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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, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. 
  Luxembourg
    
    98-0399297(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 174 Route de Longwy
L-1940 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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES o NO x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o NO x The registrant does not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 and there is no
public market for voting stock of the registrant. 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 $100 per share, outstanding at August 10, 2004
150 shares.




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JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. 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, 2004 Page No.PART I  FINANCIAL INFORMATIONItem 1. (*) Financial Statements (Unaudited):Consolidated
Financial Statements  Jafra Worldwide Holdings (Lux)
S.àR.L.Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Consolidated
Financial Statements  Jafra Cosmetics International, Inc. and
SubsidiariesConsolidated Balance Sheets
    
    
    18Consolidated Statements of Operations
    
    
    19Consolidated Statements of Cash Flows
    
    
    20Notes to Consolidated Financial Statements
    
    
    21Financial
Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    
    29Statements of Operations
    
    
    30Statements of Cash Flows
    
    
    31Notes to Financial Statements
    
    
    32Consolidated
Financial Statements  Jafra Cosmetics International, S.A. de
C.V. and SubsidiariesConsolidated Balance Sheets
    
    
    37Consolidated Statements of Operations
    
    
    38Consolidated Statements of Cash Flows
    
    
    39Notes to Consolidated Financial Statements
    
    
    40Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    60Item 4. Controls and Procedures
    
    
    61PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    62Item 6. Exhibits and Reports on Form 8-K
    
    
    62Signature
    
    
    63Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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* Jafra Worldwide Holdings (Lux) S.àr.l. (the Parent) is the parent company
of Distribuidora Comercial Jafra, S.A. de C.V. (Jafra Distribution) and Jafra
Cosmetics International, Inc. (JCI), which severally issued $120 million and
$80 million, respectively, of 103⁄4% Subordinated Notes (the Notes). The
Parent has fully and unconditionally guaranteed the Notes on a senior
subordinated basis. Jafra Distribution 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. Jafra Cosmetics International, S.A. de C.V. and its
subsidiaries (Jafra Cosmetics S.A.), additional indirect subsidiaries of the
Parent, have fully and unconditionally guaranteed the obligations of Jafra
Distribution under the Notes. As such, the Parent is filing separate financial
statements of JCI, Jafra Distribution and Jafra Cosmetics S.A. in addition to
its own financial statements, in its Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004. 3




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,768
    
    
    $
    16,120Receivables, net
    
    
    39,408
    
    
    
    39,680Inventories
    
    
    39,154
    
    
    
    39,849Prepaid income taxes
    
    
    9,630
    
    
    
    414Prepaid expenses and other current assets
    
    
    9,636
    
    
    
    4,906Deferred income taxes
    
    
    6,381
    
    
    
    6,381Assets from discontinued operations
    
    
    110
    
    
    
    138Total current assets
    
    
    111,087
    
    
    
    107,488Property and equipment, net
    
    
    61,701
    
    
    
    63,356Other assets:Goodwill
    
    
    62,589
    
    
    
    63,096Trademarks
    
    
    40,209
    
    
    
    41,242Deferred financing fees and other, net
    
    
    17,486
    
    
    
    18,561Total
    
    $
    293,072
    
    
    $
    293,743LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    8,750
    
    
    $
    7,500Accounts payable
    
    
    22,289
    
    
    
    22,213Accrued liabilities
    
    
    46,188
    
    
    
    49,174Income taxes payable
    
    
    3,465
    
    
    
    5,216Deferred income taxes
    
    
    2,868
    
    
    
    2,941Liabilites from discontinued operations
    
    
    113

    
    
    
    124Total current liabilities
    
    
    83,673
    
    
    
    87,168Long-term debt
    
    
    250,000
    
    
    
    240,000Deferred income taxes
    
    
    16,848
    
    
    
    17,163Other long-term liabilities
    
    
    4,908
    
    
    
    4,801Total liabilities
    
    
    355,429
    
    
    
    349,132Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common
stock, par value $100; 150 shares
authorized, issued and outstanding
in 2004 and 2003
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    4,296
    
    
    
    Retained deficit
    
    
    (58,373
    )
    
    
    (46,250
    )Accumulated other comprehensive loss
    
    
    (8,295
    )
    
    
    (9,154
    )Total stockholders deficit
    
    
    (62,357
    )
    
    
    (55,389
    )Total
    
    $
    293,072
    
    
    $
    293,743
 See accompanying notes to consolidated financial statements 4




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    103,716
    
    
    $
    100,010
    
    
    $
    206,838
    
    
    $
    190,148Cost of sales
    
    
    23,875
    
    
    
    22,688
    
    
    
    48,058
    
    
    
    44,218Gross profit
    
    
    79,841
    
    
    
    77,322
    
    
    
    158,780
    
    
    
    145,930Selling, general and administrative expenses
    
    
    60,952
    
    
    
    60,584
    
    
    
    124,189
    
    
    
    117,962Transaction related expenses
    
    
    26,114
    
    
    
    14,354
    
    
    
    29,523
    
    
    
    15,124Restructuring and impairment charges
    
    
    864
    
    
    
    
    
    
    
    2,773
    
    
    
    (Loss) income from operations
    
    
    (8,089
    )
    
    
    2,384
    
    
    
    2,295
    
    
    
    12,844Other income (expense):Exchange (loss) gain, net
    
    
    (5,091
    )
    
    
    459
    
    
    
    (4,540
    )
    
    
    (304
    )Interest expense
    
    
    (6,942
    )
    
    
    (4,700
    )
    
    
    (13,735
    )
    
    
    (7,453
    )Interest income
    
    
    31
    
    
    
    70
    
    
    
    77
    
    
    
    239Loss on extinguishment of debt
    
    
    
    
    
    
    (6,620
    )
    
    
    
    
    
    
    (6,620
    )Other expense
    
    
    (184
    )
    
    
    (299
    )
    
    
    (184
    )
    
    
    (339
    )Other income
    
    
    44
    
    
    
    27
    
    
    
    27
    
    
    
    44Loss before income taxes
    
    
    (20,231
    )
    
    
    (8,679
    )
    
    
    (16,060
    )
    
    
    (1,589
    )Income tax (benefit) expense
    
    
    (7,069
    )
    
    
    (2,138
    )
    
    
    (4,123
    )
    
    
    1,619Loss from continuing operations
    
    
    (13,162
    )
    
    
    (6,541
    )
    
    
    (11,937
    )
    
    
    (3,208
    )Loss on discontinued operations, net of income tax
expense of $0.0 million in 2004 and 2003
    
    
    (46
    )
    
    
    (1,117
    )
    
    
    (186
    )
    
    
    (1,926
    )Net loss
    
    $
    (13,208
    )
    
    $
    (7,658
    )
    
    $
    (12,123
    )
    
    $
    (5,134
    )
 See accompanying notes to consolidated financial statements 5




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (12,123
    )
    
    $
    (5,134
    )Loss on discontinued operations, net of tax
    
    
    186
    
    
    
    1,926Loss from continuing operations
    
    
    (11,937
    )
    
    
    (3,208
    )Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    3,270
    
    
    
    2,951Amortization and write off of deferred financing fees
    
    
    980
    
    
    
    3,030Provision for uncollectible accounts receivable
    
    
    4,256
    
    
    
    2,938Non-cash compensation expense
    
    
    4,922
    
    
    
    Asset impairment charges
    
    
    423
    
    
    
    251Unrealized foreign exchange and derivative loss
    
    
    4,511
    
    
    
    1,355Deferred realized foreign exchange loss
    
    
    
    
    
    
    646Changes in operating assets and liabilities:Receivables
    
    
    (5,082
    )
    
    
    (2,137
    )Inventories
    
    
    (3
    )
    
    
    (4,979
    )Prepaid expenses and other current assets
    
    
    (5,753
    )
    
    
    (4,170
    )Other assets
    
    
    (362
    )
    
    
    520Accounts payable and accrued liabilities
    
    
    (6,068
    )
    
    
    (247
    )Income taxes payable/prepaid
    
    
    (5,892
    )
    
    
    (1,000
    )Other long-term liabilities
    
    
    107
    
    
    
    321Net operating activities of discontinued operations
    
    
    17
    
    
    
    (88
    )Net cash used in operating activities
    
    
    (16,611
    )
    
    
    (3,817
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,563
    )
    
    
    (2,702
    )Other
    
    
    223
    
    
    
    (431
    )Net cash used in investing activities
    
    
    (3,340
    )
    
    
    (3,133
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    200,000Proceeds from issuance of term loan
    
    
    
    
    
    
    50,000Repurchase of subordinated debt due 2008
    
    
    
    
    
    
    (75,180
    )Repayments under term loan facility
    
    
    (3,750
    )
    
    
    (8,375
    )Borrowings under revolving credit facility
    
    
    28,900
    
    
    
    Repayments under revolving credit facility
    
    
    (13,900
    )
    
    
    Distribution of additional paid-in capital to shareholder
    
    
    
    
    
    
    (83,570
    )Distribution payment to shareholder from retained earnings
    
    
    
    
    
    
    (75,444
    )Distribution
to parent
    
    
    (626
    )
    
    
    Deferred financing costs
    
    
    42
    
    
    
    (13,906
    )Repayments under bank debt
    
    
    
    
    
    
    (828
    )Net cash provided by (used in) financing activities
    
    
    10,666
    
    
    
    (7,303
    )Effect of exchange rate changes on cash
    
    
    (67
    )
    
    
    (852
    )Net decrease in cash and cash equivalents
    
    
    (9,352
    )
    
    
    (15,105
    )Cash and cash equivalents at beginning of period
    
    
    16,120
    
    
    
    26,821Cash and cash equivalents at end of period
    
    $
    6,768
    
    
    $
    11,716
 See accompanying notes to consolidated financial statements 6




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation Jafra Worldwide Holdings (Lux) S.àr.l, a Luxembourg société à
responsabilité limitée(the Parent) is a wholly-owned subsidiary of Jafra
S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.). Jafra S.A., a
Luxembourg société anonyme(Jafra S.A.), was a wholly-owned subsidiary of
CDRJ Investments (Lux) S.A., a Luxembourg société anonyme(CDRJ). On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and
outstanding capital stock of Jafra S.A. (the Acquisition). As a result of
the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal,
Germany. The purchase transaction has not been pushed down to the Company due
to the outstanding registered debt. On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (JCI)
and Distribuidora Comercial Jafra S.A. de C.V. (Jafra Distribution and
together with JCI, the Issuers) completed a recapitalization of their
operations by entering into $90 million of new senior secured credit
facilities, consisting of a $50 million senior secured term loan facility and a
$40 million senior secured revolving credit facility and issuing $200 million
of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes and such
transactions collectively, the Recapitalization). The proceeds from the
Recapitalization were used to redeem the 113⁄4% Senior Subordinated Notes
due 2008 (the Old Notes) of JCI and Jafra Cometics International, S.A. de
C.V. (Jafra Cosmetics S.A.), to repay all amounts outstanding under the
existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain
payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The
stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the
Parent to act as its liquidator. Thereafter, CDRJ made an initial liquidating
distribution of such proceeds to its stockholders. In connection with the
liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities,
including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and
Jafra Distribution, to the Parent in exchange for additional shares of common
stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are
collectively referred to as Jafra Mexico. Jafra Distribution was organized February 26, 2003 to conduct the
distribution functions of the Parents Mexican operations. The Parent was
organized on February 24, 2003 as a holding company to conduct the worldwide
Jafra cosmetics business through its subsidiaries. CDRJ was a holding company
that, until the Recapitalization, conducted the Jafra cosmetics business
through its subsidiaries. Since the commencement of the liquidation, CDRJ has
conducted no operations other than those incident to winding up its activities.
The liquidation of CDRJ occurred during the second quarter of 2004. The accompanying unaudited interim consolidated financial statements as of
and for the three and six months ended June 30, 2004 and 2003 and the accompanying
audited consolidated balance sheet as of December 31, 2003 reflect the
operations of the Parent and its subsidiaries and are referred to collectively
as the Company. The unaudited interim consolidated financial statements 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, including normal
recurring adjustments, necessary to present fairly the Companys consolidated
financial statements as of June 30, 2004 and for the interim periods presented.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The functional currency of certain of the Companys foreign subsidiaries
generally 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 loss. 7




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Management Incentive Arrangements. The Company applied Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock issued to
Employees and related Interpretations in accounting for the issuance of stock
options under the Stock Incentive Plan. As part of the Acquisition, the
Management Incentive Plan was terminated. No options were granted during 2004
prior to the termination of the plan. Had the Company recorded compensation
cost based on the fair value of options granted at the grant date, as
prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation, the compensation expense for the
three and six months ended June 30, 2004 and 2003 would be immaterial to the
consolidated statements of operations. New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46
were effective for the Company in the first quarter of 2004. The adoption of
FIN 46 did not have an impact on the Companys financial position or results of
operations as the Company had no variable interest entities. (2) Inventories Inventories consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    8,886
    
    
    $
    6,131Finished goods
    
    
    30,268
    
    
    
    33,718Total inventories
    
    $
    39,154
    
    
    $
    39,849
 (3) Property and Equipment Property and equipment consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Land
    
    $
    15,450
    
    
    $
    15,686Buildings
    
    
    16,404
    
    
    
    16,662Machinery, equipment and other
    
    
    50,259
    
    
    
    50,88682,113
    
    
    
    83,234Less accumulated depreciation.
    
    
    20,412
    
    
    
    19,878Property and equipment, net
    
    $
    61,701
    
    
    $
    63,356
 8




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (4) Goodwill and Other Intangible Assets. The Companys intangible assets consist of trademarks and goodwill. The
Company has determined trademarks -- principally the Jafra name resulting from
the acquisition of the Jafra business from Gillette -- to have an indefinite
life. The carrying value of trademarks was $40,209,000 as of June 30, 2004. The
changes in the carrying amount of goodwill for the year ended December 31, 2003
and for the six months ended June 30, 2004 are as follows (in thousands): United
    
    
    
    
    
    
    
    
    
    All
    
    ConsolidatedGoodwill
    
    States
    
    Mexico
    
    Europe
    
    Others
    
    TotalBalance as of December 31, 2002
    
    $
    32,188
    
    
    $
    28,548
    
    
    $
    5,300
    
    
    $
    137
    
    
    $
    66,173Impairment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    (137
    )Translation effect
    
    
    
    
    
    
    (2,120
    )
    
    
    (820
    )
    
    
    
    
    
    
    (2,940
    )Balance as of December 31, 2003
    
    
    32,188
    
    
    
    26,428
    
    
    
    4,480
    
    
    
    
    
    
    
    63,096Translation effect
    
    
    
    
    
    
    (657
    )
    
    
    150
    
    
    
    
    
    
    
    (507
    )Balance as of June 30, 2004
    
    $
    32,188
    
    
    $
    25,771
    
    
    $
    4,630
    
    
    $
    
    
    
    $
    62,589
 In connection with the implementation of SFAS No. 142, Goodwill and Other
Intangible Assets, the Company identified all reporting units and allocated
all goodwill accordingly. During the year ended December 31, 2003, the Company
identified impairment indicators regarding the Venezuelan operations given the
Companys decision to exit this market. The Company recorded an impairment
loss of $137,000 for goodwill originally allocated to the Venezuelan reporting
unit. (5) Income Taxes The actual income tax rate of the Company differs from the expected tax
rate, computed by applying the federal corporate rate to loss before income
taxes for the six months ended June 30, 2004 and for the three and six months
ended June 30, 2003. For the six months ended June 30, 2004, the effective tax
benefit rate was approximately 26% primarily as a result of tax benefits on
pretax losses in the United States subsidiary and a valuation allowance against
certain tax losses in one of the Companys Mexican subsidiaries, partially
offset by income tax expense on pretax income at another Mexican subsidiary.
The income tax rate during the second quarter of 2003 was negatively impacted
by certain withholding taxes in connection with the Recapitalization. During
the six months ended June 30, 2003, income tax expense was approximately
$1,619,000 on a pretax losses of $1,589,000 primarily due to income tax expense
on pretax net income at the Companys Mexican subsidiaries, partially offset by
an income tax benefit in the United States subsidiary based on pretax net
losses. Additionally, the European subsidiaries recorded valuation allowances
against certain pretax net losses during the six months ended June 30, 2003. (6) Debt and Distribution to Shareholders On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes (the New Notes) due 2011 pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90
million senior credit agreement (the Senior Credit Agreement). The New Notes
represent the several obligations of JCI and Jafra Distribution in the amount
of $80 million and $120 million, respectively. The New Notes mature in 2011 and
bear a fixed interest rate of 103⁄4% payable semi-annually. 9




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
required to fully and unconditionally guarantee the U.S. portion of New Notes
jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully
and unconditionally guarantee the Mexican portion of the New Notes jointly and
severally, on a senior subordinated basis. Jafra Cosmetics S.A. has also fully
and unconditionally guaranteed the obligations of Jafra Distribution under the
New Notes. Each existing and subsequently acquired or organized subsidiary of
Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee
the Mexican portion of the New Notes jointly and severally, on a senior
subordinated basis. The New Notes are unsecured and are generally not redeemable for four
years from their issue date. Thereafter, the New Notes will be redeemable on a
pro rata basis at premiums declining to par in the sixth year. Prior to May 16,
2006, the Issuers at their option may concurrently redeem the New Notes in an
aggregate principal amount equal to up to 35% of the original aggregate
principal amount of the New Notes, with funds in an aggregate amount not
exceeding the aggregate cash proceeds of one or more equity offerings, at a
redemption price of 110.75 plus accrued interest. On September 15, 2003, the
Issuers consummated a registered exchange of the New Notes under the Securities
Act of 1933. As the Acquisition constituted a change of control as defined in
the indenture governing the Companys 103⁄4% Notes, the Issuers and the
Parent sent a notice to noteholders of their right to require the repurchase of
the outstanding notes at a price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the date of such repurchase. Subsequent to
June 30, 2004, holders of the 103⁄4% notes exercised their option to sell an
aggregate of $500,000 of the outstanding Notes to the Issuers. In addition, the Issuers entered into the Senior Credit Agreement, which
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a $50 million senior secured term loan facility
maturing in 2008 and a $40 million senior secured revolving credit facility,
also maturing in 2008, of which $20 million is available as letters of credit.
The Senior Credit Agreement is allocated 40% to JCI and 60% to Jafra
Distribution. On May 20, 2003, JCI borrowed $20 million and Jafra Distribution
borrowed $30 million of the loans under the term facility. Borrowings under the
term loan facility are payable in quarterly installments of principal and
interest over five years through May 20, 2008. Borrowings under the revolving
credit facility mature on May 20, 2008. Borrowings under the Senior Credit
Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed
3.75% or an alternate base rate plus an applicable margin not to exceed 2.75%.
As of June 30, 2004, the applicable interest rates were 7.0% and 5.13% for base
rate loans and 30 day LIBOR loans, respectively, subject in each case to
periodic adjustment based on certain levels of financial performance.
Borrowings under the Senior Credit Agreement are secured by substantially all
of the assets of JCI and Jafra Distribution. In connection with closing the Acquisition, the Issuers, the Company and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provides that for a period of
90 days following the closing of the Acquisition ending August 25, 2004, the
Acquisition will not constitute an event of default under the Credit Agreement.
The Company is seeking refinancing of the indebtedness outstanding under the
Senior Credit Agreement. The Company believes that the new senior facility
will be obtained. Both the Indenture 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. These debt agreements also
require the Company to maintain certain financial ratios including a minimum
EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA
ratio. These covenants apply to the Parent and certain of its subsidiaries,
including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A.
As of June 30, 2004, the Company was in compliance with all covenants. 10




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The senior credit agreement contains provisions whereby (i) the default by
the Parent, or any default by JCI, Jafra Distribution or any of their
respective subsidiaries, in any payment under debt obligations in an aggregate
principal amount of $5.0 million or more beyond any applicable grace period, or
(ii) any default by the Parent, or any default by JCI, Jafra Distribution or
any of their respective subsidiaries, in the observance or performance of any
other agreement or condition under such other debt obligations that allows the
holder(s) of such debt obligations to accelerate the maturity of such
obligations after the expiration of any grace period or the provision of
notice, and such grace period has expired or notice has been given, will allow
the lenders under the senior credit agreement to terminate their commitments to
lend thereunder and/or declare any amounts outstanding thereunder to be
immediately due and payable. The Indenture contains similar provisions that
apply upon the failure by the Parent, or the failure by JCI, Jafra Distribution
or any of their significant subsidiaries (as defined in the Indenture), to pay
any indebtedness for borrowed money when due, or on the acceleration of any
other debt obligations exceeding $10.0 million. The Indenture also contains
provisions that, under certain circumstances, permit the holders of certain
senior indebtedness (including the loans made under the senior credit
agreement) to block payments on the 103⁄4% Notes during the continuance of
certain defaults that would allow the holders of such senior indebtedness to
accelerate the relevant senior indebtedness. The terms of the Indenture significantly restrict the Parent and its other
subsidiaries from paying dividends and otherwise transferring assets to Jafra
S.A. The ability of the Parent to make such restricted payments or transfers is
generally limited to an amount determined by a formula based on 50% of its
consolidated net income (which, as defined in the Indenture, excludes goodwill
impairment charges and any after-tax extraordinary, unusual or nonrecurring
gains and losses) accruing from October 1, 2002, plus specified other amounts.
In addition, as a condition to making such payments to Jafra S.A. based on such
formula, the Parent must have a consolidated coverage ratio (as defined in the
Indenture) of at least 2.25 to 1 after giving effect to any such payments.
Notwithstanding such restrictions, the Indenture permits an (i) aggregate of
$5.0 million of such payments and (ii) payments for certain specific uses, such
as the payment of consolidated taxes or holding company expenses, to be made
whether or not there is availability under the formula or the conditions to its
use are met. The terms of the senior credit agreement contain similar
restrictions. The senior credit agreement generally limits dividends by the
Parent to dividends necessary to fund specified costs and expenses, but permits
the Parent to pay dividends of up to 50% of consolidated net income (as defined
in the Indenture) plus up to $5.0 million so long as the term loans have been
repaid in full, the aggregate exposure of the lenders under the revolving
portion of the senior credit facilities does not exceed $25 million and the
consolidated leverage ratio (as defined in the senior credit agreement) does
not exceed 3 to 1 after giving effect to such payment. On May 23, 2003, with proceeds from the issuance of the New Notes and
borrowings under the Senior Credit Agreement, JCI and Jafra Cosmetics S.A.
redeemed the Old Notes in the aggregate outstanding principal amount of
$75,180,000 at a premium of approximately $4,417,000. Additionally, JCI and
Jafra Cosmetics S.A. repaid $7,375,000 under its existing credit agreement (the
Old Credit Agreement) and terminated the Old Credit Agreement. In connection
with the redemption of the Old Notes and the termination of the Old Credit
Agreement, the Company wrote off approximately $2,203,000 of capitalized
deferred financing fees. Total costs related to the redemption of the Old
Notes and the repayment of amounts outstanding under the Old Credit Agreement
were $6,620,000 and were recorded as loss on extinguishment of debt on the
accompanying consolidated statements of operations during the three months
ended June 30, 2003. After the redemption of the Old Notes and repayment of all outstanding
amounts under the Old Credit Agreement, the shareholders of CDRJ resolved to
liquidate CDRJ. As a result, CDRJ made an initial liquidating distribution of
$157,609,000 to its shareholders of record at May 20, 2003. Additionally, CDRJ
reserved $1,405,000 to pay subsequent distributions or expenses associated with
its liquidation. JCI also made a special payment to the holders of CDRJ options
and certain members of management and non-employee directors. 11




