will continue to be
applied to certain of the Company's derivative instruments. However, under SFAS
133, the Company's use of forward contracts to hedge certain forecasted non-
functional currency cash flows will now qualify for hedge accounting. Unrealized
gains and losses from such derivative instruments arising subsequent to January
1, 2001 will be deferred as a separate component of other comprehensive income,
and will be recognized in income at the same time that the underlying hedged
exposure is recognized in income.
(14) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2000, the Company recorded certain adjustments
related to changes in cost accounting estimates, which resulted in an increase
to cost of sales of approximately $3 million.
96
99
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES:
ADDITIONS
----------------------
CHARGED
BALANCE TO CHARGED BALANCE
AT BEGINNING COSTS AND TO OTHER DEDUCTIONS- AT END
DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD
------------ ------------ ---------- -------- ----------- ---------
Accounts Receivable:
2000............................. $3,087 $5,958 $-- $5,492 $3,553
1999............................. 2,284 4,651 -- 3,848 3,087
May 1 - December 31, 1998........ 2,137 3,951 -- 3,804 2,284
Predecessor:
January 1 - April 30, 1998....... 2,057 1,982 -- 1,902 2,137
Inventories:
2000............................. 2,442 1,973 -- 1,953 2,462
1999............................. 4,900 2,256 -- 4,714 2,442
May 1 - December 31, 1998........ 7,089(1) 922 -- 3,111 4,900
Predecessor:
January 1 - April 30, 1998....... 1,628 733 -- 220 2,141
- ---------------
(1) Increase in inventory reserves of $4,948 over Predecessor's balance at April
30, 1998 represents certain purchase accounting entries recorded in
connection with the Acquisition.
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES:
ADDITIONS
----------------------
CHARGED
BALANCE TO CHARGED BALANCE
AT BEGINNING COSTS AND TO OTHER DEDUCTIONS- AT END
DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD
------------ ------------ ---------- -------- ----------- ---------
Accounts Receivable:
2000............................. $ 800 $ 898 $-- $1,162 $ 536
1999............................. 547 1,359 -- 1,106 800
May 1 - December 31, 1998........ 513 3,087 -- 3,053 547
Predecessor:
January 1 - April 30, 1998....... 337 1,601 -- 1,425 513
Inventories:
2000............................. 2,084 532 -- 1,212 1,404
1999............................. 3,842 1,155 -- 2,913 2,084
May 1 - December 31, 1998........ 5,674(1) 492 -- 2,324 3,842
Predecessor:
January 1 - April 30, 1998....... 1,346 469 -- -- 1,815
- ---------------
(1) Increase in inventory reserves of $3,859 over Predecessor's balance at April
30, 1998 represents certain purchase accounting entries recorded in
connection with the Acquisition.
97
100
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES:
ADDITIONS
----------------------
CHARGED
BALANCE TO CHARGED BALANCE
AT BEGINNING COSTS AND TO OTHER DEDUCTIONS- AT END
DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD
------------ ------------ ---------- -------- ----------- ---------
Accounts Receivable:
2000............................. $1,956 $4,956 $-- $4,795 $2,117
1999............................. 1,155 3,209 -- 2,408 1,956
May 1 - December 31, 1998........ 1,531 828 -- 1,204 1,155
Predecessor:
January 1 - April 30, 1998....... 1,473 357 -- 299 1,531
Inventories:
2000............................. 269 1,337 -- 712 894
1999............................. 1,012 985 -- 1,728 269
May 1 - December 31, 1998........ 1,180 619 -- 787 1,012
Predecessor:
January 1 - April 30, 1998....... 260 210 -- 312 158
- ---------------
(1) Increase in inventory reserves of $1,022 over Predecessor's balance at April
30, 1998 represents certain purchase accounting entries recorded in
connection with the Acquisition.
98
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
The names, ages and positions of the executive officers, significant
employees and directors of the Company as of March 15, 2001 are set forth below.
NAME AGE POSITION
---- --- --------
Ronald B. Clark...................... 65 Chairman and Chief Executive Officer; Director
Gonzalo R. Rubio..................... 57 President and Chief Operating Officer; Director
Ralph S. Mason, III.................. 49 Vice Chairman, Executive Vice President and General
Counsel
Michael A. DiGregorio................ 46 Senior Vice President and Chief Financial Officer
Jaime Lopez Guirao................... 53 President of Global Operations
Alan Fearnley........................ 50 Senior Vice President of Global Marketing
Joaquim Simoes....................... 48 Senior Vice President and Chief Information Officer
Eugenio Lopez Barrios................ 59 President of Mexican Operations
Jose Luis Peco....................... 55 President of European Operations
Ademar Serodio....................... 56 President of South American Operations
Beatriz Gutai........................ 40 General Manager of United States Operations -- Hispanic
Division
Dyan Lucero.......................... 51 General Manager of United States Operations -- General
Division
Donald J. Gogel...................... 52 Director
Steven D. Goldstein.................. 49 Director
Thomas E. Ireland.................... 51 Director
Siri Marshall........................ 52 Director
David A. Novak....................... 32 Director
Paul Orfalea......................... 53 Director
Ann Reese............................ 48 Director
Edward H. Rensi...................... 56 Director
Kenneth D. Taylor.................... 66 Director
None of the Company's officers has any family relationship with any
director or other officer. "Family relationship" for this purpose means any
relationship by blood, marriage or adoption, not more remote than first cousin.
The business experience during the past five years of each of the directors and
executive officers listed above is as follows:
Ronald B. Clark has served as a director and the Chairman and Chief
Executive Officer since joining the Company in May 1998. Mr. Clark served from
1996 to January 1998 as President, Richmont Europe (Mary Kay Holding Company).
Prior to 1996, he was President of Mary Kay Europe, Executive Vice President of
Primerica Corp., President of Jafra Cosmetics International, Inc., and Vice
President of Avon Products, Inc. Mr. Clark's employment agreement provides that
he shall be a director of Parent during the term of his employment.
Gonzalo R. Rubio has served as a director and the President and Chief
Operating Officer since joining the Company in May 1998. Mr. Rubio served from
prior to 1996 to 1997 as Area Vice President and later President of the European
operations of Mary Kay Inc. Prior to that, Mr. Rubio was employed by Avon
Products Inc., serving alternately as Area Director for Europe, International
Operations Director and Area Director for Latin America. Mr. Rubio's employment
agreement provides that he shall be a director of Parent during the term of his
employment.
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Ralph S. Mason, III has served as the Vice Chairman, Executive Vice
President and General Counsel since joining the Company in May 1998. 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.
Michael A. DiGregorio has served as Senior Vice President and Chief
Financial Officer of the Company since June of 1999. From May 1998 to May 1999,
Mr. DiGregorio served as President of the United States Operations of the
Company. From prior to 1996 to June 1998, Mr. DiGregorio served initially as
Financial Director and most recently as General Manager of Jafra Mexico.
Jaime Lopez Guirao has served as President, Global Operations since joining
the Company in June 1998. 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 has served as Senior Vice President of Global Marketing since
joining the Company in June 1998. From 1997 to 1998, 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.
Joaquim C. Simoes currently serves as Senior Vice President and Chief
Information Officer of the Company. Mr. Simoes joined the Company in August 1999
as Vice President and Chief Information Officer. Prior to joining the Company,
Mr. Simoes served as the Chief Information Officer, South American Theater, at
PricewaterhouseCoopers. From September 1997 to February 1998, Mr. Simoes served
as Senior Manager, Software & Systems at Pitney Bowes, Inc. From prior to 1996
to 1997, Mr. Simoes owned and served as President of ExecuTrain of Rhode Island.
