##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

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

CDRJ INVESTMENTS (LUX) S.A.

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(Exact name of Registrant as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Luxembourg                                                     |  | 98-0185444                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)

4 Boulevard Royal
L-2449 Luxembourg
Luxembourg
(Address, including zip code, of registrants principal executive offices)

(352) 226027
(Registrants telephone number, including area code)

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 3 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 [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

Common stock, par value $2.00 per share, outstanding at August 13, 2001
832,204 shares



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TABLE OF CONTENTS



|                              |                                                                                                  |                                            |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS (Unaudited)                                                        
|                              | Consolidated Financial Statements  CDRJ Investments (Lux) S.A. and Subsidiaries                
|                              |                                                                                                  | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                                  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | Consolidated Financial Statements  Jafra Cosmetics International, Inc. and Subsidiaries        
|                              |                                                                                                  | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                                  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and Subsidiaries
|                              |                                                                                                  | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                                  | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                                  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                       
|                              | Item 2. Changes in Securities and Use of Proceeds                                               
|                              | Item 3. Defaults Upon Senior Securities                                                         
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                     
|                              | Item 5. Other Information                                                                       
|                              | Item 6. Exhibits and Reports on Form 8-K                                                        
|SIGNATURE                    
|INDEX TO EXHIBITS            
|EXHIBIT 3.1                  



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##### Table of Contents



CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES

Index to Financial Statements and Exhibits

Filed with the Quarterly Report of the Company on Form 10-Q

For the Three and Six Months Ended June 30, 2001

PART I  FINANCIAL INFORMATION

|                                                                                              |                                                                                                  |  |          |    | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ |  | -------- | -- | 
|                                                                                              |                                                                                                  |  | Page No.
|                                                                                              |                                                                                                  |  |         
|Item 1. Financial Statements (Unaudited):                                                     |                                                                                                  |  |          |   
|                                                                                             
|                                                                                              | Consolidated Financial Statements  CDRJ Investments (Lux) S.A. and Subsidiaries                 |  |          |    | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
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|                                                                                              | Consolidated Balance Sheets                                                                      |  |          | 3  | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Operations                                                            |  |          | 4  | 
|                                                                                             
|                                                                                             
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|                                                                                             
|                                                                                              | Consolidated Statements of Cash Flows                                                            |  |          | 5  | 
|                                                                                             
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|                                                                                             
|                                                                                             
|                                                                                              | Notes to Consolidated Financial Statements                                                       |  |          | 6  | 
|                                                                                             
|                                                                                              | Consolidated Financial Statements  Jafra Cosmetics International, Inc. and Subsidiaries         |  |          |    | 
|                                                                                             
|                                                                                             
|                                                                                             
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|                                                                                              | Consolidated Balance Sheets                                                                      |  |          | 11 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Operations                                                            |  |          | 12 | 
|                                                                                             
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|                                                                                              | Consolidated Statements of Cash Flows                                                            |  |          | 13 | 
|                                                                                             
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|                                                                                             
|                                                                                             
|                                                                                              | Notes to Consolidated Financial Statements                                                       |  |          | 14 | 
|                                                                                             
|                                                                                              | Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and Subsidiaries |  |          |    | 
|                                                                                             
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|                                                                                              | Consolidated Balance Sheets                                                                      |  |          | 18 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Operations                                                            |  |          | 19 | 
|                                                                                             
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|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Cash Flows                                                            |  |          | 20 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Notes to Consolidated Financial Statements                                                       |  |          | 21 | 
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                  |  | 26       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                  |  | 36       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PART II  OTHER INFORMATION                                                                  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Legal Proceedings                                                                     |                                                                                                  |  | 38       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                  |  | 38       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Defaults Upon Senior Securities                                                       |                                                                                                  |  | 38       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                  |  | 38       |   
|                                                                                             
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|                                                                                             
|                                                                                             
|Item 5. Other Information                                                                     |                                                                                                  |  | 38       |   
|                                                                                             
|                                                                                             
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|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                  |  | 38       |   
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Signature                                                                                        |  |          | 39 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Exhibits                                                                                         |  |          | 40 | 



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS (Unaudited)







CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

|                                     |                                                                                                                                        |                            |         |          |         |              |         |        |         | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | ------------ | ------- | ------ | ------- | 
|                                     |                                                                                                                                        |                            |         | June 30, |         | December 31,
|                                     |                                                                                                                                        |                            |         | 2001     |         | 2000        
|                                     |                                                                                                                                        |                            |         |          |         |             
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                        |                            |         |          |         |              |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                              |                            | $       | 7,826    |         |              | $       | 5,838  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Receivables, less allowances for doubtful accounts of
$3,903 in 2001 and $3,553 in 2000                                                |                            |         | 42,186   |         |              |         | 35,919 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                                                                            |                            |         | 33,928   |         |              |         | 38,146 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid income taxes                                                                                                                   |                            |         |         |         |              |         | 1,869  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets (including value-added tax
receivables of $704 in 2001 and $5,329 in 2000)                   |                            |         | 6,723    |         |              |         | 10,296 |        
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total current assets       |         |          | 90,663  |              |         |        | 92,068  | 
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                                                                                                                        |                            | 55,416  |          |         |              | 51,448  |       
|                                    
|                                    
|                                    
|                                    
|Other assets:                        |                                                                                                                                        |                            |         |          |         |              |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net of accumulated amortization of $6,082 in 2001
and $5,114 in 2000                                                         |                            |         | 72,672   |         |              |         | 72,260 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Trademarks, net of accumulated amortization of $4,670 in 2001
and $3,724 in 2000                                                       |                            |         | 51,877   |         |              |         | 49,375 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred financing fees and other, net of accumulated
amortization of $4,872 in 2001 and $3,998 in 2000                                |                            |         | 9,769    |         |              |         | 11,793 |        
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total                      |         | $        | 280,397 |              |         | $      | 276,944 | 
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                        |                            |         |          |         |              |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short term debt, including current portion of long-term debt                                                                           |                            | $       | 6,910    |         |              | $       | 4,846  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                       |                            |         | 19,778   |         |              |         | 27,988 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                                                                                    |                            |         | 40,396   |         |              |         | 34,223 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Income taxes payable                                                                                                                   |                            |         | 1,590    |         |              |         | 426    |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                                                                                  |                            |         | 5,700    |         |              |         | 5,391  |        
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total current liabilities  |         |          | 74,374  |              |         |        | 72,874  | 
|                                    
|                                    
|                                    
|                                    
|Long-term debt                       |                                                                                                                                        |                            | 100,350 |          |         |              | 104,180 |       
|                                    
|                                    
|                                    
|                                    
|Deferred income taxes                |                                                                                                                                        |                            | 17,424  |          |         |              | 16,357  |       
|                                    
|                                    
|                                    
|                                    
|Other long-term liabilities          |                                                                                                                                        |                            | 2,595   |          |         |              | 2,366   |       
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total liabilities          |         |          | 194,743 |              |         |        | 195,777 | 
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|Commitments and contingencies        |                                                                                                                                        |                            |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                                                                                                                        |                            |         |          |         |              |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, par value $2.00; authorized, 1,020,000 shares; issued
and outstanding, 834,767 shares in 2001 and 834,609 shares in 2000 |                            |         | 1,669    |         |              |         | 1,669  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                                             |                            |         | 82,227   |         |              |         | 82,194 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                                                                      |                            |         | 7,491    |         |              |         | 2,942  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                                                                                   |                            |         | (5,092   | )       |              |         | (5,572 | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Less treasury stock, at cost, 2,563 shares in 2001
and 316 shares in 2000                                                              |                            |         | (641     | )       |              |         | (66    | )      
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total stockholders equity |         |          | 85,654  |              |         |        | 81,167  | 
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       
|                                     |                                                                                                                                        | Total                      |         | $        | 280,397 |              |         | $      | 276,944 | 
|                                     |                                                                                                                                        |                            |         |          |         |              |         |       

See accompanying notes to consolidated financial statements



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##### Table of Contents






CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |         |  
|----------------------------------------------------------------------------------------- | ---------------------- | - | ------------------ | ------ | ---------------- | - | -------- | ------ | -------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                          |                        |   | Three Months Ended |        | Six Months Ended
|                                                                                          |                        |   |                    |        |                 
|                                                                                          |                        |   | June 30,           |        | June 30,         |   | June 30, |        | June 30,
|                                                                                          |                        |   | 2001               |        | 2000             |   | 2001     |        | 2000    
|                                                                                          |                        |   |                    |        |                  |   |          |        |         
|Net sales                                                                                 |                        | $ | 96,660             |        |                  | $ | 79,422   |        |          | $ | 183,576 |         |   | $ | 153,466 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cost of sales                                                                             |                        |   | 22,311             |        |                  |   | 17,867   |        |          |   | 42,630  |         |   |   | 34,213  |        
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|                                                                                          | Gross profit           |   |                    | 74,349 |                  |   |          | 61,555 |          |   |         | 140,946 |   |   |         | 119,253 |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Selling, general and administrative expenses                                              |                        |   | 61,251             |        |                  |   | 50,890   |        |          |   | 116,678 |         |   |   | 100,359 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Restructuring and impairment charges                                                      |                        |   |                   |        |                  |   | 1,108    |        |          |   |        |         |   |   | 1,108   |        
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|                                                                                          | Income from operations |   |                    | 13,098 |                  |   |          | 9,557  |          |   |         | 24,268  |   |   |         | 17,786  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other income (expense):                                                                   |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Exchange
loss, net     |   |                    | (4,522 | )                |   |          | (1,731 | )        |   |         | (6,702  | ) |   |         | (5,349  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Interest, net          |   |                    | (3,359 | )                |   |          | (4,024 | )        |   |         | (6,847  | ) |   |         | (8,020  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Other, net             |   |                    | (117   | )                |   |          | 563    |          |   |         | (229    | ) |   |         | 1,231   |  
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|Income before income taxes, extraordinary item and
cumulative effect of accounting change |                        |   | 5,100              |        |                  |   | 4,365    |        |          |   | 10,490  |         |   |   | 5,648   |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Income tax expense                                                                        |                        |   | 3,123              |        |                  |   | 3,336    |        |          |   | 6,067   |         |   |   | 5,363   |        
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|Income before extraordinary item and cumulative
effect of accounting change               |                        |   | 1,977              |        |                  |   | 1,029    |        |          |   | 4,423   |         |   |   | 285     |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $195     |                        |   |                   |        |                  |   |         |        |          |   |        |         |   |   | 315     |        
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|Income (loss) before cumulative effect of accounting
change                               |                        |   | 1,977              |        |                  |   | 1,029    |        |          |   | 4,423   |         |   |   | (30     | )      
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cumulative effect of accounting change, net of income
tax expense of $82                  |                        |   |                   |        |                  |   |         |        |          |   | 126     |         |   |   |        |        
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        
|Net income (loss)                                                                         |                        | $ | 1,977              |        |                  | $ | 1,029    |        |          | $ | 4,549   |         |   | $ | (30     | )      
|                                                                                          |                        |   |                    |        |                  |   |          |        |          |   |         |         |   |   |         |        

See accompanying notes to consolidated financial statements



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##### Table of Contents






CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |          |       |        |        |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------ | -------- | ----- | ------ | ------ | -
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       | Six Months Ended
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                 
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       | June 30,         |        | June 30,
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       | 2001             |        | 2000    
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Cash flows from operating activities:            |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income (loss)                                                                                                                                  |                                                                  | $                                         | 4,549                                     |       |                  | $      | (30      | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Extraordinary loss on early extinguishment of debt, net of taxes |                                           |                                           |      |                  |        |          | 315   |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Cumulative effect of accounting change                           |                                           |                                           | (126  | )                |        |          |      |       
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                 | Income before extraordinary item and cumulative effect of
accounting change                                                                        |                                                                  |                                           | 4,423                                     |       |                  |        | 285      |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile income before extraordinary item and cumulative
effect of accounting change to net cash provided by operating activities: |                                                                  |                                           |                                           |       |                  |        |          |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Depreciation and amortization                                    |                                           |                                           | 3,933 |                  |        |          | 3,646 |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Amortization of deferred financing fees                          |                                           |                                           | 713   |                  |        |          | 719   |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Unrealized
foreign exchange and derivative losses                |                                           |                                           | 2,398 |                  |        |          | 3,066 |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Deferred
realized derivative losses                              |                                           |                                           | (550  | )                |        |          |      |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    | Changes in operating assets and liabilities:                     |                                           |                                           |       |                  |        |          |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Receivables, net                          |                                           |       | (4,429           | )      |          |       | (224   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Inventories                               |                                           |       | 5,879            |        |          |       | (5,921 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Prepaid expenses and other current assets |                                           |       | 4,016            |        |          |       | (666   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Other assets                              |                                           |       | 1,724            |        |          |       | (541   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Accounts payable and accrued liabilities  |                                           |       | (14,116          | )      |          |       | (3,056 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Income taxes payable/prepaid              |                                           |       | 4,303            |        |          |       | 7,817  |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                    |                                                                  | Other long-term liabilities               |                                           |       | 229              |        |          |       | 288    |       
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                 |                                                                                                                                                    |                                                                  |                                           | Net cash provided by operating activities |       |                  | 8,523  |          |       |        | 5,413  |  
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Cash flows from investing activities:            |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchases of property and equipment                                                                                                                |                                                                  |                                           | (4,360                                    | )     |                  |        | (2,811   | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Other                                                                                                                                              |                                                                  |                                           | (123                                      | )     |                  |        | (282     | )    
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                 |                                                                                                                                                    |                                                                  |                                           | Net cash used in investing activities     |       |                  | (4,483 | )        |       |        | (3,093 | )
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Cash flows from financing activities:            |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Repurchase
of subordinated notes                                                                                                                   |                                                                  |                                           |                                          |       |                  |        | (10,597  | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayments under term loan facility                                                                                                                |                                                                  |                                           | (2,250                                    | )     |                  |        | (1,750   | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Net borrowings (repayments) under revolving credit facility                                                                                        |                                                                  |                                           | (2,100                                    | )     |                  |        | 6,400    |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Net proceeds from bank debt                                                                                                                        |                                                                  |                                           | 2,584                                     |       |                  |        | 2,965    |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Issuance of common stock                                                                                                                           |                                                                  |                                           | 33                                        |       |                  |        |         |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Net repurchase of common stock                                                                                                                     |                                                                  |                                           | (575                                      | )     |                  |        |         |      
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|                                                 |                                                                                                                                                    |                                                                  |                                           | Net cash used in financing activities     |       |                  | (2,308 | )        |       |        | (2,982 | )
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Effect of exchange rate changes on cash          |                                                                                                                                                    |                                                                  | 256                                       |                                           |       |                  | 776    |         
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Net increase in cash and cash equivalents        |                                                                                                                                                    |                                                                  | 1,988                                     |                                           |       |                  | 114    |         
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                                                                                                    |                                                                  | 5,838                                     |                                           |       |                  | 4,906  |         
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         
|Cash and cash equivalents at end of period       |                                                                                                                                                    | $                                                                | 7,826                                     |                                           |       | $                | 5,020  |         
|                                                 |                                                                                                                                                    |                                                                  |                                           |                                           |       |                  |        |         

See accompanying notes to consolidated financial statements



5



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##### Table of Contents






CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The unaudited interim consolidated financial statements of CDRJ
Investments (Lux) S.A. (the Parent) and subsidiaries as of and for the three
and six months ended June 30, 2001 and 2000 have been prepared in accordance with Article
10 of the Securities and Exchange Commissions Regulation S-X. In the opinion
of management, the accompanying unaudited interim financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary to
present fairly the Companys consolidated financial statements as of June 30,
2001 and for all the interim periods presented. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Parent, a Luxembourg société anonyme, Jafra Cosmetics International,
Inc., a Delaware corporation (JCI), Jafra Cosmetics International, S.A. de
C.V., a sociedad anonima de capital variableorganized 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.