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The Company capitalized $14,647,000 of costs related to the issuance of
the New Notes and the Senior Credit Agreement as deferred financing fees.
These deferred financing fees are reported as a noncurrent asset in the
accompanying consolidated balance sheets and are being amortized on a basis
that approximates the interest method over the term of the New Notes and the
Senior Credit Agreement. As of June 30, 2004, approximately $2,311,000 of the
deferred financing fees were amortized. Upon expiration of the Senior Credit
Agreement on August 25, 2004, the Company will have approximately $4,656,000 of
unamortized deferred financing fees related to the Senior Credit Agreement.
The Company expects to write off these deferred financing fees upon expiration
of the Senior Credit Agreement and to record that write off as a loss on
extinguishment of debt during the third quarter of 2004. (7) Non-Cash Equity Contribution During the second quarter of 2004, the former primary shareholder of Jafra
S.A. paid certain members of management and non-employee board of director
members a special bonus of $4,922,000. As this amount was paid directly to the
recipients from the former primary shareholder, Jafra S.A. recorded
$4,922,000 as deemed contributed capital and as a non-cash transaction expense
representing compensation. Jafra S.A. then contributed $4,922,000 to the
Company. This contribution was partially offset by a cash distribution of $626,000 to
Jafra S.A. (8) Transaction Related Expense During the three and six months ended June 30, 2004, the Company incurred
$26,114,000 and $29,523,000 of transaction fees related to the Acquisition and
to certain other transactions contemplated but not completed. Included in
these amounts was $20,282,000 of compensation expense for the buyback and
cancellation of options to purchase shares of Jafra S.A. and $4,922,000 of
special bonus payments paid directly by the former shareholder. During the
three and six months ended June 30, 2003, the Company recorded $14,354,000 and
$15,124,000 of transaction expenses related to the Recapitalization and to
other transactions contemplated but not completed. In connection with the
Recapitalization, the Board of Directors authorized CDRJ to reprice
all existing outstanding stock options. In order to compensate option holders for any
diminished value of the outstanding options, the Board of Directors further
authorized $10,391,000 in bonus payments to current option holders during the
three and six months ended June 30, 2003. Additionally, the Company authorized
a special bonus of $2,715,000 to certain members of management and to
non-employee directors for contributions to completing the Recapitalization of
CDRJ. (9) Restructuring and Asset Impairment Charges During the three and six months ended June 30, 2004 the Company recorded
$864,000 and $2,773,000, respectively, of restructuring and asset impairment
charges primarily related to the transfer of substantially all of its skin and
body care manufacturing operations to its facilities in Mexico. The transfer
of these operations was substantially complete during the second quarter of
2004. Of these charges, approximately $423,000 was for the impairment of
certain assets not transferred and the remaining amount was primarily
termination benefits. A rollforward of the activity of the restructuring
accruals is summarized as follows (in thousands): Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2004Opening balance
    
    $
    1,220
    
    
    $
    Additions
    
    
    864
    
    
    
    2,773Charges against reserves
    
    
    (661
    )
    
    
    (1,350
    )Ending balance
    
    $
    1,423
    
    
    $
    1,423
 The Company does not expect to incur any additional significant charges in
connection with the transfer of these manufacturing operations to Mexico. 12




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (10) Comprehensive Loss Comprehensive loss is summarized as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (13,208
    )
    
    $
    (7,658
    )
    
    $
    (12,123
    )
    
    $
    (5,134
    )Unrealized and deferred realized (loss)
gain on derivatives
    
    
    236
    
    
    
    (198
    )
    
    
    (199
    )
    
    
    157Reclassification of deferred realized
loss to
exchange (loss) gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (550
    )Reclassification of deferred realized
loss (gain) to cost of sales
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    654Foreign currency translation adjustments
    
    
    1,518
    
    
    
    2,276
    
    
    
    1,058
    
    
    
    (934
    )Comprehensive loss
    
    $
    (11,454
    )
    
    $
    (5,604
    )
    
    $
    (11,264
    )
    
    $
    (5,807
    )
 (11) 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 including the Dominican Republic, and
Europe. Business results for subsidiaries in South America and Thailand are
combined and included in the following table under the caption All Others.
As of the beginning of 2004, the Company includes the results of the Dominican
Republic with the results of the United States as they are under common
management and the Companys chief operating decision makers evaluate the
results of the Dominican Republic with the results of the United States. All
prior period results have been reclassified to be consistent with the 2004
presentation. 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, 2003 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 and unusual gains and losses. 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 net sales and segment income (loss) from operations. The elimination
of intercompany profit from inventory within segment assets is included in
Corporate, Unallocated and Other. 13




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) United Statesand the
    
    
    
    
    
    
    

    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedMexico
    
    Republic
    
    Europe
    
    Others
    
    and Other
    
    Total(in thousands)As of and for the three
months ended June 30, 2004Net sales
    
    $
    67,581
    
    
    $
    25,996
    
    
    $
    8,763
    
    
    $
    1,376
    
    
    $
    
    
    
    $
    103,716Income (loss) from operations
    
    
    21,239
    
    
    
    2,180
    
    
    
    498
    
    
    
    (626
    )
    
    
    (31,380
    )
    
    
    (8,089
    )Depreciation
    
    
    601
    
    
    
    923
    
    
    
    112
    
    
    
    23
    
    
    
    
    
    
    
    1,659Capital expenditures
    
    
    525
    
    
    
    1,028
    
    
    
    18
    
    
    
    21
    
    
    
    
    
    
    
    1,592Segment assets
    
    
    181,847
    
    
    
    92,023
    
    
    
    17,505
    
    
    
    3,212
    
    
    
    (1,625
    )
    
    
    292,962Discontinued operations assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    110Goodwill
    
    
    25,771
    
    
    
    32,188
    
    
    
    4,630
    
    
    
    
    
    
    
    
    
    
    
    62,589For the three months ended
June 30, 2003Net sales
    
    $
    63,421
    
    
    $
    26,106
    
    
    $
    8,623
    
    
    $
    1,860
    
    
    $
    
    
    
    $
    100,010Income (loss) from operations
    
    
    17,881
    
    
    
    3,703
    
    
    
    503
    
    
    
    (1,227
    )
    
    
    (18,476
    )
    
    
    2,384Depreciation
    
    
    552
    
    
    
    711
    
    
    
    148
    
    
    
    74
    
    
    
    
    
    
    
    1,485Capital expenditures
    
    
    319
    
    
    
    729
    
    
    
    97
    
    
    
    29
    
    
    
    
    
    
    
    1,174As of December 31, 2003Segment assets
    
    $
    180,818
    
    
    $
    92,420
    
    
    $
    18,244
    
    
    $
    3,579
    
    
    $
    (1,456
    )
    
    $
    293,605Discontinued operations assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138Goodwill
    
    
    26,428
    
    
    
    32,188
    
    
    
    4,480
    
    
    
    
    
    
    
    
    
    
    
    63,096For the six months ended June
30, 2004Net sales
    
    $
    138,429
    
    
    $
    48,743
    
    
    $
    17,056
    
    
    $
    2,610
    
    
    $
    
    
    
    $
    206,838Income (loss) from operations
    
    
    39,898
    
    
    
    4,244
    
    
    
    765
    
    
    
    (1,284
    )
    
    
    (41,328
    )
    
    
    2,295Depreciation
    
    
    1,180
    
    
    
    1,818
    
    
    
    224
    
    
    
    48
    
    
    
    
    
    
    
    3,270Capital expenditures
    
    
    1,528
    
    
    
    1,922
    
    
    
    74
    
    
    
    39
    
    
    
    
    
    
    
    3,563For the six months ended June
30, 2003Net sales
    
    $
    120,214
    
    
    $
    50,816
    
    
    $
    16,070
    
    
    $
    3,048
    
    
    $
    
    
    
    $
    190,148Income (loss) from operations
    
    
    32,550
    
    
    
    7,057
    
    
    
    509
    
    
    
    (2,572
    )
    
    
    (24,700
    )
    
    
    12,844Depreciation
    
    
    1,098
    
    
    
    1,476
    
    
    
    232
    
    
    
    145
    
    
    
    
    
    
    
    2,951Capital expenditures
    
    
    803
    
    
    
    1,627
    
    
    
    195
    
    
    
    77
    
    
    
    
    
    
    
    2,702
 Corporate, unallocated and other includes (in thousands): Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Corporate expenses
    
    $
    (3,595
    )
    
    $
    (3,574
    )
    
    $
    (7,639
    )
    
    $
    (7,636
    )Transaction related expenses
    
    
    (26,114
    )
    
    
    (14,354
    )
    
    
    (29,523
    )
    
    
    (15,124
    )Restructuring charges
    
    
    (864
    )
    
    
    
    
    
    
    (2,773
    )
    
    
    Unusual charges(1)
    
    
    (807
    )
    
    
    (548
    )
    
    
    (1,393
    )
    
    
    (1,940
    )Total corporate, unallocated and other
    
    $
    (31,380
    )
    
    $
    (18,476
    )
    
    $
    (41,328
    )
    
    $
    (24,700
    )
   (1)
    
    Unusual charges include severance, loss or gain on sale of assets,
holding company expenses and other charges not related to the normal
operations of the business. 14




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (12) Foreign Currency Option Contracts The Company is exposed to currency risk relating to its forecasted U.S.
dollar-denominated expenditures at Jafra Mexico. As part of its overall
strategy to reduce the risk of potential adverse exchange rate fluctuations in
Mexico, the Company entered into foreign currency option contracts (option
contracts or options). The Company places option contracts based on its
rolling forecasted cash outflows from Jafra Mexico and hedges transactions
included in the forecast on the date the option contract is initiated. As a
matter of policy, the Company does not hold or issue forward contracts or
option contracts for trading or speculative purposes nor does it enter into
contracts or agreements containing embedded derivative features. The Company currently designates certain of its option contracts as cash
flow hedges of forecasted U.S. dollar-denominated inventory purchases,
forecasted U.S. dollar-denominated intercompany charges from JCI to Jafra
Mexico, forecasted management fee charges from JCI to Jafra Mexico, and U.S.
dollar-denominated interest payments. 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 loss. Such amounts will be reclassified
from other comprehensive loss 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 paid by Jafra Mexico. During the three and six months ended June 30, 2004, the Company
recognized $387,000 of gains and $33,000 of losses on option contracts,
respectively, and during the three and six months ended June 30, 2003, the
Company recognized $627,000 of gains on option contracts as a component of
exchange (loss) gain, net on the accompanying consolidated statements of
operations. As of December 31, 2003, the Company had deferred as a component of other
comprehensive loss $278,000 of gains on option contracts. During the six
months ended June 30, 2004, the Company deferred as a component of other
comprehensive loss $199,000 of losses on option contracts qualifying for hedge
accounting under SFAS No. 133. The Company expects that substantially all of
the remaining loss of $79,000 deferred as a component of other comprehensive
loss at June 30, 2004 will be recognized into net loss within the next twelve
months. The fair value of the option contracts was $208,000 at June 30, 2004 and
has been recorded in other receivables in the consolidated balance sheets. The
fair value of the option contracts was $440,000 at December 31, 2003, and was
recorded in other receivables in the consolidated balance sheets. During the three and six months ended June 30, 2004 and 2003 the
ineffectiveness generated by the Companys option 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 during the three and six months ended June
30, 2004 and 2003, $0 and $230,000, respectively, of gains, were reclassified
into earnings. The outstanding foreign currency option contracts had a notional value
denominated in Mexican pesos of 521,000,000 and 831,000,000 in put and call
positions at June 30, 2004 and December 31, 2003, respectively, and mature at
various dates through June 30, 2005. Notional amounts do not quantify the
Companys market or credit exposure or represent the Companys assets or
liabilities, but are used in the calculation of cash settlements under the
contracts. 15




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (13) Discontinued Operations/Markets to be Exited During 2003, the Company discontinued its operations in Venezuela,
Colombia, Chile and Peru. The Company has terminated sales in these markets
and has liquidated a majority of the assets in 2003. As such, the results of
the operations of these markets have been classified as discontinued operations
in all periods presented in the statements of operations. The assets and
liabilities from the discontinued operations have been segregated in the
accompanying consolidated balance sheets. Net sales and loss on discontinued operations is as follows: Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)For the three months ended June 30, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontinued operations
    
    
    (17
    )
    
    
    (17
    )
    
    
    (1
    )
    
    
    (11
    )
    
    
    (46
    )For the three months ended June 30, 2003Net sales
    
    $
    658
    
    
    $
    412
    
    
    $
    61
    
    
    $
    64
    
    
    $
    1,195Loss on discontinued operations
    
    
    (643
    )
    
    
    (343
    )
    
    
    (26
    )
    
    
    (105
    )
    
    
    (1,117
    )
 Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)For the six months ended June 30, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontinued operations
    
    
    (114
    )
    
    
    (31
    )
    
    
    (12
    )
    
    
    (29
    )
    
    
    (186
    )For the six months ended June 30, 2003Net sales
    
    $
    1,230
    
    
    $
    1,004
    
    
    $
    97
    
    
    $
    127
    
    
    $
    2,458Loss on discontinued operations
    
    
    (832
    )
    
    
    (864
    )
    
    
    (105
    )
    
    
    (125
    )
    
    
    (1,926
    )
 The components of assets and liabilities of the discontinued operations is
as follows: Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)As of June 30, 2004Assets:Cash
    
    $
    
    
    
    $
    30
    
    
    $
    28
    
    
    $
    7
    
    
    $
    65Receivables, net
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Prepaid and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Total assets
    
    $
    
    
    
    $
    55
    
    
    $
    28
    
    
    $
    27
    
    
    $
    110Liabilities:Accounts payable
    
    $
    
    
    
    $
    10
    
    
    $
    
    
    
    $
    7
    
    
    $
    17Accrued liabilities
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Total liabilities
    
    $
    
    
    
    $
    106
    
    
    $
    
    
    
    $
    7
    
    
    $
    113As of December 31, 2003Assets:Cash
    
    $
    
    
    
    $
    42
    
    
    $
    37
    
    
    $
    15
    
    
    $
    94Receivables, net
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Prepaid and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Total assets
    
    $
    
    
    
    $
    66
    
    
    $
    37
    
    
    $
    35
    
    
    $
    138Liabilities:Accounts payable
    
    $
    
    
    
    $
    12
    
    
    $
    3
    
    
    $
    
    
    
    $
    15Accrued liabilities
    
    
    1
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    86Other liabilities
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Total liabilities
    
    $
    1
    
    
    $
    120
    
    
    $
    3
    
    
    $
    
    
    
    $
    124
 In addition to the markets discontinued, the Company has ceased operating
in Thailand and is in the process of liquidating all assets. 16




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (14) Subsequent Events On August 3, 2004, Michael DiGregorio resigned from his position as
Executive Vice President and Chief Financial Officer of the Company. On August
3, 2004, the Company named Gary Eshleman as Chief Financial Officer. Five
lenders have signed commitments to participate in and syndicate a new
senior credit facility. The balance of a proposed
four-year $60 million amended and restated senior revolving credit facility
which, together with an interim loan of up to $20 million from Vorwerk, would
refinance outstanding borrowings and replace commitments under the Credit
Agreement. The Company is seeking to consummate this refinancing prior to the
expiration of the 90-day waiver under the Credit Agreement. 17




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,111
    
    
    $
    8,879Receivables, net
    
    
    4,786
    
    
    
    4,509Inventories
    
    
    11,910
    
    
    
    12,882Receivables from affiliates
    
    
    17,516
    
    
    
    18,747Prepaid expenses and other current assets
    
    
    8,007
    
    
    
    2,627Deferred income taxes
    
    
    6,381
    
    
    
    6,381Total current assets
    
    
    53,711
    
    
    
    54,025Property and equipment, net
    
    
    26,183
    
    
    
    28,048Other assets:Goodwill
    
    
    36,818
    
    
    
    36,668Notes receivable from affiliates
    
    
    18,819
    
    
    
    17,022Deferred financing fees, net
    
    
    5,057
    
    
    
    5,525Other
    
    
    5,049
    
    
    
    4,966Total
    
    $
    145,637
    
    
    $
    146,254LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    3,500
    
    
    $
    3,000Accounts payable
    
    
    6,379
    
    
    
    6,634Accrued liabilities
    
    
    19,427
    
    
    
    20,918Income taxes payable
    
    
    82
    
    
    
    387Payables to affiliates
    
    
    18,504
    
    
    
    21,118Total current liabilities
    
    
    47,892
    
    
    
    52,057Long-term debt
    
    
    109,000
    
    
    
    96,000Deferred income taxes
    
    
    4,512
    
    
    
    4,512Other long-term liabilities
    
    
    4,908
    
    
    
    4,801Total liabilities
    
    
    166,312
    
    
    
    157,370Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock, par value $.01: 1,000 shares authorized, issued
and outstanding in 2004 and 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    4,296
    
    
    
    Retained deficit
    
    
    (22,184
    )
    
    
    (8,491
    )Accumulated other comprehensive loss
    
    
    (2,787
    )
    
    
    (2,625
    )Total stockholders deficit
    
    
    (20,675
    )
    
    
    (11,116
    )Total
    
    $
    145,637
    
    
    $
    146,254
 See accompanying notes to consolidated financial statements 18




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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 EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales to third parties
    
    $
    34,759
    
    
    $
    34,796
    
    
    $
    65,799
    
    
    $
    67,056Sales to affiliates
    
    
    2,522
    
    
    
    3,789
    
    
    
    5,412
    
    
    
    8,133Net sales
    
    
    37,281
    
    
    
    38,585
    
    
    
    71,211
    
    
    
    75,189Cost of sales
    
    
    10,341
    
    
    
    11,256
    
    
    
    19,650
    
    
    
    22,428Gross profit
    
    
    26,940
    
    
    
    27,329
    
    
    
    51,561
    
    
    
    52,761Selling, general and administrative expenses
    
    
    29,013
    
    
    
    27,396
    
    
    
    56,110
    
    
    
    55,127Transaction related expenses
    
    
    23,393
    
    
    
    13,037
    
    
    
    26,802
    
    
    
    13,807Restructuring and impairment charges
    
    
    864
    
    
    
    
    
    
    
    2,611
    
    
    
    Management fee income from affiliates
    
    
    (5,765
    )
    
    
    (4,385
    )
    
    
    (7,684
    )
    
    
    (6,016
    )Royalty income from affiliates, net
    
    
    (5,070
    )
    
    
    (4,722
    )
    
    
    (10,518
    )
    
    
    (8,918
    )Market subsidy expense
    
    
    350
    
    
    
    
    
    
    
    600
    
    
    
    Loss from operations
    
    
    (15,845
    )
    
    
    (3,997
    )
    
    
    (16,360
    )
    
    
    (1,239
    )Other income (expense):Exchange loss, net
    
    
    (200
    )
    
    
    (395
    )
    
    
    (239
    )
    
    
    (451
    )Interest expense
    
    
    (2,733
    )
    
    
    (2,028
    )
    
    
    (5,384
    )
    
    
    (3,616
    )Interest income
    
    
    144
    
    
    
    153
    
    
    
    234
    
    
    
    291Loss on extinquishment of debt
    
    
    
    
    
    
    (4,778
    )
    
    
    
    
    
    
    (4,778
    )Other expense
    
    
    (12
    )
    
    
    (69
    )
    
    
    (12
    )
    
    
    (80
    )Other income
    
    
    68
    
    
    
    12
    
    
    
    107
    
    
    
    27Loss before income taxes
    
    
    (18,578
    )
    
    
    (11,102
    )
    
    
    (21,654
    )
    
    
    (9,846
    )Income tax benefit
    
    
    (6,854
    )
    
    
    (3,661
    )
    
    
    (7,961
    )
    
    
    (2,847
    )Net loss
    
    $
    (11,724
    )
    
    $
    (7,441
    )
    
    $
    (13,693
    )
    
    $
    (6,999
    )
 See accompanying notes to consolidated financial statements 19




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (13,693
    )
    
    $
    (6,999
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    2,042
    
    
    
    1,745Provision for uncollectible accounts receivable
    
    
    435
    
    
    
    269Non-cash compensation expense
    
    
    4,922
    
    
    
    Write off and amortization of deferred financing fees
    
    
    426
    
    
    
