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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 For the transition period
from

to

Commission File Number 333-106666 JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L.(Exact name of Registrant as specified in its charter) Luxembourg
    
    98-0399297(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 174 Route de Longwy
L-1940 Luxembourg
Luxembourg
(Address, including zip code, of registrants principal executive offices) (352) 226027
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   YES o   NO þ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).   YES o   NO þ 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 November 11, 2004  150 shares.




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JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. AND SUBSIDIARIES Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Three and Nine Months Ended September 30, 2004 PART I  FINANCIAL INFORMATION  
 Page No.Item 1. (*)
    
    Financial Statements (Unaudited):Consolidated Financial Statements  Jafra Worldwide Holdings (Lux) S.àR.L.Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Consolidated Financial Statements  Jafra Cosmetics International, Inc. and SubsidiariesConsolidated Balance Sheets
    
    
    18Consolidated Statements of Operations
    
    
    19Consolidated Statements of Cash Flows
    
    
    20Notes to Consolidated Financial Statements
    
    
    21Financial Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    
    29Statements of Operations
    
    
    30Statements of Cash Flows
    
    
    31Notes to Financial Statements
    
    
    32Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and SubsidiariesConsolidated Balance Sheets
    
    
    37Consolidated Statements of Operations
    
    
    38Consolidated Statements of Cash Flows
    
    
    39Notes to Consolidated Financial Statements
    
    
    40Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    59Item 4.
    
    Controls and Procedures
    
    
    61PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    62Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    62Signature
    
    
    63Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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




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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)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,417
    
    
    $
    16,120Receivables, net
    
    
    40,884
    
    
    
    39,680Inventories
    
    
    43,206
    
    
    
    39,849Prepaid income taxes
    
    
    8,766
    
    
    
    414Prepaid expenses and other current assets
    
    
    8,993
    
    
    
    4,906Deferred income taxes
    
    
    8,989
    
    
    
    6,381Assets from discontinued operations
    
    
    113
    
    
    
    138Total current assets
    
    
    119,368
    
    
    
    107,488Property and equipment, net
    
    
    61,197
    
    
    
    63,356Other assets:Goodwill
    
    
    62,734
    
    
    
    63,096Trademarks
    
    
    40,585
    
    
    
    41,242Deferred financing fees and other, net
    
    
    13,297
    
    
    
    18,561Total
    
    $
    297,181
    
    
    $
    293,743LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    7,500Accounts payable
    
    
    20,761
    
    
    
    22,213Accrued liabilities
    
    
    55,985
    
    
    
    49,174Income taxes payable
    
    
    5,384
    
    
    
    5,216Deferred income taxes
    
    
    2,579
    
    
    
    2,941Due to Vorwerk
    
    
    20,000
    
    
    
    Liabilities from discontinued operations
    
    
    116
    
    
    
    124Total current liabilities
    
    
    104,825
    
    
    
    87,168Long-term debt
    
    
    233,500
    
    
    
    240,000Deferred income taxes
    
    
    16,185
    
    
    
    17,163Other long-term liabilities
    
    
    4,685
    
    
    
    4,801Total liabilities
    
    
    359,195
    
    
    
    349,132Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock, par value $100; 150 sharesauthorized, issued and outstanding in 2004 and 2003
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    4,296
    
    
    
    Retained deficit
    
    
    (57,453
    )
    
    
    (46,250
    )Accumulated other comprehensive loss
    
    
    (8,872
    )
    
    
    (9,154
    )Total stockholders deficit
    
    
    (62,014
    )
    
    
    (55,389
    )Total
    
    $
    297,181
    
    
    $
    293,743
 See accompanying notes to consolidated financial statements 4




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    94,823
    
    
    $
    86,594
    
    
    $
    301,661
    
    
    $
    276,742Cost of sales
    
    
    20,372
    
    
    
    19,550
    
    
    
    68,429
    
    
    
    63,794Gross profit
    
    
    74,451
    
    
    
    67,044
    
    
    
    233,232
    
    
    
    212,948Selling, general and administrative expenses
    
    
    59,028
    
    
    
    55,098
    
    
    
    183,244
    
    
    
    172,962Transaction related expenses
    
    
    139
    
    
    
    422
    
    
    
    29,662
    
    
    
    15,546Restructuring and impairment charges
    
    
    2,244
    
    
    
    
    
    
    
    5,017
    
    
    
    Income from operations
    
    
    13,040
    
    
    
    11,524
    
    
    
    15,309
    
    
    
    24,440Other income (expense):Exchange gain (loss), net
    
    
    1,702
    
    
    
    (7,462
    )
    
    
    (2,839
    )
    
    
    (7,764
    )Interest expense
    
    
    (6,866
    )
    
    
    (6,905
    )
    
    
    (20,601
    )
    
    
    (14,358
    )Interest income
    
    
    20
    
    
    
    19
    
    
    
    97
    
    
    
    261Loss on extinguishment of debt
    
    
    (4,464
    )
    
    
    
    
    
    
    (4,464
    )
    
    
    (6,620
    )Other expense
    
    
    (74
    )
    
    
    (79
    )
    
    
    (258
    )
    
    
    (419
    )Other income
    
    
    40
    
    
    
    9
    
    
    
    68
    
    
    
    52Income (loss) before income taxes
    
    
    3,398
    
    
    
    (2,894
    )
    
    
    (12,688
    )
    
    
    (4,408
    )Income tax expense (benefit)
    
    
    2,453
    
    
    
    (460
    )
    
    
    (1,669
    )
    
    
    1,159Income (loss) from continuing operations
    
    
    945
    
    
    
    (2,434
    )
    
    
    (11,019
    )
    
    
    (5,567
    )Loss on discontinued operations, net of income tax
expense of $0.0 million in 2004 and 2003
    
    
    (25
    )
    
    
    (566
    )
    
    
    (184
    )
    
    
    (2,567
    )Net income (loss)
    
    $
    920
    
    
    $
    (3,000
    )
    
    $
    (11,203
    )
    
    $
    (8,134
    )
 See accompanying notes to consolidated financial statements 5




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (11,203
    )
    
    $
    (8,134
    )Loss on discontinued operations, net of tax
    
    
    184
    
    
    
    2,567Loss from continuing operations
    
    
    (11,019
    )
    
    
    (5,567
    )Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    4,838
    
    
    
    4,359Amortization and write off of deferred financing fees
    
    
    5,891
    
    
    
    3,234Provision for uncollectible accounts receivable
    
    
    6,613
    
    
    
    7,038Non-cash compensation expense
    
    
    4,922
    
    
    
    Asset impairment charges
    
    
    423
    
    
    
    388Unrealized foreign exchange and derivative loss
    
    
    2,661
    
    
    
    8,498Deferred realized foreign exchange loss
    
    
    
    
    
    
    646Deferred income taxes
    
    
    (3,724
    )
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (8,697
    )
    
    
    (718
    )Inventories
    
    
    (3,808
    )
    
    
    (11,414
    )Prepaid expenses and other current assets
    
    
    (3,550
    )
    
    
    (3,434
    )Other assets
    
    
    (106
    )
    
    
    149Accounts payable and accrued liabilities
    
    
    1,778
    
    
    
    (1,052
    )Income taxes payable/prepaid
    
    
    (4,918
    )
    
    
    (5,301
    )Other long-term liabilities
    
    
    (116
    )
    
    
    620Net operating activities of discontinued operations
    
    
    17
    
    
    
    19Net cash used in operating activities
    
    
    (8,795
    )
    
    
    (2,535
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,980
    )
    
    
    (4,963
    )Other
    
    
    (21
    )
    
    
    (643
    )Net cash used in investing activities
    
    
    (4,001
    )
    
    
    (5,606
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    200,000Proceeds from issuance of term loan
    
    
    
    
    
    
    50,000Repurchase of subordinated debt
    
    
    (500
    )
    