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 year 2000 amounts 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 total amounts that have been reclassified as net sales are
$2,559,000 and $4,887,000 for the three and six months ended June 30, 2000,
respectively. Shipping and handling costs are included in selling, general and
administrative expenses.

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. In connection with the adoption of SFAS 133, at January 1, 2001,
the Company recorded a net gain of $126,000 (net of a tax effect of $82,000) as
a cumulative transition adjustment to earnings. This adjustment relates to
derivatives not designated as hedges prior to adoption of SFAS 133, and
represents the difference between the carrying value and the fair value of such
instruments at January 1, 2001 (See Note 9).

On June 29,
2001, the FASB voted to approve two new statements which were
issued in July 2001: SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires
business combinations entered into after June 30, 2001 to be accounted for
using the purchase method of accounting. Specifically identifiable intangible
assets acquired, other than goodwill, will be amortized over their estimated
useful economic life. SFAS No. 142 requires that goodwill not be amortized,
but should be tested for impairment at least annually. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entitys statement of financial
position at that date, regardless of when those assets were initially
recognized. The Company is evaluating the impact of the adoption of these
standards and has not yet determined the effect of adoption on its financial
position and results of operations.

(2) Inventories

Inventories consist of the following (in thousands):

|                           |  |          |        |              |  |   |        | 
|-------------------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                           |  | June 30, |        | December 31,
|                           |  | 2001     |        | 2000        
|                           |  |          |        |             
|Raw materials and supplies |  | $        | 5,992  |              |  | $ | 6,751  | 
|                          
|                          
|                          
|                          
|Finished goods             |  |          | 27,936 |              |  |   | 31,395 | 
|                           |  |          |        |              |  |   |        | 



6



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##### Table of Contents



CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                  |  |   |        |  |  |   |        | 
|----------------- |  | - | ------ |  |  | - | ------ | 
|Total inventories |  | $ | 33,928 |  |  | $ | 38,146 | 
|                  |  |   |        |  |  |   |        | 

(3) Property and Equipment

Property and equipment consist of the following (in thousands):

|                              |  |          |        |              |  |   |        | 
|----------------------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                              |  | June 30, |        | December 31,
|                              |  | 2001     |        | 2000        
|                              |  |          |        |             
|Land                          |  | $        | 17,972 |              |  | $ | 17,224 | 
|                             
|                             
|                             
|                             
|Buildings                     |  |          | 18,564 |              |  |   | 17,089 | 
|                             
|                             
|                             
|                             
|Machinery and equipment       |  |          | 29,587 |              |  |   | 25,438 | 
|                              |  |          |        |              |  |   |        | 
|                              |  |          | 66,123 |              |  |   | 59,751 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |          | 10,707 |              |  |   | 8,303  | 
|                              |  |          |        |              |  |   |        | 
|Property and equipment, net   |  | $        | 55,416 |              |  | $ | 51,448 | 
|                              |  |          |        |              |  |   |        | 

(4) Debt

During the six months ended June 30, 2000, the Company repurchased and
retired a portion of the 11.75% Subordinated Notes due 2008 (the Notes) of
JCI and Jafra S.A., with a par value of $6,500,000 and $4,300,000,
respectively. In connection with the repurchase of the Notes, the related
portion of the unamortized deferred financing costs of $733,000 was written off
and included in the determination of the extraordinary loss on early
extinguishment of debt. The repurchase of the Notes resulted in an
extraordinary loss of $315,000, which is net of an income tax benefit of
$195,000.

During the six months ended June 30, 2001, Jafra S. A. entered into
an unsecured bank loan agreement borrowing the peso equivalent of $1,744,000 at a
weighted average annual interest rate of 19.0%. Principal and interest
payments are due monthly through June 29, 2004. As of June 30, 2001, $581,000
of this loan is classified as short-term debt in the accompanying consolidated
balance sheet and the remainder is classified as long-term debt.

In June 2001, Jafra S.A. entered into a short-term note borrowing the peso
equivalent of $1,329,000 at an annual interest rate of 14.2%. As of June 30,
2001, the entire principal of this note is classified as short-term debt.

(5) Income Taxes

The actual income tax rate differs from the expected income tax rate
(computed by applying the U.S. federal corporate rate of 35% to income before
income taxes) for the three and six months ended June 30, 2001 principally as a
result of (i) a higher effective tax rate in the Mexico entity, Jafra S.A., due to
certain inflation-related income tax adjustments, and (ii) valuation allowances provided
against certain operating losses in South America and state income
taxes in the United States.

(6) Comprehensive Income (Loss)

Comprehensive income (loss) is summarized as follows (in thousands):

|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | Three Months Ended |        | Six Months Ended
|                                                                      |  | June 30,           |        | June 30,        
|                                                                      |  |                    |        |                 
|                                                                      |  | 2001               |        | 2000             |  | 2001 |        | 2000
|                                                                      |  |                    |        |                  |  |      |        |     
|Net income (loss)                                                     |  | $                  | 1,977  |                  |  | $    | 1,029  |      |  | $ | 4,549  |   |  | $ | (30    | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Unrealized
and deferred realized losses on derivatives                |  |                    | (2,830 | )                |  |      |       |      |  |   | (3,719 | ) |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Tax benefit on unrealized
and deferred realized losses on derivatives |  |                    | 1,109  |                  |  |      |       |      |  |   | 1,442  |   |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Foreign currency translation adjustment                               |  |                    | 2,838  |                  |  |      | (3,831 | )    |  |   | 2,757  |   |  |   | (2,403 | )
|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive income (loss)                                           |  | $                  | 3,094  |                  |  | $    | (2,802 | )    |  | $ | 5,029  |   |  | $ | (2,433 | )
|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  



7



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##### Table of Contents



CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(7) Financial Reporting for Business Segments

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 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 included in the Companys
audited consolidated financial statements as of and for the year ended December
31, 2000 included in the Companys Annual Report on Form 10-K. The Company
evaluates performance based on segment operating income, excluding
restructuring and impairment 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 for
purposes of this presentation. The effects of intersegment sales (net sales
and related gross profit) are excluded from the related captions below and from
the computation of segment operating income.

|                                                           |  |                |        |        |  |        |         |        |  |          |        |           |  |       |        |             |  |              |         |  |  |            |         |   |  |   |         | 
|---------------------------------------------------------- |  | -------------- | ------ | ------ |  | ------ | ------- | ------ |  | -------- | ------ | --------- |  | ----- | ------ | ----------- |  | ------------ | ------- |  |  | ---------- | ------- | - |  | - | ------- | 
|                                                           |  |                |        |        |  |        |         |        |  |          |        |           |  |       |        |             |  |              |         |  |  | Corporate, |         |   |  |  
|                                                           |  | United         |        |        |  |        |         |        |  |          |        | All       |  | Total |        | Unallocated |  | Consolidated
|                                                           |  | States         |        | Mexico |  | Europe |         | Others |  | Segments |        | and Other |  | Total
|                                                           |  |                |        |        |  |        |         |        |  |          |        |           |  |      
|                                                           |  | (in thousands)
|For the Three Months ended June 30, 2001
Net sales         |  | $              | 20,791 |        |  | $      | 63,666  |        |  | $        | 6,535  |           |  | $     | 5,668  |             |  | $            | 96,660  |  |  |            |        |   |  | $ | 96,660  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 3,186  |        |  |        | 18,069  |        |  |          | 358    |           |  |       | (1,617 | )           |  |              | 19,996  |  |  | $          | (6,898  | ) |  |   | 13,098  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 627    |        |  |        | 1,143   |        |  |          | 190    |           |  |       | 43     |             |  |              | 2,003   |  |  |            | 100     |   |  |   | 2,103   | 
|                                                          
|                                                          
|                                                          
|                                                          
|For the Three Months ended June 30, 2000
Net sales         |  | $              | 19,308 |        |  | $      | 47,986  |        |  | $        | 6,894  |           |  | $     | 5,234  |             |  | $            | 79,422  |  |  |            |        |   |  | $ | 79,422  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 2,827  |        |  |        | 15,111  |        |  |          | (323   | )         |  |       | (1,219 | )           |  |              | 16,396  |  |  | $          | (6,839  | ) |  |   | 9,557   | 
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 527    |        |  |        | 1,027   |        |  |          | 215    |           |  |       | 72     |             |  |              | 1,841   |  |  |            |        |   |  |   | 1,841   | 
|                                                          
|                                                          
|                                                          
|                                                          
|As of and for the Six Months ended June
30, 2001
Net sales |  | $              | 39,120 |        |  | $      | 120,269 |        |  | $        | 12,801 |           |  | $     | 11,386 |             |  | $            | 183,576 |  |  |            |        |   |  | $ | 183,576 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 3,977  |        |  |        | 35,053  |        |  |          | 449    |           |  |       | (3,188 | )           |  |              | 36,291  |  |  | $          | (12,023 | ) |  |   | 24,268  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 1,172  |        |  |        | 2,227   |        |  |          | 283    |           |  |       | 148    |             |  |              | 3,830   |  |  |            | 103     |   |  |   | 3,933   | 
|                                                          
|                                                          
|                                                          
|                                                          
|Capital expenditures                                       |  |                | 3,276  |        |  |        | 935     |        |  |          | 78     |           |  |       | 71     |             |  |              | 4,360   |  |  |            |        |   |  |   | 4,360   | 
|                                                          
|                                                          
|                                                          
|                                                          
|Segment assets                                             |  |                | 70,002 |        |  |        | 179,902 |        |  |          | 17,100 |           |  |       | 14,067 |             |  |              | 281,071 |  |  |            | (674    | ) |  |   | 280,397 | 
|                                                          
|                                                          
|                                                          
|                                                          
|As of and for the Six Months ended June
30, 2000
Net sales |  | $              | 37,033 |        |  | $      | 93,546  |        |  | $        | 13,538 |           |  | $     | 9,349  |             |  | $            | 153,466 |  |  |            |        |   |  | $ | 153,466 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 2,653  |        |  |        | 29,320  |        |  |          | (769   | )         |  |       | (2,212 | )           |  |              | 28,992  |  |  | $          | (11,206 | ) |  |   | 17,786  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 1,007  |        |  |        | 2,090   |        |  |          | 404    |           |  |       | 141    |             |  |              | 3,642   |  |  |            | 4       |   |  |   | 3,646   | 
|                                                          
|                                                          
|                                                          
|                                                          
|Capital expenditures                                       |  |                | 2,129  |        |  |        | 262     |        |  |          | 139    |           |  |       | 281    |             |  |              | 2,811   |  |  |            |        |   |  |   | 2,811   | 
|                                                          
|                                                          
|                                                          
|                                                          
|Segment assets                                             |  |                | 69,289 |        |  |        | 175,292 |        |  |          | 17,442 |           |  |       | 11,306 |             |  |              | 273,329 |  |  |            | 148     |   |  |   | 273,477 | 

(8) Restructuring Charges and Related Accruals

At December 31, 2000, restructuring liabilities of approximately $0.7
million were reflected on the Companys consolidated balance sheet. During the
three and six months ended June 30, 2001, payments of approximately $0.2
million and $0.5 million have been charged against this accrual, respectively.
As of June 30, 2001, the remaining restructuring liability was $0.2 million.

(9) Foreign Currency Forward Contracts

The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures at Jafra S.A. As part of its overall strategy
to reduce the risk of adverse exchange rate fluctuations in Mexico,
the Company



8



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##### Table of Contents



CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

enters into foreign currency exchange contracts (forward contracts). The
Company places forward contracts based on its forecasted U.S. dollar cash
outflows from Jafra S.A. over a rolling 12 month period and does
not hedge transactions that are not included in the 12 month
forecast on the date the forward contract is initiated. As a matter of policy, the
Company does not hold or issue forward contracts for trading or speculative
purposes nor does it enter into contracts or agreements containing embedded
derivative features.

The forward contracts 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 loss in the statements of operations
for the three and six months ended June 30, 2000. Under SFAS 133, such
mark-to-market accounting treatment continues to be applied to certain of the
Companys forward contracts. However, under SFAS 133, the Companys use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Gains and losses from such derivative instruments arising
subsequent to January 1, 2001 are deferred as a separate component of other
comprehensive income, and are recognized in income at the same time that the
underlying hedged exposure is recognized in income. This accounting treatment
results in the matching of gains and losses from such forward contracts with
the corresponding gains and losses generated by the underlying hedged
transactions.

The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases,
forecasted U.S. dollar denominated intercompany charges from JCI to Jafra S.A.,
forecasted management fee charges from JCI to Jafra S.A., and U.S. dollar
denominated interest payments. On the date the Company enters into a
derivative contract, management designates the derivative as a hedge of the
identified exposure. The Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedge transactions. In this
documentation, the Company specifically identifies the forecasted transaction
that has been designated as a hedged item and states how the hedging instrument
is expected to hedge the risks related to the hedged item. The Company
formally measures effectiveness of its hedging relationships both at the hedge
inception and on an ongoing basis in accordance with its risk management
policy. For all qualifying and highly effective cash flow hedges, the changes
in the fair value of the derivative are deferred as a component of other
comprehensive income. Such amounts will be reclassified from other
comprehensive income into net income when the underlying hedged exposure is
recognized in income. For U.S. dollar denominated inventory purchases, this
will occur upon sale to an outside party of the related inventory. For
intercompany charges and interest, this will occur at the date such charges are
recorded by Jafra S.A.

During the three months ended June 30, 2000, the Company recognized gains
on forward contracts of approximately $3,400,000 and for the six months ended
June 30, 2000, the Company recognized losses on forward contracts of
approximately $2,100,000 as a component of exchange loss in the accompanying
consolidated statement of operations. During the three and six months ended
June 30, 2001, the Company recognized approximately $6,200,000 and $9,600,000
of losses as a component of exchange loss on forward contracts that did not
qualify for hedge accounting under SFAS 133. Additionally, during the six
months ended June 30, 2001, the Company deferred $4,027,000 of unrealized
losses on forward contracts that qualify for hedge accounting under SFAS 133.
Of this amount, approximately $308,000 was reclassified to earnings upon
recognition of the underlying hedged exposure prior to June 30, 2001. The
Company expects that substantially all of the remaining $3,719,000 deferred as
a component of other comprehensive income at June 30, 2001 will be reclassified
into net income within the next twelve months.