Eugenio Lopez Barrios has served as President of Mexican Operations since
joining the Company in June 1998. From prior to 1996 to 1998, Mr. Barrios was
President of Mary Kay Mexico.
Jose Luis Peco has served as President of European Operations of the
Company since joining the Company in June 1998. From prior to 1996 to 1998, Mr.
Peco served as Vice President of European Operations for Mary Kay Cosmetics and
President of Mary Kay Cosmetics -- Iberia.
Ademar Serodio joined the Company in January 2000 and currently serves as
President of South America Operations of the Company. For more than the prior
five years, Mr. Serodio was employed by Avon Products, Inc., holding several
Country President roles in Avon's South American markets.
Beatriz Gutai has served as General Manager of the Hispanic Division of
United States Operations since September of 2000. Prior to that time, Ms. Gutai
served as Vice President of Sales for the Hispanic Division and in various
positions in sales management, programs, and events since joining the Company in
1982.
Dyan Lucero has served as General Manager of the General Division of United
States Operations since September of 2000. Prior to that time, Ms. Lucero served
as Vice President of Sales for the General Division and in various positions in
sales management and business development since joining the Company in 1975.
Donald J. Gogel has been a director of the Company since January 1998.
Since 1998, Mr. Gogel has served as Chief Executive Officer of CD&R; since prior
to 1996 he has served as President and a director of CD&R and since 1989 he 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 Chief Executive Officer and a shareholder and 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,
and a director of Alliant Foodservice, Inc., and its parent, Alliant Exchange,
Inc., corporations in which an investment fund managed by CD&R has an
investment, Global Decisions Group, LLC, a limited liability company in which an
investment fund managed by CD&R has an investment, and Turbochef, Inc. Mr. Gogel
serves as a member of the compensation committee of the board of directors of
Turbochef, Inc.
Steven D. Goldstein has been a director of the Company since July 1998.
Since November of 2000, Mr. Goldstein has served as Chairman and Chief Executive
Officer of More Benefits, Corp. From December
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1997 to November of 2000, Mr. Goldstein served as 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 prior to 1996 to
1996, Mr. Goldstein was employed by American Express Co., serving most recently
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 and
a director of Investment Associates II. From prior to 1996 until joining CD&R in
1997, Mr. Ireland served as a senior managing director of Alvarez & Marsal, Inc.
Mr. Ireland also serves on the board of directors of the Maine Coast Heritage
Trust.
Siri Marshall has been a director of the Company since July 1999. Ms.
Marshall has been employed by General Mills since prior to 1996 and currently
serves as its Senior Vice President, Corporate Affairs and General Counsel.
David A. Novak has been a director of the Company since January 1998. Mr.
Novak 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.
Novak worked in the Merchant Banking and Investment Banking Divisions of Morgan
Stanley & Co. Incorporated and for the Central European Development Corporation.
Mr. Novak also serves on the board of directors of Allied Worldwide, Inc., a
corporation in which Fund V has an investment.
Paul Orfalea has been a director of the Company since July 1998 and is the
founder and Chairman Emeritus of Kinko's, Inc., a corporation in which Fund V
has an investment. From prior to 1996 to 2000, Mr. Orfalea served as Chairman of
Kinko's, Inc. Mr. Orfalea is also a director of DataProse, Inc., Espresso Caffe
Corp., and Glendale Federal Bank and serves as a member of the compensation
committee of the board of directors of Glendale Federal Bank.
Ann Reese has been a director of the Company since July 1998. From 1999 to
December 2000, Ms. Reese was a professional employee of CD&R. From prior to 1996
to March 1998, Ms. Reese was Chief Financial Officer of ITT Corp., a company in
the hotel and gaming businesses and previously in insurance and manufacturing.
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 Corp.
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.
Kenneth D. Taylor has been a director of the Company since July 1998 and
has been the Chairman of Global Public Affairs, Inc. since prior to 1996. Mr.
Taylor is a director of Devine Entertainment Corporation, Taylor Gas Liquids
Fund, McCarvill Corporation, William Resources Inc., AdvantEdge International
Inc., Finsa Energeticos, Alberta Northeast Gas Limited, and J&H Marsh & McLennan
Limited.
At present, all directors will hold office until their successors are
elected and qualified, or until their earlier removal or resignation.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the four additional most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
for each of the last three fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------- LONG-TERM
OTHER COMPENSATION ALL OTHER
ANNUAL SECURITIES COMPEN-
COMPEN- UNDERLYING SATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) OPTIONS(#) ($)(1)
--------------------------- ---- --------- -------- --------- ------------ ---------
Ronald B. Clark................. 2000 626,218 227,610 56,811
Chairman and Chief 1999 609,288 510,000 30,273
Executive Officer 1998 406,154(2) 360,000 -- 18,328 15,692
Gonzalo R. Rubio................ 2000 521,832 189,666 47,341
President and Chief 1999 507,740 425,000 55,228
Operating Officer 1998 326,923(2) 300,000 -- 18,328 1,344
Ralph S. Mason, III............. 2000 469,672 170,712 8,517
Vice Chairman, Executive 1999 456,966 382,000 146,238(3) 1,771
Vice President and General 1998 304,616(2) 270,000 263,082(4) 14,536 --
Counsel
Jaime Lopez Guirao.............. 2000 467,518 170,360 42,476
President of Global Operations 1999 455,597 382,000 47,910
1998 253,846(5) 870,000(6) -- 6,000 2,269
Michael A. DiGregorio........... 2000 312,664 94,845 1,264 18,048
Senior Vice President and 1999 304,352 212,000 22,718
Chief Financial Officer 1998 190,385(2) 150,000 79,292(7) 3,476 5,192
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(1) Amounts shown in this column constitute contributions by the Company under
the Company's 401(k) and Supplemental Savings Plans.
(2) Messrs. Clark, Rubio, Mason and DiGregorio joined the Company on May 1,
1998.
(3) Amount includes reimbursement for expenses of $140,000 incurred by Mr. Mason
in order to relocate to Company headquarters.
(4) Amount includes reimbursement for expenses of $258,347 incurred by Mr. Mason
in order to relocate to Company headquarters.
(5) Messr. Guirao joined the Company on June 1, 1998.
(6) Amount includes a $600,000 incentive bonus accrued in connection with the
hiring of Mr. Guirao.
(7) Amount includes reimbursement for expenses of $75,474 incurred by Mr.
DiGregorio in order to relocate to Company headquarters.
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OPTION GRANTS IN 2000
The following table sets forth, for the Named Executive Officers,
information concerning stock options granted during the year ended December 31,
2000. No stock appreciation rights were granted to the Named Executive Officers
during the year ended December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------- VALUE AT ASSUMED
PERCENTAGE OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
---- ---------- ------------- -------- -------------- -------- ---------
Michael A. DiGregorio........... 632(2) 7.1% $210 August 9, 2010 83,467 211,521
Michael A. DiGregorio........... 632(3) 7.1% 210 August 9, 2010 83,467 211,521
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(1) Potential realizable value is based on an assumption that the price of the
Common Stock appreciates at the annual rate shown (compounded annually) from
the date of the grant until the end of the ten (10) year option term.
Potential realizable value is shown net of exercise price. These amounts are
calculated based on the regulations promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth. The actual future gains, if any, of the stock options
will depend upon the future appreciation of the market price of the Common
Stock. This table should not be viewed in any way as a forecast of the
future performance of the Parent's stock, which will be determined by future
events and unknown factors.
(2) Subject to the continuous employment of the Named Executive Officer, the
options become vested in three equal annual installments on each of the
first three anniversaries of the date of grant, August 9, 2000.
