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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______ to ________
Commission File Number 333-106666 JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. 
  Luxembourg
(State or other jurisdiction of
incorporation or organization)
    
    98-0399297
(I.R.S. Employer
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 3 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO o 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 May 12, 2004 151
shares.




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JAFRA WORLDWIDE HOLDING (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 Months Ended March 31, 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 Income
    
    5Consolidated Statements of Cash Flows
    
    6Notes to Consolidated Financial Statements
    
    7Consolidated Financial Statements  Jafra Cosmetics International, Inc. and SubsidiariesConsolidated Balance Sheets
    
    16Consolidated Statements of Operations
    
    17Consolidated Statements of Cash Flows
    
    18Notes to Consolidated Financial Statements
    
    19Financial Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    25Statements of Operations
    
    26Statements of Cash Flows
    
    27Notes to Financial Statements
    
    28Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and SubsidiariesConsolidated Balance Sheets
    
    33Consolidated Statements of Operations
    
    34Consolidated Statements of Cash Flows
    
    35Notes to Consolidated Financial Statements
    
    36Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    41Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    53Item 4.
    
    Controls and Procedures
    
    55PART II - OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    56Item 2.
    
    Changes in Securities and Use of Proceeds
    
    56Item 3.
    
    Defaults Upon Senior Securities
    
    56Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    56Item 5.
    
    Other Information
    
    56Item 6.
    
    Exhibits and Reports on Form 8-K
    
    56Signature
    
    57Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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* Distribuidora Comercial Jafra S.A. de C.V. (Jafra Distribution) and Jafra
Cosmetics International, Inc. (JCI) have fully and unconditionally guaranteed
the obligations of the other under the $200 million aggregate principal amount
of 10 3⁄4 % Subordinated Notes due 2011 (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.) have fully and unconditionally guaranteed
the obligations of Jafra Distribution under the Notes. As such, Jafra
Worldwide Holdings (Lux) S.àr.l., the parent company of each of JCI, Jafra
Distribution and Jafra Cosmetics S.A., is filing separate financial statements
of JCI, Jafra Distribution and Jafra Cosmetics S.A. in its Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 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)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,778
    
    
    $
    16,120Receivables, net
    
    
    40,957
    
    
    
    39,680Inventories
    
    
    38,330
    
    
    
    39,849Prepaid income taxes
    
    
    2,163
    
    
    
    414Prepaid expenses and other current assets
    
    
    8,859
    
    
    
    4,906Receivable from affiliate
    
    
    560
    
    
    
    Deferred income taxes
    
    
    6,381
    
    
    
    6,381Assets from discontinued operations
    
    
    126
    
    
    
    138Total current assets
    
    
    111,154
    
    
    
    107,488Property and equipment, net
    
    
    63,450
    
    
    
    63,356Other assets:Goodwill
    
    
    63,365
    
    
    
    63,096Trademarks
    
    
    41,480
    
    
    
    41,242Deferred financing fees and other, net
    
    
    18,134
    
    
    
    18,561Total
    
    $
    297,583
    
    
    $
    293,743LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    8,125
    
    
    $
    7,500Accounts payable
    
    
    23,249
    
    
    
    22,213Accrued liabilities
    
    
    54,500
    
    
    
    49,174Income taxes payable
    
    
    4,339
    
    
    
    5,216Deferred income taxes
    
    
    2,959
    
    
    
    2,941Liabilities from discontinued operations
    
    
    113
    
    
    
    124Total current liabilities
    
    
    93,285
    
    
    
    87,168Long-term debt
    
    
    237,500
    
    
    
    240,000Deferred income taxes
    
    
    17,239
    
    
    
    17,163Other long-term liabilities
    
    
    4,759
    
    
    
    4,801Total liabilities
    
    
    352,783
    
    
    
    349,132Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock, par value $100; 151 shares
authorized, issued and outstanding
in 2004 and 2003
    
    
    15
    
    
    
    15Retained deficit
    
    
    (45,166
    )
    
    
    (46,250
    )Accumulated other comprehensive loss
    
    
    (10,049
    )
    
    
    (9,154
    )Total stockholders deficit
    
    
    (55,200
    )
    
    
    (55,389
    )Total
    
    $
    297,583
    
    
    $
    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 INCOME
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Net sales
    
    $
    103,122
    
    
    $
    90,137Cost of sales
    
    
    24,183
    
    
    
    21,557Gross profit
    
    
    78,939
    
    
    
    68,580Selling, general and administrative expenses
    
    
    63,245
    
    
    
    57,380Transaction related expenses
    
    
    3,409
    
    
    
    770Restructuring charges
    
    
    1,909
    
    
    
    Income from operations
    
    
    10,376
    
    
    
    10,430Other income (expense):Exchange gain (loss), net
    
    
    551
    
    
    
    (762
    )Interest expense
    
    
    (6,794
    )
    
    
    (2,751
    )Interest income
    
    
    47
    
    
    
    170Other expense
    
    
    (58
    )
    
    
    (40
    )Other income
    
    
    40
    
    
    
    15Income before income taxes
    
    
    4,162
    
    
    
    7,062Income tax expense
    
    
    2,946
    
    
    
    3,757Income from continuing operations
    
    
    1,216
    
    
    
    3,305Loss on discontinued operations, net of income tax
expense of $0 in 2004 and $11 in 2003
    
    
    (132
    )
    
    
    (783
    )Net income
    
    $
    1,084
    
    
    $
    2,522
 See accompanying notes to consolidated financial statements 5




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    1,084
    
    
    $
    2,522Loss on discontinued operations, net of tax
    
    
    132
    
    
    
    783Income from continuing operations
    
    
    1,216
    
    
    
    3,305Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:Depreciation
    
    
    1,611
    
    
    
    1,466Amortization of deferred financing fees
    
    
    490
    
    
    
    330Provision for uncollectible accounts receivable
    
    
    2,375
    
    
    
    2,395Asset impairment charge
    
    
    
    
    
    
    251Unrealized foreign exchange and derivative (gain) loss
    
    
    (486
    )
    
    
    1,748Deferred realized foreign exchange loss
    
    
    
    
    
    
    669Changes in operating assets and liabilities:Receivables
    
    
    (3,726
    )
    
    
    (1,784
    )Inventories
    
    
    1,687
    
    
    
    (3,436
    )Prepaid expenses and other current assets
    
    
    (2,368
    )
    
    
    101Other assets
    
    
    (113
    )
    
    
    197Accounts payable and accrued liabilities
    
    
    2,233
    
    
    
    (3,759
    )Income taxes payable/prepaid
    
    
    (923
    )
    
    
    635Other long-term liabilities
    
    
    (42
    )
    
    
    229Net operating activities of discontinued operations
    
    
    (131
    )
    
    
    (73
    )Net cash provided by operating activities
    
    
    1,823
    
    
    
    2,274Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,971
    )
    
    
    (1,528
    )Other
    
    
    53
    
    
    
    (235
    )Net cash used in investing activities
    
    
    (1,918
    )
    
    
    (1,763
    )Cash flows from financing activities:Repayments under term loan facility
    
    
    (1,875
    )
    
    
    (1,000
    )Deferred financing costs
    
    
    42
    
    
    
    Repayments under bank debt
    
    
    
    
    
    
    (177
    )Net cash used in financing activities
    
    
    (1,833
    )
    
    
    (1,177
    )Effect of exchange rate changes on cash
    
    
    (414
    )
    
    
    (989
    )Net decrease in cash and cash equivalents
    
    
    (2,342
    )
    
    
    (1,655
    )Cash and cash equivalents at beginning of period
    
    
    16,120
    
    
    
    26,821Cash and cash equivalents at end of period
    
    $
    13,778
    
    
    $
    25,166
 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.), is a wholly-owned subsidiary of CDRJ
Investments (Lux) S.A., a Luxembourg société anonyme(CDRJ). 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 10 3⁄4% Senior Subordinated Notes due 2011 (the New Notes and such
transactions collectively, the Recapitalization). The proceeds from the
Recapitalization were used to redeem the 11 3⁄4% 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 is 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 is expected to be completed during the second quarter of 2004. The accompanying unaudited interim consolidated financial statements as of
and for the three months ended March 31, 2004 and the accompanying audited
consolidated balance sheet as of December 31, 2003 reflect the
operations of the Parent and its subsidiaries. The accompanying unaudited
interim consolidated financial statements for the three months ended March 31,
2003 reflect the operations of CDRJ and its subsidiaries. The historical
consolidated financial statements of CDRJ are equivalent to the operations of
the Parent. CDRJ and its subsidiaries and the Parent and its subsidiaries 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 March 31, 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 applies 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. No options were granted during the three months
ended March 31, 2004. 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 months ended March 31,
2004 and 2003 would be immaterial to the consolidated statements of income. 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 a material impact on the Companys financial position or
results of operations.  (2)
    
    Inventories Inventories consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    7,415
    
    
    $
    6,131Finished goods
    
    
    30,915
    
    
    
    33,718Total inventories
    
    $
    38,330
    
    
    $
    39,849
  (3)
    
    Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Land
    
    $
    15,744
    
    
    $
    15,686Buildings
    
    
    16,704
    
    
    
    16,662Machinery, equipment and other
    
    
    52,301
    
    
    
    50,88684,749
    
    
    
    83,234Less accumulated depreciation.
    