    2,464Asset impairment charges
    
    
    423
    
    
    
    251Unrealized foreign exchange loss
    
    
    174
    
    
    
    971Changes in operating assets and liabilities:Receivables
    
    
    (712
    )
    
    
    521Inventories
    
    
    972
    
    
    
    (690
    )Prepaid expenses and other current assets
    
    
    (5,380
    )
    
    
    (4,151
    )Intercompany receivables and payables
    
    
    (751
    )
    
    
    5,006Other assets
    
    
    (306
    )
    
    
    162Accounts payable and accrued liabilities
    
    
    (1,746
    )
    
    
    653Income taxes payable/prepaid
    
    
    (305
    )
    
    
    (504
    )Other long-term liabilities
    
    
    107
    
    
    
    321Net cash (used in) provided by
operating activities
    
    
    (13,392
    )
    
    
    19Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,996
    )
    
    
    (1,822
    )Other
    
    
    223
    
    
    
    (431
    )Net cash used in investing activities
    
    
    (1,773
    )
    
    
    (2,253
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    80,000Proceeds from issuance of term loan
    
    
    
    
    
    
    20,000Repurchase of subordinated debt due 2008
    
    
    
    
    
    
    (45,108
    )Repayments under term loan facility
    
    
    (1,500
    )
    
    
    (6,000
    )Borrowings under revolving credit facility
    
    
    28,900
    
    
    
    Repayments under revolving credit facility
    
    
    (13,900
    )
    
    
    Advances to affiliates
    
    
    (1,797
    )
    
    
    (3,992
    )Distribution of additional paid-in capital to shareholder
    
    
    
    
    
    
    (39,649
    )Distribution payment to shareholder from retained earnings
    
    
    
    
    
    
    (4,662
    )Distribution
to Parent
    
    
    (626
    )
    
    
    Deferred financing costs
    
    
    42
    
    
    
    (5,650
    )Net cash provided by (used in)
financing activities
    
    
    11,119
    
    
    
    (5,061
    )Effect of exchange rate changes on cash
    
    
    278
    
    
    
    (460
    )Net decrease in cash and cash equivalents
    
    
    (3,768
    )
    
    
    (7,755
    )Cash and cash equivalents at beginning of period
    
    
    8,879
    
    
    
    13,088Cash and cash equivalents at end of period
    
    $
    5,111
    
    
    $
    5,333
 See accompanying notes to consolidated financial statements 20




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation Jafra Cosmetics International, Inc. a Delaware corporation, is a direct
wholly-owned subsidiary of Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourg
société à responsabilité limitée(the Parent), which is a wholly-owned direct
subsidiary of Jafra S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.),
a Luxembourg société anonyme(Jafra S.A.).Jafra S.A. was a wholly-owned
subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme
(CDRJ). On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and
outstanding capital stock of Jafra S.A. (the Acquisition). As a result of
the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal,
Germany. The purchase transaction has not been pushed down to JCI due to the
outstanding registered debt. The accompanying unaudited interim consolidated financial statements as of
June 30, 2004 and for the three and six months ended June 30, 2004 and 2003
reflect the operations of JCI and its subsidiaries (JCI) 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 consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly JCIs
consolidated financial statements as of June 30, 2004 and for the interim
periods presented. All significant intercompany accounts and transactions
between entities comprising JCI have been eliminated in consolidation. On May 20, 2003, the Parent, JCI and Distribuidora Comercial Jafra S.A. de
C.V. (Jafra Distribution and together with JCI, the Issuers) completed a
recapitalization of their operations by entering into $90 million of new senior
secured credit facilities, consisting of a $50 million senior secured term loan
facility and a $40 million senior secured revolving credit facility and issuing
$200 million of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 113⁄4% Senior Subordinated
Notes due 2008 (the Old Notes) of JCI and Jafra Cosmetics International, S.A.
de C.V. (Jafra Cosmetics S.A.), to repay all amounts outstanding under the
existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain
payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The
stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the
Parent to act as its liquidator. Thereafter, CDRJ made an initial liquidating
distribution of such proceeds to its stockholders. In connection with the
liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities,
including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and
Jafra Distribution, to the Parent in exchange for additional shares of common
stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are
collectively referred to as Jafra Mexico. The New Notes represent several obligations of JCI and Jafra Distribution.
JCI and Jafra Distribution have fully and unconditionally guaranteed the
obligations of the other under the New 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 Distribution and JCI is subject to a 30-day
standstill period, the Parent is filing these separate financial statements of
JCI on its Report on Form 10-Q. The functional currency of certain of JCI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 loss. Management Incentive Arrangements. JCI applied Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock issued to Employees and
related Interpretations in accounting for the issuance of stock options under
the Parents Stock Incentive Plan. As part of the Acquisition, the Management
Incentive Plan was terminated. No options were granted during 2004 prior to the
termination of the plan. Had JCI recorded compensation cost based on the fair
value of options granted at the grant date, as prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, the compensation expense for the three and six months ended June
30, 2004 and 2003 would be immaterial to the consolidated statements of
operations. 21




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46
were effective for JCI in the first quarter of 2004. The adoption of FIN 46
did not have an impact on JCIs financial position or results of operations as
JCI had no variable interest entities. (2) Property and Equipment Property and equipment consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    7,048
    
    
    
    7,065Machinery, equipment and other
    
    
    24,996
    
    
    
    27,18838,232
    
    
    
    40,441Less accumulated depreciation
    
    
    12,049
    
    
    
    12,393Property and equipment, net
    
    $
    26,183
    
    
    $
    28,048
 (3) Goodwill and Other Intangible Assets JCIs intangible assets consist of trademarks and goodwill. JCI has
determined trademarks, principally the Jafra name resulting from the
acquisition of the Jafra business from Gillette, to have an indefinite life.
The carrying value of trademarks was $271,000 as of June 30, 2004. The changes
in the carrying amount of goodwill for the year ended December 31, 2003 and for
the six months ended June 30, 2004 are as follows (in thousands): United
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    Europe
    
    TotalBalance as of December 31, 2002
    
    $
    32,188
    
    
    $
    5,300
    
    
    $
    37,488Translation effect
    
    
    
    
    
    
    (820
    )
    
    
    (820
    )Balance as of December 31, 2003
    
    $
    32,188
    
    
    $
    4,480
    
    
    $
    36,668Translation effect
    
    
    
    
    
    
    150
    
    
    
    150Balance as of June 30, 2004
    
    $
    32,188
    
    
    $
    4,630
    
    
    $
    36,818
 (4) Income Taxes The actual income tax rate of JCI differs from the expected tax rate,
computed by applying the U.S. federal corporate rate of 35% to loss before
income taxes for the three and six months ended June 30, 2004 and 2003
principally as the result of (i) state income tax, and (ii) valuation
allowances against certain operating losses in Europe and the Dominican
Republic. (5) Debt and Distribution to Shareholder On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes (the New Notes) due 2011 pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90
million senior credit agreement (the Senior Credit Agreement). The New Notes
represent the several obligations of JCI and Jafra Distribution in the amount
of $80 million and $120 million, respectively. The New Notes mature in 2011 and
bear a fixed interest rate of 103⁄4% payable semi-annually. 22




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
required to fully and unconditionally guarantee the U.S. portion of New Notes
jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully
and unconditionally guarantee the Mexican portion of the New Notes jointly and
severally, on a senior subordinated basis. The New Notes are unsecured and are generally not redeemable for four
years from their issue date. Thereafter, the New Notes will be redeemable on a
pro rata basis at premiums declining to par in the sixth year. Prior to May 16,
2006, the Issuers at their option may concurrently redeem the New Notes in an
aggregate principal amount equal to up to 35% of the original aggregate
principal amount of the New Notes, with funds in an aggregate amount not
exceeding the aggregate cash proceeds of one or more equity offerings, at a
redemption price of 110.75 plus accrued interest. On September 15, 2003, the
Issuers consummated a registered exchange of the New Notes under the Securities
Act of 1933. As the Acquisition constituted a change of control as defined in
the indenture governing the Companys 103⁄4% Notes, the Issuers and the
Parent sent a notice to noteholders of their right to require the repurchase of
the outstanding notes at a price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the date of such repurchase. Subsequent to
June 30, 2004, holders of the 103⁄4% notes exercised their option to sell an
aggregate of $500,000 of the outstanding Notes to the Issuers. In addition, the Issuers entered into the Senior Credit Agreement, which
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a $50 million senior secured term loan facility
maturing in 2008 and a $40 million senior secured revolving credit facility,
also maturing in 2008, of which $20 million is available as letters of credit.
The Senior Credit Agreement is allocated 40% to JCI and 60% to Jafra
Distribution. On May 20, 2003, JCI borrowed $20 million and Jafra Distribution
borrowed $30 million of the loans under the term facility. Borrowings under the
term loan facility are payable in quarterly installments of principal and
interest over five years through May 20, 2008. Borrowings under the revolving
credit facility mature on May 20, 2008. Borrowings under the Senior Credit
Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed
3.75% or an alternate base rate plus an applicable margin not to exceed 2.75%.
As of June 30, 2004, the applicable interest rates were 7.0% and 5.13% for base
rate loans and 30 day LIBOR loans, respectively, subject in each case to
periodic adjustment based on certain levels of financial performance.
Borrowings under the Senior Credit Agreement are secured by substantially all
of the assets of JCI and Jafra Distribution. In connection with closing the Acquisition, the Issuers, the Parent and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provides that for a period of
90 days following the closing of the Acquisition ending August 25, 2004, the
Acquisition will not constitute an event of default under the Credit Agreement.
The Parent and Issuers are seeking refinancing of the indebtedness outstanding
under the Senior Credit Agreement. JCI believes that the new senior facility
will be obtained. Both the Indenture and the Senior Credit Agreement contain certain
covenants that limit JCIs ability to incur additional indebtedness, pay cash
dividends and make certain other payments. These debt agreements also require
the Parent to maintain certain financial ratios including a minimum EBITDA to
cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These
covenants apply to the Parent and certain of its subsidiaries, including
without limitation, JCI and Jafra Distribution. As of June 30, 2004, the Parent
and its subsidiaries were in compliance with all covenants. The senior credit agreement contains provisions whereby (i) the default by
the Parent, or any default by JCI, Jafra Distribution or any of their
respective subsidiaries, in any payment under debt obligations in an aggregate
principal amount of $5.0 million or more beyond any applicable grace period, or
(ii) any default by the Parent, or any default by JCI, Jafra Distribution or
any of their respective subsidiaries, in the observance or performance of any
other agreement or condition under such other debt obligations that allows the
holder(s) of such debt obligations to accelerate the maturity of such
obligations after the expiration of any grace period or the provision of
notice, and such grace period has expired or notice has been given, will allow
the lenders under the senior credit 23




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) agreement to terminate their commitments to lend thereunder and/or declare
any amounts outstanding thereunder to be immediately due and payable. The
Indenture contains similar provisions that apply upon the failure by the
Parent, or the failure by JCI, Jafra Distribution or any of their significant
subsidiaries (as defined in the Indenture), to pay any indebtedness for
borrowed money when due, or on the acceleration of any other debt obligations
exceeding $10.0 million. The Indenture also contains provisions that, under
certain circumstances, permit the holders of certain senior indebtedness
(including the loans made under the senior credit agreement) to block payments
on the 103⁄4% Notes during the continuance of certain defaults that would
allow the holders of such senior indebtedness to accelerate the relevant senior
indebtedness. The terms of the Indenture significantly restrict the Parent and its other
subsidiaries from paying dividends and otherwise transferring assets to Jafra
S.A. The ability of the Parent to make such restricted payments or transfers is
generally limited to an amount determined by a formula based on 50% of its
consolidated net income (which, as defined in the Indenture, excludes goodwill
impairment charges and any after-tax extraordinary, unusual or nonrecurring
gains and losses) accruing from October 1, 2002, plus specified other amounts.
In addition, as a condition to making such payments to Jafra S.A. based on such
formula, the Parent must have a consolidated coverage ratio (as defined in the
Indenture) of at least 2.25 to 1 after giving effect to any such payments.
Notwithstanding such restrictions, the Indenture permits an (i) aggregate of
$5.0 million of such payments and (ii) payments for certain specific uses, such
as the payment of consolidated taxes or holding company expenses, to be made
whether or not there is availability under the formula or the conditions to its
use are met. The terms of the senior credit agreement contain similar
restrictions. The senior credit agreement generally limits dividends by the
Parent to dividends necessary to fund specified costs and expenses, but permits
the Parent to pay dividends of up to 50% of consolidated net income (as defined
in the Indenture) plus up to $5.0 million so long as the term loans have been
repaid in full, the aggregate exposure of the lenders under the revolving
portion of the senior credit facilities does not exceed $25 million and the
consolidated leverage ratio (as defined in the senior credit agreement) does
not exceed 3 to 1 after giving effect to such payment. On May 23, 2003, with proceeds from the issuance of the New Notes and its
borrowings under the Senior Credit Agreement, JCI redeemed its Old Notes in the
aggregate outstanding principal amount of $45,108,000 at a premium of
approximately $2,650,000. Additionally, JCI repaid $5,000,000 under its
existing credit agreement (the Old Credit Agreement) and terminated the Old
Credit Agreement. In connection with the redemption of the Old Notes and the
termination of the Old Credit Agreement, JCI wrote off approximately $2,128,000
of capitalized deferred financing fees. Total costs related to the recall of
the previous debt were $4,778,000 and were recorded as a loss on extinguishment
of debt in the accompanying consolidated statements of operations during the
three months ended June 30, 2003. After the redemption of the Old Notes and repayment of all outstanding
amounts under the Old Credit Agreement, JCI distributed a total of $44,311,000
to its sole shareholder, Jafra S.A. In addition, JCI made a special payment to
the holder of its options and to certain members of management and non-employee
directors. Upon completion of the Recapitalization and the distribution, Jafra
S.A. contributed all of its assets and liabilities, including its investment in
JCI to the Parent. JCI capitalized approximately $6,007,000 of costs related to the issuance
of the New Notes and the Senior Credit Agreement as deferred financing fees.
These deferred financing fees are reported as a noncurrent asset in the
accompanying consolidated balance sheets and are being amortized on a basis
that approximates the interest method over the term of the New Notes and the
Senior Credit Agreement. As of June 30, 2004, approximately $949,000 of the
deferred financing fees were amortized. Upon expiration of the Senior Credit
Agreement on August 25, 2004, JCI will have approximately $1,899,000 of
unamortized deferred financing fees related to the Senior Credit Agreement.
JCI expects to write off these deferred financing fees upon expiration of the
Senior Credit Agreement and to record that write off as a loss on
extinguishment of debt during the third quarter of 2004. 24




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (6) Non-Cash Equity Contribution During the second quarter of 2004, the former primary shareholder of Jafra
S.A. paid certain members of management and non-employee board of director
members a special bonus of $4,922,000. As this amount was paid directly to the
recipients from the former primary shareholder, Jafra S.A. recorded $4,922,000 as
deemed contributed capital and as a non-cash transaction expense representing
compensation. Jafra S.A. then contributed $4,922,000 to the Parent who then
contributed the amount to JCI. This contribution was partially offset by a cash
distribution of $626,000 to the Parent. (7) Transaction Related Expenses During the three and six months ended June 30, 2004, JCI incurred
$23,393,000 and $26,802,000, respectively, of transaction fees related to the
Acquisition and to certain other transactions contemplated but not completed.
Included in these amounts was $20,282,000 of compensation expense for the
buyback and cancellation of options to purchase shares of Jafra S.A. and
$4,125,000 of special bonus payments paid directly by the former shareholder.
During the three and six months ended June 30, 2003, JCI recorded $13,037,000
and $13,807,000, respectively, of transaction expenses related to the
Recapitalization and to other transactions contemplated but not completed. In
connection with the Recapitalization, the Board of Directors authorized CDRJ to
reprice all existing outstanding stock options. In order to compensate option holders
for any diminished value of the outstanding options, the Board of Directors
further authorized $9,445,000 in bonus payments to current option holders
during the three and six months ended June 30, 2003. Additionally, JCI
authorized a special bonus of $2,365,000 to certain members of management and
to non-employee directors for contributions to completing the Recapitalization
of CDRJ. (8) Restructuring and Asset Impairment Charges During the three and six months ended June 30, 2004 JCI recorded $864,000
and $2,611,000, respectively, of restructuring and asset impairment charges
primarily related to the transfer of substantially all of its skin and body
care manufacturing operations to its facilities in Mexico. The transfer of
these operations was substantially complete during the second quarter of 2004.
Of these charges, approximately $423,000 was for the impairment of assets not
transferred and the remaining amount was primarily termination benefits. A
rollforward of the activity of the restructuring accruals is summarized as
follows (in thousands): Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2004Opening balance
    
    $
    1,220
    
    
    $
    Additions
    
    
    864
    
    
    
    2,611Charges against reserves
    
    
    (661
    )
    
    
    (1,188
    )Ending balance
    
    $
    1,423
    
    
    $
    1,423
 JCI does not expect to incur any additional significant charges in
connection with the transfer of these manufacturing operations to Mexico. (9) Comprehensive Loss Comprehensive loss is summarized as follows (in thousands): Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (11,724
    )
    
    $
    (7,441
    )
    
    $
    (13,693
    )
    
    $
    (6,999
    )Foreign currency translation adjustments
    
    
    110
    
    
    
    3
    
    
    
    (162
    )
    
    
    (40
    )Comprehensive loss
    
    $
    (11,614
    )
    
    $
    (7,438
    )
    
    $
    (13,855
    )
    
    $
    (7,039
    )
 25




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (10) Related Party Transactions JCI distributes skin and body products to other affiliates of the Parent
(affiliates). Sales to affiliates were made at cost plus a markup ranging
from 0 to 11%. JCI purchased color and fragrance products from Jafra Mexico
totaling $3,163,000 and $5,946,000 for the three and six months ended June 30,
2004, respectively, and $2,942,000 and $5,626,000 for the three and six months
ended June 30, 2003, respectively. In addition, JCI provides certain management services, such as legal,
accounting and treasury, management oversight, and other administrative
functions to affiliates, primarily in Mexico and South America. The cost of
these services is included in selling, general and administrative expenses 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 allocation are reasonable and
approximate the cost of the actual services provided. Management fee income
consists of amounts billed to affiliates in Mexico and South America. JCI is charged a royalty by Jafra Cosmetics S.A. for the right to use the
Jafra trademark in the United States and Europe. The total royalty expense
charged by Jafra Cosmetics S.A. to JCI was $844,000 and $1,594,000 for the
three and six months ended June 30, 2004, respectively, and $842,000 and
$1,626,000 for the three and six months ended June 30, 2003, respectively, and
was offset against royalty income from 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 Cosmetics S.A. for the use of the Jafra Way were
$5,914,000 and $12,112,000 for three and six months ended June 30, 2004,
respectively, and $5,564,000 and $10,544,000 for the three and six months ended
June 30, 2003, respectively, and are based upon a percentage of Jafra Cosmetics
S.A.s sales to third parties. JCI has granted loans to certain affiliates at annual interest rates
ranging from 3% to 5%. 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, 2003 and June 30, 2004 consist primarily of loans JCI has made to
indirect subsidiaries of the Parent to fund certain of their operations in
South America. Net interest income from affiliates was $144,000 and $234,000
for the three and six months ended June 30, 2004, respectively, and $151,000
and $282,000 for the three and six months ended June 30, 2003, respectively,
and was included in interest income on the accompanying consolidated statements
of operations. JCI reimburses certain foreign affiliates for the expenses that they incur
in establishing a direct selling distribution system and customer base in new
markets. Such market subsidies amounted to $350,000 and $600,000 for the three
and six months ended June 30, 2004, respecitvely. Nothing was reimbursed
during the three and six months ended June 30, 2003. (11) Financial Reporting for Business Segments JCIs business is comprised of one industry segment, direct selling, with
worldwide operations, principally in the United States and Europe. JCI is
organized into geographical business units that each sell the full line of
Jafra cosmetics, skin care, body care, fragrances, and other products. JCI has
two reportable business segments: the United States, including the Dominican
Republic, and Europe. As of the beginning of 2004, JCI includes the results of
the Dominican Republic with the results of the United States as JCIs chief operating decision makers evaluate the
results of the Dominican Republic with the results of the United States. All
prior period results have been reclassified to be consistent with the 2004
presentation. Business results for the Thailand subsidiary are included in the
following table under the caption All Others. 26




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The accounting policies used to prepare the information reviewed by JCIs
chief operating decision makers are the same as those described in the summary
of significant accounting policies included in JCIs audited consolidated
financial statements as of and for the year ended December 31, 2003 included in
the Parents Annual Report on Form 10-K. JCI evaluates performance based on
segment operating income, excluding restructuring and impairment charges and
unusual gains and losses. Consistent with the information reviewed by JCI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 net sales and income
(loss) from operations. The elimination of intercompany profit from inventory
within segment assets is included in Corporate, Unallocated and Other. Gross
Profit from affiliates, management fee income from affiliates, royalty income
from affiliates and market subsidy expense to affiliates are included in the
following table under the caption Corporate, Unallocated and Other. United Statesand the
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedRepublic
    
    Europe (1)
    
    Others
    
    and Other
    
    TotalAs of and for the three
months ended June 30, 2004Net sales
    
    $
    25,996
    
    
    $
    8,763
    
    
    $
    
    
    
    $
    2,522
    
    
    $
    37,281Income (loss) from operations
    
    
    2,180
    
    
    
    498
    
    
    
    
    
    
    
    (18,523
    )
    
    
    (15,845
    )Depreciation
    
    
    923
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    1,035Capital expenditures
    
    
    1,028
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    1,046Segment assets
    
    
    92,023
    
    
    
    17,218
    
    
    
    61
    
    
    
    36,335
    
    
    
    145,637Goodwill
    
    
    32,188
    
    
    
    4,630
    
    
    
    
    
    
    