(3) Subject to the continuous employment of the Named Executive Officer, the
options become vested as follows: (a) up to one-third of the options become
vested as of each of the first three anniversaries of the date of grant,
August 9, 2000, if the Company achieves at least 85% of its EBITDA target
for the immediately preceding fiscal year, (b) if less than one-third of the
total number of options shall have become vested as provided in clause (a)
above, the portion that has not become so vested shall become vested as of
the first day of the fiscal year following the fiscal year, if any, that the
Company achieves its cumulative EBITDA target, and (c) any options that do
not become vested as provided above will become vested on August 9, 2009.
FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information for each Named Executive Officer
with regard to the aggregate value of options held at December 31, 2000. No
options were exercised by such executive officers during the year ended December
31, 2000.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2000(#) DECEMBER 31, 2000($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Ronald B. Clark........................... 9,164 9,164 $1,008,040 $1,008,040
Gonzalo R. Rubio.......................... 9,164 9,164 1,008,040 1,008,040
Ralph S. Mason, III....................... 7,268 7,268 799,480 799,480
Jaime Lopez Guirao........................ 3,000 3,000 330,000 330,000
Michael A. DiGregorio..................... 1,738 3,002 191,180 191,180
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(1) Calculated based on a per share price of Parent Common Stock of $210, the
estimated fair market value as of December 31, 2000, less the per share
exercise price.
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COMPENSATION OF DIRECTORS
During 2000, each outside director of the Company received a retainer of
$40,000 for serving on the Board of Directors of the Company and was reimbursed
for his or her out-of-pocket expenses incurred in connection with attending
board meetings. The Company pays no additional remuneration to officers of the
Company or the principals or employees of CD&R for serving as directors.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of the Named 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 of the Acquisition (the "Closing"). The
employment agreements of Messrs. Guirao and DiGregorio have a continuous
"rolling" term of two years, commencing as of June 1, 1998. Pursuant to their
respective agreements, as of their 2000 anniversary dates, Messrs. Clark, Rubio,
Mason, Guirao and DiGregorio receive annual base salaries of $632,000, $527,000,
$474,000, $473,000 and $316,000, respectively. In addition, each of Messrs.
Clark, Rubio, Mason and Guirao are eligible for a target annual bonus equal to
60%, and Mr. DiGregorio is eligible for a target annual bonus equal to 50%, of
such Named 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 Named Executive
Officer's employment by the Company without "cause" (as defined in the
employment agreement) or by such executive for "good reason" (as so defined),
such Named Executive Officer will be entitled to continued payments of his base
salary for the remaining term of his employment agreement and to payment of a
pro rata annual bonus for the year of termination provided that the Company
achieves the performance objectives applicable for such year and each year
thereafter. Each of the employment agreements also contains covenants regarding
nondisclosure of confidential information, noncompetition and nonsolicitation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company established a Compensation Committee
to review all compensation arrangements for executive officers of the Company.
The individuals serving on the Compensation Committee during 2000 were Mr.
Taylor, Chairperson, Mr. Orfalea, and Mr. Gogel. Mr. Gogel is President, Chief
Executive Officer and a principal and director of CD&R and a limited partner of
CD&R Associates V Limited Partnership ("Associates V"), the general partner of
CD&R Fund V. In addition, Mr. Gogel is President and Chief Executive Officer and
a shareholder and 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.
In 1998, CD&R received a fee of $2.7 million for providing services related
to the structuring, implementation and consummation of the Acquisition. During
the eight months ended December 31, 1998, pursuant to a consulting agreement
entered into following the Acquisition, CD&R also received a fee of $333,000
(plus reimbursement of out-of-pocket expenses) for advisory, management
consulting and monitoring services to the Company. The annual fee received by
CD&R pursuant to this agreement was originally $500,000 and as of January 1,
1999, was reduced to $400,000 for each of the years ended December 31, 1999 and
2000. The Company and CD&R are currently discussing a proposed amendment to the
consulting agreement. As proposed, the amendment would provide for an annual fee
of $1,000,000, retroactive to January 1, 2001, for ongoing services provided to
the Company. As required by the terms of the Company's lending arrangements,
such fees are determined by arm's-length negotiation and are believed by the
Company to be reasonable. In addition, the proposed amendment adds to CD&R's
services under the agreement financial advisory, investment banking and similar
services with respect to future proposals for an acquisition, merger,
recapitalization, or other similar transaction directly or indirectly involving
the Company or any of its subsidiaries. The fee for such additional services in
connection with future transactions would be an amount equal to 1% of the
transaction value for the transaction to which such fee relates. Such
transaction fees may be increased upon approval of a majority of the members of
the Company's Board of Directors who are not
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employees of the Company, CD&R or any affiliate of CD&R. The proposed amendment
also provides that if any employee of CD&R is appointed to an executive
management position (or a position of comparable responsibility) in the Company
or any of its subsidiaries, the annual fee will be increased by an amount to be
determined by CD&R, the amount of such increase not to exceed 100% of the
existing annual fee in effect at that time. The proposed amendment has been
approved by the Company's Board of Directors. Parent has also agreed to
indemnify the members of the Board employed by CD&R and CD&R against liabilities
incurred under securities laws, liabilities to third parties, and liabilities
relating to the provision by CD&R of advisory management, consulting and
monitoring services. The Company also engaged an entity in which CD&R has an
investment to develop its e-commerce business. During 2000 and 1999, the Company
paid such entity fees of $1,798,000 and $389,000, respectively. The Company
terminated this agreement and entered into a settlement and release agreement
with such entity in 2000, pursuant to which such entity agreed to pay the
Company $500,000 in quarterly installments, together with interest at 9.5% per
annum. See "Certain Relationships and Related Transactions."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Parent owns, indirectly, all of the outstanding capital stock of JCI and
Jafra S.A. The table below sets forth, as of March 10, 2001, the owners of 5% or
more of the Parent Common Stock and the ownership of Parent Common Stock by the
directors and each Named Executive Officer, as well as by all directors and
Named Executive Officers of the Company as a group.
NUMBER PERCENT
NAME OF SHARES OF CLASS
---- --------- --------
Clayton, Dubilier & Rice Fund V Limited Partnership(1)...... 769,600 92.25
Donald J. Gogel(2).......................................... -- --
Steven D. Goldstein......................................... 2,000 *
Thomas E. Ireland(2)........................................ -- --
Siri Marshall............................................... 1,667 *
David A. Novak(2)........................................... -- --
Paul Orfalea................................................ 2,500 *
Ann Reese................................................... 2,500 *
Edward H. Rensi............................................. 2,500 *
Kenneth D. Taylor........................................... 500 *
Ronald B. Clark(3).......................................... 18,328 2.20
Gonzalo R. Rubio(4)......................................... 18,328 2.20
Ralph S. Mason, III(5)...................................... 14,536 1.74
Jaime Lopez Guirao(6)....................................... 6,000 *
Michael A. DiGregorio(7).................................... 3,948 *
All directors and Named Executive Officers as a group (14
persons)(8)............................................... 72,807 8.73
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The symbol "*" denotes less than 1 percent.
(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) Does not include shares owned by CD&R Fund V.
(3) Includes 9,164 shares as to which Mr. Clark has a right to acquire through
the exercise of stock options.
(4) Includes 9,164 shares as to which Mr. Rubio has a right to acquire through
the exercise of stock options.
(5) Includes 7,268 shares as to which Mr. Mason has a right to acquire through
the exercise of stock options.
(6) Includes 3,000 shares as to which Mr. Guirao has a right to acquire through
the exercise of stock options.
(7) Includes 1,738 shares as to which Mr. DiGregorio has a right to acquire
through the exercise of stock options, and excludes 160 shares held by the
trustee of subtrusts established for the benefit of Mr. DiGregorio's
children.