    
    21,299
    
    
    
    19,878Property and equipment, net
    
    $
    63,450
    
    
    $
    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 $41,480,000 as of March 31, 2004.
The changes in the carrying amount of goodwill for the year ended December 31,
2003 and for the three months ended March 31, 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
    
    
    
    
    
    
    160
    
    
    
    109
    
    
    
    
    
    
    
    269Balance as of March 31, 2004
    
    $
    32,188
    
    
    $
    26,588
    
    
    $
    4,589
    
    
    $
    
    
    
    $
    63,365
 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 income before income
taxes for the three months ended March 31, 2004 primarily due to, (i) valuation
allowances recorded against pretax losses at Jafra Distribution and at the
Companys European and South American entities, (ii) state income taxes and
(iii) certain permanent differences, including inflation at Jafra Cosmetics
S.A. During the three months ended March 31, 2003, the income tax rate
differed primarily due to (i) state income taxes, (ii) valuation allowances
recorded against certain operating losses in South America and Europe and (iii)
a higher effective tax rate at Jafra Mexico.  (6)
    
    Transaction Related Expenses The Company incurred $3,409,000 and $770,000 of transaction related
expenses during the first quarter of 2004 and 2003, respectively, related to certain equity, debt and acquisition transactions contemplated but not completed.  (7)
    
    Restructuring Charges The Company recorded $1,909,000 of restructuring charges during the first
quarter of 2004 primarily related to its plans to transfer substantially all of
its United States manufacturing operations to its facilities in Mexico. The
Company expects the transfer of these operations to be completed during the
second quarter of 2004. These restructuring expenses related primarily to
termination benefits. Of these charges, $1,747,000 was recorded at the
Companys United States reporting segment and $162,000 was recorded at the
Companys Mexico reporting segment. A rollforward of the activity of the
restructuring accruals is summarized as follows (in thousands): 9




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Three months endedMarch 31, 2004Opening balance
    
    $
    Additions
    
    
    1,909Charges against reserves
    
    
    (689
    )Ending balance
    
    $
    1,220
 The Company expects to record approximately $500,000 in additional
termination benefits during the second quarter of 2004 in connection with the
restructuring.  (8)
    
    Debt and Distribution to Shareholders On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 10 3⁄4% 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 10 3⁄4% payable semi-annually. 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. 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
4.00% or an alternate base rate plus an applicable margin not to exceed 3.00%.
As of March 31, 2004, the applicable interest rates were 7.0% and 5.2% for base
rate loans and 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. 10




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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 March 31, 2004, the Company was 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 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 10 3⁄4% 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 in the
second quarter of 2003. 11




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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. 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 March 31, 2004, approximately $1,794,000 of the
deferred financing fees were amortized.  (9)
    
    Comprehensive Income (Loss) Comprehensive income (loss) is summarized as follows (in thousands): Three months endedMarch 31,2004
    
    2003Net income
    
    $
    1,084
    
    
    $
    2,522Unrealized and deferred realized (loss) gain on derivatives
    
    
    (435
    )
    
    
    355Reclassification of deferred realized gain to
exchange gain (loss)
    
    
    
    
    
    
    (550
    )Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    678Tax benefit on unrealized and deferred realized
(loss) gain on derivatives
    
    
    
    
    
    
    (75
    )Foreign currency translation adjustments
    
    
    (460
    )
    
    
    (3,134
    )Comprehensive income (loss)
    
    $
    189
    
    
    $
    (204
    )
  (10)
    
    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 first quarter 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. 12




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) UnitedStatesand the
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedMexico
    
    Republic
    
    Europe
    
    Others
    
    and Other
    
    Total(in thousands)As of and for the three
months ended March 31, 2004Net sales
    
    $
    70,848
    
    
    $
    22,747
    
    
    $
    8,294
    
    
    $
    1,233
    
    
    $
    
    
    
    $
    103,122Income (loss) from operations
    
    
    18,659
    
    
    
    2,063
    
    
    
    267
    
    
    
    (657
    )
    
    
    (9,956
    )
    
    
    10,376Depreciation
    
    
    579
    
    
    
    896
    
    
    
    111
    
    
    
    25
    
    
    
    
    
    
    
    1,611Capital expenditures
    
    
    1,002
    
    
    
    894
    
    
    
    56
    
    
    
    19
    
    
    
    
    
    
    
    1,971Segment assets
    
    
    180,748
    
    
    
    96,855
    
    
    
    17,489
    
    
    
    3,333
    
    
    
    (968
    )
    
    
    297,457Discontinued operations assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    126Goodwill
    
    
    26,588
    
    
    
    32,188
    
    
    
    4,589
    
    
    
    
    
    
    
    
    
    
    
    63,365As 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 three Months ended
March 31, 2003Net sales
    
    $
    56,792
    
    
    $
    24,711
    
    
    $
    7,446
    
    
    $
    1,188
    
    
    $
    
    
    
    $
    90,137Income (loss) from operations
    
    
    14,668
    
    
    
    3,354
    
    
    
    5
    
    
    
    (1,344
    )
    
    
    (6,253
    )
    
    
    10,430Depreciation
    
    
    547
    
    
    
    764
    
    
    
    84
    
    
    
    71
    
    
    
    
    
    
    
    1,466Capital expenditures
    
    
    484
    
    
    
    898
    
    
    
    97
    
    
    
    49
    
    
    
    
    
    
    
    1,528
 Corporate, unallocated and other includes (in thousands): Three months ended March 31,2004
    
    2003Corporate expenses
    
    $
    (4,044
    )
    
    $
    (4,062
    )Transaction related expenses
    
    
    (3,409
    )
    
    
    (770
    )Restructuring charges
    
    
    (1,909
    )
    
    
    Unusual charges(1)
    
    
    (594
    )
    
    
    (1,421
    )Total corporate, unallocated and other
    
    $
    (9,956
    )
    
    $
    (6,253
    )
  (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.  (11)
    
    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. 13




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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 months ended March 31, 2004 and 2003, the Company
recognized losses of approximately $420,000 and gains of approximately $627,000
on option contracts, respectively, as a component of exchange gain (loss) on
the accompanying consolidated statements of income. 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 three
months ended March 31, 2004, the Company deferred as a component of other
comprehensive loss $435,000 of losses on option contracts qualifying for hedge
accounting under SFAS No. 133. The Company expects that substantially all of
the remaining loss of $157,000 deferred as a component of other comprehensive
loss at March 31, 2004 will be recognized into net income within the next
fifteen months. The fair value of the option contracts was $415,000 at March 31, 2004 and
has been recorded in accrued liabilities 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 months ended March 31, 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 months ended March 31, 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 691,000,000 and 831,000,000 in put and call
positions at March 31, 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.  (12)
    
    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 income. 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 March 31, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on
discontinued operations
    
    
    (83
    )
    
    
    (17
    )
    
    
    (8
    )
    
    
    (24
    )
    
    
    (132
    )For the three months ended March 31, 2003Net sales
    
    $
    572
    
    
    $
    593
    
    
    $
    63
    
    
    $
    35
    
    
    $
    1,263Loss on
discontinued operations
    
    
    (189
    )
    
    
    (495
    )
    
    
    (19
    )
    
    
    (80
    )
    
    
    (783
    )
 14




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The components of assets and liabilities of the discontinued operations is
as follows: Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)As of March 31, 2004Assets:Cash
    
    $
    
    
    
    $
    45
    
    
    $
    29
    
    
    $
    7
    
    
    $
    81Receivables, net
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Prepaid and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Total assets
    
    $
    
    
    
    $
    70
    
    
    $
    29
    
    
    $
    27
    
    
    $
    126Liabilities:Accounts payable
    
    $
    
    
    
    $
    10
    
    
    $
    
    
    
    $
    6
    
    
    $
    16Accrued liabilities
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    97Total liabilities
    
    $
    
    
    
    $
    107
    
    
    $
    
    
    
    $
    6
    
    
    $
    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.  (13)
    
    First Quarter of 2004 Event  Sale of the Parent On March 30, 2004, it was announced 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. from Jafra S.A.s shareholders. Vorwerk & Co. eins
GmbH is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned
company based in Wuppertal, Germany. The Company expects the transaction to be
completed during the second quarter of 2004. 15




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,098
    
    
    $
    8,879Receivables, net
    
    
    4,717
    
    
    
    4,509Inventories
    
    
    11,830
    
    
    
    12,882Receivables from affiliates
    
    
    10,754
    
    
    
    18,747Prepaid expenses and other current assets
    
    
    4,587
    
    
    
    2,627Deferred income taxes
    
    
    6,381
    
    
    
    6,381Total current assets
    
    
    50,367
    
    
    
    54,025Property and equipment, net
    
    
    27,551
    
    
    
    28,048Other assets:Goodwill
    
    
    36,777
    
    
    
    36,668Notes receivable from affiliates
    
    
    18,002
    
    
    
    17,022Deferred financing fees, net
    
    
    5,269
    
    
    
    5,525Other
    
    
    4,921
    
    
    
    4,966Total
    
    $
    142,887
    
    
    $
    146,254LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    3,250
    
    
    $
    3,000Accounts payable
    
    
    5,405
    
    
    
    6,634Accrued liabilities
    
    
    22,466
    
    
    
    20,918Income taxes payable
    
    
    478
    
    
    
    387Payables to affiliates
    
    
    20,374
    
    
    
    21,118Total current liabilities
    
    
    51,973
    
    
    
    52,057Long-term debt
    
    
    95,000
    
    
    
    96,000Deferred income taxes
    
    
    4,512
    
    
    
    4,512Other long-term liabilities
    
    
    4,759
    
    
    
    4,801Total liabilities
    
    
    156,244
    
    
    
    157,370Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock, par value $.01: 1,000 shares authorized, issued
and outstanding in 2004 and 2003
    
    
    
    
    
    
    Retained deficit
    
    
    (10,460
    )
    
    
    (8,491
    )Accumulated other comprehensive loss
    
    
    (2,897
    )
    
    
    (2,625
    )Total stockholders deficit
    
    
    (13,357
    )
    
    
    (11,116
    )Total
    
    $
    142,887
    
    
    $
    146,254
 See accompanying notes to consolidated financial statements 16




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Net sales to third parties
    
    $
    31,041
    
    
    $
    32,257Sales to affiliates
    
    
    2,890
    
    
    
    4,344Net sales
    
    
    33,931
    
    
    
    36,601Cost of sales
    
    
    9,309
    
    
    
    11,172Gross profit
    
    
    24,622
    
    
    
    25,429Selling, general and administrative expenses
    
    
    27,096
    
    
    
    27,731Transaction related expenses
    
    
    3,409
    
    
    
    770Restructuring charges
    
    
    1,747
    
    
    
    Management fee income from affiliates
    
    
    (1,919
    )
    
    
    (1,631
    )Royalty income from affiliates, net
    
    
    (5,448
    )
    