    
    (75,180
    )Repayments under term loan facility
    
    
    (47,500
    )
    
    
    (9,625
    )Borrowings under revolving credit facility
    
    
    107,000
    
    
    
    Repayments under revolving credit facility
    
    
    (73,000
    )
    
    
    Proceeds from Vorwerk note
    
    
    20,000
    
    
    
    Distribution of additional paid-in capital to shareholder
    
    
    
    
    
    
    (83,570
    )Distribution payment to shareholder from retained earnings
    
    
    
    
    
    
    (75,444
    )Distribution to Parent
    
    
    (626
    )
    
    
    Deferred financing costs
    
    
    (737
    )
    
    
    (14,449
    )Repayments under bank debt
    
    
    
    
    
    
    (828
    )Net cash provided by (used in) financing activities
    
    
    4,637
    
    
    
    (9,096
    )Effect of exchange rate changes on cash
    
    
    456
    
    
    
    (659
    )Net decrease in cash and cash equivalents
    
    
    (7,703
    )
    
    
    (17,896
    )Cash and cash equivalents at beginning of period
    
    
    16,120
    
    
    
    26,821Cash and cash equivalents at end of period
    
    $
    8,417
    
    
    $
    8,925
 See accompanying notes to
consolidated financial statements 6




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation Jafra Worldwide Holdings (Lux) S.àr.l, a Luxembourg société à
responsabilité limitée(the Parent) is a wholly-owned subsidiary of Jafra
S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.). Jafra S.A., a
Luxembourg société anonyme(Jafra S.A.), was a wholly-owned subsidiary of
CDRJ Investments (Lux) S.A., a Luxembourg société anonyme(CDRJ). On
May 27, 2004, Vorwerk & Co. eins GmbH (Vorwerk)
acquired substantially all of the
issued and outstanding capital stock of Jafra S.A. (the Acquisition). As a
result of the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk, which is an indirect wholly-owned subsidiary of Vorwerk
& Co. KG, a family-owned company based in Wuppertal, Germany. The purchase
transaction has not been pushed down to the Company due to the outstanding
registered debt. On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (JCI)
and Distribuidora Comercial Jafra S.A. de C.V. (Jafra Distribution and
together with JCI, the Issuers) completed a recapitalization of their
operations by entering into $90 million of new senior secured credit
facilities, consisting of a $50 million senior secured term loan facility and a
$40 million senior secured revolving credit facility and issuing $200 million
of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes and such
transactions collectively, the Recapitalization). The proceeds from the
Recapitalization were used to redeem the 113⁄4% Senior Subordinated Notes
due 2008 (the Old Notes) of JCI and Jafra Cosmetics International, S.A. de
C.V. (Jafra Cosmetics S.A.), to repay all amounts outstanding under the
existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain
payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The
stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the
Parent to act as its liquidator. Thereafter, CDRJ made liquidating
distributions 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 in February 2003 to conduct the
distribution functions of the Parents Mexican operations. The Parent was
organized in February 2003 as a holding company to conduct the worldwide
Jafra cosmetics business through its subsidiaries. CDRJ was a holding company
that, until the Recapitalization, conducted the Jafra cosmetics business
through its subsidiaries. Since the commencement of the liquidation, CDRJ has
conducted no operations other than those incident to winding up its activities.
The liquidation of CDRJ occurred during the second quarter of 2004. The accompanying unaudited interim consolidated financial statements as of
and for the three and nine months ended September 30, 2004 and 2003 and the
accompanying audited consolidated balance sheet as of December 31, 2003 reflect
the operations of the Parent and its subsidiaries and are referred to
collectively as the Company. The unaudited interim consolidated financial statements have been prepared
in accordance with Article 10 of the Securities and Exchange Commissions
Regulation S-X. In the opinion of management, the accompanying unaudited
interim financial statements contain all adjustments, including normal
recurring adjustments, necessary to present fairly the Companys consolidated
financial statements as of September 30, 2004 and for the interim periods
presented. All significant intercompany accounts and transactions have been
eliminated in consolidation. The functional currency of certain of the Companys foreign subsidiaries
generally consists of currencies other than the U.S. dollar. For presentation
purposes, assets and liabilities are translated into U.S. dollars at current
exchange rates, and related revenues and expenses are translated at average
exchange rates in effect during the period. Resulting translation adjustments
are recorded as a component of other comprehensive loss. 7




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Management Incentive Arrangements. The Company applied Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock issued to
Employees and related Interpretations in accounting for the issuance of stock
options under the Stock Incentive Plan. As part of the Acquisition, the
Management Incentive Plan was terminated. No options were granted during 2004
prior to the termination of the plan. Had the Company recorded compensation
cost based on the fair value of options granted at the grant date, as
prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation, the compensation expense for the
nine months ended September 30, 2004 and the three and nine months ended
September 30, 2003 would be immaterial to the consolidated statements of
operations. New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46
were effective for the Company in the first quarter of 2004. The adoption of
FIN 46 did not have an impact on the Companys financial position or results of
operations as the Company had no variable interest entities. (2) Inventories Inventories consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    9,071
    
    
    $
    6,131Finished goods
    
    
    34,135
    
    
    
    33,718Total inventories
    
    $
    43,206
    
    
    $
    39,849
 (3) Property and Equipment Property and equipment consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Land
    
    $
    15,536
    
    
    $
    15,686Buildings
    
    
    16,521
    
    
    
    16,662Machinery, equipment and other
    
    
    51,272
    
    
    
    50,88683,329
    
    
    
    83,234Less accumulated depreciation.
    
    
    22,132
    
    
    
    19,878Property and equipment, net
    
    $
    61,197
    
    
    $
    63,356
 8




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (4) Goodwill and Other Intangible Assets. The Companys intangible assets consist of trademarks and goodwill. The
Company has determined trademarks  principally the Jafra name resulting from
the acquisition of the Jafra business from Gillette  to have an indefinite
life. The carrying value of trademarks was $40,585,000 as of September 30,
2004. The changes in the carrying amount of goodwill for the year ended
December 31, 2003 and for the nine months ended September 30, 2004 are as
follows (in thousands): United
    
    
    
    
    
    
    
    
    
    All
    
    ConsolidatedGoodwill
    
    States
    
    Mexico
    
    Europe
    
    Others
    
    TotalBalance as of December 31, 2002
    
    $
    32,188
    
    
    $
    28,548
    
    
    $
    5,300
    
    
    $
    137
    
    
    $
    66,173Impairment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    (137
    )Translation effect
    
    
    
    
    
    
    (2,120
    )
    
    
    (820
    )
    
    
    
    
    
    
    (2,940
    )Balance as of December 31, 2003
    
    
    32,188
    
    
    
    26,428
    
    
    
    4,480
    
    
    
    
    
    
    
    63,096Translation effect
    
    
    
    
    
    
    (418
    )
    
    
    56
    
    
    
    
    
    
    
    (362
    )Balance as of September 30, 2004
    
    $
    32,188
    
    
    $
    26,010
    
    
    $
    4,536
    
    
    $
    
    
    
    $
    62,734
 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(loss) before income
taxes for the three and nine months ended September 30, 2003 and 2004. During
the three and nine months ended September 30, 2004, the Companys United States
subsidiary reported an effective tax rate different than the statutory rate
primarily due to (i) permanent differences, including non-deductible expenses and
(ii) state income taxes. During the three and nine months ended September 30,
2004, Jafra Mexico reported an effective tax rate different than the statutory
rate primarily due to the reversal of certain valuation allowances against
certain net operating losses and other temporary differences. The effective
rate during the three and nine months ended September 30, 2004 was also
effected by increases of valuation allowances against certain pretax losses in other
subsidiaries. During the three months ended September 30, 2003 Jafra Mexico
reported a pretax loss and an income tax benefit. This was partially offset by
pretax income and income tax expense in the United States. During the nine
months ended September 30, 2003, Jafra Mexico reported pretax income and income
tax expense. The income tax expense was partially offset by an income tax
benefit in the United States based on pretax net losses. Additionally, during
the three and nine months ended September 30, 2003, the Company recorded
valuation allowances against certain pretax losses in other subsidiaries. (6) Debt and Distribution to Former Shareholders On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes (the New Notes) due 2011 pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90
million senior credit agreement (the Senior Credit Agreement). The New Notes
represent the several obligations of JCI and Jafra Distribution in the original
amount of $80 million and $120 million, respectively. The New Notes mature in
2011 and bear interest at a fixed rate of 103⁄4% payable semi-annually. 9