(8) Includes 30,334 shares which the directors and Named Executive Officers as a
group have a right to acquire through the exercise of stock options. Messrs.
Clark, Rubio and Mason purchased shares of 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 Common Stock; on
October 1, 1999, a former member of management exercised 579 options to
purchase Common Stock, and then sold a total of 2,317 shares of Common Stock
back to the Company; on November 19, 1999, certain members of management and
a director purchased an aggregate of 2,457 shares of Common Stock; on July
11,
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2000, a member of management purchased 316 shares of Common Stock; on July
27, 2000, a former member of management exercised 158 options to purchase
Common Stock, and then sold a total of 632 shares of Common Stock back to
the Company; on August 9, 2000, certain members of management purchased an
aggregate of 4,108 shares of Common Stock, and on November 6, 2000, a former
member of management sold 316 shares of the Common Stock back to the Company
in transactions 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, Mr. Ireland
is a director and shareholder of Investment Associates II, and Mr. Novak is
a shareholder of Investment Associates II.
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ITEM 13. 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, Chief
Executive Officer and a director of CD&R; President, Chief Executive Officer,
and a shareholder 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 and a director of Investment
Associates II, and Mr. Novak, who is a principal of CD&R, a limited partner of
Associates V, and a shareholder of Investment Associates II, is a director of
Parent. See "Directors and Executive Officers of the Company."
CD&R is a private investment firm that 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 the Closing of the Acquisition 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 of the Acquisition, until the tenth anniversary of
the Acquisition or the date on which CD&R Fund V no longer has an investment in
the Company or until the termination by either party with 30 days notice, CD&R
will receive an annual fee (and reimbursement of out-of-pocket expenses) for
providing advisory, management consulting and monitoring services to the
Company. The annual fee was originally $500,000 and as of January 1, 1999, was
reduced to $400,000. 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. The Company and
CD&R are currently discussing a proposed amendment to the consulting agreement.
As proposed, the amendment would provide for an annual fee of $1,000,000,
retroactive to January 1, 2001, for ongoing services provided to the Company. As
required by the terms of the Company's lending arrangements, such fees are
determined by arm's-length negotiation and are believed by the Company to be
reasonable.
In addition, the proposed amendment adds to CD&R's services under the
agreement financial advisory, investment banking and similar services with
respect to future proposals for an acquisition, merger, recapitalization, or
other similar transaction directly or indirectly involving the Company or any of
its subsidiaries. The fee for such additional services in connection with future
transactions would be an amount equal to 1% of the transaction value for the
transaction to which such fee relates. Such transaction fees may be increased
upon approval of a majority of the members of the Company's Board of Directors
who are not employees of the Company, CD&R or any affiliate of CD&R.
The proposed amendment also provides that if any employee of CD&R is
appointed to an executive management position (or a position of comparable
responsibility) in the Company or any of its subsidiaries, the annual fee will
be increased by an amount to be determined by CD&R, the amount of such increase
not to exceed 100% of the existing annual fee in effect at that time. The
proposed amendment has been approved by the Company's Board of Directors.
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
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securities laws in connection with offerings of securities of the Company,
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.
During 1999, the Company engaged Guidance Solutions Inc. ("Guidance"), a
corporation in which an investment fund managed by CD&R has an investment, to
develop its e-commerce business. Under the agreement entered into by both
parties, the Company agreed to pay fees of approximately $2.0 million to
Guidance in connection with the planning, defining, designing and consulting
services performed. During 2000 and 1999, the Company paid fees to Guidance of
$1,798,000 and $389,000, respectively. The Company terminated its agreement with
Guidance and executed a settlement and mutual release agreement effective
September 30, 2000. Upon execution of this settlement and mutual release
agreement in October of 2000, Guidance paid the Company $25,000 and agreed to
pay the Company an aggregate additional sum of $475,000, payable in quarterly
installments, plus interest at 9.5% per annum, beginning in January 2001.
The Company has entered into employment agreements with various members of
management, including each of the Named Executive Officers. See "Executive
Compensation -- Employment Agreements." The employment agreements of Messrs.
Clark and Rubio provide that each will be a director of Parent during the term
of his employment.
Under certain circumstances, stockholders can require the Company to
purchase their shares of Common Stock. Management stockholders are subject to a
holding period of at least seven months from the date such shares were acquired.
In July 2000, a former member of management exercised options to purchase 158
shares of Common Stock, and then requested that the Company purchase his entire
balance of Common Stock, consisting of 632 shares. In November 2000, a former
member of management requested that the Company purchase his entire balance of
Common Stock, consisting of 316 shares. In October of 1999, a former member of
management exercised options to purchase 579 shares of Common Stock, then
requested that the Company purchase his entire balance of Common Stock,
consisting of 2,317 shares. The Company repurchased the shares in 2000 at a
total cost of $199,000, or $210 per share, and the shares in 1999 at a total
cost of $348,000, or $150 per share, which represented the respective estimated
fair values at the time of the purchases.
In November 1999, a director, Siri Marshall, and certain members of
management purchased 1,667 and 790 shares of Common Stock, respectively, at a
purchase price of $150.00 per share. Certain members of management were also
granted options to purchase an aggregate of 1,580 shares of Common Stock.
Certain members of management, including Named Executive Officers, financed a
portion of the cash purchase price of the shares of Common Stock they acquired
through loans from the Chase Manhattan Bank on market terms. In July 2000, a
member of management purchased 316 shares of Common Stock at a purchase price of
$150.00 per share, which was below the estimated fair value at the time of
purchase of $210.00 per share. The Company recognized compensation expense of
approximately $19,000 at the time of the purchase. In August 2000, certain
members of management purchased an aggregate of 4,108 shares of the Common Stock
at a purchase price of $210.00 per share, which represented the estimated fair
value at the time of the purchase. During 2000, certain members of management
were also granted options to purchase an aggregate of 8,848 shares of Common
Stock. 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 Common Stock purchased by each such member of management. The
Company guaranteed loans for $687,300, $687,300, $545,100, $225,000 and $230,000
extended to Messrs. Clark, Rubio, Mason, Guirao, and DiGregorio, respectively,
which remain outstanding.
109
112
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules of the Company on page 26 of this Annual Report on Form
10-K.
(a)(2) Financial Statement Schedules. Reference is made to the Index to
Financial Statements and Financial Statement Schedules of the Company on page 28
of this Annual Report on Form 10-K. See also the following financial statement
schedules which should be read in conjunction with the financial statements
included in Item 8 of this Annual Report on Form 10-K.
PAGES IN THIS
ANNUAL REPORT
ON FORM 10-K
-------------
JAFRA COSMETICS INTERNATIONAL, INC.:
Independent Auditors' Report.............................. 57
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 58
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 59
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 2000 and 1999, the eight-month
period ended December 31, 1998, and the four-month
period ended April 30, 1998............................ 60
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 61
Notes to Consolidated Financial Statements................ 62
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.:
Independent Auditors' Report.............................. 80
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 81
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 82
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000 and 1999, the eight-month
period ended December 31, 1998, and the four-month
period ended April 30, 1998............................ 83
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, the eight-month period
ended December 31, 1998, and the four-month period
ended April 30, 1998................................... 84
Notes to Consolidated Financial Statements................ 85
110
113
(a)(3) Exhibits. The following documents are exhibits to this Annual Report
on Form 10-K.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Articles of Association (Statuts Coordonnes) of CDRJ
Investments (Lux) S.A., as restated on September 30, 1998;
previously filed as Exhibit 3.1 to Amendment 2 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed December 23, 1998, and
incorporated herein by reference.