During the six months ended June 30, 2001, the ineffectiveness generated
by the Companys forward contracts designated as hedges was insignificant.
Certain hedged forecasted transactions do not appear probable of occurring due
to timing differences between the original and current forecasts, and
accordingly $500,000 of losses were reclassified into earnings.

The outstanding foreign currency forward contracts at June 30, 2001 had a
notional value of $93,742,000 and mature at various dates extending to June
2002. 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 table below describes the forward
contracts that were outstanding at June 30, 2001 (in thousands):



9



---



##### Table of Contents



CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|------------------------------- |  | ------------- | ------ | -------- |  | -------- | -------- | -------- |  | -------- | ----- |  |  | - | ------ | 
|                                |  |               |        |          |  |          |          |          |  | Weighted |       |  |  |  
|                                |  | Forward       |        |          |  |          |          | Average  |  |          |       | 
|                                |  | Position in   |        | Maturity |  | Contract |          | Fair    
|Foreign Currency                |  | US Dollars(1) |        | Date     |  | Rate     |          | Value(1)
|                                |  |               |        |          |  |          |          |         
|Buy US Dollar/sell Mexican Peso |  | $             | 9,154  |          |  |          | 7/31/01  |          |  |          | 10.38 |  |  | $ | 7,861  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 11,816 |          |  |          | 8/31/01  |          |  |          | 10.32 |  |  |   | 10,326 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 12,125 |          |  |          | 9/28/01  |          |  |          | 10.39 |  |  |   | 10,600 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,336  |          |  |          | 10/30/01 |          |  |          | 10.70 |  |  |   | 1,987  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 10,275 |          |  |          | 10/31/01 |          |  |          | 10.71 |  |  |   | 8,737  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 6,806  |          |  |          | 11/30/01 |          |  |          | 10.24 |  |  |   | 6,175  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,110  |          |  |          | 12/27/01 |          |  |          | 10.71 |  |  |   | 3,565  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 3,761  |          |  |          | 12/31/01 |          |  |          | 10.90 |  |  |   | 3,188  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 7,643  |          |  |          | 1/31/02  |          |  |          | 10.30 |  |  |   | 7,011  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,989  |          |  |          | 2/28/02  |          |  |          | 10.38 |  |  |   | 4,576  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 9,023  |          |  |          | 3/27/02  |          |  |          | 10.46 |  |  |   | 8,278  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,764  |          |  |          | 4/30/02  |          |  |          | 10.29 |  |  |   | 4,494  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,114  |          |  |          | 5/31/02  |          |  |          | 9.97  |  |  |   | 4,035  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,826  |          |  |          | 6/28/02  |          |  |          | 9.91  |  |  |   | 2,806  | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|                                |  | $             | 93,742 |          |  |          |          |          |  |          |       |  |  | $ | 83,639 | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 



---

|(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 $10,103,000 at June 30, 2001, represents the fair value of the
forward contracts, and has been recorded in accrued liabilities in the
accompanying consolidated balance sheet as of June 30, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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##### Table of Contents









JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

|                                     |                                                                                                 |                            |        |         |          |         |              |         |        |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | -------- | ------- | ------------ | ------- | ------ | ------- | 
|                                     |                                                                                                 |                            |        |         | June 30, |         | December 31,
|                                     |                                                                                                 |                            |        |         | 2001     |         | 2000        
|                                     |                                                                                                 |                            |        |         |          |         |             
|                                    
|                                    
|                                    
|                                    
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                 |                            |        |         |          |         |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                       |                            | $      | 3,045   |          |         | $            | 3,382   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Receivables, less allowances for doubtful accounts of
$470 in 2001 and $536 in 2000             |                            |        | 7,106   |          |         |              | 6,730   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                                     |                            |        | 9,052   |          |         |              | 9,455   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Receivables from affiliates                                                                     |                            |        | 15,971  |          |         |              | 5,078   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaids and other current assets                                                               |                            |        | 2,764   |          |         |              | 2,398   |       
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 | Total current assets       |        |         | 37,938   |         |              |         | 27,043 |        
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                                                                                 |                            | 22,564 |         |          |         | 20,144       |        
|                                    
|                                    
|                                    
|                                    
|Other assets:                        |                                                                                                 |                            |        |         |          |         |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net of accumulated amortization of $3,230 in 2001
and $2,868 in 2000                  |                            |        | 38,470  |          |         |              | 39,542  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Notes receivable from affiliates                                                                |                            |        | 11,196  |          |         |              | 27,182  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred financing fees, net of accumulated
amortization of $2,185 in 2001 and $1,871 in 2000   |                            |        | 3,318   |          |         |              | 3,632   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other                                                                                           |                            |        | 3,148   |          |         |              | 3,599   |       
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 |                            | Total  |         | $        | 116,634 |              |         | $      | 121,142 | 
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                    
|                                    
|                                    
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                 |                            |        |         |          |         |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                                               |                            | $      | 2,750   |          |         | $            | 2,500   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                |                            |        | 4,806   |          |         |              | 6,552   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                                             |                            |        | 12,906  |          |         |              | 11,988  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Income taxes payable                                                                            |                            |        | 858     |          |         |              | 393     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                                           |                            |        | 343     |          |         |              | 343     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Payables to affiliates                                                                          |                            |        | 3,268   |          |         |              | 2,305   |       
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 | Total current liabilities  |        |         | 24,931   |         |              |         | 24,081 |        
|                                    
|                                    
|                                    
|                                    
|Long-term debt                       |                                                                                                 |                            | 63,008 |         |          |         | 68,608       |        
|                                    
|                                    
|                                    
|                                    
|Deferred income taxes                |                                                                                                 |                            | 548    |         |          |         | 548          |        
|                                    
|                                    
|                                    
|                                    
|Other long-term liabilities          |                                                                                                 |                            | 2,595  |         |          |         | 2,367        |        
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 | Total liabilities          |        |         | 91,082   |         |              |         | 95,604 |        
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|Commitments and contingencies        |                                                                                                 |                            |       |         |          |         |             |        
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                                                                                 |                            |        |         |          |         |              |        
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, par value $.01; authorized, issued
and outstanding, 1,000 shares in 2001 and 2000 |                            |        |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                      |                            |        | 39,649  |          |         |              | 39,649  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Retained deficit                                                                                |                            |        | (10,529 | )        |         |              | (11,888 | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                                            |                            |        | (3,568  | )        |         |              | (2,223  | )     
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 | Total stockholders equity |        |         | 25,552   |         |              |         | 25,538 |        
|                                     |                                                                                                 |                            |        |         |          |         |              |        
|                                     |                                                                                                 |                            | Total  |         | $        | 116,634 |              |         | $      | 121,142 | 
|                                     |                                                                                                 |                            |        |         |          |         |              |        

See accompanying notes to consolidated financial statements



11



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##### Table of Contents






JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ------ | ---------------- | - | -------- | ------ | -------- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                      |                                     |   | Three Months Ended |        | Six Months Ended
|                                                                                      |                                     |   |                    |        |                 
|                                                                                      |                                     |   | June 30,           |        | June 30,         |   | June 30, |        | June 30,
|                                                                                      |                                     |   | 2001               |        | 2000             |   | 2001     |        | 2000    
|                                                                                      |                                     |   |                    |        |                  |   |          |        |         
|Net sales                                                                             |                                     | $ | 31,914             |        |                  | $ | 29,369   |        |          | $ | 59,863 |        |   | $ | 57,459 |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cost of sales                                                                         |                                     |   | 9,421              |        |                  |   | 8,442    |        |          |   | 17,359 |        |   |   | 17,276 |       
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|                                                                                      | Gross profit                        |   |                    | 22,493 |                  |   |          | 20,927 |          |   |        | 42,504 |   |   |        | 40,183 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Selling, general and administrative expenses                                          |                                     |   | 25,531             |        |                  |   | 23,317   |        |          |   | 49,792 |        |   |   | 47,634 |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Management fee income from affiliates                                                 |                                     |   | (2,182             | )      |                  |   | (1,600   | )      |          |   | (4,436 | )      |   |   | (3,372 | )     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Restructuring and impairment charges                                                  |                                     |   |                   |        |                  |   | 1,108    |        |          |   |       |        |   |   | 1,108  |       
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|                                                                                      | Loss from operations                |   |                    | (856   | )                |   |          | (1,898 | )        |   |        | (2,852 | ) |   |        | (5,187 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Other income (expense):                                                               |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Royalty
income from affiliates, net |   |                    | 5,281  |                  |   |          | 3,449  |          |   |        | 9,973  |   |   |        | 6,732  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Exchange
loss, net                  |   |                    | (203   | )                |   |          | (9     | )        |   |        | (3     | ) |   |        | (96    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Interest, net                       |   |                    | (1,714 | )                |   |          | (1,902 | )        |   |        | (3,450 | ) |   |        | (3,679 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Other, net                          |   |                    | (322   | )                |   |          | (139   | )        |   |        | (416   | ) |   |        | (32    | )
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|Income (loss) before income taxes and extraordinary item                              |                                     |   | 2,186              |        |                  |   | (499     | )      |          |   | 3,252  |        |   |   | (2,262 | )     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Income tax expense                                                                    |                                     |   | 1,219              |        |                  |   | 776      |        |          |   | 1,893  |        |   |   | 920    |       
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|Income (loss) before extraordinary item                                               |                                     |   | 967                |        |                  |   | (1,275   | )      |          |   | 1,359  |        |   |   | (3,182 | )     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $120 |                                     |   |                   |        |                  |   |         |        |          |   |       |        |   |   | 205    |       
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       
|Net income (loss)                                                                     |                                     | $ | 967                |        |                  | $ | (1,275   | )      |          | $ | 1,359  |        |   | $ | (3,387 | )     
|                                                                                      |                                     |   |                    |        |                  |   |          |        |          |   |        |        |   |   |        |       

See accompanying notes to consolidated financial statements



12



---



##### Table of Contents






JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |          |       |        |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------ | -------- | ----- | ------ | ------ | -
|                                                     |                                                                                                            |                                              |                                           |                                           |       | Six Months Ended
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                 
|                                                     |                                                                                                            |                                              |                                           |                                           |       | June 30,         |        | June 30,
|                                                     |                                                                                                            |                                              |                                           |                                           |       | 2001             |        | 2000    
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Cash flows from operating activities:                |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                                          |                                              | $                                         | 1,359                                     |       |                  | $      | (3,387   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Extraordinary loss on early extinguishment of debt, net of taxes                                           |                                              |                                           |                                          |       |                  |        | 205      |      
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                     | Income (loss) before extraordinary item                                                                    |                                              |                                           | 1,359                                     |       |                  |        | (3,182   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile income (loss) before extraordinary item
to net cash used in operating activities: |                                              |                                           |                                           |       |                  |        |          |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            | Depreciation and amortization                |                                           |                                           | 1,427 |                  |        |          | 1,399 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            | Amortization of deferred financing fees      |                                           |                                           | 314   |                  |        |          | 319   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            | Asset impairment charge                      |                                           |                                           |      |                  |        |          | 290   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            | Unrealized foreign exchange loss             |                                           |                                           | 58    |                  |        |          | 81    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            | Changes in operating assets and liabilities: |                                           |                                           |       |                  |        |          |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Receivables, net                          |                                           |       | (376             | )      |          |       | 2,127  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Inventories                               |                                           |       | 403              |        |          |       | (611   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Prepaid
expenses and other current assets |                                           |       | (366             | )      |          |       | (850   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Intercompany receivables and payables     |                                           |       | (9,930           | )      |          |       | (5,277 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Other assets                              |                                           |       | 566              |        |          |       | 365    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Accounts payable and accrued liabilities  |                                           |       | (828             | )      |          |       | (1,966 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Income taxes payable                      |                                           |       | 465              |        |          |       | 587    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                            |                                              | Other long-term liabilities               |                                           |       | 228              |        |          |       | (624   | )     
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                     |                                                                                                            |                                              |                                           | Net cash used in operating activities     |       |                  | (6,680 | )        |       |        | (7,342 | )
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Cash flows from investing activities:                |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                                        |                                              |                                           | (3,354                                    | )     |                  |        | (2,267   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other                                                                                                      |                                              |                                           | (123                                      | )     |                  |        | (282     | )    
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                     |                                                                                                            |                                              |                                           | Net cash used in investing activities     |       |                  | (3,477 | )        |       |        | (2,549 | )
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Cash flows from financing activities:                |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase
of subordinated notes                                                                           |                                              |                                           |                                          |       |                  |        | (6,358   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments under term loan facility                                                                        |                                              |                                           | (1,250                                    | )     |                  |        | (1,000   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net borrowings (repayments) under revolving credit facility                                                |                                              |                                           | (4,100                                    | )     |                  |        | 6,900    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Transactions with affiliates                                                                               |                                              |                                           | 15,986                                    |       |                  |        | 10,109   |      
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|                                                     |                                                                                                            |                                              |                                           | Net cash provided by financing activities |       |                  | 10,636 |          |       |        | 9,651  |  
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Effect of exchange rate changes on cash              |                                                                                                            |                                              | (816                                      | )                                         |       |                  | 581    |         
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Net (decrease) increase in cash and cash equivalents |                                                                                                            |                                              | (337                                      | )                                         |       |                  | 341    |         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                            |                                              | 3,382                                     |                                           |       |                  | 3,026  |         
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         
|Cash and cash equivalents at end of period           |                                                                                                            | $                                            | 3,045                                     |                                           |       | $                | 3,367  |         
|                                                     |                                                                                                            |                                              |                                           |                                           |       |                  |        |         

See accompanying notes to consolidated financial statements



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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

Jafra Cosmetics International, Inc., a Delaware corporation (JCI) is an
indirect wholly owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg
société 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). JCI and its subsidiaries (collectively, the Company)
have operations in the United States, Austria, Germany, Italy, the Netherlands,
Switzerland, the Dominican Republic, and Thailand.

The accompanying unaudited interim consolidated financial statements as of
and for the three and six months ended June 30, 2001 and 2000 reflect the
operations of the Company and have been prepared in accordance with Article 10
of the Securities and Exchange Commissions Regulation S-X. In the opinion of
management, the accompanying unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly JCIs consolidated financial statements as of June 30, 2001 and for all
the interim periods presented. All significant intercompany accounts and
transactions between entities comprising the Company have been eliminated in
consolidation.

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). 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 of the other under
the Notes 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 in its Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001.

The functional currency of certain of the Company's
subsidiaries consists of currencies other than the U.S. dollar. 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 (loss).

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 year 2000 amounts 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 total amount that has been reclassified as net sales is
$1,245,000 and $2,346,000 for the three and six months ended June 30,
2000. Shipping and handling costs are included in selling, general and
administrative expenses.

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 adoption of SFAS 133 did not have a material impact on the
Companys consolidated financial statements.

On June 29,
2001, the FASB voted to approve two new statements which were
issued in July 2001: SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires business combinations entered into after June 30, 2001 to be accounted
for using the purchase method of accounting. Specifically identifiable
intangible assets acquired, other than goodwill, will be amortized over their
estimated useful economic life. SFAS No. 142 requires that goodwill not be
amortized, but should be tested for impairment at least annually. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entitys statement of financial
position at that date, regardless of when those assets were initially
recognized. The Company is evaluating the impact of the adoption of these
standards and has not yet determined the effect of adoption on its financial
position and results of operations.