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
required to fully and unconditionally guarantee the U.S. portion of New Notes
jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully
and unconditionally guarantee the Mexican portion of the New Notes jointly and
severally, on a senior subordinated basis. Jafra Cosmetics S.A. has also fully
and unconditionally guaranteed the obligations of Jafra Distribution under the
New Notes. Each existing and subsequently acquired or organized subsidiary of
Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee
the Mexican portion of the New Notes jointly and severally, on a senior
subordinated basis. The New Notes are unsecured and are generally not redeemable for four
years from their issue date. Thereafter, the New Notes will be redeemable on a
pro rata basis at premiums declining to par in the sixth year. Prior to May 16,
2006, the Issuers at their option may concurrently redeem the New Notes in an
aggregate principal amount such that at least 65% of the original aggregate principal
amount of the New Notes is outstanding, 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. In connection with
the Acquisition, holders of $500,000 principal amount of the New Notes
redeemed such notes and as a result, $199.5 million principal amount
of New Notes was outstanding at September 30, 2004. In addition, in May 2003, the Issuers entered into the Senior Credit
Agreement, which provided for senior secured credit facilities in an aggregate
principal amount of up to $90 million, consisting of a $50 million senior
secured term loan facility and a $40 million senior secured revolving credit
facility. The Senior Credit Agreement was allocated 40% to JCI and 60% to
Jafra Distribution. 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 then existing credit agreement
(the Old Credit Agreement) and terminated the Old Credit Agreement. In
connection with the redemption of the Old Notes and the termination of the Old
Credit Agreement, the Company wrote off approximately $2,203,000 of capitalized
deferred financing fees. Total costs related to the redemption of the Old
Notes and the repayment of amounts outstanding under the Old Credit Agreement
were $6,620,000 and were recorded as loss on extinguishment of debt on the
accompanying consolidated statements of operations during the nine months ended
September 30, 2003. After the redemption of the Old Notes and repayment of all outstanding
amounts under the Old Credit Agreement, the shareholders of CDRJ resolved to
liquidate CDRJ. As a result, CDRJ made liquidating distributions of
$159,014,000 to its shareholders of record at May 20, 2003. JCI also made a
special payment to the holders of CDRJ options and certain members of
management and non-employee directors. 10




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 The Company capitalized $14,647,000 of costs related to the issuance of
the New Notes and the Senior Credit Agreement as deferred financing fees. In connection with closing the Acquisition, the Issuers, the Company and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provided that for a period of
90 days following the closing of the Acquisition, the Acquisition would not
constitute an event of default under the Credit Agreement. On August 16, 2004,
prior to the expiration of the 90 day period, the Company entered into a
Restated Senior Credit Agreement (the Restated Credit Agreement) which provides for a
revolving credit facility of up to an aggregate of $60 million at any one time
outstanding, which can be increased by the Company to $90 million under certain
circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra
Distribution can borrow up to 60% of the total Restated Credit Agreement. On August 16, 2004, JCI
borrowed $16,750,000 and Jafra Distribution borrowed $26,750,000 of the loans.
Borrowings under the Restated Credit Agreement bear interest at an annual rate
of Libor plus 2.625%. As of September 30, 2004, the applicable interest rate
was 4.3%, subject to periodic adjustment based on certain levels of financial
performance. Borrowings under the Restated Credit Agreement are secured by
substantially all of the assets of JCI and Jafra Distribution. The
Company also entered into a Loan Contract (the Loan
Contract) in August, 2004 to borrow
up to $20,000,000 from Vorwerk at an annual interest rate of Libor
plus 2.625%.
The Loan Contract was allocated 100% to JCI and will expire on December 20,
2004. On August 12, 2004, the Company borrowed the full amount under the Loan
Contract. With the borrowings from the Restated Credit Agreement and the Loan
Contract, the Company paid in full all existing amounts under the Senior Credit
Agreement. In connection with the full repayment of the Senior Credit
Agreement and the purchase of $500,000 of the outstanding New Notes, the
Company wrote off approximately $4,464,000 of capitalized deferred financing
fees and recorded the write off as loss on extinguishment of debt on the
accompanying consolidated statements of operations during the three and nine
months ended September 30, 2004. The Company capitalized approximately $737,000 of costs related to the
Restated Credit Agreement. As of September 30, 2004, approximately $7,918,000
of unamortized deferred financing fees (excluding translation effects) were
reported as a noncurrent asset in the accompanying consolidated balance sheets.
These deferred financing fees are being amortized on a basis that approximates
the interest method over the term of the New Notes and the Restated Credit
Agreement. Both the Indenture and the Restated 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 September 30, 2004, the Company was in compliance with all covenants. The Restated 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 Restated Credit Agreement to terminate their commitments
to lend thereunder and/or declare any amounts outstanding thereunder to be 11




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 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
Restated Credit Agreement) to block payments on the New 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 Restated Credit Agreement contain similar
restrictions. The Restated 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 Restated Credit Agreement), accruing from July 1, 2004, plus up to $5.0 million so long
as the consolidated leverage ratio (as defined in the Restated Credit
Agreement) does not exceed 3 to 1 after giving effect to such payment and the
sum of unused borrowing availability under the Restated Credit Agreement plus
cash is not less than $5 million. (7) Non-Cash Equity Contribution During the nine months ended September 30, 2004, the former primary
shareholder of Jafra S.A. paid certain members of management and non-employee
board of director members a special bonus of $4,922,000. As this amount was
paid directly to the recipients from the former primary shareholder, Jafra S.A.
recorded $4,922,000 as deemed contributed capital and as a non-cash transaction
expense representing compensation. Jafra S.A. then contributed $4,922,000 to
the Company. This contribution was partially offset by a cash distribution of
$626,000 to Jafra S.A. (8) Transaction Related Expense During the three and nine months ended September 30, 2004, the Company
incurred $139,000 and $29,662,000, respectively, of transaction fees related to
the Acquisition and to certain other transactions contemplated but
subsequently terminated. Included in these amounts was $20,282,000 of compensation expense
for the buyback and cancellation of options to purchase shares of Jafra S.A.
and $4,922,000 of special bonus payments paid directly by the former
shareholder. During the three and nine months ended September 30, 2003, the
Company recorded $422,000 and $15,546,000, respectively, of transaction
expenses related to the Recapitalization and to other transactions contemplated
but subsequently terminated. In connection with the Recapitalization, the Board of
Directors authorized CDRJ to reprice all then existing outstanding stock
options. In order to compensate option holders for any diminished value of the
outstanding options, the Board of Directors further authorized $10,391,000 in
bonus payments to current option holders during the nine months ended September
30, 2003. Additionally, the Company authorized a special bonus of $2,715,000
to certain members of management and to non-employee directors for
contributions to completing the Recapitalization of CDRJ. 12