    
    (4,196
    )Market subsidy expense
    
    
    250
    
    
    
    (Loss) income from operations
    
    
    (513
    )
    
    
    2,755Other income (expense):Exchange loss, net
    
    
    (39
    )
    
    
    (55
    )Interest expense
    
    
    (2,651
    )
    
    
    (1,588
    )Interest income
    
    
    89
    
    
    
    139Other expense
    
    
    (2
    )
    
    
    (11
    )Other income
    
    
    41
    
    
    
    15(Loss) income before income taxes
    
    
    (3,075
    )
    
    
    1,255Income tax (benefit) expense
    
    
    (1,106
    )
    
    
    814Net (loss) income
    
    $
    (1,969
    )
    
    $
    441
 See accompanying notes to consolidated financial statements 17




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (1,969
    )
    
    $
    441Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation
    
    
    1,007
    
    
    
    884Provision for uncollectible accounts receivable
    
    
    259
    
    
    
    217Amortization of deferred financing fees
    
    
    214
    
    
    
    157Asset impairment charges
    
    
    
    
    
    
    251Unrealized foreign exchange loss
    
    
    38
    
    
    
    290Changes in operating assets and liabilities:Receivables
    
    
    (467
    )
    
    
    524Inventories
    
    
    1,052
    
    
    
    (775
    )Prepaid expenses and other current assets
    
    
    (1,960
    )
    
    
    162Intercompany receivables and payables
    
    
    7,211
    
    
    
    7,778Other assets
    
    
    (8
    )
    
    
    53Accounts payable and accrued liabilities
    
    
    319
    
    
    
    (1,367
    )Income taxes payable/prepaid
    
    
    91
    
    
    
    (550
    )Other long-term liabilities
    
    
    (42
    )
    
    
    229Net cash provided by operating activities
    
    
    5,745
    
    
    
    8,294Cash flows from investing activities:Purchases of property and equipment
    
    
    (950
    )
    
    
    (995
    )Other
    
    
    53
    
    
    
    (235
    )Net cash used in investing activities
    
    
    (897
    )
    
    
    (1,230
    )Cash flows from financing activities:Repayments under term loan facility
    
    
    (750
    )
    
    
    (1,000
    )Lending of note receivable to affiliates
    
    
    (980
    )
    
    
    (2,130
    )Deferred financing costs
    
    
    42
    
    
    
    Net cash used in financing activities
    
    
    (1,688
    )
    
    
    (3,130
    )Effect of exchange rate changes on cash
    
    
    59
    
    
    
    (165
    )Net increase in cash and cash equivalents
    
    
    3,219
    
    
    
    3,769Cash and cash equivalents at beginning of period
    
    
    8,879
    
    
    
    13,088Cash and cash equivalents at end of period
    
    $
    12,098
    
    
    $
    16,857
 See accompanying notes to consolidated financial statements 18




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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. is a wholly-owned
subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme
(CDRJ). The accompanying unaudited interim consolidated financial statements as of
March 31, 2004 and for the three months ended March 31, 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 March 31, 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 10 3⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 11 3⁄4% 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. 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 applies 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. No options were granted
during the three months ended March 31, 2004. 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 months ended
March 31, 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 JCI in the first quarter of 2004. The adoption of FIN 46
did not have a material impact on JCIs financial position or results of
operations. 19




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)  (2)
    
    Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    7,050
    
    
    
    7,065Machinery, equipment and other
    
    
    27,616
    
    
    
    27,18840,854
    
    
    
    40,441Less accumulated depreciation
    
    
    13,303
    
    
    
    12,393Property and equipment, net
    
    $
    27,551
    
    
    $
    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 March 31, 2004. The changes
in the carrying amount of goodwill for the year ended December 31, 2003 and for
the three months ended March 31, 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
    
    
    
    
    
    
    109
    
    
    
    109Balance as of March 31, 2004
    
    $
    32,188
    
    
    $
    4,589
    
    
    $
    36,777
  (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) income
before income taxes for the three months ended March 31, 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) Transaction Related Expenses The Company incurred $3,409,000 and $770,000 of transaction related
expenses during the first quarter of 2004 and 2003, respectively, related to certain equity, debt and acquisition transactions contemplated but not completed.  (6)
    
    Restructuring Charges JCI recorded $1,747,000 of restructuring charges during the first quarter
of 2004 primarily related to the Parents plans to transfer substantially all
of its United States manufacturing operations to its facilities in Mexico. JCI
expects the transfer of these operations to be completed during the second
quarter of 2004. These restructuring expenses related primarily to termination
benefits. These charges were recorded at JCIs United States reporting
segment. A rollforward of the activity of the restructuring accruals is
summarized as follows (in thousands): Three months endedMarch 31, 2004Opening balance
    
    $
    Additions
    
    
    1,747Charges against reserves
    
    
    (527
    )Ending balance
    
    $
    1,220
 20




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI expects to incur approximately $500,000 in additional termination
benefits during the second quarter of 2004 in connection with the
restructuring.  (7)
    
    Debt and Distribution to Shareholder On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 10 3⁄4% 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 10 3⁄4% payable semi-annually. 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. 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
4.00% or an alternate base rate plus an applicable margin not to exceed 3.00%.
As of March 31, 2004, the applicable interest rates were 7.0% and 5.2% for base
rate loans and 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. 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 March 31, 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 21




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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 10 3⁄4% 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 second quarter of 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 March 31, 2004, approximately $738,000 of the
deferred financing fees were amortized. 22




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (8) Comprehensive (Loss) Income Comprehensive (loss) income is summarized as follows (in thousands): Three months endedMarch 31,2004
    
    2003Net (loss) income
    
    $
    (1,969
    )
    
    $
    441Foreign currency translation adjustments
    
    
    (272
    )
    
    
    (43
    )Comprehensive (loss) income
    
    $
    (2,241
    )
    
    $
    398
 (9) 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 $2,783,000 and $2,683,000 for the three months ended March 31, 2004
and 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 $750,000 and $784,000 for the three
months ended March 31, 2004 and 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
$6,198,000 and $4,980,000 for the three months ended March 31, 2004 and 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 6% to 9%. Such loans are due to be repaid five years from the date
of grant, with no prepayment penalty. Notes receivable from affiliates at
December 31, 2003 and March 31, 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 $89,000 and $132,000
for the three months ended March 31, 2004 and 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 $251,000 and $0 for the three
months ended March 31, 2004 and 2003, respectively. 23




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (10) 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 first quarter of 2004, JCI includes the results
of the Dominican Republic with the results of the United States as they are
under common management and 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. 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. Corporate,United
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedStates
    
    Europe (1)
    
    Others
    
    and Other
    
    TotalAs of and for the three
months ended March 31, 2004Net sales
    
    $
    22,747
    
    
    $
    8,294
    
    
    $
    
    
    
    $
    2,890
    
    
    $
    33,931Income (loss) from operations
    
    
    2,063
    
    
    
    267
    
    
    
    
    
    
    
    (2,843
    )
    
    
    (513
    )Depreciation
    
    
    896
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    1,007Capital expenditures
    
    
    894
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    950Segment assets
    
    
    96,855
    
    
    
    17,212
    
    
    
    64
    
    
    
    28,756
    
    
    
    142,887Goodwill
    
    
    32,188
    
    
    
    4,589
    
    
    
    
    
    
    
    
    
    
    
    36,777As of December 31, 2003Segment assets
    
    $
    92,420
    
    
    $
    18,003
    
    
    $
    63
    
    
    $
    35,768
    
    
    $
    146,254Goodwill
    
    
    32,188
    
    
    
    4,480
    
    
    
    
    
    
    
    
    
    
    
    36,668For the three months ended
March 31, 2003Net sales
    
    $
    24,711
    
    
    $
    7,446
    
    
    $
    100
    
    
    $
    4,344
    
    
    $
    36,601Income (loss) from operations
    
    
    3,354
    
    
    
    5
    
    
    
    (190
    )
    
    
    (414
    )
    
    
    2,755Depreciation
    
    
    764
    
    
    
    84
    
    
    
    36
    
    
    
    
    
    
    
    884Capital expenditures
    
    
    898
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    995
 (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 March 31,2004
    
    2003Corporate expenses
    
    $
    (4,134
    )
    
    $
    (4,443
    )Transaction related expenses
    
    
    (3,409
    )
    
    
    (770
    )Transaction with affiliates
    
    
    7,117
    
    
    
    5,827Restructuring charges
    
    
    (1,747
    )
    
    
    Unusual charges(1)
    
    
    (670
    )
    
    
    (1,028
    )Total corporate, unallocated and other
    
    $
    (2,843
    )
    
    $
    (414
    )
   (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. 24




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##### Table of Contents



DISTRIBUIDORA COMERCIAL
JAFRA, S.A. DE C.V. BALANCE SHEETS
(In thousands, except share amounts)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash
    
    $
    29
    
    
    $
    523Receivables
    
    
    139
    
    
    
    154Inventories
    
    
    26,624
    
    
    
    27,183Receivables from affiliates
    
    
    24,661
    
    
    
    17,136Prepaid income taxes
    
    
    1,268
    
    
    
    1,265Prepaid expenses and other current assets
    
    
    3,906
    
    
    
    9,237Total current assets
    
    
    56,627
    
    
    
    55,498Property and equipment, net
    
    
    1,724
    
    
    
    1,647Other assets:Deferred financing fees, net
    
    
    7,091
    
    
    
    7,334Investment in preferred shares of affiliated company
    
    
    126,804
    
    
    
    126,042Other
    
    
    2,942
    
    
    
    3,120Total
    
    $
    195,188
    
    
    $
    193,641LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    4,875
    
    
    $
    4,500Accounts payable
    
    
    12,544
    
    
    
    11,277Accrued liabilities
    
    
    5,271
    
    
    
    2,033Payables to affiliates
    
    
    1,703
    
    
    
    2,202Total current liabilities
    
    
    24,393
    
    
    
    20,012Long-term debt
    
    
    142,500
    
    
    
    144,000Total liabilities
    
    
    166,893
    
    
    
    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
    
    
    34,227
    
    
    