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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(2) Inventories

Inventories consist of the following (in thousands):

|                           |  |          |       |              |  |   |       | 
|-------------------------- |  | -------- | ----- | ------------ |  | - | ----- | 
|                           |  | June 30, |       | December 31,
|                           |  | 2001     |       | 2000        
|                           |  |          |       |             
|Raw materials and supplies |  |          |      |              |  | $ | 44    | 
|                          
|                          
|                          
|                          
|Finished goods             |  | $        | 9,052 |              |  |   | 9,411 | 
|                           |  |          |       |              |  |   |       | 
|Total inventories          |  | $        | 9,052 |              |  | $ | 9,455 | 
|                           |  |          |       |              |  |   |       | 

(3) Property and Equipment

Property and equipment consist of the following (in thousands):

|                              |  |          |        |              |  |   |        | 
|----------------------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                              |  | June 30, |        | December 31,
|                              |  | 2001     |        | 2000        
|                              |  |          |        |             
|Land                          |  | $        | 6,188  |              |  | $ | 6,188  | 
|                             
|                             
|                             
|                             
|Buildings                     |  |          | 6,721  |              |  |   | 5,998  | 
|                             
|                             
|                             
|                             
|Machinery and equipment       |  |          | 14,656 |              |  |   | 11,997 | 
|                              |  |          |        |              |  |   |        | 
|                              |  |          | 27,565 |              |  |   | 24,183 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |          | 5,001  |              |  |   | 4,039  | 
|                              |  |          |        |              |  |   |        | 
|Property and equipment, net   |  | $        | 22,564 |              |  | $ | 20,144 | 
|                              |  |          |        |              |  |   |        | 

(4) Debt

During the six months ended June 30, 2000, JCI repurchased and retired a
portion of the 11.75% Subordinated Notes due 2008 (the
Notes) with a par
value of $6,500,000. In connection with the repurchase of the Notes, the
related portion of the unamortized deferred financing costs of $459,000 was
written off and included in the determination of the extraordinary loss on
early extinguishment of debt. The repurchase of the Notes resulted in an
extraordinary loss of $205,000, which is net of an income tax benefit of
$120,000.

(5) Income Taxes

The actual income tax rate differs from the expected income tax rate
(computed by applying the U.S. federal corporate rate of 35% to income before
income taxes) for the three and six months ended June 30, 2001 principally as a
result of valuation allowances provided against certain operating losses in
Europe and state income taxes in the United States.

(6) Comprehensive Income (Loss)

Comprehensive income (loss) is summarized as follows (in thousands):

|                                        |  |                    |      |                  |  |      |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------ | ---- | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three Months Ended |      | Six Months Ended
|                                        |  | June 30,           |      | June 30,        
|                                        |  |                    |      |                 
|                                        |  | 2001               |      | 2000             |  | 2001 |        | 2000
|                                        |  |                    |      |                  |  |      |        |     
|Net income (loss)                       |  | $                  | 967  |                  |  | $    | (1,275 | )    |  | $ | 1,359  |   |  | $ | (3,387 | )
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |                    | (440 | )                |  |      | (172   | )    |  |   | (1,345 | ) |  |   | 36     |  
|                                        |  |                    |      |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive income (loss)             |  | $                  | 527  |                  |  | $    | (1,447 | )    |  | $ | 14     |   |  | $ | (3,351 | )
|                                        |  |                    |      |                  |  |      |        |      |  |   |        |   |  |   |        |  

(7) 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 $3,677,000 and $6,181,000 for the three and six months ended June
30, 2001, respectively, and $2,989,000 and $6,763,000 for the three and six months ended June
30, 2000, respectively. These sales were made at cost plus a markup ranging
from 0 to 11%.



15



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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 upon charges identified to specific Affiliates and 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 $2,182,000 and $4,436,000 for
the three and six months ended June 30, 2001, respectively, and $1,600,000 and $3,372,000 for
the three and six months ended June 30, 2000, respectively.

Beginning in 2000, the Company has been 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 was $449,000 and
$851,000 for the three and six months ended June 30, 2001, respectively, and $290,000 and
$559,000 for the three and six months ended June 30, 2000, respectively, 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. The
royalty fees charged by the Company to Jafra S.A. were $5,730,000 and
$10,824,000, for the three and six months ended June 30, 2001, respectively, and $3,739,000
and $7,291,000 for the three and six months ended June 30, 2000, respectively,
and are based upon a percentage of Jafra S.A.s sales.

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 at December 31, 2000 consists primarily of amounts owed by Jafra
S.A. as a result of Jafra S.A.s purchase of U.S. and German trademarks from
the Company in December 1999, and amounts billed to Jafra S.A. in connection
with the Jafra Way royalty. At June 30, 2001, notes receivable from Affiliates
consists primarily of loans the Company has made to indirect subsidiaries of
the Parent to fund certain of the Parents operations in South America. Net
interest income from Affiliates, primarily Jafra S.A., was $176,000 and
$465,000 for the three and six months ended June 30, 2001 and $631,000 and
$1,279,000 for the three and six months ended June 30, 2000, respectively.

(8) Financial Reporting for Business Segments

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 included in the Companys
audited consolidated financial statements as of and for the year ended December
31, 2000 included in the Parents Annual Report on Form 10-K. The Company
evaluates performance based on segment operating income, excluding
restructuring and impairment 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 for
purposes of this presentation. The effects of intersegment sales (net sales
and related gross profit) are excluded from the computation of segment
operating income. Sales and gross profit related to Affiliates (primarily in
Mexico and South America) is included in the following table under the caption
Corporate, Unallocated and Other. Segment assets exclude notes and accounts
receivable from Affiliates.



16



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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                                                           |  |                |        |        |  |        |        |          |  |           |       |             |  |              |        |  |  |            |        |   |  |   |        |  
|---------------------------------------------------------- |  | -------------- | ------ | ------ |  | ------ | ------ | -------- |  | --------- | ----- | ----------- |  | ------------ | ------ |  |  | ---------- | ------ | - |  | - | ------ | -
|                                                           |  |                |        |        |  |        |        |          |  |           |       |             |  |              |        |  |  | Corporate, |        |   |  |  
|                                                           |  | United         |        |        |  |        |        | All      |  | Total     |       | Unallocated |  | Consolidated
|                                                           |  | States         |        | Europe |  | Others |        | Segments |  | And Other |       | Total      
|                                                           |  |                |        |        |  |        |        |          |  |           |       |            
|                                                           |  | (in thousands)
|For the Three Months ended June 30, 2001
Net sales         |  | $              | 20,791 |        |  | $      | 6,535  |          |  | $         | 911   |             |  | $            | 28,237 |  |  | $          | 3,677  |   |  | $ | 31,914 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 3,186  |        |  |        | 358    |          |  |           | (471  | )           |  |              | 3,073  |  |  |            | (3,929 | ) |  |   | (856   | )
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 627    |        |  |        | 187    |          |  |           | (38   | )           |  |              | 776    |  |  |            |       |   |  |   | 776    |  
|                                                          
|                                                          
|                                                          
|                                                          
|For the Three Months ended June 30, 2000
Net sales         |  | $              | 19,308 |        |  | $      | 6,846  |          |  |           | 226   |             |  | $            | 26,380 |  |  | $          | 2,989  |   |  | $ | 29,369 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 2,827  |        |  |        | (1,217 | )        |  |           | (232  | )           |  |              | 1,378  |  |  |            | (3,276 | ) |  |   | (1,898 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 527    |        |  |        | 211    |          |  |           |      |             |  |              | 738    |  |  |            |       |   |  |   | 738    |  
|                                                          
|                                                          
|                                                          
|                                                          
|As of and for the Six Months ended June 30,
2001
Net sales |  | $              | 39,120 |        |  | $      | 12,766 |          |  | $         | 1,796 |             |  | $            | 53,682 |  |  | $          | 6,181  |   |  | $ | 59,863 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 3,977  |        |  |        | 448    |          |  |           | (793  | )           |  |              | 3,632  |  |  |            | (6,484 | ) |  |   | (2,852 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 1,172  |        |  |        | 277    |          |  |           | (22   | )           |  |              | 1,427  |  |  |            |       |   |  |   | 1,427  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Capital expenditures                                       |  |                | 3,276  |        |  |        | 78     |          |  |           |      |             |  |              | 3,354  |  |  |            |       |   |  |   | 3,354  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Segment assets                                             |  |                | 70,002 |        |  |        | 16,738 |          |  |           | 2,727 |             |  |              | 89,467 |  |  |            |       |   |  |   | 89,467 |  
|                                                          
|                                                          
|                                                          
|                                                          
|As of and for the Six Months ended June 30,
2000
Net sales |  | $              | 37,033 |        |  | $      | 13,437 |          |  | $         | 226   |             |  | $            | 50,696 |  |  | $          | 6,763  |   |  | $ | 57,459 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Operating profit (loss)                                    |  |                | 2,653  |        |  |        | (1,513 | )        |  |           | (301  | )           |  |              | 839    |  |  |            | (6,026 | ) |  |   | (5,187 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and amortization                              |  |                | 1,007  |        |  |        | 392    |          |  |           |      |             |  |              | 1,399  |  |  |            |       |   |  |   | 1,399  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Capital expenditures                                       |  |                | 2,129  |        |  |        | 138    |          |  |           |      |             |  |              | 2,267  |  |  |            |       |   |  |   | 2,267  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Segment assets                                             |  |                | 69,289 |        |  |        | 17,028 |          |  |           | 910   |             |  |              | 87,227 |  |  |            |       |   |  |   | 87,227 |  

(9) Restructuring Charges and Related Accruals

At December 31, 2000, restructuring liabilities of approximately $0.5
million were reflected on the Companys consolidated balance sheet. During the
three and six months ended June 30, payments of approximately $0.1 million and
$0.3 million have been charged against this accrual, respectively. As of June
30, 2001, the remaining restructuring liability was $0.2 million.



17



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##### Table of Contents









JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

|                                     |                                                                                                      |                            |        |          |         |              |        |        |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------- | -------------------------- | ------ | -------- | ------- | ------------ | ------ | ------ | ------- | 
|                                     |                                                                                                      |                            |        | June 30, |         | December 31,
|                                     |                                                                                                      |                            |        | 2001     |         | 2000        
|                                     |                                                                                                      |                            |        |          |         |             
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                      |                            |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                            |                            | $      | 3,064    |         |              | $      | 561    |        
|                                    
|                                    
|                                    
|                                    
|                                     | Receivables, less allowances for doubtful accounts of
$2,252 in 2001 and $2,117 in 2000              |                            |        | 31,807   |         |              |        | 26,712 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                                          |                            |        | 21,625   |         |              |        | 25,149 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Receivables from affiliates                                                                          |                            |        | 5,293    |         |              |        | 4,679  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid income taxes                                                                                 |                            |        |         |         |              |        | 1,846  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses                                                                                     |                            |        | 2,291    |         |              |        | 1,948  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Value-added tax receivables                                                                          |                            |        | 702      |         |              |        | 5,146  |        
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total current assets       |        |          | 64,782  |              |        |        | 66,041  | 
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                                                                                      |                            | 32,079 |          |         |              | 30,402 |       
|                                    
|                                    
|                                    
|                                    
|Other assets:                        |                                                                                                      |                            |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net of accumulated amortization of $2,750 in 2001
and $2,154 in 2000                       |                            |        | 33,238   |         |              |        | 31,550 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Trademarks, net of accumulated amortization of $3,345 in 2001
and $2,475 in 2000                     |                            |        | 51,707   |         |              |        | 49,082 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred financing fees, net of accumulated
amortization of $2,687 in 2001 and $2,127 in 2000        |                            |        | 1,701    |         |              |        | 1,983  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other                                                                                                |                            |        | 1,687    |         |              |        | 2,707  |        
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total                      |        | $        | 185,194 |              |        | $      | 181,765 | 
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                      |                            |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term debt, including current portion of long-term debt                                         |                            | $      | 4,160    |         |              | $      | 2,346  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                     |                            |        | 14,074   |         |              |        | 20,266 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                                                  |                            |        | 25,799   |         |              |        | 20,735 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Income taxes payable                                                                                 |                            |        | 685      |         |              |        |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Payables to affiliates                                                                               |                            |        | 12,574   |         |              |        | 2,140  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                                                |                            |        | 5,357    |         |              |        | 5,048  |        
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total current liabilities  |        |          | 62,649  |              |        |        | 50,535  | 
|                                    
|                                    
|                                    
|                                    
|Long-term debt                       |                                                                                                      |                            | 37,342 |          |         |              | 35,572 |       
|                                    
|                                    
|                                    
|                                    
|Deferred income taxes                |                                                                                                      |                            | 16,876 |          |         |              | 15,809 |       
|                                    
|                                    
|                                    
|                                    
|Notes payable to affiliates          |                                                                                                      |                            |       |          |         |              | 20,093 |       
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total liabilities          |        |          | 116,867 |              |        |        | 122,009 | 
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|Commitments and contingencies        |                                                                                                      |                            |       |          |         |              |       |       
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                                                                                      |                            |        |          |         |              |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Series B common stock, no par value; authorized, issued
and outstanding, 151 shares in 2001 and 2000 |                            |        |         |         |              |        |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                           |                            |        | 34,184   |         |              |        | 34,184 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                                    |                            |        | 33,626   |         |              |        | 27,030 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated
other comprehensive (loss) income                                                        |                            |        | 517      |         |              |        | (1,458 | )      
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total stockholders equity |        |          | 68,327  |              |        |        | 59,756  | 
|                                     |                                                                                                      |                            |        |          |         |              |        |       
|                                     |                                                                                                      | Total                      |        | $        | 185,194 |              |        | $      | 181,765 | 
|                                     |                                                                                                      |                            |        |          |         |              |        |       