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (9) Restructuring and Asset Impairment Charges During the three and nine months ended September 30, 2004 the Company
recorded a total of $2,244,000 and $5,017,000, respectively, of restructuring
and asset impairment charges. Of these charges, approximately $65,000 and
$2,838,000 was recorded during the three and nine months ended September 30,
2004, respectively, and was primarily related to the transfer of substantially
all of its skin and body care manufacturing operations to its facilities in
Mexico. The transfer of these operations was substantially complete during the
second quarter of 2004. Of these charges in the nine months ended September
30, 2004, approximately $488,000 was for the impairment of assets not
transferred and the remaining amount was primarily termination benefits.
Additionally, during the three and nine months ended September 30, 2004, the
Company recorded $2,179,000 of severance related charges related to the
resignation of five members of management subsequent to the Acquisition. A rollforward of the activity of
the restructuring accruals is summarized as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2004Opening balance
    
    $
    1,423
    
    
    $
    Additions
    
    
    2,244
    
    
    
    5,017Charges against reserves
    
    
    (616
    )
    
    
    (1,966
    )Ending balance
    
    $
    3,051
    
    
    $
    3,051
 The Company does not expect to incur any additional significant charges in
connection with the transfer of these manufacturing operations to Mexico or in
relation to the resignation of certain members of management. (10) Comprehensive Income (Loss) Comprehensive income (loss) is summarized as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    920
    
    
    $
    (3,000
    )
    
    $
    (11,203
    )
    
    $
    (8,134
    )Unrealized and deferred realized (loss) gain on derivatives
    
    
    (130
    )
    
    
    146
    
    
    
    (329
    )
    
    
    303Reclassification of deferred realized loss to
exchange gain (loss)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (549
    )Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654Tax benefit  on unrealized and deferred realized
(loss) gain on derivatives
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Foreign currency translation adjustments
    
    
    (447
    )
    
    
    1,461
    
    
    
    47
    
    
    
    527Comprehensive income (loss)
    
    $
    343
    
    
    $
    (1,441
    )
    
    $
    (11,485
    )
    
    $
    (7,248
    )
 (11) Financial Reporting for Business Segments The Companys business is comprised of one industry segment, direct
selling, with worldwide operations. The Company is organized into geographical
business units that each sell the full line of Jafra cosmetics, skin care, body
care, fragrances, and other products. Jafra has three reportable business
segments: Mexico, the United States including the Dominican Republic, and
Europe. Business results for subsidiaries in South America and Thailand are
combined and included in the following table under the caption All Others.
As of the beginning of 2004, the Company includes the results of the Dominican
Republic with the results of the United States as they are under common
management and the Companys chief operating decision makers evaluate the
results of the Dominican Republic with the results of the United States. All
prior period results have been reclassified to be consistent with the 2004
presentation. 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 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. United States
    
    
    
    
    
    
    
    
    
    Corporate,and the Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedMexico
    
    Republic
    
    Europe
    
    Others
    
    and Other
    
    Total(in thousands)As of and for the three
months ended September 30,
2004Net sales
    
    $
    63,265
    
    
    $
    23,077
    
    
    $
    7,167
    
    
    $
    1,314
    
    
    $
    
    
    
    $
    94,823Income (loss) from operations
    
    
    15,994
    
    
    
    3,872
    
    
    
    42
    
    
    
    (501
    )
    
    
    (6,367
    )
    
    
    13,040Depreciation
    
    
    654
    
    
    
    780
    
    
    
    110
    
    
    
    24
    
    
    
    
    
    
    
    1,568Capital expenditures
    
    
    496
    
    
    
    209
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    750Segment assets
    
    
    188,835
    
    
    
    89,199
    
    
    
    17,782
    
    
    
    3,014
    
    
    
    (1,762
    )
    
    
    297,068Discontinued operations assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    113Goodwill
    
    
    26,010
    
    
    
    32,188
    
    
    
    4,536
    
    
    
    
    
    
    
    
    
    
    
    62,734For the three months ended
September 30, 2003Net sales
    
    $
    51,843
    
    
    $
    25,885
    
    
    $
    6,602
    
    
    $
    2,264
    
    
    $
    
    
    
    $
    86,594Income (loss) from operations
    
    
    12,294
    
    
    
    4,479
    
    
    
    (34
    )
    
    
    (1,187
    )
    
    
    (4,028
    )
    
    
    11,524Depreciation
    
    
    590
    
    
    
    662
    
    
    
    85
    
    
    
    72
    
    
    
    
    
    
    
    1,409Capital expenditures
    
    
    1,011
    
    
    
    1,138
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    2,260As 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 nine months ended
September 30, 2004Net sales
    
    $
    201,695
    
    
    $
    71,820
    
    
    $
    24,223
    
    
    $
    3,923
    
    
    $
    
    
    
    $
    301,661Income (loss) from operations
    
    
    55,893
    
    
    
    8,116
    
    
    
    807
    
    
    
    (1,786
    )
    
    
    (47,721
    )
    
    
    15,309Depreciation
    
    
    1,835
    
    
    
    2,598
    
    
    
    333
    
    
    
    72
    
    
    
    
    
    
    
    4,838Capital expenditures
    
    
    2,024
    
    
    
    1,797
    
    
    
    119
    
    
    
    40
    
    
    
    
    
    
    
    3,980For the nine months ended
September 30, 2003Net sales
    
    $
    172,057
    
    
    $
    76,701
    
    
    $
    22,671
    
    
    $
    5,313
    
    
    $
    
    
    
    $
    276,742Income (loss) from operations
    
    
    44,845
    
    
    
    11,536
    
    
    
    473
    
    
    
    (3,758
    )
    
    
    (28,656
    )
    
    
    24,440Depreciation
    
    
    1,688
    
    
    
    2,138
    
    
    
    317
    
    
    
    216
    
    
    
    
    
    
    
    4,359Capital expenditures
    
    
    1,814
    
    
    
    2,764
    
    
    
    305
    
    
    
    80
    
    
    
    
    
    
    
    4,963
 14




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Corporate, unallocated and other includes (in thousands): Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Corporate expenses
    
    $
    (2,647
    )
    
    $
    (2,778
    )
    
    $
    (10,286
    )
    
    $
    (10,414
    )Transaction related expenses
    
    
    (139
    )
    
    
    (422
    )
    
    
    (29,662
    )
    
    
    (15,546
    )Restructuring charges
    
    
    (2,244
    )
    
    
    
    
    
    
    (5,017
    )
    
    
    Unusual charges(1)
    
    
    (1,337
    )
    
    
    (828
    )
    
    
    (2,756
    )
    
    
    (2,696
    )Total corporate, unallocated and other
    
    $
    (6,367
    )
    
    $
    (4,028
    )
    
    $
    (47,721
    )
    
    $
    (28,656
    )
   (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. (12) Foreign Currency Option Contracts The Company is exposed to currency risk relating to its forecasted U.S.
dollar-denominated expenditures at Jafra Mexico. As part of its overall
strategy to reduce the risk of potential adverse exchange rate fluctuations in
Mexico, the Company entered into foreign currency option contracts (option
contracts or options). The Company places option contracts based on its
rolling forecasted cash outflows from Jafra Mexico and hedges transactions
included in the forecast on the date the option contract is initiated. As a
matter of policy, the Company does not hold or issue forward contracts or
option contracts for trading or speculative purposes nor does it enter into
contracts or agreements containing embedded derivative features. The Company currently designates certain of its option contracts as cash
flow hedges of forecasted U.S. dollar-denominated inventory purchases,
forecasted U.S. dollar-denominated intercompany charges from JCI to Jafra
Mexico, forecasted management fee charges from JCI to Jafra Mexico, and U.S.
dollar-denominated interest payments. For all qualifying and highly effective
cash flow hedges, the changes in the fair value of the derivative are deferred
as a component of other comprehensive loss. Such amounts will be reclassified
from other comprehensive loss into net income (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 by Jafra Mexico. During the three and nine months ended September 30, 2004, the Company
recognized $496,000 and $529,000 of losses, respectively, on option contracts
and during the nine months ended September 30, 2003, the Company recognized
$627,000 of gains on option contracts as a component of exchange gain (loss),
net on the accompanying consolidated statements of operations. As of December 31, 2003, the Company had deferred as a component of other
comprehensive loss $278,000 of gains on option contracts. During the nine
months ended September 30, 2004, the Company deferred as a component of other
comprehensive loss $329,000 of losses on option contracts qualifying for hedge
accounting under SFAS No. 133. The Company expects that substantially all of
the remaining loss of $51,000 deferred as a component of other comprehensive
loss at September 30, 2004 will be recognized into net income (loss) within the
next sixteen months. The fair value of the option contracts was $418,000 at September 30, 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. 15