    35,767Accumulated other comprehensive loss
    
    
    (5,937
    )
    
    
    (6,143
    )Total stockholders equity
    
    
    28,295
    
    
    
    29,629Total
    
    $
    195,188
    
    
    $
    193,641
 See accompanying notes to financial statements 25




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Sales to affiliates
    
    $
    39,176
    
    
    $
    30,841Cost of sales
    
    
    26,406
    
    
    
    19,971Gross profit
    
    
    12,770
    
    
    
    10,870Selling, general and administrative expenses
    
    
    905
    
    
    
    299Management fee expense to affiliate
    
    
    471
    
    
    
    398Service fee expense to affiliate
    
    
    6,469
    
    
    
    2,235Income from operations
    
    
    4,925
    
    
    
    7,938Other income
(expense):Exchange (loss) gain, net
    
    
    (2,384
    )
    
    
    779Interest expense
    
    
    (4,081
    )
    
    
    (Loss) income before income taxes
    
    
    (1,540
    )
    
    
    8,717Income tax expense
    
    
    
    
    
    
    2,963Net (loss) income
    
    $
    (1,540
    )
    
    $
    5,754
 See accompanying notes to financial statements 26




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (1,540
    )
    
    $
    5,754Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization of guarantee fee
    
    
    162
    
    
    
    49Amortization of deferred financing fees
    
    
    276
    
    
    
    Unrealized foreign exchange and derivative (gain) loss
    
    
    (918
    )
    
    
    238Changes in operating assets and liabilities:Receivables
    
    
    17
    
    
    
    (122
    )Inventories
    
    
    726
    
    
    
    (2,724
    )Prepaid expenses and other current assets
    
    
    195
    
    
    
    353Intercompany receivables and payables
    
    
    (7,946
    )
    
    
    (5,629
    )Other assets
    
    
    81
    
    
    
    11Accounts payable and accrued liabilities, VAT receivable
    
    
    9,661
    
    
    
    384Income taxes payable
    
    
    4
    
    
    
    2,251Net cash provided by operating activities
    
    
    718
    
    
    
    565Cash flows from investing activities:Purchases of property and equipment
    
    
    (113
    )
    
    
    (69
    )Net cash used in investing activities
    
    
    (113
    )
    
    
    (69
    )Cash flows from financing activities:Repayments under term loan facility
    
    
    (1,125
    )
    
    
    Net cash used in financing activities
    
    
    (1,125
    )
    
    
    Effect of exchange rate changes on cash
    
    
    26
    
    
    
    (15
    )Net (decrease) increase in cash
    
    
    (494
    )
    
    
    481Cash at beginning of period
    
    
    523
    
    
    
    38Cash at end of period
    
    $
    29
    
    
    $
    519
 See accompanying notes to financial statements 27




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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.), which in turn is 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. The accompanying unaudited interim financial statements as of March 31,
2004 and for the three months ended March 31, 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 March 31, 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 10 3⁄4% Senior
Subordinated Notes due 2011 (the New Notes and such transactions,
collectively, the Recapitalization). The proceeds from the Recapitalization
were used to redeem the 11 3⁄4% 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 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 a material impact on Jafra Distributions
financial position or results of operations. 28




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS  - (continued)
(Unaudited) (2) Inventories Inventories consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    7,378
    
    
    $
    5,578Finished goods
    
    
    19,246
    
    
    
    21,605Total inventories
    
    $
    26,624
    
    
    $
    27,183
 (3) Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Machinery, equipment and other
    
    $
    2,021
    
    
    $
    1,898Less accumulated depreciation
    
    
    297
    
    
    
    251Property and equipment, net
    
    $
    1,724
    
    
    $
    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
$9,616,000, Jafra Distribution carries
the investment on its balance sheet at cost. (5) Income Taxes During the three months ended March 31, 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 10 3⁄4% 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 10 3⁄4% 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 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. 29




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS  - (continued)
(Unaudited) 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 March 31, 2004, approximately
$2,870,000 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. 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 March 31, 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 4.00% or an alternate base rate plus an applicable margin not to exceed
3.00%. As of March 31, 2004, the applicable interest rates were 7.0% and 5.2%
for base rate loans and 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. 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 March 31, 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
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 10 3⁄4% Notes during the
continuance of certain defaults that would allow the holders of such senior
indebtedness to accelerate the relevant senior indebtedness. 30




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS  - (continued)
(Unaudited) 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 March 31, 2004, approximately $1,056,000 of the
deferred financing fees were amortized. (7) Comprehensive (Loss) Income Comprehensive (loss) income is summarized as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Net (loss) income
    
    $
    (1,540
    )
    
    $
    5,754Foreign currency translation adjustments
    
    
    206
    
    
    
    (1,259
    )Comprehensive (loss) income
    
    $
    (1,334
    )
    
    $
    4,495
 (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 $2,783,000 and $2,693,000 for the three months
ended March 31, 2004 and 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 $2,811,000 and $4,305,000 for
the three months ended March 31, 2004 and 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 $36,393,000 and $28,148,000 for the three months ended
March 31, 2004 and 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. 31




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS  - (continued)
(Unaudited) 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) gain on the accompanying statements
of operations. During the three months ended March 31, 2004, Jafra Distribution
recognized losses of $3,275,000 related to the forward contracts. As of March
31, 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
    
    
    
    10.43
    
    
    $
    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. 32




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts) March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,069
    
    
    $
    5,833Receivables, net
    
    
    35,235
    
    
    
    34,065Receivables from affiliates
    
    
    2,982
    
    
    
    2,880Prepaid expenses and other current assets
    
    
    2,407
    
    
    
    497Total current assets
    
    
    41,693
    
    
    
    43,275Property and equipment, net
    
    
    33,919
    
    
    
    33,399Other assets:Goodwill
    
    
    26,588
    
    
    
    26,428Trademarks
    
    
    41,360
    
    
    
    41,111Other
    
    
    1,407
    
    
    
    4,083Total
    
    $
    144,967
    
    
    $
    148,296LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,052
    
    
    $
    4,073Accrued liabilities
    
    
    25,279
    
    
    
    31,930Income taxes payable
    
    
    5,129
    
    
    
    6,093Payables to affiliates
    
    
    22,714
    
    
    
    24,611Deferred income taxes
    
    
    2,959
    
    
    
    2,941Other current liabilities
    
    
    461
    
    
    
    458Total current liabilities
    
    
    61,594
    
    
    
    70,106Deferred income taxes
    
    
    12,727
    
    
    
    12,651Other long-term liabilities
    
    
    3,229
    
    
    
    3,209Total liabilities
    
    
    77,550
    
    
    
    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
    
    
    22,868
    
    
    
    17,687Accumulated other comprehensive loss
    
    
    (9,785
    )
    
    
    (9,691
    )Total stockholders equity
    
    
    67,417
    
    
    
    62,330Total
    
    $
    144,967
    
    
    $
    148,296
 See accompanying notes to
consolidated financial statements 33




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Net sales
    
    $
    70,847
    
    
    $
    56,793Cost of sales
    
    
    28,755
    
    
    
    25,013Gross profit
    
    
    42,092
    
    
    
    31,780Selling, general and administrative expenses
    
    
    35,210
    
    
    
    27,598Management fee expense to affiliates
    
    
    1,448
    
    
    
    1,233Service fee income from affiliate
    
    
    (6,469
    )
    
    
    (2,235
    )Restructuring charges
    
    
    162
    
    
    
    Royalty expense to affiliates, net
    
    
    5,448
    
    
    
    4,196Income from operations
    
    
    6,293
    
    
    
    988Other income (expense):Exchange gain (loss), net
    
    
    2,971
    
    
    
    (1,726
    )Interest expense
    
    
    (19
    )
    
    
    (1,164
    )Interest income
    
    
    46
    
    
    
    162Other expense
    
    
    (57
    )
    
    
    (29
    )Income (loss) before income taxes
    
    
    9,234
    
    
    
    (1,769
    )Income tax expense (benefit)
    
    
    4,053
    
    
    
    (20
    )Net income (loss)
    
    $
    5,181
    
    
    $
    (1,749
    )
 See accompanying notes to
consolidated financial statements 34




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    5,181
    
    
    $
    (1,749
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation and amortization of guarantee fee
    
    
    417
    
    
    
    498Amortization of deferred financing fees
    
    
    
    
    
    
    173Provision for uncollectible accounts receivable
    
    
    1,962
    
    
    
    2,016Unrealized foreign exchange and derivative loss
    
    
    400
    
    
    
    1,220Deferred realized derivative loss
    
    
    
    
    
    
    669Changes in operating assets and liabilities:Receivables
    
    
    (3,207
    )
    
    
    (1,981
    )Prepaid expenses and other current assets
    
    
    (594
    )
    
    
    (446
    )Intercompany receivables and payables
    
    
    896
    
    
    
    (1,522
    )Other assets
    
    
    (187
    )
    
    
    117Accounts payable and accrued liabilities
    
    
    (7,816
    )
    
    
    (2,938
    )Income taxes payable/prepaid
    
    
    (1,005
    )
    
    
    (1,067
    )Net cash used in operating activities
    
    
    (3,953
    )
    
    
    (5,010
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (889
    )
    
    
    (415
    )Net cash used in investing activities
    
    
    (889
    )
    
    
    (415
    )Cash flows from financing activities:Repayments under bank debt
    
    
    
    
    
    
    (177
    )Net cash used in financing activities
    
    
    
    
    
    
    (177
    )Effect of exchange rate changes on cash
    
    
    78
    
    
    
    (402
    )Net decrease in cash and cash equivalents
    
    
    (4,764
    )
    
    
    (6,004
    )Cash and cash equivalents at beginning of period
    
    
    5,833
    
    
    
    13,356Cash and cash equivalents at end of period
    
    $
    1,069
    
    
    $
    7,352
 See accompanying notes to
consolidated financial statements 35




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESNOTES 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.), which in
turn is 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). The accompanying unaudited interim consolidated financial statements as of
March 31, 2004 and for the three months ended March 31, 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 March 31, 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 10 3⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 11 3⁄4% 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. 36