3.2 Certificate of Incorporation of CDRJ Acquisition
Corporation, dated March 31, 1998; previously filed as
Exhibit 3.2 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
3.3 Certificate of Merger of Jafra Cosmetics International, Inc.
into CDRJ Acquisition Corporation, dated April 30, 1998;
previously filed as Exhibit 3.3 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
3.4 Amended and Restated By-laws of Jafra Cosmetics
International, Inc. (formerly CDRJ Acquisition Corporation),
as adopted on July 21, 1998; previously filed as Exhibit 3.4
to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
3.5 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Jafra Cosmetics International, S.A. de C.V., together
with a unofficial summary thereof in English; previously
filed as Exhibit 3.5 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
3.6 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Dirsamex, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.7
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.7 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Jafra Cosmetics S.A. de C.V., formerly known as Jafra
Cosmetics S. de R.L. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.9
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.8 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Qualifax, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.10
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.9 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Reday, S.A. de C.V., together with a unofficial summary
thereof in English; previously filed as Exhibit 3.11 to
Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.10 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Cosmeticos Y Fragrancias, S.A. de C.V., together with an
unofficial summary thereof in English.
3.11 Notarial Deed and Resolutions, together with an unofficial
summary thereof in English, for the transformation of Jafra
Cosmetics S. de R.L. de C.V. into Jafra Cosmetics S.A. de
C.V.; previously filed as Exhibit 3.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended 1999,
filed on March 30, 2000, and incorporated herein by
reference.
111
114
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.12 Approval, dated as of April 17, 2000, by the Public Registry
of Commerce of the United Mexican States of the merger of
Consultoria Jafra S.A. de C.V. and Distribuidora Venus, S.A.
de C.V. with and into Reday, S.A. de C.V., together with
supporting shareholders' resolutions and the unofficial
English translation thereof; previously filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
second quarter ended June 30, 2000, filed on August 14,
2000, and incorporated herein by reference.
3.13 Notarial Deed and Resolutions, together with an unofficial
summary thereof in English, for the changing of the
corporate name from Reday, S.A. de C.V. to Distribuidora
Venus, S.A. de C.V. as a consequence of the merger of
Distribuidora Venus, S.A. de C.V. into Reday, S.A. de C.V.
4.1 Indenture, dated April 30, 1998, among CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V.,
CDRJ Investments (Lux) S.A., and State Street Bank and Trust
Company; previously filed as Exhibit 4.1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
4.2 First Supplemental Indenture, dated April 30, 1998, among
Consultoria Jafra, S.A. de C.V., Distribuidora Venus, S.A.
de C.V., Dirsamex, S.A. de C.V., Reday, S.A. de C.V.,
Qualifax S.A. de C.V., and Jafra Cosmetics S.R.L., CDRJ
Acquisition Corporation and Jafra Cosmetics International,
S.A. de C.V. and State Street Bank and Trust Company;
previously filed as Exhibit 4.2 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.3 Purchase Agreement, dated April 28, 1998, between Credit
Suisse First Boston Corporation, Chase Securities Inc., CDRJ
Acquisition Corporation, Jafra Cosmetics International, S.A.
de C.V., and CDRJ Investments (Lux) S.A.; previously filed
as Exhibit 4.3 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
4.4 Purchase Agreement Amendment, dated April 30, 1998, executed
on behalf of each of Reday, S.A. de C.V., Distribuidora
Venus, S.A. de C.V., Dirsamex, S.A. de C.V., Qualifax, S.A.
de C.V., Jafra Cosmetics, S.R.L., Consultoria Jafra, S.A. de
C.V., Credit Suisse First Boston Corporation, and Chase
Securities Inc.; previously filed as Exhibit 4.4 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.5 Registration Rights Agreement, dated April 30, 1998, among
CDRJ Acquisition Corporation, Jafra Cosmetics International,
Inc., Jafra Cosmetics International, S.A. de C.V., CDRJ
Investments (Lux) S.A., Reday, S.A. de C.V., Distribuidora,
S.A. de C.V., Dirsamex, S.A. de C.V., Qualifax, S.A. de
C.V., Jafra Cosmetics, S.A. de C.V., Consultoria Jafra, S.A.
de C.V., and Credit Suisse First Boston Corporation;
previously filed as Exhibit 4.5 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.6 Credit Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation, Jafra Cosmetics International, S.A.
de C.V., CDRJ Investments (Lux) S.A., as Guarantor and
Parent of the Borrowers, the Lenders named therein and
Credit Suisse First Boston, as Administrative Agent;
previously filed as Exhibit 4.6 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.7 Amendment No. 1 to the Credit Agreement, dated August 26,
1998; previously filed as Exhibit 4.7 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
112
115
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
4.8 Indemnity, Subrogation and Contribution Agreement, dated
April 30, 1998, among Jafra Cosmetics International, S.A. de
C.V. ("JCISA"), each Subsidiary of JCSI listed on Schedule I
thereto and Credit Suisse First Boston; previously filed as
Exhibit 4.8 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
4.9 JCI Guarantee Agreement, dated April 30, 1998, between CDRJ
Acquisition Corporation and Credit Suisse First Boston;
previously filed as Exhibit 4.9 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.10 JCISA Guarantee Agreement, dated April 30, 1998, between
Jafra Cosmetics International, S.A. de C.V. and Credit
Suisse First Boston; previously filed as Exhibit 4.10 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.11 JCISA Subsidiary Guarantee Agreement, dated April 30, 1998,
among each of the subsidiaries of Jafra Cosmetics
International, S.A. de C.V. listed on Schedule I thereto,
and Credit Suisse First Boston; previously filed as Exhibit
4.11 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998,
and incorporated herein by reference.
4.12 Parent Guarantee Agreement, dated April 30, 1998, between
CDRJ Investments (Lux) S.A. and Credit Suisse First Boston;
previously filed as Exhibit 4.12 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.13 Pledge Agreement, dated April 30, 1998 among CDRJ
Investments (Lux) S.A., CDRJ North Atlantic Sarl, CDRJ Latin
America Holding Company B.V., Latin Cosmetics Holdings B.V.,
Regional Cosmetics Holding B.V., Southern Cosmetics Holdings
B.V., and CDRJ Mexico Holding Company B.V., CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V. and
Credit Suisse First Boston; previously filed as Exhibit 4.13
to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.14 Security Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation ("JCI"), each subsidiary of JCI
listed on Schedule I thereto and Credit Suisse First Boston;
previously filed as Exhibit 4.14 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.15 Deed of Trust, with Assignment of Leases and Rents, Fixture
Filing and Security Agreement, dated April 30, 1998, by
Jafra Cosmetics International, Inc. to TitleServ Agency of
New York City, Inc., as trustee for the Benefit of Credit
Suisse First Boston; previously filed as Exhibit 4.15 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.16 Acknowledgment of Obligations and Mortgage, dated April 30,
1998, granted by Reday, S.A. de C.V. in favor of Credit
Suisse First Boston, together with an unofficial English
translation thereof; previously filed as Exhibit 4.16 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
113
116
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
4.17 Notarial Deed of Pledge, dated April 30, 1998, with respect
to the pledge to Credit Suisse First Boston of (i) 24
ordinary shares of the capital stock of CDRJ Europe Holding
Company B.V. by Jafra Cosmetics International, Inc., and
(ii) 40 ordinary shares of the capital stock of CDRJ Latin
America Holding B.V. by CDRJ North Atlantic (Lux) Sarl;
previously filed as Exhibit 4.17 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.18 Consent and Waiver, dated as of November 19, 1999, to the
Credit Agreement dated as of April 30, 1998, as amended by
Amendment No. 1 thereto dated as of August 26, 1998, among
Jafra Cosmetics International Inc., Jafra Cosmetics
International S.A. de C.V., CDRJ Investments (Lux) S.A., the
several banks and financial institutions party to the Credit
Agreement, the Issuing Bank and Credit Suisse First Boston,
as Administrative Agent; previously filed as Exhibit 4.18 to
the Company's Annual Report on Form 10-K for the fiscal year
ended 1999, filed on March 30, 2000, and incorporated herein
by reference.