See accompanying notes to consolidated financial statements



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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |        |  
|------------------------------------------------------------------------------------ | ---------------------------------- | - | ------------------ | ------ | ---------------- | - | -------- | ------ | -------- | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                                     |                                    |   | Three Months Ended |        | Six Months Ended
|                                                                                     |                                    |   |                    |        |                 
|                                                                                     |                                    |   | June 30,           |        | June 30,         |   | June 30, |        | June 30,
|                                                                                     |                                    |   | 2001               |        | 2000             |   | 2001     |        | 2000    
|                                                                                     |                                    |   |                    |        |                  |   |          |        |         
|Net sales                                                                            |                                    | $ | 66,954             |        |                  | $ | 50,191   |        |          | $ | 126,290 |        |   | $ | 97,952 |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of sales                                                                        |                                    |   | 18,285             |        |                  |   | 12,908   |        |          |   | 34,242  |        |   |   | 25,025 |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|                                                                                     | Gross profit                       |   |                    | 48,669 |                  |   |          | 37,283 |          |   |         | 92,048 |   |   |        | 72,927 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general and administrative expenses                                         |                                    |   | 30,792             |        |                  |   | 22,894   |        |          |   | 57,515  |        |   |   | 44,118 |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Management fee expense from affiliates                                               |                                    |   | 2,197              |        |                  |   | 1,600    |        |          |   | 4,437   |        |   |   | 3,345  |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|                                                                                     | Income from operations             |   |                    | 15,680 |                  |   |          | 12,789 |          |   |         | 30,096 |   |   |        | 25,464 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other income (expense):                                                              |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Royalty
expense to affiliates, net |   |                    | (5,281 | )                |   |          | (3,449 | )        |   |         | (9,973 | ) |   |        | (6,732 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Exchange
loss, net                 |   |                    | (4,084 | )                |   |          | (1,673 | )        |   |         | (6,242 | ) |   |        | (5,269 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Interest, net                      |   |                    | (1,541 | )                |   |          | (2,055 | )        |   |         | (3,224 | ) |   |        | (4,233 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Other, net                         |   |                    | (95    | )                |   |          | 706    |          |   |         | (89    | ) |   |        | 1,246  |  
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|Income before income taxes, extraordinary item and cumulative                        |                                    |   | 4,679              |        |                  |   | 6,318    |        |          |   | 10,568  |        |   |   | 10,476 |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | effect of accounting change        |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense                                                                   |                                    |   | 1,835              |        |                  |   | 2,552    |        |          |   | 4,098   |        |   |   | 4,498  |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|Income before extraordinary item and cumulative
effect of accounting change          |                                    |   | 2,844              |        |                  |   | 3,766    |        |          |   | 6,470   |        |   |   | 5,978  |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $75 |                                    |   |                   |        |                  |   |         |        |          |   |        |        |   |   | 110    |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|Income before cumulative effect of accounting
change                                 |                                    |   | 2,844              |        |                  |   | 3,766    |        |          |   | 6,470   |        |   |   | 5,868  |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cumulative effect of accounting change, net of income
tax expense of $82             |                                    |   |                   |        |                  |   |         |        |          |   | 126     |        |   |   |       |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       
|Net income                                                                           |                                    | $ | 2,844              |        |                  | $ | 3,766    |        |          | $ | 6,596   |        |   | $ | 5,868  |       
|                                                                                     |                                    |   |                    |        |                  |   |          |        |          |   |         |        |   |   |        |       

See accompanying notes to consolidated financial statements



19



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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |          |       |        |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------- | -------- | ----- | ------ | ------- | -
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       | Six Months Ended
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                 
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       | June 30,         |         | June 30,
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       | 2001             |         | 2000    
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Cash flows from operating activities:                |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income                                                                                                                                         |                                                   | $                                         | 6,596                                     |       |                  | $       | 5,868    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Extraordinary loss on early extinguishment of debt, net of taxes                                                                                   |                                                   |                                           |                                          |       |                  |         | 110      |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cumulative effect of accounting change                                                                                                             |                                                   |                                           | (126                                      | )     |                  |         |         |      
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                     | Income before extraordinary item and cumulative effect of                                                                                          |                                                   |                                           | 6,470                                     |       |                  |         | 5,978    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | accounting change                                 |                                           |                                           |       |                  |         |          |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile income before extraordinary item and
cumulative effect of accounting change to net cash provided by
operating activities: |                                                   |                                           |                                           |       |                  |         |          |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | Depreciation and amortization                     |                                           |                                           | 2,227 |                  |         |          | 2,090 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | Amortization of deferred financing fees           |                                           |                                           | 399   |                  |         |          | 400   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | Unrealized
foreign exchange and derivative losses |                                           |                                           | 2,299 |                  |         |          | 2,985 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | Deferred
realized derivative losses               |                                           |                                           | (550  | )                |         |          |      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    | Changes in operating assets and liabilities:      |                                           |                                           |       |                  |         |          |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Receivables, net                          |                                           |       | (3,257           | )       |          |       | (1,882 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Inventories                               |                                           |       | 5,185            |         |          |       | (5,402 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Prepaid expenses and other current assets |                                           |       | (210             | )       |          |       | 169    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Value-added
tax receivables               |                                           |       | 4,753            |         |          |       | 250    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Intercompany receivables and payables     |                                           |       | 11,081           |         |          |       | 5,910  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Other assets                              |                                           |       | 1,193            |         |          |       | (805   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Accounts payable and accrued liabilities  |                                           |       | (13,109          | )       |          |       | (1,477 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   | Income taxes payable/prepaid              |                                           |       | 4,064            |         |          |       | 6,912  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                     |                                                                                                                                                    |                                                   |                                           | Net cash provided by operating activities |       |                  | 20,545  |          |       |        | 15,128  |  
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Cash flows from investing activities:                |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of property and equipment                                                                                                       |                                                   |                                           |                                          |       |                  |         | 31       |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                                                                                |                                                   |                                           | (935                                      | )     |                  |         | (262     | )    
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                     |                                                                                                                                                    |                                                   |                                           | Net cash used in investing activities     |       |                  | (935    | )        |       |        | (231    | )
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Cash flows from financing activities:                |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase
of subordinated notes                                                                                                                   |                                                   |                                           |                                          |       |                  |         | (4,239   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments under term loan facility                                                                                                                |                                                   |                                           | (1,000                                    | )     |                  |         | (750     | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net borrowings (repayments) under revolving credit facility                                                                                        |                                                   |                                           | 2,000                                     |       |                  |         | (500     | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from bank debt                                                                                                                        |                                                   |                                           | 2,584                                     |       |                  |         | 2,965    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Transactions with affiliates                                                                                                                       |                                                   |                                           | (21,276                                   | )     |                  |         | (12,638  | )    
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|                                                     |                                                                                                                                                    |                                                   |                                           | Net cash used in financing activities     |       |                  | (17,692 | )        |       |        | (15,162 | )
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Effect of exchange rate changes on cash              |                                                                                                                                                    |                                                   | 585                                       |                                           |       |                  | 262     |         
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                    |                                                   | 2,503                                     |                                           |       |                  | (3      | )       
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                                                                    |                                                   | 561                                       |                                           |       |                  | 3       |         
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         
|Cash and cash equivalents at end of period           |                                                                                                                                                    | $                                                 | 3,064                                     |                                           |       | $                |        |         
|                                                     |                                                                                                                                                    |                                                   |                                           |                                           |       |                  |         |         

See accompanying notes to consolidated financial statements



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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

Jafra Cosmetics International, S.A. de C.V., a sociedad anomina de capital
variableorganized under the laws of the United Mexican States (Jafra S.A.)
is an indirect wholly owned subsidiary of CDRJ Investments (Lux) S.A., a
Luxembourg société 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).

The accompanying unaudited interim consolidated financial statements as of
and for the three and six months ended June 30, 2001 and 2000 reflect the
operations of Jafra S.A. and its subsidiaries (collectively, the Company) and
have been prepared in accordance with Article 10 of the Securities and Exchange
Commissions Regulation S-X. In the opinion of management, the accompanying
unaudited interim financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly Jafra S.A.s
consolidated financial statements as of June 30, 2001 and for all the interim
periods presented. All significant intercompany accounts and transactions
between entities comprising the Company have been eliminated in consolidation.

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). 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 of the other under
the Notes 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. in its Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.

The functional currency for the Company 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.

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 year 2000 amounts 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 total amounts that have been reclassified as net sales are
$1,243,000 and $2,408,000 for the three and six months ended June 30, 2000,
respectively. Shipping and handling costs are included in selling, general and
administrative expenses.

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. In connection with the adoption of SFAS 133, at January 1, 2001,
the Company recorded a net gain of $126,000 (net of a tax effect of $82,000) as
a cumulative transition adjustment to earnings. This adjustment relates to
derivatives not designated as hedges prior to adoption of SFAS 133, and
represents the difference between the carrying value and the fair value of such
instruments at January 1, 2001 (See Note 8).

On June 29,
2001, the FASB voted to approve two new statements which were
issued in July 2001: SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires business combinations entered into after June 30, 2001 to be accounted
for using the purchase method of accounting. Specifically identifiable
intangible assets acquired, other than goodwill, will be amortized over their
estimated useful economic life. SFAS No. 142 requires that goodwill not be
amortized, but should be tested for impairment at least annually. SFAS No. 142
is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entitys statement of financial position at that date, regardless of when those
assets were initially recognized. The Company is evaluating the



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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

impact of the adoption of these standards and has not yet determined the effect
of adoption on its financial position and results of operations.

(2) Inventories

Inventories consist of the following (in thousands):

|                           |  |          |        |              |  |   |        | 
|-------------------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                           |  | June 30, |        | December 31,
|                           |  | 2001     |        | 2000        
|                           |  |          |        |             
|Raw materials and supplies |  | $        | 7,031  |              |  | $ | 6,443  | 
|                          
|                          
|                          
|                          
|Finished goods             |  |          | 14,594 |              |  |   | 18,706 | 
|                           |  |          |        |              |  |   |        | 
|Total inventories          |  | $        | 21,625 |              |  | $ | 25,149 | 
|                           |  |          |        |              |  |   |        | 

(3) Property and Equipment

Property and equipment consist of the following (in thousands):

|                              |  |          |        |              |  |   |        | 
|----------------------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                              |  | June 30, |        | December 31,
|                              |  | 2001     |        | 2000        
|                              |  |          |        |             
|Land                          |  | $        | 11,784 |              |  | $ | 11,036 | 
|                             
|                             
|                             
|                             
|Buildings                     |  |          | 11,843 |              |  |   | 11,091 | 
|                             
|                             
|                             
|                             
|Machinery and equipment       |  |          | 13,671 |              |  |   | 12,146 | 
|                              |  |          |        |              |  |   |        | 
|                              |  |          | 37,298 |              |  |   | 34,273 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |          | 5,219  |              |  |   | 3,871  | 
|                              |  |          |        |              |  |   |        | 
|Property and equipment, net   |  | $        | 32,079 |              |  | $ | 30,402 | 
|                              |  |          |        |              |  |   |        | 

(4) Debt

During the six months ended June 30, 2000, Jafra S.A. repurchased and
retired a portion of the 11.75% Subordinated Notes due 2008 (the Notes) with
a par value of $4,300,000. In connection with the repurchase of the Notes,
the related portion of the unamortized deferred financing costs of $274,000 was
written off and included in the determination of the extraordinary loss on
early extinguishment of debt. The repurchase of the Notes resulted in an
extraordinary loss of $110,000, which is net of an income tax benefit of
$75,000.

During the six months ended June 30, 2001, Jafra S. A. entered into
an unsecured bank loan agreement and borrowed the peso equivalent of $1,744,000 at
a weighted average annual interest rate of 19.0%. Principal and interest
payments are due monthly through June 29, 2004. As of June 30, 2001, $581,000
of this loan is classified as short-term debt in the accompanying consolidated
balance sheet and the remainder is classified as long-term debt.

In June 2001, Jafra S.A. entered into a short-term note and borrowed the
peso equivalent of $1,329,000 at an annual interest rate of 14.2%. As of June
30, 2001, the entire principal of this note is classified as short-term debt.

(5) Income Taxes

The actual income tax rate differs from the expected income tax rate
(computed by applying the Mexican federal corporate rate of 35% to income
before income taxes) for the three and six months ended June 30, 2001
principally as a result of certain inflation-related income tax adjustments.



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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(6) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):

|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | Three Months Ended |        | Six Months Ended
|                                                                      |  | June 30,           |        | June 30,        
|                                                                      |  |                    |        |                 
|                                                                      |  | 2001               |        | 2000             |  | 2001 |        | 2000
|                                                                      |  |                    |        |                  |  |      |        |     
|Net income                                                            |  | $                  | 2,844  |                  |  | $    | 3,766  |      |  | $ | 6,596  |   |  | $ | 5,868  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Unrealized
and deferred realized losses on
derivatives                |  |                    | (2,830 | )                |  |      |       |      |  |   | (3,719 | ) |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Tax benefit on unrealized
and deferred realized losses on derivatives |  |                    | 1,109  |                  |  |      |       |      |  |   | 1,442  |   |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Foreign currency
translation
adjustment                               |  |                    | 3,301  |                  |  |      | (3,442 | )    |  |   | 4,252  |   |  |   | (2,136 | )
|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive income                                                  |  | $                  | 4,424  |                  |  | $    | 324    |      |  | $ | 8,571  |   |  | $ | 3,732  |  
|                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  

(7) Related Party Transactions

The Company manufactures and distributes color cosmetics and fragrance
products to other affiliates of the Parent (Affiliates). Sales to
Affiliates, primarily in the United States and Germany, were $3,288,000 and
$6,021,000 for the three and six months ended June 30, 2001, respectively, and $2,206,000 and
$4,406,000 for the three and six months ended June 30, 2000, respectively.
These sales were made at cost plus a markup ranging from 0 to 11%.

In addition, the Company is provided with certain management services,
such as legal, accounting and treasury, management oversight, and other
administrative functions from JCI. 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 upon charges identified to specific Affiliates
and 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 to the Company was
$2,197,000 and $4,437,000 for the three and six months ended
June 30, 2001, respectively, and
$1,600,000 and $3,345,000 for the three and six months ended June 30, 2000,
respectively.

Beginning in 2000, Jafra S.A. charged JCI 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 was $449,000 and $851,000 for
the three and six months ended June 30, 2001, respectively, and $290,000 and $559,000 for the
three and six months ended June 30, 2000, respectively, 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. The royalty fees
charged by JCI to Jafra S.A. for the use of the Jafra Way were $5,730,000 and
$10,824,000 for the three and six months ended June 30, 2001, respectively, and $3,739,000 and
$7,291,000 for the three and six months ended June 30, 2000, respectively, and
are based upon a percentage of Jafra S.A.s sales.

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 at
December 31, 2000 consists primarily of amounts owed by Jafra S.A. as a result
of Jafra S.A.s purchase of the U.S. and German trademarks from JCI in December
1999, and amounts billed to Jafra S.A. in connection with the Jafra Way
royalty. Net interest expense to Affiliates, primarily JCI, was $47,000 and
$257,000 for the three and six months ended June 30, 2001,
respectively, and $555,000 and
$1,153,000 for the three and six months ended June 30, 2000, respectively.

(8) Foreign Currency Forward Contracts

The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures. As part of the Parents overall strategy to
reduce the risk of adverse exchange rate fluctuations in Mexico, the Company
enters into foreign currency exchange contracts (forward contracts). The
Company places forward



23



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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

contracts based on its forecasted U.S. dollar cash outflows over a rolling 12
month period and does not hedge transactions that are
not included in the 12 month forecast on the date the forward contract is
initiated. As a matter of policy, the Company does not hold or issue
forward contracts for trading or speculative purposes nor does it enter into
contracts or agreements containing embedded derivative features.

The forward contracts 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 loss in the statements of
operations for the three and six months ended June 30, 2000. Under SFAS 133,
such mark-to-market accounting treatment continues to be applied to certain of
the Companys forward contracts. However, under SFAS 133, the Companys use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Gains and losses from such derivative instruments arising
subsequent to January 1, 2001 are deferred as a separate component of other
comprehensive income, and are recognized in income at the same time that the
underlying hedged exposure is recognized in income. This accounting treatment
results in the matching of gains and losses from such forward contracts with
the corresponding gains and losses generated by the underlying hedged
transactions.