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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 a
material impact on Jafra Cosmetics S.A.s
financial position or results of operations. (2) Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Land
    
    $
    9,556
    
    
    $
    9,498Buildings
    
    
    9,603
    
    
    
    9,545Machinery, equipment and other
    
    
    22,198
    
    
    
    21,30441,357
    
    
    
    40,347Less accumulated depreciation
    
    
    7,438
    
    
    
    6,948Property and equipment, net
    
    $
    33,919
    
    
    $
    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 $41,360,000
and $41,111,000 as of March 31, 2004 and December 31, 2003, respectively.
Except for translation adjustments, there were no changes in the carrying
amount of goodwill during the three months ended March 31, 2004 and the year
ended December 31, 2003. Goodwill was $26,588,000 and $26,428,000 at March 31,
2004 and December 31, 2003. (4) Income Taxes The actual income tax rate of Jafra Cosmetics S.A. for the three months
ended March 31, 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 quarter of 2004 related to the Parents
plans to transfer substantially all of its United States manufacturing
operations to its facilities in Mexico. The Parent expects the transfer of
these operations to be completed 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. (6) Debt On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 10 3⁄4% 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 10 3⁄4% payable semi-annually. 37




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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. 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 March 31, 2004, approximately $2,870,000 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 second quarter of 2003. (7) Comprehensive Income (Loss) Comprehensive Income (loss) is summarized as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Net income (loss)
    
    $
    5,181
    
    
    $
    (1,749
    )Unrealized and deferred realized (loss) gain on derivatives
    
    
    (435
    )
    
    
    355Reclassification
of deferred realized gain to exchange (loss) gain
    
    
    
    
    
    
    (550
    )Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    678Tax benefit on unrealized and deferred realized (loss)
gain on derivatives
    
    
    
    
    
    
    (75
    )Foreign currency translation adjustments
    
    
    341
    
    
    
    (1,487
    )Comprehensive income (loss)
    
    $
    5,087
    
    
    $
    (2,828
    )
 38




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (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 $12,388,000 and $10,797,000
for the three months ended March 31, 2004 and 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. 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 $750,000 and $784,000 for the three months
ended March 31, 2004 and 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
$6,198,000 and $4,980,000 for the three months ended March 31, 2004 and 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 months ended March 31, 2004 and 2003, Jafra Cosmetics
S.A. recognized losses of approximately $420,000 and gains of approximately
$627,000 on option contracts, respectively, as a component of exchange gain
(loss) on the accompanying consolidated statements of operations. 39




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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
three months ended March 31, 2004, Jafra Cosmetics S.A. deferred as a
component of other comprehensive loss $435,000 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 $157,000 deferred as a
component of other comprehensive loss at March 31, 2004 will be recognized into
net income (loss) within the next fifteen months. The fair value of the option contracts was $415,000 at March 31, 2004 and
has been recorded in accrued liabilities 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 months ended March 31, 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 months ended March 31, 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 691,000,000 and 831,000,000 in put and call
positions at March 31, 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 three months ended March 31,
2004, Jafra Cosmetics S.A. recognized gains of $3,275,000 related to the
forward contracts. As of March 31, 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. dollars
    
    
    1,677,924
    
    
    
    3/04/04
    
    
    
    10.43
    
    
    $
    (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. 40




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##### Table of Contents








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


General

The following discussion of the results of operations, financial condition and
liquidity of the Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourg société à
responsabilité limitée(the Parent), 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 months
ended March 31, 2004 are not necessarily indicative of results that may be
expected for future periods.

Recent
DevelopmentsAnnouncement of Sale to Vorwerk & Co.
eins GmbH

On
March 30, 2004, it was announced that Vorwerk & Co.
eins GmbH (Vorwerk) entered into an agreement whereby it will acquire all of
the issued and outstanding common stock of Jafra S.A. (formerly known
as CDRJ North Atlantic (Lux) S.àr.l.) , which will be
the Companys top-tier holding company upon completion of the
liquidation of CDRJ Investments, from its shareholders.
Vorwerk & Co. eins GmbH is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based
in Wuppertal, Germany. The
transaction is expected to close in the second quarter of 2004 and is
subject to the satisfaction of customary closing conditions,
including customary regulatory approvals. The agreement may be
terminated if the transaction is not consummated by July 31,
2004. The Company and its subsidiaries will remain responsible for
their outstanding debt following the closing of the transaction.

There
can be no assurance that this transaction will be completed as
announced, or at all. If this transaction is completed as
contemplated, it will constitute a change of control as defined in
the Senior Credit Agreement and in the indenture governing the
Companys 10 3/4% Notes. Upon completion of this transaction,
the Company expects that Jafra S.A. will withdraw the
registration statement filed on February 13, 2004 in connection
with its proposed initial public offering of its common stock (the
Registration Statement) and that the Company will not consummate
the redemption of 35% of the 10 3/4% Notes described in the
Registration Statement.

Because
this transaction will constitute a change of control as defined in
the indenture governing the Companys 10 3/4% Notes, the Company
will be required to send 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, if any, to the date of such repurchase. As of May 12, 2004, the 10 3/4%
Notes were trading at a price equal to approximately
111% of the principal amount thereof. The
Senior Credit Agreement prohibits the Company from making such a
purchase unless and until all outstanding indebtedness under the term
loan portion of the senior secured credit facility is paid in full,
no other defaults under the Senior Credit Agreement shall have
occurred and be continuing and the Company is in compliance with a
maximum leverage test, or unless the Company obtains a waiver of this condition from at
least two lenders holding more than 50% in the aggregate of the loans and commitments outstanding
thereunder. The occurrence of a change of control constitutes an
event of default under the Senior Credit Agreement and, unless waived
by at least two lenders holding more than 50% in the aggregate of the loans and
commitments outstanding thereunder, could result in the acceleration
of all amounts owing under the Senior Credit Agreement and the
termination of the lending commitments thereunder. The Company and
Vorwerk are currently seeking such waivers and the Company
understands that Vorwerk intends to seek an appropriate source of refinancing for the outstanding
indebtedness under the Senior Credit Agreement in the event
that this transaction is consummated as contemplated and such waivers
are not obtained.




There
can be no assurance that such refinancing will be obtained or that the Company will be able to obtain such
waivers, or, even if such waivers were to be obtained, that the
Company would have funds available to make
the required offer to repurchase the 10 3/4% Notes. The Company
understands that Vorwerk intends to seek an appropriate source of financing for the
repurchase of any 10 3/4% Notes that may be offered
to the Company by the holders thereof; however, there can be no
assurance that the Company will be able to obtain such financing on
terms that would not result in a violation of the terms of the Senior
Credit Agreement (to the extent then effective) and/or the indenture
governing the 10 3/4% Notes, or at all. The occurrence of an event of default under either
or both of the Senior Credit Agreement and the indenture governing
the 10 3/4% Notes could result in materially adverse consequences to
the Company and to the holders of its 10 3/4% Notes.








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##### Table of Contents



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 March 31,2004
    
    2003Net sales
    
    $
    103.1
    
    
    
    100.0
    %
    
    $
    90.1
    
    
    
    100.0
    %Cost of sales
    
    
    24.2
    
    
    
    23.5
    
    
    
    21.5
    
    
    
    23.9Gross profit
    
    
    78.9
    
    
    
    76.5
    
    
    
    68.6
    
    
    
    76.1Selling, general and administrative expenses
    
    
    63.2
    
    
    
    61.3
    
    
    
    57.4
    
    
    
    63.7Transaction related expenses
    
    
    3.4
    
    
    
    3.3
    
    
    
    0.8
    
    
    
    0.9Restructuring charges
    
    
    1.9
    
    
    
    1.8
    
    
    
    
    
    
    
    Income from operations
    
    
    10.4
    
    
    
    10.1
    
    
    
    10.4
    
    
    
    11.5Other income
(expense):Exchange gain (loss), net
    
    
    0.5
    
    
    
    0.5
    
    
    
    (0.8
    )
    
    
    (0.9
    )Interest expense
    
    
    (6.8
    )
    
    
    (6.6
    )
    
    
    (2.7
    )
    
    
    (3.0
    )Interest income
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    Other income
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    Income before
income taxes
    
    
    4.2
    
    
    
    4.1
    
    
    
    7.1
    
    
    
    7.8Income tax expense
    
    
    3.0
    
    
    
    2.9
    
    
    
    3.8
    
    
    
    4.2Income from continuing operations
    
    
    1.2
    
    
    
    1.2
    
    
    
    3.3
    
    
    
    3.6Loss on discontinued operations, net of
income tax benefit of $0 in 2004 and 2003
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.8
    )
    
    
    (0.9
    )Net income
    
    $
    1.1
    
    
    
    1.1
    %
    
    $
    2.5
    
    
    
    2.7
    %
 Three months ended March 31, 2004 compared to the three months ended March 31, 2003 Corporate,Unallocated andDollars in millions
    
    Mexico
    
    United States
    
    Europe
    
    All Others
    
    Other
    
    Consolidated TotalThree Months Ended March 31,
2004Net sales
    
    $
    70.9
    
    
    $
    22.7
    
    
    $
    8.3
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    103.1Cost of sales
    
    
    17.5
    
    
    
    5.0
    
    
    
    1.3
    
    
    
    0.4
    
    
    
    
    
    
    
    24.2Gross profit
    
    
    53.4
    
    
    
    17.7
    
    
    
    7.0
    
    
    
    0.8
    
    
    
    
    
    
    
    78.9Selling, general and
administrative expenses
    
    
    34.7
    
    
    
    15.6
    
    
    
    6.7
    
    
    
    1.5
    
    
    
    4.7
    
    
    
    63.2Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    3.4Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    1.9Income (loss) from operations
    
    $
    18.7
    
    
    $
    2.1
    
    
    $
    0.3
    
    
    $
    (0.7
    )
    
    $
    (10.0
    )
    
    $
    10.4Three Months Ended March 31,
2003Net sales
    
    $
    56.8
    
    
    $
    24.7
    
    
    $
    7.4
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    90.1Cost of sales
    
    
    14.2
    
    
    
    5.5
    
    
    