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 During the three and nine months ended September 30, 2004 and 2003 the
ineffectiveness generated by the Companys option contracts designated as
hedges was insignificant. Certain hedged forecasted transactions do not appear
probable of occurring due to timing differences between the original and current
forecasts, and accordingly during the three and nine months ended September 30,
2004 and 2003, $0 and $230,000, respectively, of gains, were reclassified into
earnings. The outstanding foreign currency option contracts had a notional value
denominated in Mexican pesos of 657,000,000 and 831,000,000 in put and call
positions at September 30, 2004 and December 31, 2003, respectively, and mature
at various dates through January 31, 2006. 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. (13) Discontinued Operations/Markets to be Exited During 2003, the Company discontinued its operations in Venezuela,
Colombia, Chile and Peru. The Company has terminated sales in these markets
and has liquidated a majority of the assets in 2003. As such, the results of
the operations of these markets have been classified as discontinued operations
in all periods presented in the statements of operations. The assets and
liabilities from the discontinued operations have been segregated in the
accompanying consolidated balance sheets. Net sales and loss on discontinued operations was as follows: Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)For the three months ended
September 30, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontinued operations
    
    
    (4
    )
    
    
    (18
    )
    
    
    (3
    )
    
    
    
    
    
    
    (25
    )For the three months ended
September 30, 2003Net sales
    
    $
    25
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    25Loss on discontinued operations
    
    
    (163
    )
    
    
    (292
    )
    
    
    (33
    )
    
    
    (78
    )
    
    
    (566
    )
 Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)For the nine months ended
September 30, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontinued operations
    
    
    (91
    )
    
    
    (49
    )
    
    
    (32
    )
    
    
    (12
    )
    
    
    (184
    )For the nine months ended
September 30, 2003Net sales
    
    $
    1,255
    
    
    $
    1,004
    
    
    $
    97
    
    
    $
    127
    
    
    $
    2,483Loss on discontinued operations
    
    
    (995
    )
    
    
    (1,129
    )
    
    
    (191
    )
    
    
    (252
    )
    
    
    (2,567
    )
 16




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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 was
as follows: Venezuela
    
    Colombia
    
    Chile
    
    Peru
    
    Total(in thousands)As of September 30, 2004Assets:Cash
    
    $
    
    
    
    $
    31
    
    
    $
    29
    
    
    $
    7
    
    
    $
    67Receivables, net
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Prepaid and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21Total assets
    
    $
    
    
    
    $
    56
    
    
    $
    29
    
    
    $
    28
    
    
    $
    113Liabilities:Accounts payable
    
    $
    
    
    
    $
    10
    
    
    $
    
    
    
    $
    7
    
    
    $
    17Accrued liabilities
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Total liabilities
    
    $
    
    
    
    $
    109
    
    
    $
    
    
    
    $
    7
    
    
    $
    116As 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. The Company also
plans to cease operating in Brazil during the fourth quarter of
2004. Subsequent to the end of the third quarter
of 2004, the Company entered into a distributorship agreement with a third
party in Brazil. 17




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,839
    
    
    $
    8,879Receivables, net
    
    
    4,742
    
    
    
    4,509Inventories
    
    
    13,268
    
    
    
    12,882Receivables from affiliates
    
    
    20,773
    
    
    
    18,747Prepaid expenses and other current assets
    
    
    6,153
    
    
    
    2,627Deferred income taxes
    
    
    6,381
    
    
    
    6,381Total current assets
    
    
    57,156
    
    
    
    54,025Property and equipment, net
    
    
    25,578
    
    
    
    28,048Other assets:Goodwill
    
    
    36,724
    
    
    
    36,668Notes receivable from affiliates
    
    
    19,462
    
    
    
    17,022Deferred financing fees, net
    
    
    3,252
    
    
    
    5,525Other
    
    
    4,804
    
    
    
    4,966Total
    
    $
    146,976
    
    
    $
    146,254LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    3,000Accounts payable
    
    
    4,198
    
    
    
    6,634Accrued liabilities
    
    
    23,486
    
    
    
    20,918Income taxes payable
    
    
    67
    
    
    
    387Payables to affiliates
    
    
    17,289
    
    
    
    21,118Due to Vorwerk
    
    
    20,000
    
    
    
    Total current liabilities
    
    
    65,040
    
    
    
    52,057Long-term debt
    
    
    95,050
    
    
    
    96,000Deferred income taxes
    
    
    4,512
    
    
    
    4,512Other long-term liabilities
    
    
    4,685
    
    
    
    4,801Total liabilities
    
    
    169,287
    
    
    
    157,370Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock, par value $.01: 1,000 shares authorized, issued
and outstanding in 2004 and 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    4,296
    
    
    
    Retained deficit
    
    
    (24,287
    )
    
    
    (8,491
    )Accumulated other comprehensive loss
    
    
    (2,320
    )
    
    
    (2,625
    )Total stockholders deficit
    
    
    (22,311
    )
    
    
    (11,116
    )Total
    
    $
    146,976
    
    
    $
    146,254
 See accompanying notes to
consolidated financial statements 18




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales to third parties
    
    $
    30,244
    
    
    $
    32,578
    
    
    $
    96,042
    
    
    $
    99,634Sales to affiliates
    
    
    1,822
    
    
    
    3,074
    
    
    
    7,234
    
    
    
    11,207Net sales
    
    
    32,066
    
    
    
    35,652
    
    
    
    103,276
    
    
    
    110,841Cost of sales
    
    
    8,267
    
    
    
    10,205
    
    
    
    27,916
    
    
    
    32,633Gross profit
    
    
    23,799
    
    
    
    25,447
    
    
    
    75,360
    
    
    
    78,208Selling, general and administrative expenses
    
    
    24,263
    
    
    
    25,369
    
    
    
    80,404
    
    
    
    80,653Transaction related expenses
    
    
    139
    
    
    
    331
    
    
    
    26,911
    
    
    
    13,982Restructuring charges
    
    
    2,244
    
    
    
    
    
    
    
    4,855
    
    
    
    Management fee income from affiliates
    
    
    (2,051
    )
    
    
    (1,895
    )
    
    
    (9,735
    )
    
    
    (7,911
    )Royalty income from affiliates, net
    
    
    (4,779
    )
    
    
    (3,720
    )
    
    
    (15,297
    )
    
    
    (12,638
    )Market subsidy income
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    4,583
    
    
    
    5,362
    
    
    
    (11,778
    )
    
    
    4,122Other income (expense):Exchange gain (loss), net
    
    
    86
    
    
    
    216
    
    
    
    (153
    )
    
    
    (235
    )Interest expense
    
    
    (2,795
    )
    
    
    (2,664
    )
    
    
    (8,179
    )
    
    
    (6,280
    )Interest income
    
    
    111
    
    
    
    161
    
    
    
    344
    
    
    
    452Loss on
extinguishment of debt
    
    
    (1,905
    )
    
    
    
    
    
    
    (1,905
    )
    
    
    (4,778
    )Other expense
    
    
    (48
    )
    
    
    (209
    )
    
    
    (60
    )
    
    
    (289
    )Other income
    
    
    63
    
    
    
    19
    
    
    
    171
    
    
    