The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases,
forecasted U.S. dollar denominated intercompany charges from JCI, forecasted
management fee charges from JCI and U.S. dollar denominated interest payments.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. In this documentation, the Company specifically
identifies the forecasted transaction that has been designated as a hedged item
and states how the hedging instrument is expected to hedge the risks related to
the hedged item. The Company formally measures effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis in accordance
with its risk management policy. For all qualifying and highly effective cash
flow hedges, the changes in the fair value of the derivative are deferred as a
component of other comprehensive income. Such amounts will be reclassified
from other comprehensive income into net income when the underlying hedged
exposure is recognized in income. For U.S. dollar denominated inventory
purchases, this will occur upon sale to an outside party of the related
inventory. For intercompany charges and interest, this will occur at the date
such charges are recorded by the Company.

During the three months ended June 30, 2000, the Company recognized gains
on forward contracts of approximately $3,400,000 and for the six months ended
June 30, 2000, the Company recognized losses on forward contracts of
approximately $2,100,000 as a component of exchange loss in the accompanying
consolidated statement of operations. During the three and six months ended
June 30, 2001, the Company recognized approximately $6,200,000 and $9,600,000
of losses as a component of exchange loss on forward contracts that did not
qualify for hedge accounting under SFAS 133. Additionally, during the six
months ended June 30, 2001, the Company deferred $4,027,000 of unrealized
losses on forward contracts that qualify for hedge accounting under SFAS 133.
Of this amount, $308,000 was reclassified to earnings upon recognition of the
underlying hedged exposure prior to June 30, 2001. The Company expects that
substantially all of the remaining $3,719,000 deferred as a component of other
comprehensive income at June 30, 2001 will be reclassified into net income
within the next twelve months.

During the three and six months ended June 30, 2001, the ineffectiveness
generated by the Companys forward contracts designated as hedges was
insignificant. Certain hedged forecasted transactions do not appear probable
of occurring due to timing difference between the original and current
forecasts, and accordingly $500,000 million of losses were reclassified into
earnings.

The outstanding foreign currency forward contracts at June 30, 2001 had a
notional value of $93,742,000 and mature at various dates extending to June
2002. 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 table below describes the forward
contracts that were outstanding at June 30, 2001 (in thousands):



24



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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|------------------------------- |  | ------------- | ------ | -------- |  | -------- | -------- | -------- |  | -------- | ----- |  |  | - | ------ | 
|                                |  |               |        |          |  |          |          |          |  | Weighted |       |  |  |  
|                                |  | Forward       |        |          |  |          |          | Average  |  |          |       | 
|                                |  | Position in   |        | Maturity |  | Contract |          | Fair    
|Foreign Currency                |  | US Dollars(1) |        | Date     |  | Rate     |          | Value(1)
|                                |  |               |        |          |  |          |          |         
|Buy US Dollar/sell Mexican Peso |  | $             | 9,154  |          |  |          | 7/31/01  |          |  |          | 10.38 |  |  | $ | 7,861  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 11,816 |          |  |          | 8/31/01  |          |  |          | 10.32 |  |  |   | 10,326 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 12,125 |          |  |          | 9/28/01  |          |  |          | 10.39 |  |  |   | 10,600 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,336  |          |  |          | 10/30/01 |          |  |          | 10.70 |  |  |   | 1,987  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 10,275 |          |  |          | 10/31/01 |          |  |          | 10.71 |  |  |   | 8,737  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 6,806  |          |  |          | 11/30/01 |          |  |          | 10.24 |  |  |   | 6,175  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,110  |          |  |          | 12/27/01 |          |  |          | 10.71 |  |  |   | 3,565  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 3,761  |          |  |          | 12/31/01 |          |  |          | 10.90 |  |  |   | 3,188  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 7,643  |          |  |          | 1/31/02  |          |  |          | 10.30 |  |  |   | 7,011  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,989  |          |  |          | 2/28/02  |          |  |          | 10.38 |  |  |   | 4,576  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 9,023  |          |  |          | 3/27/02  |          |  |          | 10.46 |  |  |   | 8,278  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,764  |          |  |          | 4/30/02  |          |  |          | 10.29 |  |  |   | 4,494  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,114  |          |  |          | 5/31/02  |          |  |          | 9.97  |  |  |   | 4,035  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,826  |          |  |          | 6/28/02  |          |  |          | 9.91  |  |  |   | 2,806  | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|                                |  | $             | 93,742 |          |  |          |          |          |  |          |       |  |  | $ | 83,639 | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 



---

|(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 $10,103,000 at June 30, 2001, represents the fair value of the
forward contracts, and has been recorded in accrued liabilities in the
accompanying consolidated balance sheet as of June 30, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

The following discussion of the results of operations, financial condition
and liquidity of the Company should be read in conjunction with the
accompanying unaudited interim consolidated financial statements and notes
thereto and with the Companys audited consolidated financial statements as of
and for the year ended December 31, 2000, included in the Companys Annual
Report on Form 10-K. The results of operations for the three and six months
ended June 30, 2001 are not necessarily indicative of results that may be
expected for future periods.

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 three and six months
ended June 30, 2001 and 2000.

|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ---- | ------------------------- |  | ---- | ----- | -------- |  | - | ---- | - |  |  | ----- | - |  | - | ----- | - |  |  | ----- | - |  | - | ----- | - |  |  | ----- | -
|                                                                                          |  | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                                                                          |  |                             |      |                          
|                                                                                          |  | 2001                        |      | 2000 (1)                  |  | 2001 |       | 2000 (1)
|                                                                                          |  |                             |      |                           |  |      |       |         
|Net sales                                                                                 |  | $                           | 96.7 |                           |  |      | 100.0 | %        |  | $ | 79.4 |   |  |  | 100.0 | % |  | $ | 183.6 |   |  |  | 100.0 | % |  | $ | 153.4 |   |  |  | 100.0 | %
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cost of sales                                                                             |  |                             | 22.3 |                           |  |      | 23.1  |          |  |   | 17.9 |   |  |  | 22.5  |   |  |   | 42.6  |   |  |  | 23.2  |   |  |   | 34.2  |   |  |  | 22.3  |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Gross profit                                                                              |  |                             | 74.4 |                           |  |      | 76.9  |          |  |   | 61.5 |   |  |  | 77.5  |   |  |   | 141.0 |   |  |  | 76.8  |   |  |   | 119.2 |   |  |  | 77.7  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Selling, general and administrative expenses                                              |  |                             | 61.3 |                           |  |      | 63.4  |          |  |   | 50.9 |   |  |  | 64.1  |   |  |   | 116.7 |   |  |  | 63.6  |   |  |   | 100.4 |   |  |  | 65.4  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Restructuring charges                                                                     |  |                             |     |                           |  |      |      |          |  |   | 1.1  |   |  |  | 1.4   |   |  |   |      |   |  |  |      |   |  |   | 1.1   |   |  |  | 0.7   |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Income from operations                                                                    |  |                             | 13.1 |                           |  |      | 13.5  |          |  |   | 9.5  |   |  |  | 12.0  |   |  |   | 24.3  |   |  |  | 13.2  |   |  |   | 17.7  |   |  |  | 11.6  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Exchange loss                                                                             |  |                             | (4.5 | )                         |  |      | (4.7  | )        |  |   | (1.7 | ) |  |  | (2.1  | ) |  |   | (6.7  | ) |  |  | (3.6  | ) |  |   | (5.3  | ) |  |  | (3.5  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Interest, net                                                                             |  |                             | (3.4 | )                         |  |      | (3.5  | )        |  |   | (4.0 | ) |  |  | (5.0  | ) |  |   | (6.9  | ) |  |  | (3.8  | ) |  |   | (8.0  | ) |  |  | (5.2  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other (expense) income, net                                                               |  |                             | (0.1 | )                         |  |      | (0.1  | )        |  |   | 0.5  |   |  |  | 0.6   |   |  |   | (0.2  | ) |  |  | (0.1  | ) |  |   | 1.2   |   |  |  | 0.8   |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Income before income taxes, extraordinary
item and cumulative effect of accounting
change |  |                             | 5.1  |                           |  |      | 5.2   |          |  |   | 4.3  |   |  |  | 5.5   |   |  |   | 10.5  |   |  |  | 5.7   |   |  |   | 5.6   |   |  |  | 3.7   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Income tax expense                                                                        |  |                             | 3.1  |                           |  |      | 3.2   |          |  |   | 3.3  |   |  |  | 4.2   |   |  |   | 6.1   |   |  |  | 3.3   |   |  |   | 5.3   |   |  |  | 3.5   |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Income before extraordinary item and
cumulative effect of accounting change               |  |                             | 2.0  |                           |  |      | 2.0   |          |  |   | 1.0  |   |  |  | 1.3   |   |  |   | 4.4   |   |  |  | 2.4   |   |  |   | 0.3   |   |  |  | 0.2   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $0.2     |  |                             |     |                           |  |      |      |          |  |   |     |   |  |  |      |   |  |   |      |   |  |  |      |   |  |   | 0.3   |   |  |  | 0.2   |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Income before cumulative effect of
accounting change                                      |  |                             | 2.0  |                           |  |      | 2.0   |          |  |   | 1.0  |   |  |  | 1.3   |   |  |   | 4.4   |   |  |  | 2.4   |   |  |   | 0.0   |   |  |  | 0.0   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cumulative effect of accounting change, net of
income tax expense of $0.1                 |  |                             |     |                           |  |      |      |          |  |   |     |   |  |  |      |   |  |   | 0.1   |   |  |  |      |   |  |   |      |   |  |  |      |  
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  
|Net income                                                                                |  | $                           | 2.0  |                           |  |      | 2.0   | %        |  | $ | 1.0  |   |  |  | 1.3   | % |  | $ | 4.5   |   |  |  | 2.4   | % |  | $ | 0.0   |   |  |  | 0.0   | %
|                                                                                          |  |                             |      |                           |  |      |       |          |  |   |      |   |  |  |       |   |  |   |       |   |  |  |       |   |  |   |       |   |  |  |       |  



---

|(1) |  | 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 year 2000 amounts to reflect shipping
and handling fees, previously reported as reductions to selling, general
and administrative expenses, in net sales to conform to the current period
presentation. Total amounts that have been reclassified are approximately
$2.6 million and $4.9 million for the three and six months ended June 30,
2000. Shipping and handling costs are included in selling, general and
administrative expenses.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents



Three months ended June 30, 2001 compared to the three months ended June 30, 2000

Net sales. Net sales in the second quarter of 2001 increased to $96.7
million from $79.4 million in the second quarter of 2000, an increase of $17.3
million, or 21.8%. Net sales in local currencies in the second quarter of 2001
increased by 21.3% over the comparable prior year period. The sales increase
in U.S. dollars was higher than the increase measured in local currencies,
primarily as a result of strengthening of average exchange rates of local
currencies in Mexico during the second quarter of 2001 as compared to the
second quarter of 2000. The Companys average number of consultants (who
perform the duties of sales representatives) worldwide for the second quarter
increased to approximately 365,000 or 18.7% over the 2000 average, while the
number of active consultants placing orders increased by 20.3% over the same
period of 2000. In general, consultants are considered to be active if they
place at least one order within four months.

In Mexico, net sales in the second quarter of 2001 increased to $63.7
million from $48.0 million in the second quarter of 2000, an increase of $15.7
million, or 32.7%. Sales in Mexico in local currency increased by 29.1% over
the comparable 2000 period. The quarter-to-quarter increase was due primarily
to higher sponsoring (activation of new consultants), better retention of
consultants and increased ordering activity achieved as a result of certain
promotional activities implemented during the second quarter of 2001. In
Mexico, the average number of consultants for the second quarter of 2001
increased to approximately 229,000, or by approximately 20.7%, and the number
of active, ordering consultants increased by 25.7%, over the respective second
quarter 2000 averages.

In the U.S., net sales in the second quarter of 2001 increased to $20.8
million from $19.3 million in the second quarter of 2000, an increase of $1.5
million, or 7.8%. The increase was due to a combination of
an increase in the average consultant base achieved by improved retention and
increased ordering activity. The increased ordering activity was due to
successful product launches of the Intensive Retinol Treatment and the
initiation of consultant order placing and order paying via the Internet. In
the U.S., the average number of consultants for the second quarter of 2001
increased to approximately 68,000, or by 3.8%, and the number of active,
ordering consultants increased by 12.8%, over the respective second quarter
2000 averages. These increases were partially offset by a decrease in
consultant productivity, as measured by lower average order value.

In Europe, net sales decreased to $6.5 million in the second quarter of
2001 from $6.9 million in the second quarter of 2000, a decrease of $0.4
million, or 5.8%. The decrease is the result of a stronger U.S.
dollar when measured with equivalent exchange rates. Excluding the exchange rate
impact, net sales increased by $0.1 million or 1.5%. The average number of
consultants for the second quarter of 2001 was unchanged from the comparable
prior year period at 17,000.

Gross profit.Consolidated gross profit in the second quarter of 2001
increased to $74.4 million from $61.5 million in the comparable prior year
period, an increase of $12.9 million, or 21.0%. Gross profit as a percentage of
sales (gross margin) decreased to 76.9% from 77.5%. The reduction in gross
margin in the second quarter of 2001 was due primarily to a heavier mix of
promotional products, as compared to regular (non-discounted) products.

In Mexico, gross margin in the second quarter of 2001 decreased to 75.7%
from 77.7% in the second quarter of 2000, due primarily to a heavier mix of lower-margin promotional products, including consultant kits and discounted
products, which were offered to stimulate sponsoring and consultant activity.
The impact of lower margin sales were partially offset by favorable purchase
price variances due to the strengthening of the Mexican peso. In the United
States, gross margin in the second quarter of 2001 decreased to 77.9% from
79.5% in the second quarter of 2000, due to a heavier mix of promotional
products in the second quarter of 2001. In Europe, gross margin in the second
quarter of 2001 increased to 82.7% from 78.5% in the second quarter of 2000,
due primarily to a more favorable product mix and less aggressive promotional
discounts.

Selling, general and administrative expenses.SG&A expenses in the
second quarter of 2001 increased to $61.3 million from $50.9 million in the
second quarter of 2000, an increase of $10.4 million, or 20.4%. SG&A as a
percentage of net sales decreased in the second quarter of 2001 to 63.4% from
64.1% for the same period in 2000, primarily due to a decrease, as a percentage
of sales, in administrative costs, offset by the increase in sales and variable
selling expenses.



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In Mexico, SG&A expenses in the second quarter of 2001 increased by $7.6
million, or 33.7%, from the second quarter of 2000. SG&A as a percentage of
net sales in Mexico was 47.4% in the second quarter of 2001, compared to 47.1%
in the second quarter of 2000. The increased SG&A expenses in Mexico related
primarily to sales promotional expenses, commission expenses, freight and certain
administration expenses. Promotion and commission expenses tend to increase
proportionally with sales, however as a percentage of sales, sales promotion
decreased due to reduced promotion expenses, while freight expenses increased
proportionately more than sales during the second quarter of 2001, due to the
shipment of promotion items which resulted in higher packaging costs and
shipment of more small orders. Administrative costs increased due to increased
headcount and other general expenses, including collection fees which are highly
variable, to support the growing business.