    1.4
    
    
    
    0.4
    
    
    
    
    
    
    
    21.5Gross profit
    
    
    42.6
    
    
    
    19.2
    
    
    
    6.0
    
    
    
    0.8
    
    
    
    
    
    
    
    68.6Selling, general and
administrative expenses
    
    
    27.9
    
    
    
    15.9
    
    
    
    6.0
    
    
    
    2.0
    
    
    
    5.6
    
    
    
    57.4Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    0.8Income (loss) from operations
    
    $
    14.7
    
    
    $
    3.3
    
    
    $
    0.0
    
    
    $
    (1.2
    )
    
    $
    (6.4
    )
    
    $
    10.4
 42




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##### Table of Contents



Net sales. Net sales in the first quarter of 2004 increased to $103.1
million from $90.1 million in the first quarter of 2003, an increase of $13.0
million, or 14.4%. Net sales in local currencies in the first quarter of 2004
increased by 15.0% over the comparable prior year period. As a result of
weaker average exchange rates during the first quarter of 2004 compared to the
first 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 primarily a result of the increase in the average number of consultants and
in consultant productivity in Mexico, offset in part by a decrease in
the average number of consultants in the United States. The Companys average number of consultants in the
first quarter of 2004 increased to approximately 438,000, or 9.5% over the
average number of consultants in the first 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 first quarter of 2004
increased 4.6% compared to the first quarter of 2003. Measured in local
currencies, consultant productivity increased 5.3% compared to the first
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 first quarter of 2004 increased to $70.9
million from $56.8 million in the first quarter of 2003, an increase of $14.1
million, or 24.8%. Net sales in Mexico measured in local currency increased
27.7% 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 and in consultant productivity. In Mexico the
average number of consultants in the first quarter of 2004 was approximately
320,000, an increase of 22.8% compared to the first quarter of 2003, primarily
as a result of attractive sponsoring promotions, such as promotional new
consultant cases or consultant cases that included special gifts, and increased
consultant retention. Consultant productivity measured in local currency
during the first quarter of 2004 increased 4.0% compared to consultant
productivity during the first quarter of 2003 as a result of hostess promotions
in March and the product sales mix which included more fragrances and skin care
products, which had higher average prices compared to prices of the
types of products sold in the first quarter of
2003. In the United States, including the Dominican Republic, net sales in the
first quarter of 2004 decreased to $22.7 million from $24.7 million in the
first quarter of 2003, a decrease of $2.0 million, or 8.1%. During 2004,
the Company classified its Dominican Republic operations within the United
States segment 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. The decrease in net sales was primarily the result of a
decrease in the average number of consultants in both the Hispanic and General
Divisions and a decrease in General Division consultant productivity. Net sales in the Hispanic Division (including the Dominican Republic)
decreased to approximately $15.4 million in the first quarter of 2004, or 5.4%
compared to the first quarter of 2003 as a result of a decrease in the average
number of consultants. The average number of consultants decreased 6.0%, to
approximately 54,000 consultants, in the first quarter of 2004 compared to the
first quarter of 2003 as a result of system implementation issues, mainly in
January and February, that affected sponsoring and consultant ordering and
contributed to increased consultant losses. Net sales in the General Division decreased 13.0% to approximately $7.3
million in the first quarter of 2004 compared to the first quarter of 2003, due
to decreases in the average number of consultants and in consultant
productivity. The average number of consultants in the period was
approximately 27,000, a 10.6% decrease compared to the first quarter
of 2003, as
a result of system implementation issues, mainly in January and February, that
affected sponsoring and consultant ordering and contributed to increased
consultant losses. Consultant productivity in the first quarter of 2004
decreased 2.5% compared to consultant productivity in the first quarter of
2003. 43




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In Europe, net sales increased to $8.3 million in the first quarter of
2004 from $7.4 million in the first quarter of 2003, an increase of $0.9
million, or 12.2%, as a result of stronger average local currencies compared to
the U.S. dollar. European net sales measured in local currencies in the first
quarter of 2004 decreased 2.7% compared to the first quarter of 2003, primarily
as a result of a decrease in consultant productivity, partially offset by an
increase in the average number of consultants. During the first quarter of
2004, consultant productivity measured in local currencies decreased 6.2% as a
result of a less active consultant base. The average number of consultants in
Europe increased 3.8% to over 18,000 consultants during the first quarter of
2004 compared to the first quarter of 2003. The growth in the average number
of consultants was primarily due to promotions aimed at consultant retention. Net sales in the other markets were constant at $1.2 million in the first
quarters of 2004 and 2003. Other markets consist of Brazil, Argentina and, in
2003, Thailand. Brazil net sales were $1.0 million in the first quarter of
2004, an increase of 11.3% compared to the first quarter of 2003, as a result of
a stronger average exchange rates and an increase in consultant productivity,
partially offset by a decrease in the average number of consultants. During
the fourth quarter of 2003, the Company implemented restructuring activities in
Brazil. A result of program changes implemented as part of the restructuring
was a smaller, more productive consultant base. Net sales in Argentina
increased 26.5% to approximately $0.2 million in the first quarter of 2004
compared to the first quarter of 2003 primarily as a result of an increase in
the consultant base and stronger average exchange rates compared to the U.S.
dollar. The increase in the average number of consultants in Argentina in the
period was primarily the result of strategies implemented at the end of 2003 to
focus on sponsoring new consultants. The strategies were carried forward into
2004. During the fourth quarter of 2003, the Company ceased operations in
Thailand, where net sales had been minimal. Gross profit.Consolidated gross profit in the first quarter of 2004
increased to $78.9 million from $68.6 million in the comparable prior year
period, an increase of $10.3 million, or 15.0%. Gross profit as a percentage
of net sales (gross margin) increased to 76.5% in the first quarter of 2004,
compared to 76.1% in the first quarter of 2003. The increase in gross margin
in the first quarter of 2004 was due primarily to increases in gross margin in
Mexico and the United States. In Mexico, gross margin in the first quarter of 2004 increased to 75.3%
from 75.0% in the first quarter of 2003. The increase in gross margin in
Mexico was primarily the result of the impact in 2003 of reclassification of
deferred exchange losses from other comprehensive income to cost of sales in
connection with Statement of Financial Accounting Standards
(SFAS) No. 133. In
the first quarter of 2003, approximately $0.7 million of deferred exchange losses were reclassified to cost of sales. No deferred
exchange losses were reclassified to cost of sales during the first quarter of
2004. In the United States, gross margin in the first quarter of 2004
increased to 78.0% from 77.7% in the first quarter of 2003 mainly due
to a decrease in the proportion of total sales composed of
lower-margin promotional products in the first quarter of 2004 compared to the same period of 2003 and more
favorable margins on regular line and promotional products. This was
partially offset by greater negative purchase price variances based on a standard costing system in the first
quarter of 2004 compared to the first quarter of 2003. In Europe, gross margin in the first quarter of 2004 increased to 84.3%
from 81.1% in the first quarter of 2003 due to the favorable impact of
purchases of inventory denominated in U.S. dollars as a result of the stronger
euro. Selling, general and administrative expenses.SG&A expenses in the first
quarter of 2004 increased to $63.2 million from $57.4 million in the first
quarter of 2003, an increase $5.8 million, or 10.1%. SG&A expenses as a
percentage of net sales were 61.3% during the first quarter of 2004 compared to
63.7% in the first 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. 44




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##### Table of Contents



In Mexico, SG&A expenses in the first quarter of 2004 increased by $6.8
million, or 24.4%, to $34.7 million compared to $27.9 million in the first
quarter of 2003. SG&A expenses decreased as a percentage of net sales to 48.9%
in the first quarter of 2004, compared to 49.1% in the first quarter of 2003.
The decrease in SG&A expenses as a percentage of net sales was primarily due to
decreased administrative expenses, partially offset by increased commission
and sales promotional expenses. During the first quarter of 2004 compared to
the first quarter of 2003, collection of accounts receivable improved in
Mexico. Improved collections resulted in an increase in override expense as a
percentage of net sales, as overrides are paid on collected net sales, and a
decrease in bad debt expense as a percentage of net sales, which had a
favorable impact on administrative expenses. Sales promotional expenses
increased as a percentage of net sales as a result of additional promotional
activity aimed at increasing sales and reducing inventories during the first
quarter of 2004 compared to the first quarter of 2003. In the United States, SG&A expenses in the first quarter of 2004 decreased
by $0.3 million, or 1.8%, to $15.6 million from $15.9 million in the first
quarter of 2003. SG&A expenses as a percentage of net sales were 68.7% in the
first quarter of 2004 compared to 64.4% in the first 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 the negative impact
of lower sales on fixed administrative expenses as a percentage of net sales. In Europe, SG&A expenses in the first quarter of 2004 increased by $0.7
million, or 11.7%, to $6.7 million from $6.0 million in the first quarter of
2003. SG&A expenses as a percentage of net sales in Europe decreased to
80.7% in the first quarter of 2004 compared to 81.1% in the first quarter of
2003. The decrease in SG&A expenses as a percentage of net sales was due to a
decrease in sales promotional expenses, partially offset by an increase in
override expenses. In the first quarter of 2003, promotional expenses were
greater than in 2004 in an effort to increase the consultant base and generate
sales. 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. SG&A
expenses in the Companys other markets in the first quarter of 2004 decreased
by $0.5 million, or 25.0%, compared to the first 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 125.0% during the first quarter
of 2004 compared to 167.7% during the first quarter of 2003. SG&A expenses in Corporate, Unallocated and Other decreased by $0.9
million or 16.1% to $4.7 million in the first quarter of 2004
compared to $5.6 million in the first quarter of 2003 as a result of fewer termination charges during the first quarter of 2004 compared to the
first quarter of 2003. Transaction Related Expenses.During the first quarter of 2004, the
Company incurred $3.4 million of contemplated transaction expenses compared to
$0.8 million in the first quarter of 2003. Most of these transaction related
expenses were for transactions contemplated but never completed. Restructuring Charges.During the first quarter of 2004 the Company
recorded $1.9 million of restructuring charges, primarily
severance charges,
related to implementation of its plan to move substantially all of its
manufacturing functions to its facilities in Mexico. 45