    
    
    
    
    36,818For the three months ended
June 30, 2003Net sales
    
    $
    26,106
    
    
    $
    8,623
    
    
    $
    67
    
    
    $
    3,789
    
    
    $
    38,585Income (loss) from operations
    
    
    3,703
    
    
    
    503
    
    
    
    (102
    )
    
    
    (8,101
    )
    
    
    (3,997
    )Depreciation
    
    
    711
    
    
    
    117
    
    
    
    33
    
    
    
    
    
    
    
    861Capital expenditures
    
    
    729
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    826As of December 31, 2003Segment assets
    
    $
    92,420
    
    
    $
    18,003
    
    
    $
    63
    
    
    $
    35,768
    
    
    $
    146,254Goodwill
    
    
    32,188
    
    
    
    4,480
    
    
    
    
    
    
    
    
    
    
    
    36,668For the six months ended
June 30, 2004Net sales
    
    $
    48,743
    
    
    $
    17,056
    
    
    $
    
    
    
    $
    5,412
    
    
    $
    71,211Income (loss) from operations
    
    
    4,244
    
    
    
    765
    
    
    
    
    
    
    
    (21,369
    )
    
    
    (16,360
    )Depreciation
    
    
    1,818
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    2,042Capital expenditures
    
    
    1,922
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    1,996For the six months ended
June 30, 2003Net sales
    
    $
    50,816
    
    
    $
    16,070
    
    
    $
    170
    
    
    $
    8,133
    
    
    $
    75,189Income (loss) from operations
    
    
    7,057
    
    
    
    509
    
    
    
    (282
    )
    
    
    (8,523
    )
    
    
    (1,239
    )Depreciation
    
    
    1,476
    
    
    
    201
    
    
    
    68
    
    
    
    
    
    
    
    1,745Capital expenditures
    
    
    1,627
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    1,822
  (1)
    
    excludes Jafra Poland sp.zo.o, an indirect wholly-owned subsidiary of the
Parent and affiliate of JCI Corporate, unallocated and other includes (in thousands): Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Corporate expenses
    
    $
    (4,076
    )
    
    $
    (4,309
    )
    
    $
    (8,210
    )
    
    $
    (8,981
    )Transaction related expenses
    
    
    (23,393
    )
    
    
    (13,037
    )
    
    
    (26,802
    )
    
    
    (13,807
    )Transaction with affiliates
    
    
    10,488
    
    
    
    9,107
    
    
    
    17,603
    
    
    
    14,934Restructuring charges
    
    
    (864
    )
    
    
    
    
    
    
    (2,611
    )
    
    
    Unusual charges(1)
    
    
    (678
    )
    
    
    138
    
    
    
    (1,349
    )
    
    
    (669
    )Total corporate, unallocated and other
    
    $
    (18,523
    )
    
    $
    (8,101
    )
    
    $
    (21,369
    )
    
    $
    (8,523
    )
   (1)
    
    Unusual charges include severance, loss or gain on sale of assets,
holding company expenses and other charges not related to the normal
operations of the business. 27




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (12) Subsequent Event Five
lenders have signed commitments to participate in and syndicate a new senior
credit facility. The balance of a proposed
four-year $60 million amended and restated senior revolving credit facility
which, together with an interim loan of up to $20 million from Vorwerk, would
refinance outstanding borrowings and replace commitments under the Credit
Agreement. The Parent is seeking to consummate this refinancing prior to the
expiration of the 90-day waiver under the Credit Agreement. 28




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 BALANCE SHEETS
 (In thousands, except share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash
    
    $
    11
    
    
    $
    523Receivables
    
    
    169
    
    
    
    154Inventories
    
    
    27,536
    
    
    
    27,183Receivables from affiliates
    
    
    17,424
    
    
    
    17,136Prepaid income taxes
    
    
    4,130
    
    
    
    1,265Prepaid expenses and other current assets
    
    
    3,821
    
    
    
    9,237Total current assets
    
    
    53,091
    
    
    
    55,498Machinery and equipment, net
    
    
    1,651
    
    
    
    1,647Other assets:Deferred financing fees, net
    
    
    6,607
    
    
    
    7,334Investment in preferred shares of affiliated company
    
    
    122,908
    
    
    
    126,042Other
    
    
    2,753
    
    
    
    3,120Total
    
    $
    187,010
    
    
    $
    193,641LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    5,250
    
    
    $
    4,500Accounts payable
    
    
    11,645
    
    
    
    11,277Accrued liabilities
    
    
    1,778
    
    
    
    2,033Payables to affiliates
    
    
    3,460
    
    
    
    2,202Total current liabilities
    
    
    22,133
    
    
    
    20,012Long-term debt
    
    
    141,000
    
    
    
    144,000Total liabilities
    
    
    163,133
    
    
    
    164,012Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 151 shares authorized,
issued and outstanding in 2004 and 2003
    
    
    5
    
    
    
    5Retained earnings
    
    
    30,688
    
    
    
    35,767Accumulated other comprehensive loss
    
    
    (6,816
    )
    
    
    (6,143
    )Total stockholders equity
    
    
    23,877
    
    
    
    29,629Total
    
    $
    187,010
    
    
    $
    193,641
 See accompanying notes to financial statements 29




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Sales to affiliates
    
    $
    36,867
    
    
    $
    33,263
    
    
    $
    76,043
    
    
    $
    64,084Cost of sales
    
    
    25,276
    
    
    
    20,984
    
    
    
    51,682
    
    
    
    40,952Gross profit
    
    
    11,591
    
    
    
    12,279
    
    
    
    24,361
    
    
    
    23,132Selling, general and administrative expenses
    
    
    109
    
    
    
    1,455
    
    
    
    1,014
    
    
    
    1,755Management fee expense to affiliate
    
    
    1,898
    
    
    
    1,297
    
    
    
    2,369
    
    
    
    1,695Service fee expense to affiliate
    
    
    8,153
    
    
    
    1,488
    
    
    
    14,622
    
    
    
    3,706Income from operations
    
    
    1,431
    
    
    
    8,039
    
    
    
    6,356
    
    
    
    15,976Other expense:Exchange loss, net
    
    
    (880
    )
    
    
    (2,266
    )
    
    
    (3,263
    )
    
    
    (1,487
    )Interest expense
    
    
    (4,091
    )
    
    
    (1,795
    )
    
    
    (8,206
    )
    
    
    (1,795
    )Interest income
    
    
    
    
    
    
    29
    
    
    
    34
    
    
    
    29(Loss) income before income taxes
    
    
    (3,540
    )
    
    
    4,007
    
    
    
    (5,079
    )
    
    
    12,723Income tax expense
    
    
    
    
    
    
    3,398
    
    
    
    
    
    
    
    6,361Net (loss) income
    
    $
    (3,540
    )
    
    $
    609
    
    
    $
    (5,079
    )
    
    $
    6,362
 See accompanying notes to financial statements 30




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (5,079
    )
    
    $
    6,362Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:Depreciation and amortization of guarantee fee
    
    
    396
    
    
    
    106Amortization of deferred financing fees
    
    
    545
    
    
    
    131Unrealized foreign exchange and derivative loss
    
    
    3,796
    
    
    
    1,965Changes in operating assets and liabilities:Receivables
    
    
    (19
    )
    
    
    (321
    )Inventories
    
    
    (1,053
    )
    
    
    (4,430
    )Prepaid expenses and other current assets
    
    
    99
    
    
    
    (1,663
    )Intercompany receivables and payables
    
    
    546
    
    
    
    (10,118
    )Other assets
    
    
    66
    
    
    
    (15
    )Accounts payable and accrued liabilities and value added taxes
    
    
    5,654
    
    
    
    4,351Income taxes payable
    
    
    (2,961
    )
    
    
    3,034Net cash provided by (used in) operating activities
    
    
    1,990
    
    
    
    (598
    )Cash flows from investing activities:Purchase of preferred shares of affiliate
    
    
    
    
    
    
    (136,420
    )Purchases of property and equipment
    
    
    (212
    )
    
    
    (46
    )Net cash used in investing activities
    
    
    (212
    )
    
    
    (136,466
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    120,000Proceeds from term loan
    
    
    
    
    
    
    30,000Payment of debt guarantee fee to affiliate
    
    
    
    
    
    
    (4,000
    )Deferred financing costs
    
    
    
    
    
    
    (8,256
    )Repayments under term loan facility
    
    
    (2,250
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (2,250
    )
    
    
    137,744Effect of exchange rate changes on cash
    
    
    (40
    )
    
    
    (324
    )Net (decrease) increase in cash
    
    
    (512
    )
    
    
    356Cash at beginning of period
    
    
    523
    
    
    
    38Cash at end of period
    
    $
    11
    
    
    $
    394
 See accompanying notes to financial statements 31




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 NOTES TO FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation Distribuidora Comercial Jafra, S.A. de C.V., a sociedad anonima de capital
variable(Jafra Distribution),organized under the laws of the United Mexican
States on February 26, 2003, is owned by five indirect wholly-owned
subsidiaries of Jafra Worldwide Holdings (Lux), S.àr.l., a Luxembourg société a
responsabilité limitée(the Parent). The Parent is the wholly-owned
subsidiary of Jafra S.A. (formerly CDRJ North Atlantic (Lux) S.àr.l.), a
Luxembourg société anonyme(Jafra S.A.). Jafra S.A. was formerly a
wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société
anonyme(CDRJ). Jafra Distribution was organized to conduct the Parents
distribution business in Mexico. The distribution business was previously
conducted by Distribuidora Venus, S.A. de C.V., (Venus), a wholly-owned
subsidiary of Jafra Cosmetics International, S.A. de C.V. (Jafra Cosmetics
S.A.). Jafra Cosmetics S.A. is also primarily owned by five indirect
wholly-owned subsidiaries of the Parent. Jafra Distribution owns a minority
interest of Jafra Cosmetics S.A. On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and
outstanding capital stock of Jafra S.A. (the Acquisition). As a result of
the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal,
Germany. The purchase transaction has not been pushed down to Jafra
Distribution due to the outstanding registered debt. The accompanying unaudited interim financial statements as of June 30,
2004 and for the three and six months ended June 30, 2004 and 2003 reflect the
operations of Jafra Distribution or the carved-out distribution operations of
Venus, which are now conducted by Jafra Distribution, 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 Distributions
financial statements as of June 30, 2004 and for the interim periods presented. On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (JCI)
and Jafra Distribution (together with JCI, the Issuers) completed a
recapitalization of their operations by entering into $90 million of new senior
credit facilities, consisting of a $50 million senior secured term loan
facility and a $40 million senior secured revolving credit facility and issuing
$200 million of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions, collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 113⁄4% Senior Subordinated
Notes due 2008 (the Old Notes) of JCI and Jafra Cosmetics S.A., to repay all
amounts outstanding under the existing credit facilities of JCI and Jafra
Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and
Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be
liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ
made an initial liquidating distribution of such proceeds to its stockholders.
In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its
assets and liabilities, including its direct and indirect holdings of JCI,
Jafra Cosmetics S.A. and Jafra Distribution to the Parent in exchange for
additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra
Distribution are collectively referred to as Jafra Mexico. The New Notes represent several obligations of Jafra Distribution and JCI.
Jafra Distribution and JCI have fully and unconditionally guaranteed the
obligations of the other under the New 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 Distribution is subject to a 30-day
standstill period, the Parent is filing these separate financial statements of
Jafra Distribution on its Report on Form 10-Q. The functional currency for Jafra Distribution 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 loss. New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party 32




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) considered to be the primary beneficiary of that entity. The FASB amended FIN
46 in December of 2003. The revised provisions of FIN 46 were effective for
Jafra Distribution in the first quarter of 2004. The adoption of FIN 46 did
not have an impact on Jafra Distributions financial position or results of
operations as Jafra Distribution had no variable interest entities. (2) Inventories Inventories consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    8,875
    
    
    $
    5,578Finished goods
    
    
    18,661
    
    
    
    21,605Total inventories
    
    $
    27,536
    
    
    $
    27,183
 (3) Machinery and Equipment Machinery and equipment consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Machinery, equipment and other
    
    $
    2,058
    
    
    $
    1,898Less accumulated depreciation
    
    
    407
    
    
    
    251Machinery and equipment, net
    
    $
    1,651
    
    
    $
    1,647
 (4) Investment in Affiliated Company On May 20, 2003, Jafra Distribution subscribed for and purchased 13,642
shares Series C preferred stock of Jafra Cosmetics S.A. for $10,000 per share,
for a total purchase price of $136,420,000. Holders of Series C preferred
shares of Jafra Cosmetics S.A. have the right to vote only on matters submitted
by law and are entitled to receive a preferred cumulative dividend equal to
4.5%, of the effective liquidation preference per share, upon any liquidation
before any holder of Series B common stock of Jafra Cosmetics S.A. receives a
dividend. Jafra Distribution has recorded the total investment in 13,642
preferred shares of Jafra Cosmetics S.A. of $136,420,000 as an investment in
affiliated company in the accompanying balance sheets.Except for the effect
of translation, which has reduced the investment by approximately $13,512,000,
Jafra Distribution carries the investment on its balance sheet at cost. (5) Income Taxes During the three and six months ended June 30, 2004, Jafra Distribution
recorded valuation allowances against pretax losses, which resulted in a pretax
loss without a corresponding tax benefit. (6) Debt On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes due 2011, (the New Notes), pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90
million senior credit agreement (the Senior Credit Agreement). The New Notes
represent the several obligations of Jafra Distribution and JCI in the amount
of $120 million and $80 million, respectively. The New Notes mature in 2011 and
bear a fixed interest rate of 103⁄4% payable semi-annually. Jafra Distribution is an indirect wholly-owned subsidiary of the Parent
and JCI is a direct wholly-owned subsidiary of the Parent. The Parent has fully
and unconditionally guaranteed the obligations under the New Notes on a senior
subordinated basis on the terms provided in the Indenture governing the New
Notes. The Issuers have 33




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) fully and unconditionally guaranteed the obligations under the New Notes
of the other on a senior subordinated basis, subject to a 30-day standstill
period prior to enforcement of such guarantees. Each existing or subsequently
acquired or organized Mexican subsidiary of Jafra Distribution is also required
to fully and unconditionally guarantee the Mexican portion of the New Notes
jointly and severally, on a senior subordinated basis. On May 20, 2003, Jafra Distribution paid Jafra Cosmetics S.A. $4,000,000
for Jafra Cosmetics S.A. to fully and unconditionally guarantee the obligations
of Jafra Distribution under the New Notes on a senior subordinated basis. Each
existing and subsequently acquired or organized subsidiary of Jafra Cosmetics
S.A. is also required to fully and unconditionally guarantee the Mexican
portion of the New Notes jointly and severally, on a senior subordinated basis.
The guarantee fee is being amortized into income over an eight year period, the
term of the New Notes. At June 30, 2004, approximately $2,753,000 was
classified as a non-current asset and the remaining unamortized amount was
classified as a current asset in the accompanying balance sheets. The New Notes are unsecured and are generally not redeemable for four
years from the issue date. Thereafter, the Notes will be redeemable on a pro
rata basis at premiums declining to par in the sixth year. Prior to May 16,
2006, the Issuers at their option may concurrently redeem the New Notes in an
aggregate principal amount equal to up to 35% of the original aggregate
principal amount of the New Notes, with funds in an aggregate amount not
exceeding the aggregate cash proceeds of one or more equity offerings, at a
redemption price of 110.75 plus accrued interest. On September 15, 2003, the
Issuers consummated a registered exchange of the New Notes under the Securities
Act of 1933. As the Acquisition constituted a change of control as defined in
the indenture governing the Companys 103⁄4% Notes, the Issuers and the
Parent sent a notice to noteholders of their right to require the repurchase of
the outstanding notes at a price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the date of such repurchase. Subsequent to
June 30, 2004, holders of the 103⁄4% notes exercised their option to sell an
aggregate of $500,000 of the outstanding Notes to the Issuers. In addition, the Issuers entered into the Senior Credit Agreement, which
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a $50 million senior secured term loan facility
maturing in 2008 and a $40 million senior secured revolving credit facility,
also maturing in 2008, of which $20 million is available as letters of credit.
The Senior Credit Agreement is allocated 40% to JCI and 60% to Jafra
Distribution. As of May 20, 2003, JCI borrowed $20 million and Jafra
Distribution borrowed $30 million under the term facility. No amounts were
outstanding under the revolving credit facility at June 30, 2004. Borrowings
under the term loan facility are payable in quarterly installments of principal
and interest over five years through May 20, 2008. Borrowings under the
revolving credit facility mature on May 20, 2008. Borrowings under the Senior
Credit Agreement bear interest at an annual rate of LIBOR plus a margin not to
exceed 3.75% or an alternate base rate plus an applicable margin not to exceed
2.75%. As of June 30, 2004, the applicable interest rates were 7.0% and 5.13%
for base rate loans and 30 day LIBOR loans, respectively, subject in each case
to periodic adjustment based on certain levels of financial performance.
Borrowings under the Senior Credit Agreement are secured by substantially all
of the assets of JCI and Jafra Distribution. In connection with closing the Acquisition, the Issuers, the Parent and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provides that for a period of
90 days following the closing of the Acquisition ending August 25, 2004, the
Acquisition will not constitute an event of default under the Credit Agreement.
The Parent and Issuers are seeking refinancing of the indebtedness outstanding
under the Senior Credit Agreement. Jafra Distribution believes that the new
senior facility will be obtained. Both the Indenture and the Senior Credit Agreement contain certain
covenants that limit the Parents ability to incur additional indebtedness, pay
cash dividends and make certain other payments. These debt agreements also
require the Parent to maintain certain financial ratios including a minimum
EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA
ratio. These covenants apply to the Parent and certain of its subsidiaries,
including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A.
As of June 30, 2004, the Parent and its subsidiaries were in compliance with
all debt covenants The senior credit agreement contains provisions whereby (i) the default by
the Parent, or any default by JCI, Jafra Distribution or any of their
respective subsidiaries, in any payment under debt obligations in an aggregate 34




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) principal amount of $5.0 million or more beyond any applicable grace
period, or (ii) any default by the Parent, or any default by JCI, Jafra
Distribution or any of their respective subsidiaries, in the observance or
performance of any other agreement or condition under such other debt
obligations that allows the holder(s) of such debt obligations to accelerate
the maturity of such obligations after the expiration of any grace period or
the provision of notice, and such grace period has expired or notice has been
given, will allow the lenders under the senior credit agreement to terminate
their commitments to lend thereunder and/or declare any amounts outstanding
thereunder to be immediately due and payable. The Indenture contains similar
provisions that apply upon the failure by the Parent, or the failure by JCI,
Jafra Distribution or any of their significant subsidiaries (as defined in the
Indenture), to pay any indebtedness for borrowed money when due, or on the
acceleration of any other debt obligations exceeding $10.0 million. The
Indenture also contains provisions that, under certain circumstances, permit
the holders of certain senior indebtedness (including the loans made under the
senior credit agreement) to block payments on the 103⁄4% Notes during the
continuance of certain defaults that would allow the holders of such senior
indebtedness to accelerate the relevant senior indebtedness. The terms of the Indenture significantly restrict the Parent and its other
subsidiaries from paying dividends and otherwise transferring assets to Jafra
S.A. The ability of the Parent to make such restricted payments or transfers is
generally limited to an amount determined by a formula based on 50% of its
consolidated net income (which, as defined in the Indenture, excludes goodwill
impairment charges and any after-tax extraordinary, unusual or nonrecurring
gains and losses) accruing from October 1, 2002, plus specified other amounts.
In addition, as a condition to making such payments to Jafra S.A. based on such
formula, the Parent must have a consolidated coverage ratio (as defined in the
Indenture) of at least 2.25 to 1 after giving effect to any such payments.
Notwithstanding such restrictions, the Indenture permits an (i) aggregate of
$5.0 million of such payments and (ii) payments for certain specific uses, such
as the payment of consolidated taxes or holding company expenses, to be made
whether or not there is availability under the formula or the conditions to its
use are met. The terms of the senior credit agreement contain similar
restrictions. The Senior Credit Agreement generally limits dividends by the
Parent to dividends necessary to fund specified costs and expenses, but permits
the Parent to pay dividends of up to 50% of consolidated net income (as defined
in the Indenture) plus up to $5.0 million so long as the term loans have been
repaid in full, the aggregate exposure of the lenders under the revolving
portion of the senior credit facilities does not exceed $25 million and the
consolidated leverage ratio (as defined in the senior credit agreement) does
not exceed 3 to 1 after giving effect to such payment. Jafra Distribution capitalized approximately $8,640,000 of costs related
to the issuance of the New Notes and the Senior Credit Agreement as deferred
financing fees. These deferred financing fees are reported as a noncurrent
asset in the accompanying balance sheets and are being amortized on a basis
that approximates the interest method over the term of the New Notes and the
Senior Credit Agreement. As of June 30, 2004, approximately $1,362,000 of the
deferred financing fees were amortized. Upon expiration of the Senior Credit
Agreement on August 25, 2004, Jafra Distribution will have approximately
$2,757,000 of unamortized deferred financing fees related to the Senior Credit
Agreement. Jafra Distribution expects to write off these deferred financing
fees upon expiration of the Senior Credit Agreement and to record that write
off as a loss on extinguishment of debt during the third quarter of 2004. (7) Comprehensive (Loss) Income Comprehensive (loss) income is summarized as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    $
    (3,540
    )
    
    $
    609
    
    
    $
    (5,079
    )
    
    $
    6,362Foreign currency translation adjustments
    
    
    (879
    )
    
    
    1,364
    
    
    
    (673
    )
    
    
    105Comprehensive income (loss)
    
    $
    (4,419
    )
    
    $
    1,973
    
    
    $
    (5,752
    )
    