    46Income (loss) before income taxes
    
    
    95
    
    
    
    2,885
    
    
    
    (21,560
    )
    
    
    (6,962
    )Income tax expense (benefit)
    
    
    2,196
    
    
    
    1,444
    
    
    
    (5,764
    )
    
    
    (1,404
    )Net (loss) income
    
    $
    (2,101
    )
    
    $
    1,441
    
    
    $
    (15,796
    )
    
    $
    (5,558
    )
 See accompanying notes to
consolidated financial statements 19




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (15,796
    )
    
    $
    (5,558
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    2,931
    
    
    
    2,552Provision for uncollectible accounts receivable
    
    
    639
    
    
    
    407Non-cash compensation expense
    
    
    4,922
    
    
    
    Write off and amortization of deferred financing fees
    
    
    2,519
    
    
    
    2,668Asset impairment charges
    
    
    423
    
    
    
    251Unrealized foreign exchange loss
    
    
    63
    
    
    
    586Changes in operating assets and liabilities:Receivables
    
    
    (872
    )
    
    
    998Inventories
    
    
    (386
    )
    
    
    (2,640
    )Prepaid expenses and other current assets
    
    
    (3,526
    )
    
    
    (3,482
    )Intercompany receivables and payables
    
    
    (5,305
    )
    
    
    4,118Other assets
    
    
    183
    
    
    
    63Accounts payable and accrued liabilities
    
    
    132
    
    
    
    3,213Income taxes payable/prepaid
    
    
    (320
    )
    
    
    (776
    )Other long-term liabilities
    
    
    (116
    )
    
    
    620Net cash (used in) provided by
operating activities
    
    
    (14,509
    )
    
    
    3,020Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,916
    )
    
    
    (3,069
    )Other
    
    
    (21
    )
    
    
    (643
    )Net cash used in investing activities
    
    
    (1,937
    )
    
    
    (3,712
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    80,000Repayments of subordinated debt due 2011
    
    
    (200
    )
    
    
    Proceeds from issuance of term loan
    
    
    
    
    
    
    20,000Repurchase of subordinated debt due 2008
    
    
    
    
    
    
    (45,108
    )Proceeds from issuance of Vorwerk note
    
    
    20,000
    
    
    
    Repayments under term loan facility
    
    
    (19,000
    )
    
    
    (6,500
    )Borrowings under revolving credit facility
    
    
    50,250
    
    
    
    Repayments under revolving credit facility
    
    
    (35,000
    )
    
    
    Advances to affiliates
    
    
    (2,440
    )
    
    
    (5,315
    )Distribution of additional paid-in capital to shareholder
    
    
    
    
    
    
    (39,649
    )Distribution to Parent
    
    
    (626
    )
    
    
    Distribution payment to shareholder from retained earnings
    
    
    
    
    
    
    (4,662
    )Deferred financing costs
    
    
    (309
    )
    
    
    (5,821
    )Net cash provided by (used in)
financing activities
    
    
    12,675
    
    
    
    (7,055
    )Effect of exchange rate changes on cash
    
    
    731
    
    
    
    387Net decrease in cash and cash equivalents
    
    
    (3,040
    )
    
    
    (7,360
    )Cash and cash equivalents at beginning of period
    
    
    8,879
    
    
    
    13,088Cash and cash equivalents at end of period
    
    $
    5,839
    
    
    $
    5,728
 See accompanying notes to
consolidated financial statements 20




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##### Table of Contents



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




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46
were effective for JCI in the first quarter of 2004. The adoption of FIN 46
did not have an impact on JCIs financial position or results of operations as
JCI had no variable interest entities. (2)  Property and Equipment Property and equipment consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    7,075
    
    
    
    7,065Machinery, equipment and other
    
    
    25,309
    
    
    
    27,18838,572
    
    
    
    40,441Less accumulated depreciation
    
    
    12,994
    
    
    
    12,393Property and equipment, net
    
    $
    25,578
    
    
    $
    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 $275,000 as of September 30, 2004. The
changes in the carrying amount of goodwill for the year ended December 31, 2003
and for the nine months ended September 30, 2004 are as follows (in thousands): United
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    Europe
    
    TotalBalance as of December 31, 2002
    
    $
    32,188
    
    
    $
    5,300
    
    
    $
    37,488Translation effect
    
    
    
    
    
    
    (820
    )
    
    
    (820
    )Balance as of December 31, 2003
    
    $
    32,188
    
    
    $
    4,480
    
    
    $
    36,668Translation effect
    
    
    
    
    
    
    56
    
    
    
    56Balance as of September 30, 2004
    
    $
    32,188
    
    
    $
    4,536
    
    
    $
    36,724
 (4)  Income Taxes The actual income tax rate of JCI differs from the expected tax rate,
computed by applying the U.S. federal corporate rate of 35% to loss before
income taxes for the three and nine months ended September 30, 2004 and 2003
principally as the result of (i) certain non-deductible expenses (ii) state
income tax, and (iii) valuation allowances against certain operating losses in
Europe and the Dominican Republic. (5)  Debt and Distribution to Shareholder On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes (the New Notes) due 2011 pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90 million senior credit agreement (the Senior Credit Agreement). The New
Notes represent the several obligations of JCI and Jafra Distribution in the
amount of $80 million and $120 million, respectively. The New Notes mature in
2011 and bear a fixed interest rate of 103⁄4% payable semi-annually. 22




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
required to fully and unconditionally guarantee the U.S. portion of New Notes
jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully
and unconditionally guarantee the Mexican portion of the New Notes jointly and
severally, on a senior subordinated basis. The New Notes are unsecured and are generally not redeemable for four
years from their issue date. Thereafter, the New Notes will be redeemable on a
pro rata basis at premiums declining to par in the sixth year. Prior to May 16,
2006, the Issuers at their option may concurrently redeem the New Notes in an
aggregate principal amount such that  at least 65% of the original aggregate principal
amount of the New Notes is outstanding, 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. In connection with
the Acquisition, holders of $200,000 principal amount of the New
Notes redeemed such Notes and as a result, $79.8 million principal
amount of New Notes was outstanding at September 30, 2004. In addition, in May 2003, the Issuers entered into the Senior Credit
Agreement, which provided for senior secured credit facilities in an aggregate
principal amount of up to $90 million, consisting of a $50 million senior
secured term loan facility and a $40 million senior secured revolving credit
facility. The Senior Credit Agreement was allocated 40% to JCI and 60% to
Jafra Distribution.
On May 23, 2003, with proceeds from the issuance of the New Notes and
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 then
existing credit agreement (the Old Credit Agreement) and terminated the Old
Credit Agreement. In connection with the redemption of the Old Notes and the
termination of the Old Credit Agreement, JCI wrote off approximately $2,128,000
of capitalized deferred financing fees. Total costs related to the recall of
the previous debt were $4,778,000 and were recorded as a loss on extinguishment
of debt in the accompanying consolidated statements of operations during the
nine months ended September 30, 2003. After the redemption of the Old Notes and repayment of all outstanding
amounts under the Old Credit Agreement, JCI distributed a total of $44,311,000
to its sole shareholder, Jafra S.A. In addition, JCI made a special payment to
the holder of its options and to certain members of management and non-employee
directors. Upon completion of the Recapitalization and the distribution, Jafra
S.A. contributed all of its assets and liabilities, including its investment in
JCI to the Parent. In May 2003, 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. 23