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##### Table of Contents



Exchange gain (loss).The Companys foreign exchange gain was $0.5 million
in the first quarter of 2004 compared to an exchange loss of $0.8 million in
the first quarter of 2003, a favorable change of $1.3 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, and gains and losses arising from other foreign
currency-denominated transactions, including remeasurment of U.S.
dollar-denominated intercompany accounts. During the first quarter of 2004,
the Company recognized $0.9 million of exchange gains related to the
remeasurement of U.S. dollar-denominated debt. This was partially offset by
$0.4 million of exchange losses on option contracts. The net gains and losses
related to other foreign currency-denominated transactions was nominal during
the first quarter of 2004. During the first quarter of 2003, the Company
recognized $1.2 million of losses related to the remeasurement of U.S.
dollar-denominated debt and $0.2 million of exchange losses on other foreign
currency transactions. These exchange losses were partially offset by $0.6
million of exchange gains on option contracts. See Item 3, Quantitative and
Qualitative Disclosures about Market Risk. Interest expense.Net interest expense (including interest income) in the
first quarter of 2004 increased to $6.7 million from $2.5 million in the first
quarter of 2003, an increase of $4.2 million, or 168.0%. The increase was
primarily due to a greater amount of debt outstanding during the first quarter
of 2004 compared to the first quarter of 2003. As of March 31, 2004, the
Company had $245.6 million of debt outstanding, comprised of $200.0 million of
10 3⁄4% notes and $45.6 million of term loan, compared to $83.2 million of
debt outstanding at March 31, 2003. Income tax expense.Income tax expense was $3.0 million in the first
quarter of 2004, compared to $3.8 million in the first quarter of 2003, a
decrease of $0.8 million. The Companys effective income tax rate from
continuing operations was 71.4% in the first quarter of 2004,
compared to 53.5% in the first quarter of 2003. The increase in the effective tax rate in the
first quarter of 2004 compared to the first quarter of 2003 was primarily the
result of valuation allowances against certain operating losses at a Mexican
entity during the first quarter of 2004. In each quarter, the Company recorded
valuation allowances against operating losses in its European and South
American subsidiaries, which resulted in an increase in 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 income as losses on discontinued
operations. Losses on discontinued operations were $0.1 million during the
first quarter of 2004, compared to $0.8 million during the first quarter of
2003, a decrease of $0.7 million. As these markets were substantially
liquidated during 2003, the losses attributable to these markets was less
during the first quarter of 2004 compared to the first quarter of 2003. Net income.Net income was $1.1 million in the first quarter of 2004
compared to $2.5 million in the first quarter of 2003, a decrease of $1.4
million, or 56.0%. The decrease in net income was primarily the result of an
increase of $5.8 million in SG&A expenses, $2.6 million increase in transaction
related expenses, $1.9 million of restructuring charges in the first quarter
2004, a $4.2 million increase in net interest expense, partially offset by a
$10.3 million increase in gross profit, a $1.3 million favorable change in
exchange gain (loss), net, a $0.8 million decrease in income tax expense and a
$0.7 million decrease in loss on discontinued operations. 46




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##### Table of Contents



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 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 the senior credit
facilities as put in place in May 2003, although no assurance can be given in
this regard. The Companys belief that it will be able to meet
its debt service obligations and fund its operating requirements as
described herein assumes that the Company will be able to obtain the
necessary consents of the lenders under its Senior Credit Agreement
to repurchase any outstanding 10 3/4% Notes that may be offered to
the Company by the holders of such notes should
the transaction described above in Recent
Developments  Announcement of Sale to Vorwerk & Co.
eins GmbH be completed as contemplated. It further assumes that
sufficient funds will be available to the Company either from
operations or from another source of financing to repurchase any of the
10 3/4% Notes that may be offered to the Company by holders of such
notes. The Company and Vorwerk are currently seeking the consent to
these transactions of at least two lenders holding more than 50% in
the aggregate of the loans and commitments outstanding under the
Senior Credit Agreement, and the Company understands that Vorwerk
also intends to seek an appropriate source of financing for the repurchase of any
10 3/4% Notes that may be offered to the Company by holders of such
notes. However, there can be no assurance that such consents or such
financing will be made available to the Company. 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.  
    
    Jafra Worldwide was formed as a subsidiary of Jafra S.A. to act as
the intermediate holding company of JCI, Jafra Cosmetics S.A. and other
businesses.  
    
    Jafra Distribution, an affiliate of Jafra Cosmetics S.A. and an
indirect wholly-owned subsidiary of Jafra Worldwide, was formed to
operate the distribution business in Mexico and to act as the Mexican
borrower under the new senior credit facilities and the issuer of the
Mexican portion of the senior subordinated notes.  
    
    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.  
    
    Jafra Distribution and JCI issued $120 million and $80 million,
respectively, in aggregate principal amount of the 10 3⁄4% Senior
Subordinated Notes due 2011, or the 10 3⁄4% 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. 47




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##### Table of Contents




    
    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 10 3⁄4% Notes and borrowings under the
senior credit facilities were paid and distributed to CDRJ Investments
(Lux) S.A.  
    
    CDRJ Investments (Lux) S.A. then commenced liquidation proceedings
and 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. The Company expects to
complete the liquidation of CDRJ Investments (Lux) S.A. in the second
quarter of 2004, prior to the sale of the shares of Jafra S.A. to
Vorwerk. In connection with the completion of the
liquidation, 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., will be distributed to the
shareholders of CDRJ Investments (Lux) S.A. on a pro rata basis
according to their shareholdings. As a result, upon completion of the
liquidation, the shareholders of CDRJ Investments (Lux) S.A. will
become shareholders of Jafra S.A., and will own the same number and
percentage of
shares of Jafra S.A. as the number and percentage of shares they currently own in
CDRJ Investments (Lux) S.A. It is expected that the shareholders of
Jafra S.A. will then sell their shares to Vorwerk & Co. eins
GmbH as described above under Recent
Developments  Announcement of Sale to Vorwerk & Co.
eins GmbH.   Liquidity On May 20, 2003, JCI and Jafra Distribution issued $200 million aggregate
principal amount of 10 3⁄4% Notes pursuant to an indenture dated May 20, 2003
(or 10 3⁄4% Notes Indenture) and entered into a $90 million senior credit
agreement (or Senior Credit Agreement.) The 10 3⁄4% Notes represent the
several obligations of JCI and Jafra Distribution in the amount of $80 million
and $120 million, respectively. The 10 3⁄4% Notes mature in 2011 and bear a
fixed interest rate of 10 3⁄4% payable semi-annually. 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 10 3⁄4%
Notes on a senior subordinated basis on the terms provided in the 10 3⁄4%
Notes Indenture. Each of JCI and Jafra Distribution has fully and
unconditionally guaranteed the obligations of the other under the 10 3⁄4%
Notes on a senior subordinated basis, subject to a 30-day standstill period
prior to enforcement of such guarantees. Each U.S. subsidiary of JCI is
required to fully and unconditionally guarantee the U.S. portion of the 10
3⁄4% Notes jointly and severally, on a senior subordinated basis. Each
Mexican subsidiary of Jafra Distribution is required to fully and
unconditionally guarantee the Mexican portion of the 10 3⁄4% Notes jointly
and severally, on a senior subordinated basis. Jafra Distribution currently has
no Mexican subsidiaries. Jafra Cosmetics S.A. has also fully and
unconditionally guaranteed the obligation of Jafra Distribution under the 10
3⁄4% Notes. Each Mexican subsidiary of Jafra Cosmetics S.A. is required to
fully and unconditionally guarantee the Mexican portion of the 10 3⁄4% Notes
jointly and severally, on a senior subordinated basis. The 10 3⁄4% 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 10 3⁄4% Notes
in an aggregate principal amount equal to up to 35% of the original aggregate
principal amount of 10 3⁄4% 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. 48




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##### Table of Contents



In addition, JCI and Jafra Distribution entered into a Senior Credit
Agreement (the Senior 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. No amounts were outstanding under the revolving credit
facility at December 31, 2003. 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 March 31, 2004, these applicable margins
were 3.00% and 4.00% for base rate loans and LIBOR loans, respectively, subject
in each case to periodic adjustment based on certain levels of financial
performance. As of March 31, 2004, the interest rates were 7.0% and 5.2% on
base rate and LIBOR loans, respectively. Borrowings under the Senior Credit
Agreement are secured by substantially all of the Companys assets. The 10 3⁄4% 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 10 3⁄4%
Notes; consolidate, merge, sell or otherwise dispose of all or substantially
all of its assets; enter into certain transactions with affiliates; and
designate subsidiaries as unrestricted subsidiaries. The Parent is permitted
under the 10 3⁄4% 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 10 3⁄4% 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 10 3⁄4% Notes
Indenture) of at least 2.25 to 1.00 after giving effect to any such payments.
Notwithstanding these restrictions, the 10 3⁄4% 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 10 3⁄4% 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 10 3⁄4%
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 March 31, 2004, the Company was in compliance with all debt covenants. 49




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##### Table of Contents



On May 23, 2003, with the proceeds from the issuance of the 10 3⁄4%
Notes and borrowings under the Senior Credit Agreement, JCI and Jafra Cosmetics
S.A. redeemed the 11 3⁄4% Notes (Old Notes) in the aggregate outstanding
principal amount of $75.2 million at a premium of approximately $4.4 million.
Additionally, JCI and Jafra Cosmetics S.A. repaid $7.4 million under the old
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
$2.2 million 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 $6.6 million and were recorded as a loss on
extinguishment of debt in the second quarter of 2003.

After the redemption of the Old Notes and the Repayment of all outstanding
amounts under the Old Credit Agreement, the shareholders resolved to liquidate
CDRJ. As a result, CDRJ made an initial liquidating distribution of $157.6
million to its shareholders of record at May 20, 2003. Additionally, CDRJ
reserved $1.4 million to pay expenses associated with the liquidation, any
remaining amounts of which will be distributed to the shareholders at the
conclusion of the liquidation. JCI and Jafra Cosmetics S.A. also made
compensating payments to the holders of the options and transaction related
bonus payments to certain members of management and non-employee directors.