    $
    6,467
 35




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) (8) Related Party Transactions Jafra Distribution sells color cosmetics and fragrance products to other
affiliates of the Parent (affiliates). Sales to affiliates, primarily in the
United States and Germany, were $3,163,000 and $5,946,000 for the three and six
months ended June 30, 2004, respectively, and $2,977,000 and $5,670,000 for the
three and six months ended June 30, 2003, respectively. These sales were made
at cost plus a markup ranging from 0 to 11%. Jafra Distribution purchases skin
and body products from an affiliate. Purchases were $2,453,000 and $5,264,000
for the three and six months ended June 30, 2004, respectively and $3,752,000
and $8,057,000 for the three and six months ended June 30, 2003, respectively.
Jafra Distribution sells products purchased from an affiliate and other
purchased inventory to its Mexico affiliate, Jafra Cosmetics S.A., at a markup.
Sales to Jafra Cosmetics S.A. were $33,704,000 and $70,097,000 for the three
and six months ended June 30, 2004, respectively, and $30,286,000 and
$58,414,000 for the three and six months ended June 30, 2003, respectively. Jafra Distribution receives certain administrative and other services from
Jafra Cosmetics S.A. The cost of these services is included in service fee
expense to affiliate in the accompanying statements of operations. Jafra
Distribution believes the amounts are reasonable and approximate the cost of
the actual services received. In addition, Jafra Distribution is provided with certain management
services, such as legal, accounting and treasury, management oversight, and
other administrative functions from affiliates, including JCI. The cost of
these services is included in management fee expense to affiliates in the
accompanying statements of operations. Jafra Distribution is charged a portion
of these management expenses based upon charges identified to Jafra
Distribution and a formula using the percentage of revenues of the subsidiaries
to the total consolidated revenues of the Parent. Jafra Distribution believes
the amounts and methods of allocation are reasonable and approximate the cost
of the actual services received. (9) Foreign Currency Forward Contracts Jafra Distribution is exposed to currency risk related to its U.S.
dollar-denominated debt and related principal and interest payments. As part of
its overall strategy to reduce the risk of adverse potential exchange rate
fluctuations, Jafra Distribution enters into foreign currency forward contracts
(forward contracts) with Jafra Cosmetics S.A. Pursuant to SFAS No. 133, the
contracts are remeasured based on fair value and the gains and losses are
included as a component of exchange loss on the accompanying statements of
operations. During the six months ended June 30, 2004, Jafra Distribution
recognized losses of $3,275,000 related to the forward contracts. As of June
30, 2004, there were no outstanding forward contracts between Jafra
Distribution and Jafra Cosmetics S.A. The following provides information
about the details of Jafra Distributions forward contract as of December 31,
2003 (in thousands): Forward Position
    
    
    
    
    
    WeightedIn Mexican
    
    Maturity
    
    Average
    
    Fair Value inForeign Currency
    
    Pesos(1)
    
    Date
    
    Contract Rate
    
    U.S. Dollars(1)Buy U.S. dollar/sell Mexican peso
    
    
    1,677,924
    
    
    
    3/04/04
    
    
    
    10.97
    
    
    $
    3,213
   (1)
    
    The fair value of the forward position presented above, an unrealized
gain of $3,213,000 at December 31, 2003, represents the carrying value of
the forward contract and has been recorded in receivables from affiliates
in the accompanying balance sheets. (10) Subsequent Event Five
lenders have signed commitments to participate in and syndicate a new
senior credit facility. The balance of a proposed
four-year $60 million amended and restated senior revolving credit facility
which, together with an interim loan of up to $20 million from Vorwerk, would
refinance outstanding borrowings and replace commitments under the Credit
Agreement. The Parent is seeking to consummate this refinancing prior to the
expiration of the 90-day waiver under the Credit Agreement. 36




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,170
    
    
    $
    5,833Receivables, net
    
    
    33,510
    
    
    
    34,065Receivables from affiliates
    
    
    3,088
    
    
    
    2,880Prepaid expenses and other current assets
    
    
    3,100
    
    
    
    497Total current assets
    
    
    40,868
    
    
    
    43,275Property and equipment, net
    
    
    33,629
    
    
    
    33,399Other assets:Goodwill
    
    
    25,771
    
    
    
    26,428Trademarks
    
    
    40,089
    
    
    
    41,111Other
    
    
    1,416
    
    
    
    4,083Total
    
    $
    141,773
    
    
    $
    148,296LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    3,991
    
    
    
    4,073Accrued liabilities
    
    
    23,522
    
    
    
    31,930Income taxes payable
    
    
    3,383
    
    
    
    6,093Payables to affiliates
    
    
    23,718
    
    
    
    24,611Deferred income taxes
    
    
    2,868
    
    
    
    2,941Other current liabilities
    
    
    388
    
    
    
    458Total current liabilities
    
    
    57,870
    
    
    
    70,106Deferred income taxes
    
    
    12,336
    
    
    
    12,651Other long-term liabilities
    
    
    3,130
    
    
    
    3,209Total liabilities
    
    
    73,336
    
    
    
    85,966Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 139,373 shares authorized,
issued and outstanding in 2004 and 2003Series C preferred stock, no par value: 13,642 shares authorized,
issued and outstanding in 2004 and 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    54,334
    
    
    
    54,334Retained earnings
    
    
    25,860
    
    
    
    17,687Accumulated other comprehensive loss
    
    
    (11,757
    )
    
    
    (9,691
    )Total stockholders equity
    
    
    68,437
    
    
    
    62,330Total
    
    $
    141,773
    
    
    $
    148,296
 See accompanying notes to consolidated financial statements 37




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    67,581
    
    
    $
    63,421
    
    
    $
    138,430
    
    
    $
    120,214Cost of sales
    
    
    25,909
    
    
    
    26,517
    
    
    
    54,664
    
    
    
    51,513Gross profit
    
    
    41,672
    
    
    
    36,904
    
    
    
    83,766
    
    
    
    68,701Selling, general and administrative expenses
    
    
    34,416
    
    
    
    30,927
    
    
    
    69,628
    
    
    
    58,525Management fee expense to affiliates
    
    
    3,867
    
    
    
    3,088
    
    
    
    5,315
    
    
    
    4,320Service fee income from affiliate
    
    
    (8,153
    )
    
    
    (1,488
    )
    
    
    (14,622
    )
    
    
    (3,706
    )Restructuring charges
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    Royalty expense to affiliates, net
    
    
    5,070
    
    
    
    4,722
    
    
    
    10,518
    
    
    
    8,918Income (loss) from operations
    
    
    6,472
    
    
    
    (345
    )
    
    
    12,765
    
    
    
    644Other income (expense):Exchange (loss) gain, net
    
    
    (3,483
    )
    
    
    1,823
    
    
    
    (512
    )
    
    
    96Interest expense
    
    
    (127
    )
    
    
    (879
    )
    
    
    (146
    )
    
    
    (2,042
    )Interest income
    
    
    31
    
    
    
    34
    
    
    
    76
    
    
    
    196Loss on extinquishment of debt
    
    
    
    
    
    
    (1,842
    )
    
    
    
    
    
    
    (1,842
    )Other expense
    
    
    (115
    )
    
    
    (87
    )
    
    
    (172
    )
    
    
    (116
    )Income (loss) before income taxes
    
    
    2,778
    
    
    
    (1,296
    )
    
    
    12,011
    
    
    
    (3,064
    )Income tax expense (benefit)
    
    
    (215
    )
    
    
    (2,525
    )
    
    
    3,838
    
    
    
    (2,545
    )Net income (loss)
    
    $
    2,993
    
    
    $
    1,229
    
    
    $
    8,173
    
    
    $
    (519
    )
 See accompanying notes to consolidated financial statements 38




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    8,173
    
    
    $
    (519
    )Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Depreciation and amortization of guarantee fee
    
    
    784
    
    
    
    992Write off and amortization of deferred financing fees
    
    
    
    
    
    
    435Provision for uncollectible accounts receivable
    
    
    3,585
    
    
    
    2,507Unrealized foreign exchange and derivative loss
    
    
    33
    
    
    
    40Deferred realized derivative loss
    
    
    
    
    
    
    646Changes in operating assets and liabilities:Receivables
    
    
    (4,115
    )
    
    
    (1,542
    )Prepaid expenses and other current assets
    
    
    (451
    )
    
    
    (888
    )Intercompany receivables and payables
    
    
    1,598
    
    
    
    6,178Other assets
    
    
    (122
    )
    
    
    224Accounts payable and accrued liabilities and value added taxes
    
    
    (10,044
    )
    
    
    (3,323
    )Income taxes payable/prepaid
    
    
    (2,615
    )
    
    
    (3,522
    )Net cash (used in) provided by operating activities
    
    
    (3,174
    )
    
    
    1,228Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,316
    )
    
    
    (757
    )Net cash used in investing activities
    
    
    (1,316
    )
    
    
    (757
    )Cash flows from financing activities:Repurchase of subordinated debt due 2008
    
    
    
    
    
    
    (30,072
    )Repayments under term loan facility
    
    
    
    
    
    
    (2,375
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    3,000Payments under revolving credit facility
    
    
    
    
    
    
    (3,000
    )Receipt of guarantee fee from affiliate
    
    
    
    
    
    
    4,000Repayments under bank debt
    
    
    
    
    
    
    (828
    )Sale of Series C preferred stock
    
    
    
    
    
    
    20,150Net cash used in financing activities
    
    
    
    
    
    
    (9,125
    )Effect of exchange rate changes on cash
    
    
    (173
    )
    
    
    (24
    )Net decrease in cash and cash equivalents
    
    
    (4,663
    )
    
    
    (8,678
    )Cash and cash equivalents at beginning of period
    
    
    5,833
    
    
    
    13,356Cash and cash equivalents at end of period
    
    $
    1,170
    
    
    $
    4,678
 See accompanying notes to consolidated financial statements 39




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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 anonima de capital
variable, organized under the laws of the United Mexican States, is owned by
five indirect wholly-owned subsidiaries of Jafra Worldwide Holdings (Lux),
S.àr.l., a Luxembourg société à responsabilité limitée(the Parent). The
Parent is the wholly-owned subsidiary of Jafra S.A. (formerly known as CDRJ
North Atlantic (Lux) S.àr.l.), a Luxembourg société ananyme(Jafra S.A.).
Jafra S.A. was formerly a wholly-owned subsidiary of CDRJ Investments (Lux)
S.A., a Luxembourg société anonyme(CDRJ). A minority interest of Jafra
Cosmetics International S.A. de C.V. is owned by Distribuidora Comercial Jafra
S.A. de C.V. (Jafra Distribution). On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and
outstanding capital stock of Jafra S.A. (the Acquisition). As a result of
the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal,
Germany. The purchase transaction has not been pushed down to Jafra Cosmetics
S.A. due to the outstanding registered debt. The accompanying unaudited interim consolidated financial statements as of
June 30, 2004 and for the three and six months ended June 30, 2004 and 2003
reflect the operations of Jafra Cosmetics International S.A. de C.V. and its
subsidiaries (Jafra Cosmetics S.A.), excluding the carved-out distribution
operations of Distribuidora Venus, S.A. de C.V. (Venus) 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 consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly Jafra
Cosmetics S.A.s consolidated financial statements as of June 30, 2004 and for
the interim periods presented. All significant intercompany accounts and
transactions between entities comprising Jafra Cosmetics S.A. have been
eliminated in consolidation. Jafra Distribution was organized under the laws of the United Mexican
States on February 26, 2003 to conduct the Parents distribution business in
Mexico. The distribution business was previously conducted by Venus, a
wholly-owned subsidiary of Jafra Cosmetics S.A. Jafra Distribution is owned by
five indirect wholly-owned subsidiaries of the Parent. On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (JCI)
and Jafra Distribution (together with JCI, the Issuers) completed a
recapitalization of their operations by entering into $90 million of new senior
credit facilities, consisting of a $50 million senior secured term loan
facility and a $40 million senior secured revolving credit facility and issuing
$200 million of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 113⁄4% Senior Subordinated
Notes due 2008 (the Old Notes), of JCI and Jafra Cosmetics S.A. to repay all
amounts outstanding under the existing credit facilities of JCI and Jafra
Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and
Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be
liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ
made an initial liquidating distribution of such proceeds to its stockholders.
In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its
assets and liabilities, including its direct and indirect holdings of JCI,
Jafra Cosmetics S.A. and Jafra Distribution to the Parent in exchange for
additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra
Distribution are collectively referred to as Jafra Mexico. The New Notes represent several obligations of Jafra Distribution and JCI.
Jafra Cosmetics S.A. has fully and unconditionally guaranteed the obligations
of Jafra Distribution under the New Notes. As Jafra Cosmetics S.A. is not a
consolidated subsidiary of Jafra Distribution, the Parent is filing these
separate financial statements of Jafra Cosmetics S.A. in its Report on Form
10-Q. The functional currency for Jafra Cosmetics S.A. 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 loss. 40




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46
were effective for Jafra Cosmetics S.A. in the first quarter of 2004. The
adoption of FIN 46 did not have an impact on Jafra Cosmetics S.A.s financial
position or results of operations as Jafra Cosmetics S.A. had no variable
interest entities. (2) Property and Equipment Property and equipment consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Land
    
    $
    9,262
    
    
    $
    9,498Buildings
    
    
    9,308
    
    
    
    9,545Machinery, equipment and other
    
    
    22,739
    
    
    
    21,30441,309
    
    
    
    40,347Less accumulated depreciation
    
    
    7,680
    
    
    
    6,948Property and equipment, net
    
    $
    33,629
    
    
    $
    33,399
 (3) Goodwill and Other Intangible Assets. Jafra Cosmetics S.A.s intangible assets consist of trademarks and
goodwill. Jafra Cosmetics S.A. has determined trademarks, principally the
Jafra name resulting from the acquisition of the Jafra business from Gillette,
to have an indefinite life. The carrying value of trademarks was $40,089,000
and $41,111,000 as of June 30, 2004 and December 31, 2003, respectively. Except
for translation adjustments, there were no changes in the carrying amount of
goodwill during the three and six months ended June 30, 2004 and the year ended
December 31, 2003. Goodwill was $25,771,000 and $26,428,000 at June 30, 2004
and December 31, 2003. (4) Income Taxes The actual income tax rate of Jafra Cosmetics S.A. for the three and six
months ended June 30, 2004 from the expected tax rate, computed by applying
the Mexico federal corporate rate of 33% to income before income taxes due to
certain permanent differences, including inflation. (5) Restructuring Charges Jafra Cosmetics S.A. recorded and paid out $162,000 of restructuring
charges during the first six months of 2004 related to the Parents transfer of
substantially all of its skin and body care manufacturing operations to its
facilities in Mexico. The transfer of these operations was substantially
complete during the second quarter of 2004. These restructuring expenses
related primarily to termination benefits. Jafra Cosmetics S.A. does not
expect to incur any additional restructuring costs in connection with this
transfer. (6) Debt On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes due 2011 pursuant to an Indenture dated
May 20, 2003 (the Indenture) and entered into a $90 million senior credit
agreement (the Senior Credit Agreement). The New Notes represent the several
obligations of JCI and Jafra Distribution in the amount of $80 million and $120
million, respectively. The New Notes mature in 2011 and bear a fixed interest
rate of 103⁄4% payable semi-annually. 41




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. The Issuers have fully and unconditionally guaranteed of the
other the obligations under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
also required to fully and unconditionally guarantee the New Notes jointly and
severally, on a senior subordinated basis. Each existing and subsequently
acquired or organized Mexican subsidiary of Jafra Distribution is also required
to fully and unconditionally guarantee the Mexican portion of the New Notes
jointly and severally, on a senior subordinated basis. On May 20, 2003, Jafra Cosmetics S.A. received $4,000,000 from Jafra
Distribution to fully and unconditionally guarantee the obligations of Jafra
Distribution under the New Notes on a senior subordinated basis and
under the Senior Credit Agreement. Each existing
and subsequently acquired or organized subsidiary of Jafra Cosmetics S.A. is
also required to fully and unconditionally guarantee the Mexican portion of the
New Notes jointly and severally, on a senior subordinated basis. The guarantee
fee is being amortized into income over an eight year period, the term of the
New Notes. At June 30, 2004, approximately $2,753,000 was classified as a
non-current liability and the remaining unamortized amount was classified as a
current liability in the accompanying consolidated balance sheets. On May 23, 2003, with the proceeds from the guarantee fee paid by Jafra
Distribution, an equity contribution by Jafra Distribution and available cash,
Jafra Cosmetics S.A. redeemed its Old Notes in the aggregate principal amount
of $30,072,000 at a premium of approximately $1,767,000. Additionally, Jafra
Cosmetics S.A. repaid $2,375,000 under the Old Credit Agreement and terminated
the Old Credit Agreement. In connection with the redemption of the Old Notes
and the termination of the Old Credit Agreement, Jafra Cosmetics S.A. wrote off
approximately $75,000 of capitalized deferred financing fees. Total costs
related to the recall of the previous debt was $1,842,000 and was recorded as
loss on extinguishment of debt in the accompanying consolidated statements of
operations during the three months ended June 30, 2003. (7) Comprehensive Income (Loss) Comprehensive Income (loss) is summarized as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    2,993
    
    
    $
    1,229
    
    
    $
    8,173
    
    
    $
    (519
    )Unrealized and deferred realized (loss) gain on derivatives
    
    
    236
    
    
    
    (198
    )
    
    
    (199
    )
    
    
    157Reclassification of deferred realized loss to exchange (loss) gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (550
    )Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    654Foreign currency translation adjustments
    
    
    (2,208
    )
    
    
    817
    
    
    
    (1,867
    )
    
    
    (745
    )Comprehensive income (loss)
    
    $
    1,021
    
    
    $
    1,824
    
    
    $
    6,107
    
    
    $
    (1,003
    )
 (8) Related Party Transactions Jafra Cosmetics S.A. purchases products from its Mexican affiliate, Jafra
Distribution at a markup. The cost of these purchases was $12,870,000 and
$24,957,000 for the three and six months ended June 30, 2004, respectively, and
$12,086,000 and $22,866,000 for the three and six months ended June 30, 2003,
respectively. Jafra Cosmetics S.A. provides certain administrative and other services to
Jafra Distribution. The income from these services is included in service fee
income from affiliate on the accompanying consolidated statements of
operations. Jafra Cosmetics S.A. believes the amounts are reasonable and
approximate the value of the actual services rendered. 42




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) In addition, Jafra Cosmetics S.A. is provided with certain management
services, such as legal, accounting and treasury, management oversight, and
other administrative functions from an affiliate. The cost of these services
is included in management fee expense to affiliates in the accompanying
consolidated statements of operations. Jafra Cosmetics S.A. is charged a
portion of these management expenses based upon charges identified to Jafra
Cosmetics S.A. and a formula using the percentage of revenues of Jafra
Cosmetics S.A. to the total consolidated revenues of the Parent. Jafra
Cosmetics S.A. believes the amounts and methods of allocation are reasonable
and approximate the cost of the actual services received. Jafra Cosmetics S.A. charges JCI a royalty for the right to use the Jafra
trademark in the United States and Europe. The total royalty income earned by
Jafra Cosmetics S.A. from JCI was $844,000 and $1,594,000 for the three and six
months ended June 30, 2004, respectively, and $842,000 and $1,626,000 for the
three and six months ended June 30, 2003, 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 Cosmetics S.A. for the use of the Jafra Way were
$5,914,000 and $12,112,000 for three and six months ended June 30, 2004,
respectively, and $5,564,000 and $10,544,000 for the three and six months ended
June 30, 2003, respectively. and are based upon a percentage of Jafra
Cosmetics S.A.s third party sales. (9) Foreign Currency Forward and Option Contracts Jafra Cosmetics S.A. 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 potential adverse exchange rate
fluctuations in Mexico, Jafra Cosmetics S.A. entered into foreign currency
option contracts (option contracts or options). Jafra Cosmetics S.A.
places option contracts based on its rolling forecasted cash outflows and
hedges transactions included in the forecast on the date the option contract is
initiated. As a matter of policy, Jafra Cosmetics S.A. does not hold or issue
forward contracts or option contracts for trading or speculative purposes nor
does it enter into contracts or agreements containing embedded derivative
features. Jafra Cosmetics S.A. currently designates certain of its option 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
made by Jafra Cosmetics S.A. or Jafra Distribution. 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 loss. Such
amounts will be reclassified from other comprehensive loss into net income
(loss) 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 paid. During the three and six months ended June 30, 2004, Jafra Cosmetics S.A.
recognized $387,000 of gains and $33,000 of losses, respectively, on option
contracts and during the three and six months ended June 30, 2003, Jafra
Cosmetics S.A. recognized $627,000 of gains, respectively on option contracts
as a component of exchange (loss) gain, net on the accompanying consolidated
statements of operations. As of December 31, 2003, Jafra Cosmetics S.A. had deferred as a component
of other comprehensive loss $278,000 of gains on option contracts. During the
six months ended June 30, 2004, Jafra Cosmetics S.A. deferred as a component
of other comprehensive loss $199,000 of losses on option contracts qualifying
for hedge accounting under SFAS No. 133. Jafra Cosmetics S.A. expects that
substantially all of the remaining loss of $79,000 deferred as a component of
other comprehensive loss at June 30, 2004 will be recognized into net income
(loss) within the next twelve months. 43