4.19 Substitution of Trustee and Partial Reconveyance of Deed of
Trust, Assignment of Leases and Rents, Fixture Filing and
Security Agreement, and Release of Financing Statement,
dated November 29, 1999, which amends the Deed of Trust
filed as Exhibit 4.15 above; previously filed as Exhibit
4.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended 1999, filed on March 30, 2000, and
incorporated herein by reference.
4.20 Partial Reconveyance of Deed of Trust, Assignment of Leases
and Rents, Fixture Filing and Security Agreement and Release
of Financing Statement, dated November 29, 1999, which
amends the Deed of Trust filed as Exhibit 4.15 above;
previously filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended 1999, filed on
March 30, 2000, and incorporated herein by reference.
Items in this Section 10 constitute management contracts or
compensatory plans or arrangements with the exception of Exhibits
10.1, 10.7, 10,12, 10.13, 10.14, 10.15, 10.16, 10.17, 10.18, and
10.19.
10.1 Indemnification Agreement, dated April 30, 1998, among CDRJ
Investments (Lux) S.A., CDRJ Acquisition Corporation, Jafra
Cosmetics International, S.A. de C.V., Clayton, Dubilier &
Rice, Inc., Clayton, Dubilier & Rice Fund V Limited
Partnership; previously filed as Exhibit 10.1 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.2 Consulting Agreement, dated April 30, 1998, by and among
CDRJ Investments (Lux) S.A., Jafra Cosmetics International,
Inc. and Jafra Cosmetics, S.A. de C.V., and Clayton,
Dubilier & Rice, Inc.; previously filed as Exhibit 10.2 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.3 Form of Employment Agreement for Messrs. Clark, Rubio,
Mason, Guirao and DiGregorio; previously filed as Exhibit
10.3 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998,
and incorporated herein by reference.
10.4 Amended and Restated Jafra Cosmetics International, Inc.
Stock Incentive Plan, as adopted September 3, 1998;
previously filed as Exhibit 10.4 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed October 27, 1998, and
incorporated herein by reference.
10.5 CDRJ Investments (Lux) S.A. Form of Management Stock Option
Agreement; previously filed as Exhibit 10.5 to Amendment No.
1 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
114
117
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.6 Amended and Restated Stock Purchase Warrant, dated September
30, 1998, by and between CDRJ Investments (Lux) S.A. and
Jafra Cosmetics International, Inc.; previously filed as
Exhibit 10.6 to Amendment No. 1 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by
reference.
10.7 Registration and Participation Agreement, dated April 30,
1998, among CDRJ Investments (Lux) S.A. and Clayton,
Dubilier & Rice Fund V Limited Partnership and the other
parties thereto; previously filed as Exhibit 10.7 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.8 CDRJ Investments (Lux) S.A. Form of Management Stock
Subscription Agreement; previously filed as Exhibit 10.8 to
Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
10.9 CDRJ Investments (Lux) S.A. Form of Individual Investor
Stock Subscription Agreement; previously filed as Exhibit
10.9 to Amendment No. 1 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by
reference.
10.10 Jafra Cosmetics International, Inc. Supplemental Savings
Plan, dated October 27, 1998; previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
first quarter ended March 31, 1999, filed May 17, 1999, and
incorporated herein by reference.
10.11 Jafra Cosmetics International, Inc. Special Supplemental
Savings Plan for Non-United States-Source Income, dated
January 20, 1999; previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the first
quarter ended March 31, 1999, filed May 17, 1999, and
incorporated herein by reference.
10.12 Asset Purchase Agreement, dated as of June 10, 1999, as
amended by Amendment No. 1, dated as of June 10, 1999; by
and between the Company and the Contractor, previously filed
as Exhibit 10.1 to Form 8-K, filed on June 10, 1999, and
incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.13 Amendment No. 1 to Asset Purchase Agreement, dated as of
June 10, 1999; previously filed as Exhibit 10.2 to Form 8-K,
filed on June 10, 1999, and incorporated herein by reference
(portions of which were filed under a confidentiality
request).
10.14 Manufacturing Agreement, dated as of June 10, 1999, by and
between the Company and the Contractor, as amended by
Amendment No. 1, dated as of June 22, 1999; previously filed
as Exhibit 10.3 to Form 8-K, filed on June 10, 1999, and
incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.15 Form of Amendment No. 1 to Manufacturing Agreement, dated as
of June 10, 1999; previously filed as Exhibit 10.4 to Form
8-K, filed on June 10, 1999 and incorporated herein by
reference (portions of which were filed under a
confidentiality request).
10.16 Form of Secured Note for the Assets, dated June 10, 1999,
made by the Contractor in favor of the Company; previously
filed as Exhibit 10.5 to Form 8-K, filed on June 10, 1999
and incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.17 Form of Secured Note for the Inventory, dated June 10, 1999,
made by the Contractor in favor of the Company; previously
filed as Exhibit 10.6 to Form 8-K, filed on June 10, 1999
and incorporated herein by reference (portions of which were
filed under a confidentiality request).
115
118
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.18 Sale Agreement, dated as of September 29, 1999, between the
Company and Townsgate Road LLC; previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
third quarter ended September 30, 1999, filed November 12,
1999, and incorporated herein by reference.
10.19 Sale Agreement, dated as of October 15, 1999, between the
Company and Selvin Properties; previously filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
third quarter ended September 30, 1999, filed November 12,
1999, and incorporated herein by reference.
10.20 Trust Agreement dated May 26, 1999 by and between Jafra
Cosmetics International, Inc. and Scudder Trust Company;
previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended 1999, filed on
March 30, 2000, and incorporated herein by reference.
10.21 Amendment No. 1 to Consulting Agreement, dated as of March
15, 2000, by and among CDRJ Investments (Lux) S.A., Jafra
Cosmetics International, Inc., Jafra Cosmetics
International, S.A. de C.V., and Clayton, Dubilier & Rice,
Inc.; previously filed as Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended 1999,
filed on March 30, 2000, and incorporated herein by
reference.
10.22 First Amendment to Amended and Restated Jafra Cosmetics
International, Inc. Stock Incentive Plan.
10.23 CDRJ Investments (Lux) S.A. Form of Management Stock
Subscription Agreement, as amended.
21.1 Subsidiaries of the registrant.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, the Company filed no reports on
Form 8-K.
116
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CDRJ Investments (Lux) S.A.
By: /s/ RONALD B. CLARK
------------------------------------
Name: Ronald B. Clark
Title: Chief Executive Officer of
the Advisory Committee and
Director
Date April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RONALD B. CLARK Chief Executive Officer of the April 2, 2001
- ----------------------------------------------------- Advisory Committee and Director
Ronald B. Clark (Principal executive officer)
/s/ MICHAEL A. DIGREGORIO Senior Vice President and Chief April 2, 2001
- ----------------------------------------------------- Financial Officer of the Advisory
Michael A. DiGregorio Committee (Principal financial
officer, Principal accounting
officer)
/s/ RALPH S. MASON, III Secretary and Executive Vice April 2, 2001
- ----------------------------------------------------- President of the Advisory
Ralph S. Mason, III Committee (Representative in the
U.S.)