The Company capitalized $14.7 million of costs related to the issuance of
the 10 3⁄4% 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 10 3⁄4% Notes and the Senior Credit
Agreement.

As of March 31, 2004, the Company had outstanding $245.6 million of debt,
consisting of $200.0 million of 10 3⁄4% Notes and $45.6 million of term loans
due under the Senior Credit Agreement.




The Company believes, but no assurance can be given, that its existing
cash, cash flow from operations and availability under the Senior Credit
Agreement will provide sufficient liquidity to meet the Companys cash
requirements and working capital needs over the next twelve months,
assuming that the necessary waivers from the Companys lenders
and/or an appropriate alternate source of financing can be obtained with regard to the change of control that would result if the
proposed sale to Vorwerk is completed as contemplated. See
Recent
Developments  Announcement of Sale to Vorwerk &
Co. eins GmbH. In certain foreign markets, the Company has experienced
reduced consultant liquidity in certain foreign subsidiaries. Reduced
consultant liquidity could result in future reduced cash flows from operations,
which may require the Company to use available funds under the Senior Credit
Agreement.




50



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##### Table of Contents



Cash Flows Net cash provided by operating activities was $1.8 million for the three
months ended March 31, 2004, compared to $2.3 million for the three months
ended March 31, 2003, a decrease of $0.5 million. Net cash provided by
operating activities for the three months ended March 31, 2004 consisted of
$5.2 million provided by net income plus depreciation and other non-cash items
included in net income, partially offset by $3.4 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 three months ended March
31, 2004 were a decrease of $3.8 million in receivables and a decrease of $2.4
million in prepaid and other current assets, partially offset by an increase of
$2.2 million in accounts payables and accrued liabilities and a $1.7 million
increase in inventories. Net cash used in investing activities was $1.9 million for the three
months ended March 31, 2004 primarily related to the purchase of property and
equipment. Capital expenditures in 2004 are expected to be approximately
$10.0 million. Net cash used in financing activities was $1.8 million for the three
months ended March 31, 2004 primarily related to repayment under the term loan
facility. The effect of exchange changes on cash was $0.4 million for the three
months ended March 31, 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 a
material impact on the Companys financial position or results of operations. Foreign Operations As a group doing more than 78% of its business in international markets
during the first quarter 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 aggregated approximately 78% and
73% of the Companys total net sales for the three months ended March 31, 2004
and 2003, respectively. In addition, as of March 31, 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 a hedging program to protect against potential devaluation of the
Mexican peso. The Companys subsidiaries in Mexico generated approximately 69% and 63%
of the Companys net sales for the three months ended March 31, 2004 and 2003,
respectively, substantially all of which were denominated in Mexican pesos.
During the first three months of 2004, the Mexican peso has strengthened
slightly, however, during 2003 and 2002, the Mexican peso weakened compared to
the U.S. dollar. During the first quarter of 2004, the remeasuremant of U.S.
dollar-denominated debt resulted in an exchange gain of $0.9 million, most of
which was unrealized. Jafra Mexico had $147.4 million of outstanding U.S.
dollar denominated debt at March 31, 2004. 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
Brazil and its largest European operation is Germany. During the three months
ended March 31, 2004, the Brazilian real was relatively stable, but the euro
devalued 2.2%. 51




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Business Trends and Initiatives During the three months ended March 31, 2004, the Companys Mexican
subsidiary reported an increase in net sales of 25% measured in U.S. dollars
and 28% measured in local currency compared to the first quarter of 2003. The
increase in net sales was primarily the result of the increase in the
consultant base, which has been the trend over the last several years. The
Companys Mexico subsidiary has reported net sales growth measured in local
currencies during the last three years. Additionally, the Mexico subsidiary
contributes a significant portion of the Companys consolidated net sales. The
Companys Mexican subsidiary generated 69% of total net sales for the three
months ended March 31, 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 three months ended
March 31, 2004 compared to the three months ended March 31, 2003 decreased
primarily as a result of a decrease in the consultant base due to certain
issues associated with a system implementation. However, in each of the past two
years, net sales in the United States have increased. The Hispanic
Group (U.S. Hispanic Division plus the Dominican Republic) reported 22% and 5% net sales increase for the years ended
December 31, 2002 and 2003, respectively, compared to the year prior. 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. In
the first three months of 2004, European sales contributed 8% to consolidated
sales. The average number of consultants increased 4% in the first quarter of
2004 compared to the first quarter 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. Information Concerning Forward-Looking Statements 
 Certain of the statements contained in this report (other than the
Companys consolidated financial statements and other statements of historical
fact) are forward-looking statements, including, without limitation,
(i) the statements in Recent Developments regarding
the sale of the outstanding shares of common stock of Jafra S.A. to
Vorwerk & Co. eins GmbH and the
Companys and Vorwerks intent to seek waivers of, or
refinancing of the indebtedness outstanding under, the Senior Credit
Agreement; (ii) the
statements in Liquidity and Capital Resources concerning the Companys expectations regarding the completion of the
liquidation of CDRJ Investments (Lux) S.A., the Companys
belief 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 the senior credit facilities, that its existing cash, cash
flow from operations and availability under the Senior Credit Agreement will
provide sufficient liquidity to meet its cash requirements and working capital
needs over the next twelve months and the
Companys and Vorwerks intent to seek waivers of, or
refinancing of the indebtedness outstanding under, the Senior Credit Agreement; (iii) the statement in Cash Flows that
total capital expenditures in 2004 are expected to be approximately $10.0
million; and (iv) other statements as to managements or the Companys
expectations or beliefs presented in this ''Managements Discussion and
Analysis of Financial Condition and Results of Operations. 
 Forward-looking statements are based upon managements current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with managements expectations or that the effect of
future developments on the Company will be those anticipated by management. 52




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The factors described in the Companys
Annual Report on Form 10-K for the year ended December 31, 2003 (including,
without limitation, those discussed in Business  Strategy, Business 
Products, Business  Marketing, Business  Independent Consultants,
Business  International Operations, Business  Manufacturing, Business 
Distribution, Business  Competition, Business  Environmental Matters,
Properties, Legal Proceedings,  Market for Registrants Common Equity and
Related Stockholder Matters, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Overview  Recent Developments
 Announcement of Sale to Vorwerk & Co. KG,  Markets,  New Accounting
Pronouncements,  Critical Accounting Policies and Estimates,  Liquidity
and Capital Resources,  Cash Flows, 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. 
 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 three
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. In addition, 78% of the
Companys revenue for first three months of 2004 was generated in countries
with a functional currency other than the U.S. dollar. As a result, the
Companys earnings and cash flows for the three months ended March 31, 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 to 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 and ensures that contract amounts do not exceed the
amounts of the underlying exposures. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives. The outstanding foreign currency option contracts had a notional value
denominated in Mexican pesos of 691,000,000 and 831,000,000 in put and call
positions at March 31, 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. 53




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The following tables provide information about the details of the
Companys option contracts as of March 31, 2004 (in thousands except for
average strike price): Coverage inMexican
    
    Average Strike
    
    Fair Value inForeign Currency
    
    Pesos
    
    Price
    
    U.S. Dollars(1)
    
    Maturity DateAt March 31, 2004:Purchased Puts (Company may sell Peso/buy USD)Mexican Peso
    
    
    170,000
    
    
    
    12.10  12.35
    
    
    $
    257
    
    
    Apr.  Jun. 2004Mexican Peso
    
    
    122,000
    
    
    
    12.41  12.60
    
    
    
    167
    
    
    Jul.  Aug. 2004Mexican Peso
    
    
    182,000
    
    
    
    12.28  12.38
    
    
    
    209
    
    
    Oct.  Dec. 2004Mexican Peso
    
    
    85,000
    
    
    
    12.62  12.72
    
    
    
    152
    
    
    Jan.  Mar. 2005Mexican Peso
    
    
    132,000
    
    
    
    12.50  12.60
    
    
    
    165
    
    
    Apr.  Jun. 2005691,000
    
    
    
    
    
    
    $
    950Written Calls (Counterparty may buy Peso/sell
USD)Mexican Peso
    
    
    170,000
    
    
    
    10.26  10.93
    
    
    $
    (239
    )
    
    Apr.  Jun. 2004Mexican Peso
    
    
    122,000
    
    
    
    10.49  11.42
    
    
    
    (96
    )
    
    Jul.  Aug. 2004Mexican Peso
    
    
    182,000
    
    
    
    11.13  11.22
    
    
    
    (115
    )
    
    Oct.  Dec. 2004Mexican Peso
    
    
    85,000
    
    
    
    11.44  11.53
    
    
    
    23
    
    
    Jan.  Mar. 2005Mexican Peso
    
    
    132,000
    
    
    
    11.34  11.41
    
    
    
    (108
    )
    
    Apr.  Jun. 2005691,000
    
    
    
    
    
    
    $
    (535
    )
 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, 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
loss of $415,000 and gain of $440,000 at March 31, 2004 and December 31,
2003, respectively, represents the carrying value and was recorded in
other receivables in the consolidated balance sheets. 54




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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 significant change in the Companys internal controls or
procedures during the fiscal quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting. 55




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##### Table of Contents



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 2. Changes in Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information (a)     None. (b)     None. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. The following documents are exhibits to this quarterly report
on Form 10-Q. ExhibitNumber10.1
    
    Stock Purchase Agreement, dated as
of March 29, 2004, among Vorwerk & Co eins GmbH, CDRJ North
Atlantic (Lux) S.àr.l. and the stockholders of CDRJ Investments
(Lux) S.A., the indirect owners of CDRJ North Atlantic (Lux) S.àr.l.31.1
    
    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 furnished (not filed) on
February 26, 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 fourth quarter and
full year results. 56




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##### Table of Contents



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 of the Advisory Committee andDirector/s/ MICHAEL A. DIGREGORIOMichael A. DiGregorioSenior Vice President and Chief Financial Officer of theAdvisory Committee (Principal Financial Officer)Date May 14, 2004
 57