In the United States, SG&A expenses in the second quarter of 2001
increased by $0.2 million, or 1.8% from the second quarter of 2000.
SG&A expenses as a percentage of net sales in the U.S. were 62.6% in the second
quarter of 2001, compared to 66.2% for the second quarter of 2000. The
increased SG&A expenses in the U.S. were primarily due to
increased incremental variable
costs related to increased sales, partially offset by decreases in
administrative and certain sales promotion expenses. In Europe, SG&A expenses
in the second quarter of 2001 decreased by $0.6 million, or 12.0%, from the
second quarter of 2000. The decrease was primarily the result of
administrative cost savings achieved from restructuring activities undertaken
during the latter part of 2000.

SG&A expenses in other selling markets (South America and Thailand) and at
corporate headquarters in the second quarter of 2001 increased by $3.2 million,
or 32.8%, primarily as a result of sales promotional and commission expenses in
the Companys growing South American markets.

Exchange gain (loss).The Companys foreign exchange loss was $4.5
million in the second quarter of 2001, compared to $1.7 million in the prior
year, an increase of $2.8 million, or 164.7%. The Companys foreign exchange
gains and losses primarily result from its operations in Mexico. During the
second quarter of 2001, the Company recognized $6.2 million of exchange losses
on forward contracts, resulting from the strengthening of the Mexican peso
against the U.S. dollar and exchange losses of $0.3 million
on other foreign currency transactions. These exchange losses were partially
offset by an unrealized exchange gain of $2.0 million on the remeasurement of
U.S. dollar-denominated debt. During the second quarter of 2000, the Company
recognized $3.4 million of exchange gains on forward contracts, resulting from
the weakening of the Mexican peso against the U.S. dollar during the period.
The exchange gains were offset by $0.4 million of exchange losses on other
foreign currency transactions and an unrealized exchange loss of $4.7 million
on the remeasurement of U.S. dollar-denominated debt. See Recent Accounting
Pronouncements and Item 3, Quantitative and Qualitative
Disclosures about Market Risk.

Interest expense.Net interest expense (including amortization of
deferred financing fees) in the second quarter of 2001 decreased to $3.4
million from $4.0 million in 2000, a decrease of $0.6 million, or 15.0%. The
decrease was due to a combination of lower average balances on the term loan
and revolving credit line, and lower interest rates on those borrowings. The
lower interest rates in the second quarter of 2001 reflected both decreases in
general market interest rates along with a 25 basis point reduction in
borrowing costs achieved by the Company due to the attainment of specified
leverage ratios as defined by the Companys Senior Credit Agreement.

Other income (expense).Other expense in the second quarter of 2001 was
$0.1 million, compared to other income of $0.5 million in the second quarter of
2000, a change of $0.6 million. The other income in the second quarter of 2000
consisted primarily of $0.5 million related to a recovery of the effect of
inflation upon a prior year tax receivable.

Income tax expense.Income tax expense decreased to $3.1 million in the
second quarter of 2001 from $3.3 million in the comparable 2000 period, a
decrease of $0.2 million, or 6.1%. The Companys effective
income tax rate decreased to approximately 60.8%, compared to 76.7% for the
comparable period of 2000. The decrease in the effective tax rate was driven
in part by the U.S. subsidiary, as a result of, valuation
allowances taken against certain foreign tax credits of the U.S.
subsidiary in 2000, which were not deemed necessary in the second
quarter of 2001. Additionally, valuation allowances
were provided against net operating losses in South America in 2001
and 2000, and Europe in 2000.



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Net income.Net income was $2.0 million for the second quarter of 2001, a
$1.0 million increase compared to a net income of $1.0 million in 2000. The
increase was due to a 21.8% increase in net sales which resulted in a $12.9 million increase in gross profit, a $0.6 million
reduction in interest expense, a $0.2 million reduction in income tax expense,
the absence of a $1.1 million restructuring charge incurred in 2000, partially
offset by a $10.4 million increase in SG&A expenses, a $2.8 million increase in
exchange loss, and a $0.6 million negative fluctuation in other (expense)
income.

Six months ended June 30, 2001 compared to the six months ended June 30, 2000

Net sales. Net sales for the six months ended June 30, 2001 increased to
$183.6 million from $153.4 million in the comparable prior year period, an
increase of $30.2 million, or 19.7%. Net sales in local currencies for the six
months ended June 30, 2001 increased by 20.7% over the comparable prior year
period. The sales increase in local currencies was higher than the increase
measured in U.S. dollars, primarily as a result of weaker average exchange
rates of local currencies in South America and Europe during the first six
months of 2001 as compared to the first six months of 2000. The Companys
average number of consultants worldwide for the six months ended June 30, 2001
increased to approximately 352,000 or 16.9% over the 2000 average, while the
number of active consultants placing orders increased by 21.7% over the same
period of 2000.

In Mexico, net sales for the six months ended June 30, 2001 increased to
$120.3 million from $93.5 million in the comparable prior year period, an
increase of $26.8 million, or 28.7%. Sales in Mexico in local currency
increased by 28.0% over the comparable 2000 period. The year-to-year increase
was due primarily to higher sponsoring and increased ordering activity achieved
as a result of certain promotional activities implemented during the first six
months of 2001, and increased consultant productivity. In Mexico, the average
number of consultants for the first six months of 2001 increased to
approximately 220,000, or by 14.4%, and the number of active, ordering
consultants increased by 23.3%, over the respective 2000 averages.

In the U.S., net sales for the six months ended June 30, 2001 increased to
$39.1 million from $37.0 million in the comparable prior year period, an
increase of $2.1 million, or 5.7%. The year-to-year increase was due to a
combination of increased ordering activity and an increase in the average
consultant base achieved by improved retention. The increased ordering
activity was due to successful product launches of the Intensive Retinol
Treatment, Home Spa and Tropical Rhythm shades, and a new commission structure
which was in effect for the entire first six months of 2001, but only four of
the first six months of 2000. In the U.S., the average number of consultants
for the six months ended June 30, 2001 increased to approximately 66,000, or
8.2%, and the number of active, ordering consultants increased by 19.7%, over
the respective 2000 averages. These increases were partially offset by a
decrease in consultant productivity, because the new commission structure
resulted in lower average order sizes.

In Europe, net sales decreased to $12.8 million for the six months ended
June 30, 2001 from $13.5 million in the comparable prior year period, a
decrease of $0.7 million, or 5.2%. The total decrease in sales
is the result of a stronger U.S. dollar when measured with equivalent
exchange rates. The average number of consultants for the six months ended June 30,
2001 was unchanged from the comparable prior year period at 17,000.

Gross profit.Consolidated gross profit for the six months ended June
30, 2001 increased to $141.0 million from $119.2 million in the comparable
prior year period, an increase of $21.8 million, or 18.3%. Gross profit as a
percentage of sales (gross margin) decreased to 76.8% from 77.7%. The
reduction in gross margin was due primarily to a heavier mix of promotional
products, as compared to regular (non-discounted) products.

In Mexico, gross
margin for the six months ended June 30, 2001 increased
to $91.2 million from $72.3 million in the comparable period of 2000, an
increase of $18.9 million, or 26.1%. Gross margin decreased to 75.8% for the six months ended June 30, 2001 from 77.2% during
the comparable prior year period, due primarily to a heavier mix of promotional
products, including lower-margin promotional kits, which were offered to
stimulate sponsoring activity.



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In the United States, gross margin for the six months ended June 30, 2001
decreased to 77.9% from 78.8% in the comparable period of 2000, due to a
slightly heavier mix of promotional products in 2001. In Europe, gross margin
for the six months ended June 30, 2001, increased to 82.2% from 78.4% in
comparable prior year period, due primarily to better management of promotional
kits, a more favorable product mix and less aggressive discounting.

Selling, general and administrative expenses.SG&A expenses for the six
months ended June 30, 2001 increased to $116.7 million from $100.4 million in
the comparable period of the prior year, an increase of $16.3 million, or
16.2%. SG&A as a percentage of net sales for the six months ended June 30,
2001 decreased to 63.6% from 65.4% for the same period in 2000, primarily due
to reduced promotional spending in the United States and administrative cost
savings in the United States and Europe.

In Mexico, SG&A expenses for the six months ended June 30, 2001 increased
by $12.8 million, or 29.6%, from the comparable period in the prior year. SG&A
as a percentage of net sales in Mexico was 46.8% for the six months ended June
30, 2001, compared to 46.4% for the six months ended June 30, 2000. The
increased SG&A expenses in Mexico related primarily to sales
promotion expenses and commission expenses, which tend to increase proportionally with sales and
additional administrative costs to support the growing business. Variable
freight expenses increased proportionately more than sales, during the six
months ended June 30, 2001 due to a greater number of smaller shipments of certain
promotional items and consultant kits.

In the U.S., SG&A expenses for the six months ended June 30, 2001
decreased by $0.3 million, or 1.1% from the comparable period of the prior
year. SG&A expenses, as a percentage of net sales, in the U.S. were 67.8% for
the first six months of 2001, compared to 72.3% for the first six months of
2000. The reduced SG&A expenses in the U.S. were primarily due to changes in
the scope of certain sales promotion events and administrative cost savings
achieved during the six months ended June 30, 2001. Costs which tend to
increase proportionally with sales remained relatively consistent as a
percentage of sales. In Europe, SG&A expenses for the first six months of 2001
decreased by $1.3 million, or 11.5%, compared to the first six months of 2000.
The decrease was primarily the result of administrative cost savings achieved
from restructuring activities undertaken during the latter part of 2000.

SG&A expenses in other selling markets (South America and Thailand) and at
corporate headquarters for the six months ended June 30, 2001 increased by $5.1
million, or 26.9%, primarily as a result of sales promotion and commission
expenses in the Companys growing South American markets and increased
corporate expenses.

Exchange loss.The Companys foreign exchange loss was $6.7 million for
the six months ended June 30, 2001, compared to $5.3 million in the comparable
period of the prior year, an increase of $1.4 million, or 26.4%. The Companys
foreign exchange gains and losses primarily result from its operations in
Mexico. During the first six months of 2001, the Company recognized $9.6
million of exchange losses on certain forward contracts, resulting from the
strengthening of the Mexican peso against the U.S. dollar,
and exchange losses on other foreign currency transactions of $0.1 million.
These exchange losses were partially offset by an unrealized exchange gain of
$3.0 million on the remeasurement of U.S. dollar-denominated debt. For the
six months ended June 30, 2000, the net loss on forward contracts was $2.1
million, the remeasurement of U.S. dollar-denominated debt resulted in an
unrealized exchange loss of $2.5 million, and net realized losses on other
foreign currency transactions were $0.7 million. See
Recent Accounting Pronouncements and Item 3,
Quantitative and Qualitative Disclosures about Market Risk.

Interest expense.Net interest expense (including amortization of
deferred financing fees) for the six months ended June 30, 2001 decreased to
$6.9 million from $8.0 million in 2000, a decrease of $1.1 million, or 13.8%.
The decrease was due to a combination of lower average balances on the term
loan and revolving credit line, and lower interest rates on those borrowings.
The lower interest rates for the six months ended June 30, 2001 reflected both
decreases in general market interest rates along with a 25 basis point
reduction in borrowing costs achieved by the Company due to the attainment of
specified leverage ratios as defined by the Companys credit agreement.

Other income (expense).Other expense for the six months ended June 30,
2001 was $0.2 million, compared to other income of $1.2 million during the six
months ended June 30, 2000, a change of $1.4 million. The other income during
the six months ended June 30, 2000 consisted primarily of income related to a
recovery of the effect of inflation on a prior year tax receivable.



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Income tax expense.Income tax expense increased to $6.1 million for the
six months ended June 30, 2001 from $5.3 million in the comparable 2000
period, an increase of $0.8 million, or 15.1%. The increase is due to higher
taxable income generated by the Companys Mexican and United States
subsidiaries in 2001 as compared to 2000. After taking into effect the tax
impacts related to the cumulative effect of accounting change in 2001 and the
extraordinary item in 2000, the Companys effective income tax rate decreased
to approximately 57%, compared to 101% for the comparable period of 2000. The
decrease in the effective tax rate was driven in part by the U.S. subsidiary
and Europe. In the United States, valuation allowances were
provided for certain foreign tax credits in 2000, whereas no
valuation allowances were deemed necessary in 2001. In Europe, net
operating losses were recorded in 2000 and taxable income in 2001.
The Company provided valuation allowances against the Europe net
operating losses in 2000. For
the six months ended June 30, 2001 and 2000, valuation
allowances were provided against net operating losses in South America.

Net income.Net income was $4.5 million for the six months ended June 30,
2001, a $4.5 million increase compared to the prior year. The
change was due to a 19.7% increase in net sales which resulted in $21.8 million increase in gross
profit, a $1.1 million reduction in interest expense, the absence of a $0.3
million extraordinary loss (net of income taxes) on early extinguishment of
debt and $1.1 million of restructuring charges incurred in 2000, and
income of $0.1 million (net of income taxes) from the cumulative effect of an
accounting change, partially offset by a $16.3 million increase in SG&A
expenses, $1.4 million increase in exchange loss, a $1.4 million negative
fluctuation in other (expense) income, and a $0.8 million increase in income
tax expenses.

Liquidity and Capital Resources

The Companys liquidity needs arise primarily from principal and interest
payments under its 11.75% Subordinated Notes due 2008
(Notes), and the
Senior Credit Agreement consisting of 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 original amount of $60 million and $40 million (currently
at $45.1 million and $30.1 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.

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 ($12.4 million as of June 30, 2001) 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 rate in effect at June
30, 2001 was approximately 5.4% for the LIBOR-based borrowings, and the rate
for the prime-based borrowings was approximately 7.4%. Borrowings under the
Senior Credit Agreement are secured by substantially all of the assets of JCI
and Jafra S. A. During the six months ended June 30, 2001, cash paid for
interest was approximately $6.1 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. The Company has two letters of credit outstanding
as of June 30, 2001 under the Revolving Credit Facility,
totaling $1.8 million. Additionally, Jafra S.A. has five letters
of credit outstanding as of June 30, 2001 totaling
$1.0 million.



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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. The Company may from
time to time repurchase the Notes in the open market.
The Company has obtained Consent and Waivers to the Senior Credit Agreement
which allow the Company to repurchase the Notes in the open market, with the
aggregate purchase price for all such Notes repurchased not to exceed $50.0
million. Aggregate repurchases as of June 30, 2001 were $24.8 million. The
repurchased debt was replaced with debt under the Revolving Credit Facility,
which currently has lower effective interest rates.

During the six months
ended June 30, 2001, Jafra S.A. repaid the balance
remaining under a one-year term loan originally due on August 16, 2001, and
entered into an unsecured bank loan agreement, borrowing the peso equivalent of
$1,744,000 at a weighted average annual interest rate of 19.0%. Principal and
interest payments are due monthly through June 29, 2004. As of June 30, 2001,
$581,000 of this loan is classified as short-term debt in the accompanying
consolidated balance sheet and the remainder is classified as long-term debt.