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) In connection with closing the Acquisition, the Issuers, the Company and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provided that for a period of
90 days following the closing of the Acquisition, the Acquisition would not
constitute an event of default under the Credit Agreement. On August 16, 2004,
prior to the expiration of the 90 day period, the Parent entered into a
Restated Senior Credit Agreement (the Restated Credit Agreement) which provides for a
revolving credit facility of up to an aggregate of $60 million at any one time
outstanding, which can be increased by the Company to $90 million under certain
circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow
up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit
Agreement. On August 16, 2004, JCI
borrowed $16,750,000 of the loans. Borrowings under the Restated Credit
Agreement bear interest at an annual rate of Libor plus 2.625%. As of
September 30, 2004, the applicable interest rate was 4.3%, subject to periodic
adjustment based on certain levels of financial performance. Borrowings under
the Restated Credit Agreement are secured by substantially all of the assets of
JCI and Jafra Distribution. JCI
also entered into a Loan Contract (the Loan Contract) in
August, 2004 to borrow up to
$20,000,000 from Vorwerk at an annual interest rate of Libor plus
2.625%. The
Loan Contract will expire on December 20, 2004. On August 12, 2004, JCI
borrowed the full amount under the Loan Contract. With the borrowings from the Restated Credit Agreement and the Loan
Contract, JCI paid in full all existing amounts under the Senior Credit
Agreement. In connection with the full repayment of the Senior Credit
Agreement and the purchase of $200,000 of the outstanding New Notes, JCI wrote
off approximately $1,905,000 of capitalized deferred financing fees and
recorded the write off as loss on extinguishment of debt on the accompanying consolidated
statements of operations during the three and nine months ended September 30,
2004. JCI capitalized approximately $309,000 of costs related to the Restated
Credit Agreement. As of September 30, 2004, approximately $3,268,000 of
unamortized deferred financing fees were reported as a noncurrent asset in the
accompanying consolidated balance sheets. These deferred financing fees are
being amortized on a basis that approximates the interest method over the term
of the New Notes and the Restated Credit Agreement. Both the Indenture and the Restated 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, Jafra Distribution and Jafra Cosmetics S.A. As of
September 30, 2004, the Parent and its subsidiaries were in compliance with all
covenants. The Restated 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 Restated 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 Restated Credit
Agreement) to block payments on the New Notes during the continuance of certain
defaults that would allow the holders of such senior indebtedness to accelerate
the relevant senior indebtedness. 24




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 Restated Credit Agreement contain similar
restrictions. The Restated 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 Restated Credit Agreement), accruing from July 1, 2004, plus up to $5.0 million so long
as the consolidated leverage ratio (as defined in the Restated Credit
Agreement) does not exceed 3 to 1 after giving effect to such payment and the
sum of unused borrowing availability under the Restated Credit Agreement plus
cash is not less than $5 million. (6)  Non-Cash Equity Contribution During the nine months ended September 30, 2004, the former primary
shareholder of Jafra S.A. paid certain members of management and non-employee
board of director members a special bonus of $4,922,000. As this amount was
paid directly to the recipients from the former primary shareholder, Jafra S.A.
recorded $4,922,000 as deemed contributed capital and as a non-cash transaction
expense representing compensation. Jafra S.A. then contributed $4,922,000 to
the Parent who then contributed the amount to JCI. This contribution was
partially offset by a cash distribution of $626,000 to the Parent. (7)  Transaction Related Expenses During the three and nine months ended September 30, 2004, JCI incurred
$139,000 and $26,911,000, respectively, of transaction fees related to the
Acquisition and to certain other transactions contemplated but
subsequently terminated.
Included in these amounts was $20,282,000 of compensation expense for the
buyback and cancellation of options to purchase shares of Jafra S.A. and
$4,125,000 of special bonus payments paid directly by the former shareholder.
During the three and nine months ended September 30, 2003, JCI recorded
$331,000 and $13,982,000, respectively, of transaction expenses related to the
Recapitalization and to other transactions contemplated but subsequently terminated. In
connection with the Recapitalization, the Board of Directors authorized CDRJ to
reprice all existing outstanding stock options. In order to compensate option
holders for any diminished value of the outstanding options, the Board of
Directors further authorized $9,445,000 in bonus payments to current option
holders during the nine months ended September 30, 2003. Additionally, JCI
authorized a special bonus of $2,365,000 to certain members of management and
to non-employee directors for contributions to completing the Recapitalization
of CDRJ. (8)  Restructuring and Asset Impairment Charges During the three and nine months ended September 30, 2004 JCI recorded a
total of $2,244,000 and $4,855,000, respectively, of restructuring and asset
impairment charges. Of these charges, approximately $65,000 and $2,676,000 was
recorded during the three and nine months ended September 30, 2004 and was
primarily related to the transfer of substantially all of its skin and body
care manufacturing operations to its facilities in Mexico. The transfer of
these operations was substantially complete during the second quarter of 2004.
Of these charges recorded during the nine months ended September 30, 2004,
approximately $423,000 was for the impairment of assets not transferred and the
remaining amount was primarily termination benefits. Additionally, during the
three and nine months ended September 30, 2004, JCI recorded $2,179,000 of
severance related charges related to the resignation of five members of management subsequent
to the Acquisition. A
rollforward of the activity of the restructuring accruals is summarized as
follows (in thousands): 25




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2004Opening balance
    
    $
    1,423
    
    
    $
    Additions
    
    
    2,244
    
    
    
    4,855Charges against reserves
    
    
    (616
    )
    
    
    (1,804
    )Ending balance
    
    $
    3,051
    
    
    $
    3,051
 JCI does not expect to incur any additional significant charges in
connection with the transfer of these manufacturing operations to Mexico or in
relation to the resignation of certain members of management. (9)  Comprehensive (Loss) Income Comprehensive (loss) income is summarized as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    $
    (2,101
    )
    
    $
    1,441
    
    
    $
    (15,796
    )
    
    $
    (5,558
    )Foreign currency translation adjustments
    
    
    467
    
    
    
    (94
    )
    
    
    305
    
    
    
    (134
    )Comprehensive (loss) income
    
    $
    (1,634
    )
    
    $
    1,347
    
    
    $
    (15,491
    )
    
    $
    (5,692
    )
 (10)  Related Party Transactions JCI distributes skin and body products to other affiliates of the Parent
(affiliates). Sales to affiliates were made at cost plus a markup ranging
from 0 to 11%. JCI purchased color and fragrance products, and in late 2004,
most skin and body care products from Jafra Mexico totaling $4,479,000 and
$10,425,000 for the three and nine months ended September 30, 2004,
respectively, and $3,031,000 and $8,657,000 for the three and nine months ended
September 30, 2003, respectively. In addition, JCI provides certain management services, such as legal,
accounting and treasury, management oversight, and other administrative
functions to affiliates, primarily in Mexico. 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. 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 $746,000 and $2,340,000 for the
three and nine months ended September 30, 2004, respectively, and $819,000 and
$2,445,000 for the three and nine months ended September 30, 2003,
respectively, and was offset against royalty income from affiliates in the
accompanying consolidated statements of operations. JCI owns the worldwide rights to its multi-level sales know-how (referred
to as the Jafra Way). The Jafra Way was initially developed in the United
States for lineage, training, and compensation of consultants. The royalty fees
charged by JCI to Jafra Cosmetics S.A. for the use of the Jafra Way was
$5,525,000 and $17,637,000 for the three and nine months ended September
30, 2004, respectively, and $4,539,000 and $15,083,000 for the three and nine months ended September 30, 2003,
respectively, and are based upon a percentage of Jafra Cosmetics S.A.s sales
to third parties. 26