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The fair value of the option contracts was $208,000 at June 30, 2004 and
has been recorded in other receivables in the consolidated balance sheets. The
fair value of the option contracts was $440,000 at December 31, 2003, and was
recorded in other receivables in the consolidated balance sheets. During the three and six months ended June 30, 2004 and 2003 the
ineffectiveness generated by Jafra Cosmetics S.A.s option 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 during the three and six months ended June
30, 2004 and 2003, $0 and $230,000, respectively, of gains, were reclassified
into earnings. The outstanding foreign currency option contracts had a notional value
denominated in Mexican pesos of 521,000,000 and 831,000,000 in put and call
positions at June 30, 2004 and December 31, 2003, respectively, and mature at
various dates through June 30, 2005. Notional amounts do not quantify Jafra
Cosmetics S.A.s market or credit exposure or represent Jafra Cosmetics S.A.s
assets or liabilities, but are used in the calculation of cash settlements
under the contracts. Jafra Cosmetics S.A. provides treasury functions to Jafra Distribution.
Jafra Distribution is exposed to currency risk related to its U.S.
dollar-denominated debt and related principal and interest payments. As part of
the Parents overall strategy to reduce the risk of adverse potential exchange
rate fluctuations, Jafra Cosmetics S.A. enters into foreign currency forward
contracts (forward contracts) with Jafra Distribution. Pursuant to SFAS No.
133, the contracts are remeasured based on fair value and the gains and losses
are included as a component of exchange gain (loss) on the accompanying
consolidated statements of operations. During the six months ended June 30,
2004, Jafra Cosmetics S.A. recognized gains of $3,275,000 related to the
forward contracts. As of June 30, 2004, there were no outstanding forward
contracts between Jafra Distribution and Jafra Cosmetics S.A. The following
provides information about the details of Jafra Cosmetics S.A.s forward
contract as of December 31, 2003 (in thousands): Forward Position
    
    
    
    
    
    WeightedIn Mexican
    
    Maturity
    
    Average
    
    Fair Value inForeign Currency
    
    Pesos(1)
    
    Date
    
    Contract Rate
    
    U.S. Dollars(1)Sell Mexican peso/buy U.S. dollar
    
    
    1,677,924
    
    
    
    3/04/04
    
    
    
    10.97
    
    
    $
    (3,213
    )
   (1)
    
    The fair value of the forward position presented above, an unrealized
loss of $3,213,000 at December 31, 2003, represents the carrying value of
the forward contract and has been recorded in payables to affiliates in
the accompanying consolidated balance sheets. (10) Subsequent Event Five
lenders have signed commitments to participate in and syndicate a new
senior credit facility. The balance of a proposed
four-year $60 million amended and restated senior revolving credit facility
which, together with an interim loan of up to $20 million from Vorwerk, would
refinance outstanding borrowings and replace commitments under the Credit
Agreement. The Parent is seeking to consummate this refinancing prior to the
expiration of the 90-day waiver under the Credit Agreement. 44




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion of the consolidated results of operations,
financial condition and liquidity of the Jafra Worldwide Holdings (Lux)
S.àr.l., a Luxembourg société à responsabilité limitée(the Parent or the
Company), and its subsidiaries should be read in conjunction with the
accompanying unaudited interim consolidated financial statements and notes
thereto and with the audited consolidated financial statements as of and for
the year ended December 31, 2003 included in the Annual Report on Form 10-K.
The results of operations for the three and six months ended June 30, 2004 are
not necessarily indicative of results that may be expected for future periods. On May 27, 2004 Vorwerk & Co. eins GmbH (Vorwerk) acquired all of the issued and outstanding common stock of Jafra S.A.
(formerly known as CDRJ North Atlantic (Lux) S.àr.l.), which is the Companys
immediate holding company from its shareholders. The purchase transaction by
Vorwerk has not been pushed down to the Company due to the outstanding
registered debt. As this transaction constituted a change of control as defined in the
indenture governing the Companys 103⁄4% Notes, the Company sent a notice to
noteholders of their right to require the repurchase of the outstanding notes
at a price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of such repurchase. Subsequent to June 30, 2004,
holders of the 103⁄4% notes exercised their option to sell an aggregate of
$0.5 million of the outstanding Notes to the Company. As a result, $199.5
million principal amount of the 103⁄4% notes remain outstanding. In connection with closing of the acquisition, Jafra Cosmetics
International, Inc. (JCI), Distribuidora Comercial Jafra, S.A. de C.V.
(Jafra Distribution), the Parent and the requisite lenders under the Credit
Agreement entered into an amendment to the Credit Agreement which provides that
for a period of 90 days following the closing of the acquisition ending August
25, 2004, the acquisition will not constitute an event of default under the
Credit Agreement. Five lenders have signed commitments to participate
in and syndicate a senior credit facility. The balance
of a proposed four-year $60 million amended and restated senior revolving
credit facility which, together with an interim loan of up to $20 million from
Vorwerk, would refinance outstanding borrowings and replace commitments under
the Credit Agreement. The Company is seeking to consummate this refinancing
prior to the expiration of the 90-day waiver under the Credit Agreement. Foreign Operations As a group doing more than 76% of its business in international markets
during the first six months of 2004, the Company is subject to foreign taxes
and intercompany pricing laws, including those relating to the flow of funds
between its subsidiaries pursuant to, for example, purchase agreements,
licensing agreements or other arrangements. Regulators in the United States,
Mexico and in other foreign markets may closely monitor the Companys corporate
structure and how it effects intercompany fund transfers. Net
sales outside of the United States constituted approximately 76% and
73% of the Companys total net sales for the six months ended June 30, 2004 and
2003, respectively. In addition, as of June 30, 2004, non-U.S. subsidiaries
comprised approximately 69% of the Companys consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. The Company has implemented a hedging program to protect
against potential devaluation of the Mexican peso. The Companys subsidiaries in Mexico generated approximately 67% and 63%
of the Companys net sales for the six months ended June 30, 2004 and 2003,
respectively, substantially all of which were denominated in Mexican pesos.
During the first six months of 2004 and in 2003, the Mexican peso has devalued
2.6% compared to the U.S. dollar. During the first six months of 2004, the
remeasuremant of U.S. dollar-denominated debt resulted in an exchange loss of
$3.8 million, most of which was unrealized. Jafra Distribution had $146.3
million of outstanding U.S. dollar denominated debt at June 30, 2004. 45




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The Company is also exposed to foreign exchange risk due to its operations
in South America and Europe. The Companys largest South American operation is
in Brazil; and its largest European operation is in Germany. During the six months
ended June 30, 2004, the Brazilian real devalued 6.7% and the euro devalued
3.1%. The Company does not currently have a hedging program to protect against
any further devaluation of the real or the euro. A further devaluation of
either currency could have a negative impact on the Companys results. Information Concerning Forward-Looking Statements Certain of the statements contained in this report are forward-looking
statements made based on managements or the Companys expectations or 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, 2003 or in
other Securities and Exchange Commission filings, could affect (and in some
cases have affected) the Companys actual results and could cause such results
to differ materially from estimates or expectations reflected in such
forward-looking statements. 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. 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. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    103.7
    
    
    
    100.0
    %
    
    $
    100.0
    
    
    
    100.0
    %
    
    $
    206.8
    
    
    
    100.0
    %
    
    $
    190.1
    
    
    
    100.0
    %Cost of sales
    
    
    23.9
    
    
    
    23.0
    
    
    
    22.7
    
    
    
    22.7
    
    
    
    48.0
    
    
    
    23.2
    
    
    
    44.2
    
    
    
    23.3Gross profit
    
    
    79.8
    
    
    
    77.0
    
    
    
    77.3
    
    
    
    77.3
    
    
    
    158.8
    
    
    
    76.8
    
    
    
    145.9
    
    
    
    76.7Selling, general and administrative expenses
    
    
    60.9
    
    
    
    58.7
    
    
    
    60.5
    
    
    
    60.5
    
    
    
    124.2
    
    
    
    60.1
    
    
    
    117.9
    
    
    
    62.0Transaction related expenses
    
    
    26.1
    
    
    
    25.2
    
    
    
    14.4
    
    
    
    14.4
    
    
    
    29.5
    
    
    
    14.3
    
    
    
    15.1
    
    
    
    7.9Restructuring and impairment charges
    
    
    0.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    1.3
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (8.1
    )
    
    
    (7.8
    )
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.3
    
    
    
    1.1
    
    
    
    12.9
    
    
    
    6.8Exchange (loss) gain, net
    
    
    (5.1
    )
    
    
    (4.9
    )
    
    
    0.4
    
    
    
    0.4
    
    
    
    (4.5
    )
    
    
    (2.1
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Interest expense
    
    
    (6.9
    )
    
    
    (6.7
    )
    
    
    (4.7
    )
    
    
    (4.7
    )
    
    
    (13.7
    )
    
    
    (6.6
    )
    
    
    (7.5
    )
    
    
    (3.9
    )Interest income
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (6.6
    )
    
    
    (6.6
    )
    
    
    
    
    
    
    
    
    
    
    (6.6
    )
    
    
    (3.4
    )Other expense
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Other income
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss before income taxes
    
    
    (20.2
    )
    
    
    (19.5
    )
    
    
    (8.7
    )
    
    
    (8.7
    )
    
    
    (16.0
    )
    
    
    (7.7
    )
    
    
    (1.6
    )
    
    
    (0.8
    )Income tax (benefit) expense
    
    
    (7.1
    )
    
    
    (6.9
    )
    
    
    (2.1
    )
    
    
    (2.1
    )
    
    
    (4.1
    )
    
    
    (2.0
    )
    
    
    1.6
    
    
    
    0.8Loss from continuing operations
    
    
    (13.1
    )
    
    
    (12.6
    )
    
    
    (6.6
    )
    
    
    (6.6
    )
    
    
    (11.9
    )
    
    
    (5.7
    )
    
    
    (3.2
    )
    
    
    (1.6
    )Loss on discontinued operations,
net of income tax expense
of $0 in 2004 and 2003
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (1.9
    )
    
    
    (1.1
    )Net loss
    
    $
    (13.2
    )
    
    
    (12.7
    )%
    
    $
    (7.7
    )
    
    
    (7.7
    )%
    
    $
    (12.1
    )
    
    
    (5.8
    )%
    
    $
    (5.1
    )
    
    
    (2.7
    )%
 46




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##### Table of Contents



Three months ended June 30, 2004 compared to the three months ended June 30,
2003 Corporate,United
    
    
    
    
    
    
    
    
    
    Unallocated
    
    ConsolidatedDollars in millions
    
    Mexico
    
    States
    
    Europe
    
    All Others
    
    and Other
    
    TotalThree Months Ended June 30, 2004Net sales
    
    $
    67.6
    
    
    $
    26.0
    
    
    $
    8.8
    
    
    $
    1.3
    
    
    $
    
    
    
    $
    103.7Cost of sales
    
    
    16.5
    
    
    
    5.9
    
    
    
    1.7
    
    
    
    0.5
    
    
    
    (0.7
    )
    
    
    23.9Gross profit
    
    
    51.1
    
    
    
    20.1
    
    
    
    7.1
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    79.8Selling, general and
administrative expenses
    
    
    29.9
    
    
    
    17.9
    
    
    
    6.6
    
    
    
    1.4
    
    
    
    5.1
    
    
    
    60.9Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.1
    
    
    
    26.1Restructuring and impairment
charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    0.9Income (loss) from operations
    
    $
    21.2
    
    
    $
    2.2
    
    
    $
    0.5
    
    
    $
    (0.6
    )
    
    $
    (31.4
    )
    
    $
    (8.1
    )Three Months Ended June 30, 2003Net sales
    
    $
    63.4
    
    
    $
    26.1
    
    
    $
    8.6
    
    
    $
    1.9
    
    
    $
    
    
    
    $
    100.0Cost of sales
    
    
    15.0
    
    
    
    5.9
    
    
    
    1.9
    
    
    
    0.8
    
    
    
    (0.9
    )
    
    
    22.7Gross profit
    
    
    48.4
    
    
    
    20.2
    
    
    
    6.7
    
    
    
    1.1
    
    
    
    0.9
    
    
    
    77.3Selling, general and
administrative expenses
    
    
    30.5
    
    
    
    16.5
    
    
    
    6.2
    
    
    
    2.3
    
    
    
    5.0
    
    
    
    60.5Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.4
    
    
    
    14.4Income (loss) from operations
    
    $
    17.9
    
    
    $
    3.7
    
    
    $
    0.5
    
    
    $
    (1.2
    )
    
    $
    (18.5
    )
    
    $
    2.4
 Net sales. Net sales in the second quarter of 2004 increased to $103.7
million from $100.0 million in the second quarter of 2003, an increase of $3.7
million, or 3.7%. Net sales in local currencies in the second quarter of 2004
increased by 9.5% over the comparable prior year period. As a result of weaker
average exchange rates during the second quarter of 2004 compared to the second
quarter of 2003, the increase in net sales measured in U.S. dollars was less
than the increase measured in local currencies. The increase in net sales was
driven by the increase in net sales in Mexico primarily as a result of the
increase in the average number of consultants in Mexico, partially offset by a
decrease in Mexico consultant productivity. The Companys average number of
consultants in the second quarter of 2004 increased to approximately 440,000,
or 8.7% over the average number of consultants in the second quarter of 2003. A
consultant is included in the total ending consultant base if she places an
order within the past four months as of the end of the period. The average
number of consultants is calculated based on the number of consultants at the
end of each month during the period, divided by the number of months in the
period. Consultant productivity measured in U.S. dollars in the second quarter
of 2004 decreased 4.6% compared to the second quarter of 2003. Measured in
local currencies, consultant productivity increased 0.8% compared to the second
quarter of 2003. Consultant productivity refers to the average amount
purchased by each consultant during the period and is calculated by dividing
net sales during the period by the average number of consultants during that
period. Quarterly productivity may increase or decrease significantly due to
changes in the nature and timing of certain promotions from one year to
another. In Mexico, net sales in the second quarter of 2004 increased to $67.6
million from $63.4 million in the second quarter of 2003, an increase of $4.2
million, or 6.6%. Net sales in Mexico measured in local currency increased
16.7% in the second quarter of 2004 over the comparable 2003 period. The
period-over-period net sales increase measured in local currency was due
primarily to increases in the average number of consultants partially offset by
a decrease in consultant productivity. In Mexico the average number of
consultants in the second quarter of 2004 was approximately 323,000, an
increase of 23.9% compared to the second quarter of 2003, primarily as a result
of a larger consultant base at the beginning of the period and successful
promotions and initiatives to recruit and retain consultants. Consultant
productivity measured in local currency during the second quarter of 2004
decreased 5.8% compared to consultant productivity during the second quarter of
2003 as a result of promotions focusing on the increasing the number of
consultants who place orders rather than the amount ordered by each consultant. 47




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In the United States, including the Dominican Republic, net sales in the
second quarter of 2004 decreased nominally to $26.0 million from $26.1 million
in the second quarter of 2003, a decrease of $0.1 million, or 0.4%. During
2004, the Company classified its Dominican Republic operations within the
United States segment for all periods presented as the operations in the
Dominican Republic are under the same management as operations in the United
States and the Companys key financial decision makers evaluate the results of
the Dominican Republic within the United States segment. Operations in the
United States (inclusive of the Dominican Republic) are bifurcated into two
separate units: the Hispanic Group, which represents approximately
two-thirds of the United States segment and includes the Dominican Republic, and
the General Division. In the United States, the slight decrease in net sales
was primarily the result of a decrease in the average number of consultants,
partially offset by an increase in consultant productivity. Net sales in the Hispanic Group (including the Dominican Republic)
increased to $18.8 million in the second quarter of 2004 from $18.3 million in
the second quarter of 2003, an increase of $0.5 million or 2.7%. The increase
in net sales was primarily the result of an increase in consultant productivity
partially offset by a decrease in the average number of consultants.
Consultant productivity increased 7.1% in the second quarter of 2004 compared
to the second quarter of 2003 as a result of program changes to increase the
minimum order size in order to obtain the maximum commission percentage and
certain productivity driven promotions. The average number of consultants in
the Hispanic Group decreased 4.2% to approximately 56,000 in the second quarter
of 2004 compared to the second quarter of 2003 as a result of a smaller
consultant base at the beginning of the period. The consultant base at the
beginning of the period was negatively impacted by the commercial system implementation issues
experienced primarily during the latter part of 2003 and the first couple
months of 2004. In the Dominican Republic, program changes were implemented
and were aimed at a smaller more productive consultant base. This also
contributed to the decrease in the average number of consultants and the
increase in consultant productivity during the second quarter of 2004 compared
to the second quarter of 2003. Net sales in the General Division decreased 7.7% to approximately $7.2
million in the second quarter of 2004 compared to $7.8 million the second
quarter of 2003, due to decreases in the average number of consultants
partially offset by an increase in consultant productivity. The average number
of consultants in the period was approximately 27,000, a 13.3% decrease
compared to the second quarter of 2003, as a result of a smaller consultant
base at the beginning of the period as a result of the same system
implementation issues experience by the Hispanic Group. Additionally, in the
General Division, the minimum order size was increased in order to obtain the
maximum commission percentage. A result of these program changes was a smaller
more productive consultant base, and therefore consultant productivity in the
second quarter of 2004 increased 6.3% compared to consultant productivity in
the second quarter of 2003. In Europe, net sales increased to $8.8 million in the second quarter of
2004 from $8.6 million in the second quarter of 2003, an increase of $0.2
million, or 2.3%, as a result of stronger average local currencies compared to
the U.S. dollar partially offset by decreases in the average number of
consultants and in consultant productivity. European net sales measured in
local currencies in the second quarter of 2004, decreased 4.6% compared to the
second quarter of 2003. During the second quarter of 2004, the average number
of consultants decreased to 18,000, or 2.6% over the comparable prior year
period due to a larger consultant base in 2003 as a result of successful
promotions during that 2003 period. Consultant productivity measured in local
currencies decreased 2.0% as a result of more difficult general economic
conditions in Germany. Net sales in the other markets decreased to $1.3 million in the second
quarter of 2004 compared to $1.9 million in the second quarter of 2003, a
decrease of $0.6 million, or 31.6%. Other markets consist of Brazil, Argentina
and, in 2003, Thailand. Brazilian net sales were $1.1 million in the second
quarter of 2004 compared to $1.6 million in the second quarter of 2003, a
decrease of $0.5 million, or 31.3%. The decrease was primarily a result of a
decrease in the average number of consultants partially offset by an increase
in consultant productivity. A result of program changes implemented as part of
the restructuring in 2003 was a smaller, more productive consultant base. Net
sales in Argentina were constant at $0.2 million in the second quarter of 2004
and 2003. The Company ceased operations in Thailand during the fourth quarter
of 2003 and therefore, there were no sales in Thailand in 2004 compared to $0.1
million during the second quarter of 2003. Gross profit.Consolidated gross profit in the second quarter of 2004
increased to $79.8 million from $77.3 million in the comparable prior year
period, an increase of $2.5 million, or 3.2%. Gross profit as a percentage of
net 48




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##### Table of Contents



sales (gross margin) decreased to 77.0% in the second quarter of 2004 from
77.3% in the second quarter of 2003. The decrease in gross margin in the
second quarter of 2004 was primarily a result of reduced gross margin in the
Companys Mexico subsidiary. In Mexico, gross margin in the second quarter of 2004 decreased to 75.6%
from 76.3% in the second quarter of 2003. The decreased gross margin in Mexico
was primarily the result of additional charges to the reserve for slow moving
inventory and the unfavorable impact of a greater promotional product mix,
partially offset by more favorable direct cost variances in the second quarter
of 2004 compared to the second quarter of 2003. In the United States, gross margin in the second quarter of 2004 decreased
nominally to 77.3% from 77.4%. In Europe, gross margin in the second quarter of 2004 increased to 80.7%
from 77.9% in the second quarter of 2003 due to stonger local currencies
compared to the U.S. dollar at the time of the purchase of the goods and
favorable changes in freight and duty costs. Selling, general and administrative expenses.SG&A expenses in the
second quarter of 2004 increased to $60.9 million from $60.5 million in the
second quarter of 2003, an increase of $0.4 million, or 0.7%. SG&A expenses as
a percentage of net sales decreased to 58.7% in the second quarter of 2004
compared to 60.5% in the second quarter of 2003, due primarily to reduced SG&A
expenses, as a percentage of net sales, at the Companys Mexican subsidiary,
offset in part by higher SG&A expenses, as a percentage of net sales, at the
Companys U.S. subsidiary. In Mexico, SG&A expenses in the second quarter of 2004 decreased by $0.6
million, or 2.0%, to $29.9 million compared to $30.5 million in the second
quarter of 2003. SG&A expenses decreased as a percentage of net sales to 44.2%
in the second quarter of 2004 compared to 48.1% in the second quarter of 2003.
The decrease in SG&A expenses as a percentage of net sales was primarily due to
decreased administrative expenses as a result of decreased bad debt expenses
and personnel related expense savings. Mexico has had improvements in the
collection of receivables. As a result of these improvements, bad debt expense
as a percentage of net sales has decreased. Additionally, administrative
expenses were favorably impacted by reduced salary and personnel expenses due
to personnel vacancies. In the United States, SG&A expenses in the second quarter of 2004
increased by $1.4 million, or 8.5%, to $17.9 million from $16.5 million in the
second quarter of 2003. SG&A expenses as a percentage of net sales were 68.8%
in the second quarter of 2004 compared to 63.2% in the second quarter of 2003.
The increase in SG&A expenses as a percentage of net sales was primarily
attributable to increased selling and administrative expenses in part due to
increased information technology depreciation expense and incremental third
party information technology consulting fees. In Europe, SG&A expenses in the second quarter of 2004 increased by $0.4
million, or 6.5%, to $6.6 million from $6.2 million in the second quarter of
2003. SG&A expenses as a percentage of net sales in Europe increased to 75.0%
in the second quarter of 2004 compared to 72.1% in the second quarter of 2003.
The increase in SG&A expenses as a percentage of net sales was due primarily to
increased administrative expenses as a result of more information technology
maintenance costs during the second quarter of 2004 compared to the second
quarter of 2003. SG&A expenses in the Companys other markets in the second quarter of 2004
decreased by $0.9 million, or 39.1%, to $1.4 million compared to $2.3 million
in the second quarter of 2003. During the latter part of 2003, the Company
implemented an aggressive restructuring plan in Brazil to reduce costs and
minimize losses. As a result of this restructuring, SG&A expenses as a
percentage of net sales were 107.7% during the second quarter of 2004 compared
to 121.1% during the second quarter of 2003. SG&A expenses in Corporate, Unallocated and Other increased marginally
to $5.1 million in the second quarter of 2004 compared to $5.0 million in the
second quarter of 2003. 49