/s/ DONALD J. GOGEL Director April 2, 2001
- -----------------------------------------------------
Donald J. Gogel
/s/ STEVEN D. GOLDSTEIN Director April 2, 2001
- -----------------------------------------------------
Steven D. Goldstein
/s/ THOMAS E. IRELAND Director April 2, 2001
- -----------------------------------------------------
Thomas E. Ireland
/s/ SIRI MARSHALL Director April 2, 2001
- -----------------------------------------------------
Siri Marshall
/s/ DAVID A. NOVAK Director April 2, 2001
- -----------------------------------------------------
David A. Novak
/s/ PAUL ORFALEA Director April 2, 2001
- -----------------------------------------------------
Paul Orfalea
/s/ ANN REESE Director April 2, 2001
- -----------------------------------------------------
Ann Reese
117
120
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EDWARD H. RENSI Director April 2, 2001
- -----------------------------------------------------
Edward H. Rensi
/s/ GONZALO RUBIO Director April 2, 2001
- -----------------------------------------------------
Gonzalo Rubio
/s/ KENNETH TAYLOR Director April 2, 2001
- -----------------------------------------------------
Kenneth D. Taylor
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
118
121
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1 Articles of Association (Statuts Coordonnes) of CDRJ
Investments (Lux) S.A., as restated on September 30, 1998;
previously filed as Exhibit 3.1 to Amendment 2 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed December 23, 1998, and
incorporated herein by reference.
3.2 Certificate of Incorporation of CDRJ Acquisition
Corporation, dated March 31, 1998; previously filed as
Exhibit 3.2 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
3.3 Certificate of Merger of Jafra Cosmetics International, Inc.
into CDRJ Acquisition Corporation, dated April 30, 1998;
previously filed as Exhibit 3.3 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
3.4 Amended and Restated By-laws of Jafra Cosmetics
International, Inc. (formerly CDRJ Acquisition Corporation),
as adopted on July 21, 1998; previously filed as Exhibit 3.4
to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
3.5 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Jafra Cosmetics International, S.A. de C.V., together
with a unofficial summary thereof in English; previously
filed as Exhibit 3.5 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
3.6 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Dirsamex, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.7
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.7 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Jafra Cosmetics S.A. de C.V., formerly known as Jafra
Cosmetics S. de R.L. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.9
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.8 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Qualifax, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.10
to Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.9 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Reday, S.A. de C.V., together with a unofficial summary
thereof in English; previously filed as Exhibit 3.11 to
Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
3.10 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales)
of Cosmeticos Y Fragrancias, S.A. de C.V., together with an
unofficial summary thereof in English.
3.11 Notarial Deed and Resolutions, together with an unofficial
summary thereof in English, for the transformation of Jafra
Cosmetics S. de R.L. de C.V. into Jafra Cosmetics S.A. de
C.V.; previously filed as Exhibit 3.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended 1999,
filed on March 30, 2000, and incorporated herein by
reference.
122
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.12 Approval, dated as of April 17, 2000, by the Public Registry
of Commerce of the United Mexican States of the merger of
Consultoria Jafra S.A. de C.V. and Distribuidora Venus, S.A.
de C.V. with and into Reday, S.A. de C.V., together with
supporting shareholders' resolutions and the unofficial
English translation thereof; previously filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
second quarter ended June 30, 2000, filed on August 14,
2000, and incorporated herein by reference.
3.13 Notarial Deed and Resolutions, together with an unofficial
summary thereof in English, for the changing of the
corporate name from Reday, S.A. de C.V. to Distribuidora
Venus, S.A. de C.V. as a consequence of the merger of
Distribuidora Venus, S.A. de C.V. into Reday, S.A. de C.V.
4.1 Indenture, dated April 30, 1998, among CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V.,
CDRJ Investments (Lux) S.A., and State Street Bank and Trust
Company; previously filed as Exhibit 4.1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
4.2 First Supplemental Indenture, dated April 30, 1998, among
Consultoria Jafra, S.A. de C.V., Distribuidora Venus, S.A.
de C.V., Dirsamex, S.A. de C.V., Reday, S.A. de C.V.,
Qualifax S.A. de C.V., and Jafra Cosmetics S.R.L., CDRJ
Acquisition Corporation and Jafra Cosmetics International,
S.A. de C.V. and State Street Bank and Trust Company;
previously filed as Exhibit 4.2 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.3 Purchase Agreement, dated April 28, 1998, between Credit
Suisse First Boston Corporation, Chase Securities Inc., CDRJ
Acquisition Corporation, Jafra Cosmetics International, S.A.
de C.V., and CDRJ Investments (Lux) S.A.; previously filed
as Exhibit 4.3 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
4.4 Purchase Agreement Amendment, dated April 30, 1998, executed
on behalf of each of Reday, S.A. de C.V., Distribuidora
Venus, S.A. de C.V., Dirsamex, S.A. de C.V., Qualifax, S.A.
de C.V., Jafra Cosmetics, S.R.L., Consultoria Jafra, S.A. de
C.V., Credit Suisse First Boston Corporation, and Chase
Securities Inc.; previously filed as Exhibit 4.4 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.5 Registration Rights Agreement, dated April 30, 1998, among
CDRJ Acquisition Corporation, Jafra Cosmetics International,
Inc., Jafra Cosmetics International, S.A. de C.V., CDRJ
Investments (Lux) S.A., Reday, S.A. de C.V., Distribuidora,
S.A. de C.V., Dirsamex, S.A. de C.V., Qualifax, S.A. de
C.V., Jafra Cosmetics, S.A. de C.V., Consultoria Jafra, S.A.
de C.V., and Credit Suisse First Boston Corporation;
previously filed as Exhibit 4.5 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.6 Credit Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation, Jafra Cosmetics International, S.A.
de C.V., CDRJ Investments (Lux) S.A., as Guarantor and
Parent of the Borrowers, the Lenders named therein and
Credit Suisse First Boston, as Administrative Agent;
previously filed as Exhibit 4.6 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.7 Amendment No. 1 to the Credit Agreement, dated August 26,
1998; previously filed as Exhibit 4.7 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
123
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
4.8 Indemnity, Subrogation and Contribution Agreement, dated
April 30, 1998, among Jafra Cosmetics International, S.A. de
C.V. ("JCISA"), each Subsidiary of JCSI listed on Schedule I
thereto and Credit Suisse First Boston; previously filed as
Exhibit 4.8 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
4.9 JCI Guarantee Agreement, dated April 30, 1998, between CDRJ
Acquisition Corporation and Credit Suisse First Boston;
previously filed as Exhibit 4.9 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.10 JCISA Guarantee Agreement, dated April 30, 1998, between
Jafra Cosmetics International, S.A. de C.V. and Credit
Suisse First Boston; previously filed as Exhibit 4.10 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.11 JCISA Subsidiary Guarantee Agreement, dated April 30, 1998,
among each of the subsidiaries of Jafra Cosmetics
International, S.A. de C.V. listed on Schedule I thereto,
and Credit Suisse First Boston; previously filed as Exhibit
4.11 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998,
and incorporated herein by reference.