In June 2001, Jafra S.A. entered into a short-term note and borrowed the
peso equivalent of $1,329,000 at an annual interest rate of 14.2%. As of June
30, 2001, the entire principal of this note is classified as short-term debt in
the accompanying consolidated balance sheet.

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 twelve months.

Cash Flows

Net cash provided by
operating activities was $8.5 million for the six
months ended June 30, 2001, consisting of $10.9 million provided by net income
plus depreciation, amortization, and other non-cash items included in
net income, offset by $2.4 million used by changes in operating assets and
liabilities. The significant elements of net cash used by changes in operating
assets and liabilities during the six months ended June 30, 2001 were an
increase of $4.4 million in accounts receivable and a reduction
of $14.1 million in accounts payable and accrued liabilities, partially offset by a
reduction in prepaid income taxes of $4.3 million, a reduction in inventories
of $5.9 million, and a reduction in prepaid and other assets of
$4.0 million.

Net cash used in investing activities was $4.5 million for the six months
ended June 30, 2001, of which $4.4 million was used for capital expenditures,
consisting primarily of information system upgrades. Capital expenditures in
2001 are expected to be approximately $12.0 million.

Net cash used in financing activities was $2.3 million for the six months
ended June 30, 2001, and consisted of repayments of $2.3 million under the Term
Loan Facility, net repayments under the Revolving Credit Facility of $2.1
million and $0.5 used in the net repurchase of common stock, partially offset by
net proceeds from other bank debt of $2.6 million.

The effect of
exchange rate changes on cash was $0.3 million for the six
months ended June 30, 2001 relating primarily to fluctuations in the exchange
rates in Europe and Mexico.

Recent Accounting Pronouncements

The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures at Jafra S.A. As part of its overall strategy
to reduce the risk of adverse exchange rate fluctuations in Mexico, the Company
enters into foreign currency exchange contracts (forward contracts). The
Company places forward contracts based on its forecasted U.S. dollar cash
outflows from Jafra S.A. over a rolling 12 month period and does not hedge
transactions that are not included in the 12 month forecast on the date the
forward contract is initiated. As a matter of policy, the Company does not
hold or issue forward contracts for trading or speculative purposes nor does it
enter into contracts or agreements containing embedded derivative features.



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The forward contracts 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 six months ended June 30, 2000. Under SFAS 133, such
mark-to-market accounting treatment continues to be applied to certain of the
Companys forward contracts. However, under SFAS 133, the Companys use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Unrealized gains and losses from such derivative instruments
arising subsequent to January 1, 2001 are deferred as a separate component of
other comprehensive income, and are recognized in income at the same time that
the underlying hedged exposure is recognized in income. This accounting
treatment results in the matching of gains and losses from such forward
contracts with the corresponding gains and losses generated by the underlying
hedged transactions.

The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases,
U.S. dollar denominated intercompany charges from JCI to Jafra S.A.,
management charges from JCI to Jafra S.A. and U.S. dollar denominated interest
payments. On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. In this documentation, the Company specifically
identifies the forecasted transaction that has been designated as a hedged item
and states how the hedging instrument is expected to hedge the risks related to
the hedged item. The Company formally measures effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis in accordance
with its risk management policy. For all qualifying and highly effective cash
flow hedges, the changes in the fair value of the derivative are deferred as a
component of other comprehensive income. Such amounts will be reclassified
from other comprehensive income into net income when the underlying hedged
exposure is recognized in income. For U.S. dollar denominated inventory
purchases, this will occur upon sale to an outside party of the related
inventory. For intercompany charges, this will occur at the date such charges
are recorded by Jafra S.A. For intercompany charges and interest, this will
occur at the date such charges are recorded by the Company.

During the three months ended June 30, 2000, the Company recognized gains
on forward contracts of approximately $3.4 million and for the six months ended
June 30, 2000, the Company recognized losses on forward contracts of
approximately $2.1 million as a component of exchange loss in the accompanying
consolidated statement of operations. During the three and six months ended
June 30, 2001, the Company recognized approximately $6.2 million and $9.6 million
of losses as a component of exchange loss on forward contracts that did not
qualify for hedge accounting under SFAS 133. Additionally, during the six
months ended June 30, 2001, the Company deferred $4.0 million of unrealized
losses on forward contracts that qualify for hedge accounting under SFAS 133.
Of this amount, $0.3 million was reclassified to earnings upon recognition of the
underlying hedged exposure prior to June 30, 2001. The Company expects that
substantially all of the remaining $3.7 million deferred as a component of other
comprehensive income at June 30, 2001 will be reclassified into net income
within the next twelve months.

During the three and six months ended June 30, 2001, the ineffectiveness
generated by the Companys forward contracts designated as hedges was
insignificant. Certain hedged forecasted transactions do not appear probable
of occurring due to timing differences between the original and current
forecasts, and accordingly $0.5 million of losses were reclassified into earnings.

On June 29, 2001, the FASB voted
to approve two new statements which were issued in July 2001: SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires business combinations entered into after June 30, 2001 to be accounted
for using the purchase method of accounting. Specifically identifiable
intangible assets acquired, other than goodwill, will be amortized over their
estimated useful economic life. SFAS No. 142 requires that goodwill not be
amortized, but should be tested for impairment at least annually. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entitys statement of financial
position at that date, regardless of when those assets were initially
recognized. The Company is evaluating the impact of the adoption of these
standards and has not yet determined the effect of adoption on its financial
position and results of operations.



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Foreign Operations

Sales outside of the United States aggregated approximately 78.5% and
78.7% of the Companys total net sales for the three and six months ended June
30, 2001, respectively, and 75.8% and 76.2% for the three and six months ended June 30, 2000,
respectively. In addition, as of June 30, 2001, international subsidiaries
comprised approximately 75.3% of the Companys consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. In 2001, the Company entered into foreign currency forward
contracts in Mexican pesos to reduce the effect of potentially adverse exchange
rate fluctuations in Mexico.

The Companys subsidiary in Mexico, Jafra S.A., generated approximately
65.9% and 65.5% of the Companys net sales for the three and six months ended
June 30, 2001, compared to 60.4% and 61.0% for the comparable 2000 periods,
substantially all of which were denominated in Mexican pesos. Jafra S.A. had
$38.6 million of U.S. dollar-denominated third party debt. Gains and losses
from remeasuring such debt to the U.S. dollar from the peso are included as a
component of net income. Jafra S.A. recognized an unrealized gain of $2.0
million and $3.0 million on the remeasurement of this U.S.
dollar-denominated and a net loss of $6.2 and $9.6 million on foreign currency
forward contracts debt for the three and six months ended June 30, 2001,
respectively.

European Economic and Monetary Union

On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro will trade on currency exchanges
and be available for non-cash transactions during the transition period between
January 1, 1999 and January 1, 2002. During this transition period, the
existing currencies are scheduled to remain legal tender in the participating
countries as denominations of the euro and public and private parties may pay
for goods and services using either the euro or the participating countries
existing currencies.

During the transition period, the Company will continue to utilize the
respective countrys existing currency as the functional currency. Use of the
euro by the Company or its consultants is not expected to be significant and
will be converted and recorded in the Companys accounting records in the
existing functional currency.

The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the euro.
The Company 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 started 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
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. The Companys Mexican subsidiary
generated 65.5% of the Companys consolidated net sales for six months ended
June 30, 2001, compared to 62% for the full year in 2000. The year-to-year
sales growth in Mexico for the six months ended June 30, 2001 was approximately
29% in U.S. dollars and 28% in local currency. Assuming a continued stable
economic environment, the Company intends to continue to grow its revenues and
consultant 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. The U.S. subsidiary has created
distinct business divisions to recognize the distinct elements of its General
and Hispanic customer groups. Net sales in the U.S. for the six months ended
June 30, 2001 increased 6% compared to the comparable period of the prior year.
The U.S. plans to implement a number of strategies in the remainder of 2001
which, along with the initiation of doing business via e-commerce and an
increased focus on



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sponsoring new consultants through enhanced training programs, are intended to
stimulate sales growth in the high single digits over 2000 levels.

Net sales in Europe have been on a downward trend for the last two years.
European sales have declined from approximately 16% of the Companys business
in 1998 to 7% of the Companys business in the six months ended June 30, 2001.
In the first six months of 2001, excluding the impact of exchange rates, net
sales remained relatively consistent compared to the first six months of 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.

During the last two years, the Company has made significant investments in
new markets in South America. Sales in U.S. dollars in the South American
region grew by over 20% in 2000 and are up 12% in the six months ended June 30,
2001. In 2000, net sales generated by subsidiaries in the South American
region were approximately 6% of consolidated sales, but the Company expects the
region to contribute approximately 7% of consolidated sales for 2001.

As a result of these differential growth rates, the Company expects, but
no assurance can be given, that its percentage of net sales in Mexico and South
America will increase slightly, and its percentage of net sales in Europe will
decrease slightly for the near term.

The Company has made plans to develop new business in 2001 through
expansion into new markets, particularly Thailand, which was opened in 2000,
and by utilizing the Internet and electronic commerce to increase its revenue
base in existing markets.

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 Liquidity and Capital Resources concerning the Companys
belief that it will have sufficient liquidity to meet its cash requirements and
working capital needs over the next twelve months; (ii) the statement in Cash
Flows that total capital expenditures in 2001 are expected to be approximately
$12.0 million; (iii) the statements in European Economic and Monetary
Union concerning the Companys expectations that (a) during the transition
period, use of the euro by the Company or its consultants will not be
significant; (b) it will complete the necessary modifications to achieve a
euro-compliant system by the end of 2001 without incurring significant
expenses, and (c) the introduction of the euro will not materially adversely
affect its business, financial condition or results of operations; (iv) the
statements in Business Trends and Initiatives that (a) assuming a continued
stable economic environment, the Company intends to continue to grow its
revenues and consultant base in Mexico, but at rates in the range of
1012% per
year; (b) the Companys expectation that U.S. sales growth will be in the high
single digits in 2001; (c) the Companys expectation that the level of sales in
Europe for the year 2001 will be approximately the same as was achieved in
2000, but at higher operating profit; (d) the Companys expectation that the
percentage of net sales in South America will increase to approximately 7% of
consolidated sales for 2001, and (e) the Companys expectation that the
percentage of net sales in Mexico and South America will increase slightly, and
that its percentage of net sales in Europe will decrease slightly for the near
term; and (v) 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 factors described in the Companys Annual Report on Form 10-K for the year
ended December 31, 2000 (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,
and European Economic and Monetary Union), or in other Securities and
Exchange



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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.

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 3. 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. See disclosures under Item 7a, Quantitative and Qualitative
Disclosures About Market Risks in the Companys annual report on Form 10-K for
the year ended December 31, 2000. No significant changes have occurred during
the second quarter of 2001 in relation to the interest rate risk or its credit
standing.

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, 78.5% of the Companys revenue for first six months of 2001 was generated in
countries with a functional currency other than the U.S. dollar. As a result,
the Companys earnings and cash flows for the six months ended June 30, 2001
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 outstanding foreign currency forward contracts at June 30, 2001 had a
notional value of $93,742,000 and mature at various dates extending to June
2002. 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 table below describes the forward
contracts that were outstanding at June 30, 2001 (in thousands):

|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|------------------------------- |  | ------------- | ------ | -------- |  | -------- | -------- | -------- |  | -------- | ----- |  |  | - | ------ | 
|                                |  |               |        |          |  |          |          |          |  | Weighted |       |  |  |  
|                                |  | Forward       |        |          |  |          |          | Average  |  |          |       | 
|                                |  | Position in   |        | Maturity |  | Contract |          | Fair    
|Foreign Currency                |  | US Dollars(1) |        | Date     |  | Rate     |          | Value(1)
|                                |  |               |        |          |  |          |          |         
|Buy US Dollar/sell Mexican Peso |  | $             | 9,154  |          |  |          | 7/31/01  |          |  |          | 10.38 |  |  | $ | 7,861  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 11,816 |          |  |          | 8/31/01  |          |  |          | 10.32 |  |  |   | 10,326 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 12,125 |          |  |          | 9/28/01  |          |  |          | 10.39 |  |  |   | 10,600 | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,336  |          |  |          | 10/30/01 |          |  |          | 10.70 |  |  |   | 1,987  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 10,275 |          |  |          | 10/31/01 |          |  |          | 10.71 |  |  |   | 8,737  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 6,806  |          |  |          | 11/30/01 |          |  |          | 10.24 |  |  |   | 6,175  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,110  |          |  |          | 12/27/01 |          |  |          | 10.71 |  |  |   | 3,565  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 3,761  |          |  |          | 12/31/01 |          |  |          | 10.90 |  |  |   | 3,188  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 7,643  |          |  |          | 1/31/02  |          |  |          | 10.30 |  |  |   | 7,011  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,989  |          |  |          | 2/28/02  |          |  |          | 10.38 |  |  |   | 4,576  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 9,023  |          |  |          | 3/27/02  |          |  |          | 10.46 |  |  |   | 8,278  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,764  |          |  |          | 4/30/02  |          |  |          | 10.29 |  |  |   | 4,494  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 4,114  |          |  |          | 5/31/02  |          |  |          | 9.97  |  |  |   | 4,035  | 
|                               
|                               
|                               
|                               
|Buy US Dollar/sell Mexican Peso |  |               | 2,826  |          |  |          | 6/28/02  |          |  |          | 9.91  |  |  |   | 2,806  | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 
|                                |  | $             | 93,742 |          |  |          |          |          |  |          |       |  |  | $ | 83,639 | 
|                                |  |               |        |          |  |          |          |          |  |          |       |  |  |   |        | 



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---

|    |  |                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(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 $10,103,000 at June 30, 2001, represents the fair value of the
forward contracts, and has been recorded in accrued liabilities in the
accompanying consolidated balance sheet as of June 30, 2001.



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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

See discussion under Legal Proceedings in the Companys Annual Report on
Form 10-K for the year ended December 31, 2000.




Item 2. Changes in Securities and Use of Proceeds

None.




Item 3. Defaults Upon Senior Securities

None.




Item 4. Submission of Matters to a Vote of Security Holders

None.




Item 5. Other Information

None.




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

The following exhibit is filed herewith or incorporated by reference:



| | 3.1 |  | Notarial Deed and Resolutions, together with an unofficial summary
thereof in English, for the renaming of Qualifax, S.A. de C.V. as
Serviday, S.A. de C.V.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

During the quarter ended June 30, 2001, the Company filed no reports on
Form 8-K.



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SIGNATURE

Pursuant to the requirements 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.                                                                                                    
|
|
|
|
|
| |  | /s/   MICHAEL A. DIGREGORIO                                                                                                    
| |  |                                                                                                                                
| |  | Michael A. DiGregorio
Senior Vice President and Chief Financial Officer
of the Advisory Committee (Principal Financial Officer)

August 14, 2001



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INDEX TO EXHIBITS

|            |  |                                                                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                               
|            |  |                                                                                                                                                           
|3.1         |  | Notarial Deed and Resolutions, together with an unofficial summary thereof in English, for the
renaming of Qualifax, S.A. de C.V. as Serviday S.A. de C.V.