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##### Table of Contents



Transaction Related Expenses.During the second quarter of 2004, the
Company incurred $26.1 million of transaction related expenses compared to
$14.4 million in the second quarter of 2003. During the second quarter of
2004, Vorwerk acquired all of the outstanding capital stock of Jafra S.A., the
Companys parent. As a part of the acquisition, all outstanding employee stock
options were bought back and cancelled. This resulted in $20.3 million of
compensation expense. Additionally, the former primary shareholder of Jafra
S.A. paid $4.9 million in special bonuses directly to certain members of
management and non-employee board of director members. This non-cash charge
has been accounted for as deemed contribution by the former principal
shareholder. The remaining amount recorded in the second quarter of 2004
related primarily to the expensing of insurance premiums due to change of
control provisions in the insurance contracts and fees paid to professional
service providers. During the second quarter of 2003, the Company completed a
recapitalization of its operations by the issuance of new debt. In connection
with the recapitalization, the Company paid and expensed $13.3 million in bonus
payments to the then holders that held options to purchase CDRJS common stock,
certain members of management and non-employee board of director members.
Additionally, the Company expensed $1.1 million in transaction related fees
during the second quarter of 2003. The Company does not expect to incur any
material additional transaction related expenses relating to the acquisition.
This purchase transaction has not been pushed down to the company due
to the outstanding registered debt. Restructuring and impairment charges.During the second quarter of 2004
the Company recorded $0.9 million of restructuring and impairment charges
related to its relocation of substantially all of its manufacturing functions
to its facilities in Mexico. Of that amount, approximately $0.4 million
related to the impairment of assets not transferred. The remaining amount was
primarily severance related. Exchange (loss) gain.The Companys foreign exchange loss was $5.1 million
in the second quarter of 2004 compared to a foreign exchange gain of $0.4
million in the second quarter of 2003, an unfavorable change of $5.5 million.
Foreign exchange losses and gains result from three primary sources: gains and
losses on option contracts, gains and losses due to the remeasurement of U.S.
dollar-denominated debt at Jafra Distribution and gains and losses arising from
other foreign currency-denominated transactions, including remeasurement of
U.S. dollar-denominated intercompany accounts. During the second quarter of
2004, the Company recognized $4.7 million of exchange losses related to the
remeasurement of U.S. dollar-denominated debt and $0.8 million of exchange
losses on other foreign currency transactions. This was partially offset by
$0.4 million of exchange gains on option contracts. During the second quarter
of 2003, the Company did not recognize any gains or losses on option contracts
and recognized $1.0 million of exchange gains on other foreign currency
transactions. These gains were partially offset by $0.6 million of exchange
losses on the remeasurement of U.S. dollar-denominated debt. See Item 3,
Quantitative and Qualitative Disclosures about Market Risk. Interest expense.Net interest expense (including interest income) in the
second quarter of 2004 increased to $6.9 million from $4.6 million in the
second quarter of 2003, an increase of $2.3 million, or 50.0%. The increase
was primarily due to a greater amount of average debt outstanding during the
second quarter of 2004 compared to the second quarter of 2003 as a result of
the recapitalization of the Company during the second quarter of 2003. Loss on extinguishment of debt.On May 23, 2003, the Company repurchased
its outstanding 113⁄4% Subordinated Notes due April 30, 2008 in the
aggregate principal amount of $75.2 million at a premium of approximately $4.4
million. Additionally, the Company repaid $7.4 million under its existing
credit agreement. In connection with the redemption of the Notes and the
termination of the Credit Agreement, the Company wrote off approximately $2.2
million of capitalized deferred financing fees. The total expense related to
the extinguishment of the previous debt was $6.6 million and was recorded in
the second quarter of 2003. 50




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##### Table of Contents



Income tax (benefit) expense.Income tax benefit was $7.1 million in the
second quarter of 2004, compared to $2.1 million in the second quarter of 2003,
a $5.0 million increase. The Companys effective income tax rate from
continuing operations was 35.1% in the second quarter of 2004, compared to
24.1% in the second quarter of 2003. The second quarter of 2004 was
negatively impacted by valuation allowances against certain pretax losses in
one of the Companys Mexican subsidiaries The second quarter of 2003 was
negatively impacted by certain withholding taxes related to the
recapitalization of the Company. In each quarter, the Company recorded
valuation allowances against operating losses in its European and South
American subsidiaries, which had a negative impact on the effective tax rate
over the corporate rate. Loss on discontinued operations.During 2003 the Company discontinued its
operations in Venezuela, Colombia, Chile and Peru. The results of these
markets were included in the statements of operations as losses on discontinued
operations. Losses on discontinued operations were $0.1 million during the
second quarter of 2004, compared to $1.1 million during the second quarter of
2003, a decrease of $1.0 million. As these markets were substantially
liquidated during 2003, the losses attributable to these markets were less
during the second quarter of 2004 compared to the second quarter of 2003. Net loss.Net loss was $13.2 million in the second quarter of 2004
compared to $7.7 million in the second quarter of 2003, an increase of $5.5
million, or 71.4%. The increase in net loss was primarily the result of a $0.4
million increase in SG&A expenses, an $11.7 million increase in transaction
related expenses, $0.9 million of restructuring and impairment charges during
the second quarter of 2004, a $5.5 million unfavorable change in exchange loss,
a $2.2 million increase in interest expense, partially offset by an increase of
$2.5 million in gross profit, the absence of $6.6 million of losses on
extinguishment of debt, a $5.0 million increase in income tax benefit and a
$1.0 million decrease in loss on discontinued operations. 51




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##### Table of Contents



Six months ended June 30, 2004 compared to the Six months ended June 30, 2003 Corporate,United
    
    
    
    
    
    
    
    
    
    Unallocated
    
    ConsolidatedDollars in millions
    
    Mexico
    
    States
    
    Europe
    
    All Others
    
    and Other
    
    TotalSix Months Ended June 30, 2004Net sales
    
    $
    138.4
    
    
    $
    48.7
    
    
    $
    17.1
    
    
    $
    2.6
    
    
    $
    
    
    
    $
    206.8Cost of sales
    
    
    33.9
    
    
    
    10.9
    
    
    
    3.2
    
    
    
    0.9
    
    
    
    (0.9
    )
    
    
    48.0Gross profit
    
    
    104.5
    
    
    
    37.8
    
    
    
    13.9
    
    
    
    1.7
    
    
    
    0.9
    
    
    
    158.8Selling, general and
administrative expenses
    
    
    64.6
    
    
    
    33.6
    
    
    
    13.1
    
    
    
    3.0
    
    
    
    9.9
    
    
    
    124.2Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.5
    
    
    
    29.5Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    2.8Income (loss) from operations
    
    $
    39.9
    
    
    $
    4.2
    
    
    $
    0.8
    
    
    $
    (1.3
    )
    
    $
    (41.3
    )
    
    $
    2.3Six Months Ended June 30, 2003Net sales
    
    $
    120.2
    
    
    $
    50.8
    
    
    $
    16.1
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    190.1Cost of sales
    
    
    29.2
    
    
    
    11.2
    
    
    
    3.3
    
    
    
    1.3
    
    
    
    (0.8
    )
    
    
    44.2Gross profit
    
    
    91.0
    
    
    
    39.6
    
    
    
    12.8
    
    
    
    1.7
    
    
    
    0.8
    
    
    
    145.9Selling, general and
administrative expenses
    
    
    58.4
    
    
    
    32.5
    
    
    
    12.3
    
    
    
    4.3
    
    
    
    10.4
    
    
    
    117.9Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.1
    
    
    
    15.1Income (loss) from operations
    
    $
    32.6
    
    
    $
    7.1
    
    
    $
    0.5
    
    
    $
    (2.6
    )
    
    $
    (24.7
    )
    
    $
    12.9
 Net sales. Net sales for the six months ended June 30, 2004 increased to
$206.8 million from $190.1 million for the six months ended June 30, 2003, an
increase of $16.7 million, or 8.8%. Net sales measured in local currencies for
the six months ended June 30, 2004 increased 12.1% compared to net sales
measured in local currencies for the six months ended June 30, 2003. During
the six months ended June 30, 2004 there were weaker average exchange rates
compared to the six months ended June 30, 2003, resulting in a lower net sales
increase measured in U.S. dollars compared to the increase measured in local
currencies. The net sales increase was primarily due to an increase in net
sales in Mexico as a result of an increase in the average number of consultants
partially offset by a decrease in consultant productivity in Mexico. The
Companys average number of consultants worldwide for the six months ended June
30, 2004 increased to approximately 439,000, 8.9% over the average number of
consultants for the six months ended June 30, 2003. Consultant productivity
measured in local currencies increased 3.1% for the six months ended June 30,
2004 compared to consultant productivity for the six months ended June 30,
2003. In Mexico, net sales for the six months ended June 30, 2004 increased to
$138.4 million from $120.2 million for the six months ended June 30, 2003, an
increase of $18.2 million, or 15.1% over the comparable prior year period. Net
sales measured in local currency increased 22.0% for the six months ended June
30, 2004 compared to the six months ended June 30, 2003. The increase measured
in local currency was primarily due to an increase in the average number of
consultants partially offset by a decrease in consultant productivity. During
the six months ended June 30, 2004, the average number of consultants in Mexico
was approximately 321,000, an increase of 23.4% over the comparable prior year
period primarily as a result of a larger consultant base at the beginning of
the period and successful promotions to recruit and retain consultants.
Consultant productivity measured in local currency during the six months ended
June 30, 2004 decreased 1.1% compared to consultant productivity during the six
months ended June 30, 2003. In the United States, including the Dominican Republic, net sales for the
six months ended June 30, 2004 decreased to $48.7 million compared to $50.8
million for the six months ended June 30, 2003, a decrease of $2.1 million, or
4.1%. In the United States, the decrease in net sales was primarily the result
of a decrease in the average number of consultants, partially offset by an
increase in consultant productivity. Net sales in the Hispanic Group decreased to $34.2 million for the six
months ended June 30, 2004 from $34.6 million for the six months ended June 30,
2003, a decrease of $0.4 million, or 1.2% as a result of a decrease in the 52




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average number of consultants partially offset by an increase in consultant
productivity. During the six months ended June 30, 2004, the average number of
consultants decreased to approximately 55,000 consultants, a decrease of 5.1%
over the comparable prior year period primarily as a result of a diminished
beginning consultant base as a result of system implementation issues
experienced at the end of 2003 and first few months of 2004. Consultant
productivity increased 4.2% for the six months ended June 30, 2004 compared to
the six months ended June 30, 2003 as a result of an increase in the minimum
order size to receive the maximum commission percentage. Additionally, the
Dominican Republic implemented program changes which resulted in a smaller more
productive consultant base. Net sales in the General Division decreased 10.5% to approximately $14.5
million for the six months ended June 30, 2004 compared to $16.2 million for
the six months ended June 30, 2003 due to a decrease in the average number of
consultants partially offset by an increase in consultant productivity. The
General Division had approximately 27,000 consultants during the six months
ended June 30, 2004, a decrease of 12.0% over the comparable prior year. The
average number of consultants was also impacted by a diminished beginning base
due to the system implementation issues at the end of 2003 and the first few
months of 2004. The minimum order size required to receive the maximum
commission percentage was increased. A result of the change in the minimum
order size was a smaller more productive consultant base. This change had a
negative impact on the total number of consultants, but resulted in an increase
in consultant productivity. Consultant productivity during the six months
ended June 30, 2004 was also favorably impacted by successful promotions aimed
at increasing consultant productivity. In Europe, net sales increased to $17.1 million for the six months ended
June 30, 2004 from $16.1 million for the six months ended June 30, 2003, an
increase of $1.0 million, or 6.2%. In local currencies, net sales decreased
3.7% for the six months ended June 30, 2004 over the comparable prior year
period as a result of a decrease in consultant productivity partially offset by
a small increase in the average number of consultants. Consultant productivity
measured in local currencies decreased approximately 4.2% for the six months
ended June 30, 2004 compared to the six months ended June 30, 2003 as a result
of a less favorable macroeconomic situation faced by the consultants. The
average number of consultants increased 0.5% to approximately 18,000 for the
six months ended June 30, 2004 compared to the six months ended June 30, 2003. Net sales in the other markets decreased to $2.6 million for the six
months ended June 30, 2004 compared to $3.0 million for the six months ended
June 30, 2003, a decrease of $0.4 million or 13.3%. Net sales in Brazil
decreased $0.3 million for the six months ended June 30, 2004 over the
comparable prior year period due to a decrease in the consultant base partially
offset by increased consultant productivity due to program changes implemented
during the latter part of 2003. Net sales in Argentina increased nominally for
the six months ended June 30, 2004 over the comparable prior year period. As
the Company ceased operations in Thailand at the end of 2003, there were no
sales during 2004 compared to $0.1 million for the six months ended June 30,
2003. Gross profit.Consolidated gross profit for the six months ended June
30, 2004 increased to $158.8 million from $145.9 million for the six months
ended June 30, 2003, an increase of $12.9 million, or 8.8%. Gross profit as a
percentage of net sales (gross margin) increased to 76.8% for the six months
ended June 30, 2004 compared to 76.7% for the six months ended June 30, 2003. In Mexico, gross margin for the six months ended June 30, 2004 decreased
to 75.5% from 75.7% for the six months ended June 30, 2003. The decrease in
gross margin was primarily due lower gross margin on non-commissionable sales
and additional charges for the reserve for slow moving inventory during the six
months ended June 30, 2004 over the comparable prior year period. This was
partially offset by the reclassification of exchange losses to cost of sales in
connection with hedge accounting pursuant to SFAS No. 133 during the six months
ended June 30, 2003. There were no such reclassification of losses during the
six months ended June 30, 2004. In the United States, gross margin for the six months ended June 30, 2004

decreased to 77.6% compared to 78.0% for the six months ended June 30, 2003.
The decrease in gross margin was primarily the result of the impact of the
devaluation of Dominican Republic peso on the cost of goods and a less
favorable product mix. 53




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In Europe, gross margin for the six months ended June 30, 2004 increased
to 81.3% from 79.5% in the comparable prior year period due to the favorable
impact of exchange rates on the purchase of goods. Selling, general and administrative expenses.SG&A expenses for the six
months ended June 30, 2004 increased to $124.2 million compared to $117.9
million for the six months ended June 30, 2003, an increase of $6.3 million, or
5.3%. SG&A expenses, as a percentage of net sales, decreased to 60.1% for the
six months ended June 30, 2004 from 62.0% for the six months ended June 30,
2003 due primarily to reduced SG&A expenses in Mexico, partially offset by
increased SG&A expenses in the United States. In Mexico, SG&A expenses for the six months ended June 30, 2004 increased
by $6.2 million, or 10.6% to $64.6 million compared to $58.4 million for the
six months ended June 30, 2003. SG&A expenses decreased, as a percentage of
net sales, to 46.7% for the six months ended June 30, 2004 compared to 48.6%
for the six months ended June 30, 2003. The decrease in SG&A expenses as a
percentage of net sales was primarily due to decreased administrative and
selling expenses partially offset by increased sales promotional expense.
Administrative expenses decreased primarily as a result of decreased bad debt
expenses because of better collections and savings of personnel related costs
due to position vacancies. Sales promotional expenses increased due to
increased promotional activity and the costs associated with more winners of a
trip to the annual conference. In the United States, SG&A expenses for the six months ended June 30, 2004
increased by $1.1 million or 3.4% to $33.6 million from $32.5 million for the
six months ended June 30, 2003. SG&A expenses, as a percentage of net sales,
were 69.0% for the six months ended June 30, 2004 compared to 64.0% for the six
months ended June 30, 2003. The increase in SG&A expenses as a percentage of
net sales was primarily attributable to increased selling and administrative
expenses as a result of incremental system depreciation expenses and additional
third party consulting fees related to information technology system that was
implemented at the end of 2003. In Europe, SG&A expenses for the six months ended June 30, 2004 increased
by $0.8 million, or 6.5% to $13.1 million from $12.3 million for the six months
ended June 30, 2003. SG&A expenses, as a percentage of net sales, in Europe
increased to 76.6% from 76.4% for the six months ended June 30, 2003. The
increase in SG&A expenses as a percentage of net sales was due to increased
administrative expenses and override expenses partially offset by decreased
sales promotional expenses. Incremental information technology costs were the
primary cause of the increased administrative expenses. Override expenses have
been increasing as a percentage of net sales due to better collections and
changes in the program implemented during the middle of 2003. In 2003,
promotional expenses were greater than in 2004 in an effort to increase the
consultant base and generate sales. SG&A expenses in the other markets decreased by $1.3 million or 30.2% to
$3.0 million for the six months ended June 30, 2004 compared to $4.3 million
for the six months ended June 30, 2003. During the latter part of 2003, the
Company implemented an aggressive restructuring plan in Brazil to reduce costs
and minimize losses. As a result of this restructuring, SG&A expenses were
115.4% for the six months ended June 30, 2004 compared to 143.3% for the
comparable prior year period. SG&A expenses in Corporate, Unallocated and Other decreased to $9.9
million for the six months ended June 30, 2004 compared to $10.4 million for
the six months ended June 30, 2003, a decrease of $0.5 million, or 4.8%. The
decrease in SG&A expenses was primarily related to less unusual charges,
including severance, allocated to the Companys corporate headquarters in the
first six months of 2004 over the comparable prior year period. Transaction Related Expenses.During the six months ended June 30, 2004,
the Company incurred $29.5 million of transaction related expenses compared to
$15.1 million during the six months ended June 30, 2003. During the six months
ended June 30, 2004, Jafra S.A. (the Companys sole shareholder) was acquired.
As a part of this acquisition, all outstanding employee stock options were
bought back and cancelled. This resulted in $20.3 million of compensation
expense. Additionally, the former primary shareholder of Jafra S.A. paid $4.9
million in special bonuses directly to certain members of management and
non-employee board of director members. This non-cash charge has been
accounted for as a deemed contribution by the former primary shareholder. The
remaining amount recorded in the six months ended June 30, 2004 related
primarily to expensing of insurance premiums due to change of control
provisions in the insurance contract and fees paid to professional service
providers for this transaction and other transactions contemplated but not
completed. During the six months ended June 30, 2003, the 54




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Company completed a recapitalization of its operations by the issuance of
new debt. In connection with the recapitalization, the Company paid and
expensed $13.3 million in bonus payments to the then holders that held options
to purchase CDRJS common stock, certain members of management and non-employee
board of director members. Additionally, the Company expensed $1.1 million in
transaction related fees during the six months ended June 30, 2003. Restructuring and impairment charges.During the six months ended June
30, 2004, the Company recorded restructuring and impairment charges of $2.8
million related to relocating substantially all of its manufacturing functions
to its facilities in Mexico. Of this amount, approximately $0.4 million
related to asset impairment charges and the remaining amount was primarily
severance related. Exchange (loss) gain.The Companys foreign exchange loss was $4.5 million
for the six months ended June 30, 2004 compared to $0.3 million for the six
months ended June 30, 2003, an unfavorable change of $4.2 million. During the
six months ended June 30, 2004, the Company recognized $3.8 million of exchange
losses related to the remeasurement of U.S. dollar-denominated debt and $0.7
million of exchange losses on other foreign currency transactions. Exchange
losses and gains related to option contracts were nominal during the six months
ended June 30, 2004. During the six months ended June 30, 2003, the Company
recognized $1.8 million of exchange losses on the remeasurement of U.S.
dollar-denominated debt. The loss was partially offset by $0.6 million of
exchange gains related to option contracts and $0.9 million of exchange gains
on other foreign currency transactions. See Item 3, Quantitative and
Qualitative Disclosures about Market Risk. Interest expense.Net interest expense (including interest income) for
the six months ended June 30, 2004 increased to $13.6 million from $7.3 million
for the six months ended June 30, 2003, an increase of $6.3 million, or 86.3%.
The increase was primarily due to a greater average amount of debt outstanding
during the six months ended June 30, 2004 compared to the six months ended June
30, 2003 as a result of the recapitalization of the Company during the second
quarter of 2003. Loss on extinguishment of debt.During the six months ended June 30,
2003, the Company repurchased its outstanding Notes in the aggregate principal
amount of $75.2 million at a premium of approximately $4.4 million.
Additionally, the Company repaid $7.4 million to terminate the Credit
Agreement. In connection with the redemption of the Notes and the termination
of the Credit Agreement, the Company wrote off approximately $2.2 million of
capitalized deferred financing fees. The total expense related to the
extinguishment of the debt was $6.6 million and was recorded during the six
months ended June 30, 2003. Income tax (benefit) expense.Income tax benefit was $4.1 million for
the six months ended June 30, 2004 compared to an expense of $1.6 million for
the six months ended June 30, 2003, a $5.7 million change. During the six
months ended June 30, 2004, the effective tax rate of 25.6% was the result of a
tax benefit on pretax losses in the Companys United States subsidiary,
partially offset by income tax expense on pretax income at one of the Companys
Mexican subsidiaries and valuation allowances recorded against certain pretax
losses in another of the Companys Mexican subsidiaries and certain European
and South American subsidiaries. During the six months ended June 30, 2003,
the Company reported a pretax loss of $1.6 million and income tax expense of
$1.6 million. The Companys Mexican subsidiaries reported pretax net income
and income tax expense for the six months ended June 30, 2003. The income tax
expense was partially offset by an income tax benefit in the United States
subsidiary based on pretax net loss. Additionally, the European and other
subsidiaries recorded valuation allowances against pretax net losses for the
six months ended June 30, 2003. Loss on discontinued operations.During 2003 the Company discontinued its
operations in Venezuela, Colombia, Chile and Peru. The results of these
markets were included in the statements of operations as losses on discontinued
operations. Losses on discontinued operations were $0.2 million for the six
months ended June 30, 2004 compared to $1.9 million for the six months ended
June 30, 2003, a decrease of $1.7 million. As these markets were substantially
liquidated during 2003, the losses attributable to these markets were less
during the second quarter of 2004 compared to the second quarter of 2003. Net loss.Net loss was $12.1 million for the six months ended June 30,
2004 compared to $5.1 million for the six months ended June 30, 2003, a $7.0
million decrease in income. The decrease in income was primarily due a 55




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$6.3 million increase in selling, general and administrative expenses, a $14.4
million increase in transaction related expenses, a $2.8 million restructuring
and impairment charge, a $4.2 million increase in exchange loss, a $6.3 million
increase in interest expense partially offset by a $12.9 million increase in
gross profit, a $6.6 million loss on extinguishment of debt, a $5.7 million
favorable change in income tax (benefit) expense and a $1.7 million decrease in
loss on discontinued operations. Liquidity and Capital Resources Overview The Company has historically funded expenditures for operations,
administrative expenses, capital expenditures and debt service obligations with
internally generated funds from operations, with working capital needs being
satisfied from time to time with borrowings under the senior credit facilities.
The current senior credit facility implemented in May of 2003 has been amended
to expire on August 25, 2004. The Company believes that it will be able to
meet its debt service obligations and fund its operating requirements in the
future with cash flow from operations and borrowings under a new senior credit
facility to be executed prior to August 25, 2004 in combination with interim
funding from Vorwerk. If either or both of these assumptions proves incorrect,

the Company may not have sufficient funding to meet its operating cash needs or
to service its outstanding indebtedness. The Company continues to focus on
working capital management, including the collection of accounts receivable,
decreasing inventory levels and management of accounts payable. The May 2003 Recapitalization In May 2003 the Company entered into a series of transactions to replace
existing indebtedness, to provide funds for certain internal reorganizations,
including the separation of the distribution business in Mexico from certain
other operating businesses and to finance distributions to equityholders. As
part of these transactions, the Company took or caused to be taken the
following steps the affected liquidity.  
    