4.12 Parent Guarantee Agreement, dated April 30, 1998, between
CDRJ Investments (Lux) S.A. and Credit Suisse First Boston;
previously filed as Exhibit 4.12 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.13 Pledge Agreement, dated April 30, 1998 among CDRJ
Investments (Lux) S.A., CDRJ North Atlantic Sarl, CDRJ Latin
America Holding Company B.V., Latin Cosmetics Holdings B.V.,
Regional Cosmetics Holding B.V., Southern Cosmetics Holdings
B.V., and CDRJ Mexico Holding Company B.V., CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V. and
Credit Suisse First Boston; previously filed as Exhibit 4.13
to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.14 Security Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation ("JCI"), each subsidiary of JCI
listed on Schedule I thereto and Credit Suisse First Boston;
previously filed as Exhibit 4.14 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
4.15 Deed of Trust, with Assignment of Leases and Rents, Fixture
Filing and Security Agreement, dated April 30, 1998, by
Jafra Cosmetics International, Inc. to TitleServ Agency of
New York City, Inc., as trustee for the Benefit of Credit
Suisse First Boston; previously filed as Exhibit 4.15 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.16 Acknowledgment of Obligations and Mortgage, dated April 30,
1998, granted by Reday, S.A. de C.V. in favor of Credit
Suisse First Boston, together with an unofficial English
translation thereof; previously filed as Exhibit 4.16 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.17 Notarial Deed of Pledge, dated April 30, 1998, with respect
to the pledge to Credit Suisse First Boston of (i) 24
ordinary shares of the capital stock of CDRJ Europe Holding
Company B.V. by Jafra Cosmetics International, Inc., and
(ii) 40 ordinary shares of the capital stock of CDRJ Latin
America Holding B.V. by CDRJ North Atlantic (Lux) Sarl;
previously filed as Exhibit 4.17 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by
reference.
124
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
4.18 Consent and Waiver, dated as of November 19, 1999, to the
Credit Agreement dated as of April 30, 1998, as amended by
Amendment No. 1 thereto dated as of August 26, 1998, among
Jafra Cosmetics International Inc., Jafra Cosmetics
International S.A. de C.V., CDRJ Investments (Lux) S.A., the
several banks and financial institutions party to the Credit
Agreement, the Issuing Bank and Credit Suisse First Boston,
as Administrative Agent; previously filed as Exhibit 4.18 to
the Company's Annual Report on Form 10-K for the fiscal year
ended 1999, filed on March 30, 2000, and incorporated herein
by reference.
4.19 Substitution of Trustee and Partial Reconveyance of Deed of
Trust, Assignment of Leases and Rents, Fixture Filing and
Security Agreement, and Release of Financing Statement,
dated November 29, 1999, which amends the Deed of Trust
filed as Exhibit 4.15 above; previously filed as Exhibit
4.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended 1999, filed on March 30, 2000, and
incorporated herein by reference.
4.20 Partial Reconveyance of Deed of Trust, Assignment of Leases
and Rents, Fixture Filing and Security Agreement and Release
of Financing Statement, dated November 29, 1999, which
amends the Deed of Trust filed as Exhibit 4.15 above;
previously filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended 1999, filed on
March 30, 2000, and incorporated herein by reference.
Items in this Section 10 constitute management contracts or
compensatory plans or arrangements with the exception of Exhibits
10.1, 10.7, 10,12, 10.13, 10.14, 10.15, 10.16, 10.17, 10.18, and
10.19.
10.1 Indemnification Agreement, dated April 30, 1998, among CDRJ
Investments (Lux) S.A., CDRJ Acquisition Corporation, Jafra
Cosmetics International, S.A. de C.V., Clayton, Dubilier &
Rice, Inc., Clayton, Dubilier & Rice Fund V Limited
Partnership; previously filed as Exhibit 10.1 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.2 Consulting Agreement, dated April 30, 1998, by and among
CDRJ Investments (Lux) S.A., Jafra Cosmetics International,
Inc. and Jafra Cosmetics, S.A. de C.V., and Clayton,
Dubilier & Rice, Inc.; previously filed as Exhibit 10.2 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.3 Form of Employment Agreement for Messrs. Clark, Rubio,
Mason, Guirao and DiGregorio; previously filed as Exhibit
10.3 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998,
and incorporated herein by reference.
10.4 Amended and Restated Jafra Cosmetics International, Inc.
Stock Incentive Plan, as adopted September 3, 1998;
previously filed as Exhibit 10.4 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed October 27, 1998, and
incorporated herein by reference.
10.5 CDRJ Investments (Lux) S.A. Form of Management Stock Option
Agreement; previously filed as Exhibit 10.5 to Amendment No.
1 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
10.6 Amended and Restated Stock Purchase Warrant, dated September
30, 1998, by and between CDRJ Investments (Lux) S.A. and
Jafra Cosmetics International, Inc.; previously filed as
Exhibit 10.6 to Amendment No. 1 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by
reference.
10.7 Registration and Participation Agreement, dated April 30,
1998, among CDRJ Investments (Lux) S.A. and Clayton,
Dubilier & Rice Fund V Limited Partnership and the other
parties thereto; previously filed as Exhibit 10.7 to
Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
125
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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10.8 CDRJ Investments (Lux) S.A. Form of Management Stock
Subscription Agreement; previously filed as Exhibit 10.8 to
Amendment No. 1 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed October
27, 1998, and incorporated herein by reference.
10.9 CDRJ Investments (Lux) S.A. Form of Individual Investor
Stock Subscription Agreement; previously filed as Exhibit
10.9 to Amendment No. 1 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by
reference.
10.10 Jafra Cosmetics International, Inc. Supplemental Savings
Plan, dated October 27, 1998; previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
first quarter ended March 31, 1999, filed May 17, 1999, and
incorporated herein by reference.
10.11 Jafra Cosmetics International, Inc. Special Supplemental
Savings Plan for Non-United States-Source Income, dated
January 20, 1999; previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the first
quarter ended March 31, 1999, filed May 17, 1999, and
incorporated herein by reference.
10.12 Asset Purchase Agreement, dated as of June 10, 1999, as
amended by Amendment No. 1, dated as of June 10, 1999; by
and between the Company and the Contractor, previously filed
as Exhibit 10.1 to Form 8-K, filed on June 10, 1999, and
incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.13 Amendment No. 1 to Asset Purchase Agreement, dated as of
June 10, 1999; previously filed as Exhibit 10.2 to Form 8-K,
filed on June 10, 1999, and incorporated herein by reference
(portions of which were filed under a confidentiality
request).
10.14 Manufacturing Agreement, dated as of June 10, 1999, by and
between the Company and the Contractor, as amended by
Amendment No. 1, dated as of June 22, 1999; previously filed
as Exhibit 10.3 to Form 8-K, filed on June 10, 1999, and
incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.15 Form of Amendment No. 1 to Manufacturing Agreement, dated as
of June 10, 1999; previously filed as Exhibit 10.4 to Form
8-K, filed on June 10, 1999 and incorporated herein by
reference (portions of which were filed under a
confidentiality request).
10.16 Form of Secured Note for the Assets, dated June 10, 1999,
made by the Contractor in favor of the Company; previously
filed as Exhibit 10.5 to Form 8-K, filed on June 10, 1999
and incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.17 Form of Secured Note for the Inventory, dated June 10, 1999,
made by the Contractor in favor of the Company; previously
filed as Exhibit 10.6 to Form 8-K, filed on June 10, 1999
and incorporated herein by reference (portions of which were
filed under a confidentiality request).
10.18 Sale Agreement, dated as of September 29, 1999, between the
Company and Townsgate Road LLC; previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
third quarter ended September 30, 1999, filed November 12,
1999, and incorporated herein by reference.
10.19 Sale Agreement, dated as of October 15, 1999, between the
Company and Selvin Properties; previously filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
third quarter ended September 30, 1999, filed November 12,
1999, and incorporated herein by reference.
10.20 Trust Agreement dated May 26, 1999 by and between Jafra
Cosmetics International, Inc. and Scudder Trust Company;
previously filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended 1999, filed on
March 30, 2000, and incorporated herein by reference.