    As further described below, JCI and Jafra Distribution entered into
new senior credit facilities, consisting of a $50.0 million senior
secured term loan facility and a $40.0 million senior revolving credit
facility, and borrowed the full amount of the term loan.
    
    As further described below, Jafra Distribution and JCI issued $120
million and $80 million, respectively, in aggregate principal amount of
the 103⁄4% Senior Subordinated Notes due 2011, or the 103⁄4%
Notes, and used a portion of the proceeds from such issuance, together
with borrowings under the term loan facility described above, to repay
the indebtedness of JCI and Jafra Cosmetics S.A. then outstanding and
to consummate other corporate transactions.
    
    In order to compensate holders of then-outstanding options to
acquire the capital stock of CDRJ Investments (Lux) S.A. for the
diminution in the value of such options that would otherwise have
resulted from the recapitalization transactions, JCI and Jafra
Cosmetics S.A. made compensating payments in an aggregate amount of
approximately $10.4 million to such holders. Through a series of
inter-company transactions, the remaining proceeds from the issuance of
the 103⁄4% Notes and borrowings under the senior credit facilities
were paid and distributed to CDRJ Investments (Lux) S.A.
    
    CDRJ Investments (Lux) S.A. was then liquidated. In the course of
its liquidation, CDRJ Investments (Lux) S.A. made an initial
liquidating distribution to its shareholders of approximately $157.6
million in cash, of which approximately $7.2 million was paid to the
Companys executive officers and approximately $145.8 million was paid
to the Clayton Dubilier & Rice Fund V Limited Partnership, the
Companys primary shareholder, each in their respective capacities as
shareholders. In connection with the completion of the liquidation of CDRJ Investments
(Lux) S.A, all of the remaining assets of CDRJ Investments (Lux) S.A.,
consisting of approximately $1.3 million in cash and all of the outstanding
shares of Jafra S.A., was distributed to the shareholders of CDRJ Investments
(Lux) S.A. on a pro rata basis according to 56




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their shareholdings. As a
result, the shareholders of CDRJ Investments (Lux)
S.A. became shareholders of Jafra S.A. The shareholders of Jafra S.A. then sold
their shares to Vorwerk & Co. eins GmbH as described above. Liquidity On May 20, 2003, JCI and Jafra Distribution issued $200 million aggregate
principal amount of 103⁄4% Notes pursuant to an indenture dated May 20, 2003
and entered into a $90 million senior credit agreement. The 103⁄4% Notes
represent the several obligations of JCI and Jafra Distribution in the amount
of $80 million and $120 million, respectively and is guaranteed by the Company
and various other subsidiaries. The 103⁄4% Notes mature in 2011 and bear a
fixed interest rate of 103⁄4% payable semi-annually. The 103⁄4% Notes are unsecured and are generally not redeemable for
four years. Thereafter, the notes will be redeemable on a pro rata basis at
premiums declining to par in the sixth year. Prior to May 16, 2006, JCI and
Jafra Distribution at their option may concurrently redeem the 103⁄4% Notes
in an aggregate principal amount equal to up to 35% of the original aggregate
principal amount of 103⁄4% Notes, with funds in an aggregate amount not
exceeding the aggregate cash proceeds of one or more equity offerings, at a
redemption price of 110.75% plus accrued and unpaid interest. As
the acquisition of Jafra S.A. by Vorwerk constituted a change of control as defined in the
indenture governing the Companys 103⁄4% Notes, the Issuers and the Parent
sent a notice to noteholders of their right to require the repurchase of the
outstanding notes at a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of such repurchase. Subsequent to June
30, 2004, holders of the 103⁄4% notes exercised their option to sell an
aggregate of $0.5 million of the outstanding Notes to the Issuers. As a
result, $199.5 million principal amount of 103⁄4% notes remain
outstanding. In addition, JCI and Jafra Distribution entered into a Credit Agreement
which provides for senior credit facilities in an aggregate principal amount of
$90 million, consisting of a $50 million senior secured term loan facility
maturing in 2008 and a $40 million senior secured revolving credit facility,
also maturing in 2008, of which a portion is available in the form of letters
of credit. On May 20, 2003, JCI borrowed $20 million and Jafra Distribution
borrowed $30 million of the loans under the term facility. At August 11, 2004,
$18.5 million was outstanding under the revolving credit facility. Borrowings
under the term loan facility are amortized in quarterly installments. Amounts
outstanding under the senior credit facilities bear interest at a rate equal
to, at the Companys option, (1) an alternate base rate plus an applicable
margin or (2) an adjusted LIBOR rate plus an applicable margin. As of June 30,
2004, these applicable margins were 2.75% and 3.75% for base rate loans and
LIBOR loans, respectively, subject in each case to periodic adjustment based on
certain levels of financial performance. As of June 30, 2004, the interest
rates were 7.0% and 5.13% on base rate and 30 day LIBOR loans, respectively.
Borrowings under the Senior Credit Agreement are secured by substantially all
of the Companys assets. As a result of the recent acquisition, the Senior Credit Agreement will
expire on August 25, 2004.
Five lenders have signed commitments to participate in and syndicate
a new senior credit facility. The balance of a proposed
four-year $60 million amended and restated senior revolving credit facility
which, together with an interim loan of up to $20 million from Vorwerk, would
refinance outstanding borrowings and replace commitments under the Credit
Agreement. The Company is seeking to consummate this refinancing prior to the
expiration of the 90-day waiver under the Credit Agreement on August
25, 2004. The 103⁄4% Notes Indenture contains certain covenants that, among other
things, limit the Parents ability and the ability of some of its subsidiaries
to incur indebtedness or issue preferred shares, pay dividends or make
distributions in respect of capital stock or to make other restricted payments;
make investments; sell assets; create liens without securing the 103⁄4%
Notes; consolidate, merge, sell or otherwise dispose of all or substantially
all of its assets; enter 57




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into certain transactions with affiliates; and designate subsidiaries as
unrestricted subsidiaries. The Parent is permitted under the 103⁄4% Notes
Indenture to pay dividends, distributions and other restricted payments in an
amount determined pursuant to a formula based on 50% of its consolidated net
income (which, as defined in the 103⁄4% Notes Indenture, excludes goodwill
impairment charges and any after-tax extraordinary, unusual or nonrecurring
gains and losses) accruing from October 1, 2002, plus specified other amounts.
In addition, as a condition to making any restricted payments to Jafra S.A.
based on such formula, the Parent must have a consolidated coverage ratio (as
defined in the 103⁄4% Notes Indenture) of at least 2.25 to 1.00 after giving
effect to any such payments. Notwithstanding these restrictions, the 103⁄4%
Notes Indenture permits (i) an aggregate of $5.0 million of otherwise
restricted payments and (ii) payments for certain specified uses, such as the
payment of consolidated taxes or holding company expenses, to be made whether
or not there is availability under the formula or the conditions to its use are
met. The 103⁄4% Notes Indenture also provides for events of default,
including, but not limited to, payment defaults on, or the acceleration of the
maturity of, other material debt obligations. The Senior Credit Agreement contains covenants that limit the Parents
ability to incur or guarantee indebtedness, make investments, loans and
advances, dispose of assets, pay dividends, make acquisitions, enter into
mergers, create liens, enter into certain transactions with affiliates, make
fundamental changes to its businesses and amend the terms of or prepay certain
other indebtedness. In addition, the Parent is required to maintain certain
financial covenants, including to maintain a maximum ratio of total debt to
EBITDA of 4.25 to 1.00 (decreasing annually in steps to 3.00 to 1.00 in October
2007), to maintain a minimum interest expense ratio of 2.15 to 1.00 (increasing
annually in steps to 3.00 to 1.00 in October 2007) and not to exceed a maximum
annual amount of capital expenditures of $13 million, with certain exceptions.
The Parent is also subject to customary affirmative covenants and events of
default, including, but not limited to, a cross-default provision relating to
defaults on other material debt obligations. The terms of the Senior Credit
Agreement permit the Parent to pay dividends to Jafra S.A. of up to 50% of its
consolidated net income (as defined in the indenture governing the 103⁄4%
Notes) plus up to $5.0 million so long as the term loans have been repaid in
full, the aggregate exposure of the lenders under the revolving portion of the
senior credit facilities does not exceed $25 million and the consolidated
leverage ratio (as defined in the Senior Credit Agreement) does not exceed 3.00
to 1.00 after giving effect to such payment. These covenants apply to the Parent and certain of its subsidiaries,
including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A.
As of June 30, 2004, the Company was in compliance with all debt covenants. It
is expected that the new credit facility will have various covenants, including
covenants similar to those under the existing credit agreement. The Company capitalized $14.7 million of costs related to the issuance of
the 103⁄4% Notes and the Senior Credit Agreement as deferred financing fees.
These capitalized expenses are being amortized on a basis that approximates the
interest method over the term of the 103⁄4% Notes and the Senior Credit
Agreement. Upon expiration of the Senior Credit Facility on August 25, 2004,
the Company will have approximately $4,656,000 of unamortized deferred
financing fees related to the Senior Credit Facility. The Company expects to
write off of these deferred financing fees upon expiration of the Senior Credit
Facility and to record that write off as a loss on extinguishment of debt
during the third quarter of 2004. As of June 30, 2004, the Company had outstanding $258.8 million of debt,
consisting of $200.0 million of 103⁄4% Notes, $43.8 million of term loans
and $15.0 million outstanding under the revolving credit facility due under the
Senior Credit Agreement. The
Company believes, subject to the matters discussed under Overview
above, that its existing cash, cash flow from operations and availability under
a new credit agreement will provide sufficient liquidity to meet the Companys
cash requirements and working capital needs over the next twelve months.
Reduced consultant liquidity could result in future reduced cash flows from
operations, which may require the Company to use funds under a credit
agreement. 58




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Cash Flows Net cash used in operating activities was $16.6 million for the six months
ended June 30, 2004 compared to $3.8 million for the six months ended June 30,
2003, a decrease of $12.8 million. Net cash used in operating activities for
the six months ended June 30, 2004 consisted of $6.4 million provided by net
loss plus depreciation and other non-cash items included in net loss offset by
$23.0 million used in changes in operating assets and liabilities. The
significant elements of net cash used in changes in operating assets and
liabilities during the six months ended June 30, 2004 were an increase of $5.1
million in receivables, an increase of $5.8 million in prepaid expenses, a
decrease of $6.1 million in accounts payable and accrued liabilities and a $5.9
million decrease in income tax payable. Net cash used in investing activities was $3.3 million for the six months
ended June 30, 2004 primarily related to the purchase of property and
equipment. Capital expenditures in 2004 are expected to be approximately $10.0
million. Net cash provided in financing activities was $10.6 million for the six
months ended June 30, 2004 and included borrowings of $28.9 million under the
revolving credit facility to fund the buy back and cancellation of the options
to purchase shares of Jafra S.A. These were partially offset by $13.9 million
of repayments under the revolving credit facility. The effect of exchange changes on cash was $0.7 million for the six months
ended June 30, 2004. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, Consolidated Financial Statements. FIN 46
requires the consolidation of variable interest entities by the party
considered to be the primary beneficiary of that entity. The FASB amended FIN
46 in December of 2003. The revised provisions of FIN 46 were effective for the
Company in the first quarter of 2004. The adoption of FIN 46 did not have an
impact on the Companys financial position or results of operations as the
Company had no variable interest entities. Business Trends and Initiatives The Companys Mexico subsidiary has reported net sales growth measured in
local currencies during the last three years, primarily as a result of
increases in the consultant base. Additionally, the Mexico subsidiary
contributes a significant portion of the Companys consolidated net sales. The
Companys Mexican subsidiary generated 67% of total net sales for the six
months ended June 30, 2004 and 63% of total net sales for the year ended
December 31, 2003. In the United States, the Company has continued its strategy of focusing
on the distinct elements of its General and Hispanic customer groups.
Additionally, the Company is including the results of the Dominican Republic
within the results of the United States. Net sales for the six months ended
June 30, 2004 compared to the six months ended June 30, 2003 decreased
primarily as a result of a decrease in the consultant base due to a lower base
at the beginning of the period because of certain issues associated with a
system implementation. However, in each of the past two years, net sales in
the United States have increased. Net sales in Europe have increased due to strengthening of the euro
compared to the U.S. dollar and an increase in the consultant base. For the
first six months of 2004, European sales contributed 8% to consolidated sales.
The average number of consultants increased 1% in the first six months of 2004
compared to the first six months of 2003. During third quarter of 2003, the Company discontinued it operations in
Venezuela, Colombia, Chile and Peru. During the fourth quarter of 2003, the
Company ceased operations in Thailand. Additionally, during 2003, the Company
implemented aggressive restructuring plans in Brazil to cut costs and minimize
losses. A result of the restructuring in Brazil is a reduced, but more
productive consultant base. 59




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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 recapitalization discussed in Liquidity and Capital Resources under Item
2. Such risks are 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, 2003. No significant changes have occurred during the first six
months of 2004 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. With the
exception of most intercompany product sales between European subsidiares and
intercompany sales between Mexican entities, substantially all intercompany
product sales are denominated in U.S. dollars. However, 76% of the Companys
revenue for first six months of 2004 was generated in countries with a
functional currency other than the U.S. dollar, and 67% of the Companys
revenue for the first six months of 2004 was denominated in Mexican pesos. As
a result, the Companys earnings and cash flows for the six months ended June
30, 2004 were 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 or option contracts. The Company regularly monitors its
foreign currency exposures to ensure 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 Company uses foreign currency option contracts to hedge against the
adverse effects that exchange rate fluctuations may have on the earnings of its
foreign subsidiaries. The outstanding foreign currency option contracts had a
notional value denominated in Mexican pesos of 521,000,000 and 831,000,000 in
put and call positions at June 30, 2004 and December 31, 2003, respectively,
and mature at various dates through June 30, 2005. Notional amounts do not
quantify the Companys market or credit exposure or represent the Companys
assets or liabilities, but are used in the calculation of cash settlements
under the contracts. The following tables provide information about the details of the
Companys option contracts as of June 30, 2004 (in thousands except for average
strike price): Coverage inMexican
    
    Average Strike
    
    Fair Value inForeign Currency
    
    Pesos
    
    Price
    
    U.S.Dollars(1)
    
    Maturity DateAt June 30, 2004:Purchased Puts (Company may sell Peso/buy USD)Mexican Peso
    
    
    122,000
    
    
    
    12.41 - 12.60
    
    
    
    207
    
    
    Jul. - Aug. 2004Mexican Peso
    
    
    182,000
    
    
    
    12.28 - 12.38
    
    
    
    264
    
    
    Oct. - Dec. 2004Mexican Peso
    
    
    85,000
    
    
    
    12.62 - 12.72
    
    
    
    173
    
    
    Jan. - Mar. 2005Mexican Peso
    
    
    132,000
    
    
    
    12.50 - 12.60
    
    
    
    190
    
    
    Apr. - Jun. 2005521,000
    
    
    
    
    
    
    $
    834Written Calls (Counterparty may buy Peso/sell
USD)Mexican Peso
    
    
    122,000
    
    
    
    10.49 - 11.42
    
    
    
    (194
    )
    
    Jul. - Aug. 2004Mexican Peso
    
    
    182,000
    
    
    
    11.13 - 11.22
    
    
    
    (327
    )
    
    Oct. - Dec. 2004Mexican Peso
    
    
    85,000
    
    
    
    11.44 - 11.53
    
    
    
    (174
    )
    
    Jan. - Mar. 2005Mexican Peso
    
    
    132,000
    
    
    
    11.34 - 11.41
    
    
    
    (347
    )
    
    Apr. - Jun. 2005521,000
    
    
    
    
    
    
    $
    (1042
    )
 60




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The following table provides information about the details of the
Companys option contracts as of December 31, 2003 (in thousands): Coverage inMexican
    
    Average Strike
    
    Fair Value inForeign Currency
    
    Pesos
    
    Price
    
    U.S. Dollars(1)
    
    Maturity DateAt December 31, 2003:Purchased puts
(Company may sell
peso/buy USD)Mexican peso
    
    
    140,000
    
    
    
    11.54-12.75
    
    
    $
    136
    
    
    Jan.-Mar. 2004Mexican peso
    
    
    170,000
    
    
    
    12.03-12.35
    
    
    
    127
    
    
    Apr.-June 2004Mexican peso
    
    
    122,000
    
    
    
    12.41-12.60
    
    
    
    74
    
    
    July-Sept. 2004Mexican peso
    
    
    182,000
    
    
    
    12.24-12.38
    
    
    
    14
    
    
    Oct.-Dec. 2004Mexican peso
    
    
    85,000
    
    
    
    12.62-12.72
    
    
    
    76
    
    
    Jan.-Mar. 2005Mexican peso
    
    
    132,000
    
    
    
    12.50-12.60
    
    
    
    29
    
    
    Apr.-Jun. 2005831,000
    
    
    
    
    
    
    $
    456Written calls
(Counterparty may
buy peso/sell USD)Mexican peso
    
    
    140,000
    
    
    
    10.26-10.93
    
    
    $
    (167
    )
    
    Jan.-Mar. 2004Mexican peso
    
    
    170,000
    
    
    
    10.19-12.35
    
    
    
    (234
    )
    
    Apr.-June 2004Mexican peso
    
    
    122,000
    
    
    
    10.49-11.41
    
    
    
    (109
    )
    
    July-Sept. 2004Mexican peso
    
    
    182,000
    
    
    
    11.09-11.22
    
    
    
    (147
    )
    
    Oct.-Dec. 2004Mexican peso
    
    
    85,000
    
    
    
    11.44-11.53
    
    
    
    (68
    )
    
    Jan.-Mar. 2005Mexican peso
    
    
    132,000
    
    
    
    11.34-11.41
    
    
    
    (171
    )
    
    Apr.-Jun. 2005831,000
    
    
    
    
    
    
    $
    (896
    )
   (1)
    
    The Fair Value of the option contracts presented above, an unrealized
gain of $208,000 and $440,000 at June 30, 2004 and December 31, 2003,
respectively, represents the carrying value and was recorded in other
receivables in the consolidated balance sheets. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys principal executive officer and principal financial officer have
evaluated the effectiveness of the Companys disclosure controls and
procedures, as such term is defined in Rule 15d-15(e) of the Securities
Exchange Act of 1934, as amended. Based upon their evaluation, the principal
executive officer and principal financial officer concluded that the Companys
disclosure controls and procedures are effective as of the end of the period
covered by this Quarterly Report on Form 10-Q. There has been no change in the Companys internal controls or procedures
during the fiscal quarter ended June 30, 2004 that has materially affected, or
is reasonably likely to materially affect, the registrants internal control
over financial reporting. 61




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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, 2003. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. The following documents are exhibits to this quarterly report
on Form 10-Q. ExhibitNumber31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.3
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K A current Report on Form 8-K was filed on April 1, 2004, under Item 9,
Regulation FD Disclosure relating to the announcement that Vorwerk & Co. eins
GmbH entered into an agreement whereby it will acquire all of the issued and
outstanding common stock of Jafra S.A. (formerly CDRJ North Atlantic (Lux)
S.àr.l.), the parent company of the Company. A current Report on form 8-K was filed on April 28, 2004 under Item 9,
Regulation FD Disclosure and Item 12, Results of Operations and Financial
Condition, relating to the Companys press release setting forth its first
quarter results. A current Report on Form 8-K was filed on May 28, 2004 under Item 1,
Changes in Control of Registrant, Item 5. Other Events and Required FD
Disclosure, Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits and Item 9 Regulation FD Disclosure related to the acquisition of
all of the issued and outstanding capital stock of Jafra S.A., the parent of
the Company by Vorwerk & Co. eins GmbH. 62




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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. Jafra Worldwide Holdings (Lux) S.àr.l./s/ RONALD B. CLARKRonald B. ClarkChief Executive Officer/s/ GARY ESHLEMANGary EshlemanChief Financial Officer(Principal Financial Officer)/s/ STACY WOLFStacy WolfCorporate Controller (Principal Accounting Officer)
 Date August 13, 2004 63