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) JCI has granted loans to certain affiliates at annual interest rates
ranging from 3% to 5%. Such loans are due to be repaid five years from the date
of grant, with no prepayment penalty. Notes receivable from affiliates at
December 31, 2003 and September 30, 2004 consist primarily of loans JCI has
made to indirect subsidiaries of the Parent to fund certain of their operations
in South America. Net interest income from affiliates was $111,000 and
$344,000 for the three and nine months ended September 30, 2004, respectively,
and $161,000 and $443,000 for the three and nine months ended September 30,
2003, respectively, and was included in interest income on the accompanying
consolidated statements of operations. JCI reimbursed certain foreign affiliates for the expenses that they incur
in establishing a direct selling distribution system and customer base in new
markets. As the parent is intending to cease operations in South America,
during the third quarter of 2004, JCI reversed accruals for such subsidies
during 2004. (11)  Financial Reporting for Business Segments JCIs business is comprised of one industry segment, direct selling, with
worldwide operations, principally in the United States and Europe. JCI is
organized into geographical business units that each sell the full line of
Jafra cosmetics, skin care, body care, fragrances, and other products. JCI has
two reportable business segments: the United States, including the Dominican
Republic, and Europe. As of the beginning of 2004, JCI includes the results of
the Dominican Republic with the results of the United States as JCIs chief
operating decision makers evaluate the results of the Dominican Republic with
the results of the United States. All prior period results have been
reclassified to be consistent with the 2004 presentation. Business results for
the Thailand subsidiary are included in the following table under the caption
All Others. 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. 27




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) United States and
    
    
    
    
    
    
    
    
    
    Corporate,the Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedRepublic
    
    Europe (1)
    
    Others
    
    and Other
    
    TotalAs of and for the three
months ended September 30,
2004Net sales
    
    $
    23,077
    
    
    $
    7,167
    
    
    $
    
    
    
    $
    1,822
    
    
    $
    32,066Income  from operations
    
    
    3,872
    
    
    
    42
    
    
    
    
    
    
    
    669
    
    
    
    4,583Depreciation
    
    
    780
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    890Capital expenditures
    
    
    209
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    254Segment assets
    
    
    89,199
    
    
    
    17,483
    
    
    
    60
    
    
    
    40,234
    
    
    
    146,976Goodwill
    
    
    32,188
    
    
    
    4,536
    
    
    
    
    
    
    
    
    
    
    
    36,724For the three months ended
September 30, 2003Net sales
    
    $
    25,885
    
    
    $
    6,602
    
    
    $
    91
    
    
    $
    3,074
    
    
    $
    35,652Income (loss) from operations
    
    
    4,479
    
    
    
    (34
    )
    
    
    (68
    )
    
    
    985
    
    
    
    5,362Depreciation
    
    
    662
    
    
    
    115
    
    
    
    30
    
    
    
    
    
    
    
    807Capital expenditures
    
    
    1,138
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    1,249As of December 31, 2003Segment assets
    
    $
    92,420
    
    
    $
    18,003
    
    
    $
    63
    
    
    $
    35,768
    
    
    $
    146,254Goodwill
    
    
    32,188
    
    
    
    4,480
    
    
    
    
    
    
    
    
    
    
    
    36,668For the nine months ended
September 30, 2004Net sales
    
    $
    71,820
    
    
    $
    24,222
    
    
    $
    
    
    
    $
    7,234
    
    
    $
    103,276Income (loss) from operations
    
    
    8,116
    
    
    
    807
    
    
    
    
    
    
    
    (20,701
    )
    
    
    (11,778
    )Depreciation
    
    
    2,598
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    2,931Capital expenditures
    
    
    1,797
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    1,916For the nine months ended
September 30, 2003Net sales
    
    $
    76,701
    
    
    $
    22,671
    
    
    $
    262
    
    
    $
    11,207
    
    
    $
    110,841Income (loss) from operations
    
    
    11,536
    
    
    
    473
    
    
    
    (350
    )
    
    
    (7,537
    )
    
    
    4,122Depreciation
    
    
    2,138
    
    
    
    317
    
    
    
    67
    
    
    
    
    
    
    
    2,522Capital expenditures
    
    
    2,764
    
    
    
    305
    
    
    
    
    
    
    
    
    
    
    
    3,069
   (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
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Corporate expenses
    
    $
    (4,210
    )
    
    $
    (3,656
    )
    
    $
    (12,420
    )
    
    $
    (12,637
    )Transaction related expenses
    
    
    (139
    )
    
    
    (331
    )
    
    
    (26,911
    )
    
    
    (13,982
    )Transaction with affiliates
    
    
    7,432
    
    
    
    5,615
    
    
    
    25,035
    
    
    
    20,549Restructuring charges
    
    
    (2,244
    )
    
    
    
    
    
    
    (4,855
    )
    
    
    Unusual charges(1)
    
    
    (170
    )
    
    
    (643
    )
    
    
    (1,550
    )
    
    
    (1,467
    )Total corporate, unallocated and other
    
    $
    669
    
    
    $
    985
    
    
    $
    (20,701
    )
    
    $
    (7,537
    )
   (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. 28




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 BALANCE SHEETS(In thousands, except share amounts)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash
    
    $
    20
    
    
    $
    523Receivables
    
    
    321
    
    
    
    154Inventories
    
    
    30,401
    
    
    
    27,183Receivables from affiliates
    
    
    24,226
    
    
    
    17,136Prepaid income taxes
    
    
    5,124
    
    
    
    1,265Prepaid expenses and other current assets
    
    
    4,105
    
    
    
    9,237Total current assets
    
    
    64,197
    
    
    
    55,498Property and equipment, net
    
    
    1,856
    
    
    
    1,647Other assets:Deferred financing fees, net
    
    
    4,292
    
    
    
    7,334Investment in preferred shares of affiliated company
    
    
    124,048
    
    
    
    126,042Other
    
    
    2,679
    
    
    
    3,120Total
    
    $
    197,072
    
    
    $
    193,641LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    4,500Accounts payable
    
    
    13,343
    
    
    
    11,277Accrued liabilities
    
    
    5,091
    
    
    
    2,033Payables to affiliates
    
    
    
    
    
    
    2,202Deferred income taxes
    
    
    2,579
    
    
    
    Total current liabilities
    
    
    21,013
    
    
    
    20,012Long-term debt
    
    
    138,450
    
    
    
    144,000Total liabilities
    
    
    159,463
    
    
    
    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
    
    
    44,066
    
    
    
    35,767Accumulated other comprehensive loss
    
    
    (6,462
    )
    
    
    (6,143
    )Total stockholders equity
    
    
    37,609
    
    
    
    29,629Total
    
    $
    197,072
    
    
    $
    193,641
 See accompanying notes to financial statements 29




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF OPERATIONS(In thousands)(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales to affiliates
    
    $
    34,408
    
    
    $
    28,804
    
    
    $
    110,451
    
    
    $
    92,888Cost of sales
    
    
    21,424
    
    
    
    18,111
    
    
    
    73,107
    
    
    
    59,063Gross profit
    
    
    12,984
    
    
    
    10,693
    
    
    
    37,344
    
    
    
    33,825Selling, general and administrative expenses
    
    
    602
    
    
    
    547
    
    
    
    1,591
    
    
    
    2,304Management fee expense to affiliate
    
    
    744
    
    
    
    412
    
    
    
    3,113
    
    
    
    2,107Service fee expense to affiliate
    
    
    4,764
    
    
    
    3,989
    
    
    
    19,410
    
    
    
    7,694Income from operations
    
    
    6,874
    
    
    
    5,745
    
    
    
    13,230
    
    
    
    21,720Other expense:Exchange
gain (loss), net
    
    
    15,600
    
    
    
    (7,175
    )
    
    
    12,336
    
    
    
    (8,661
    )Interest expense
    
    
    (4,011
    )
    
    
    (4,258
    )
    
    
    (12,216
    )
    
    
    (5,998
    )Interest income
    
    
    
    
    
    
    27
    
    
    
    34
    
    
    
    1Loss on
extinguishment of debt
    
    
    (2,559
    )
    
    
    
    
    
    
    (2,559
    )
    
    
    Other expense
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (30
    )Other income
    
    
    29
    
    
    
    
    
    
    
    29
    
    
    
    Income (loss) before income taxes
    
    
    15,933
    
    
    
    (5,690
    )
    
    
    10,854
    
    
    
    7,032Income tax expense (benefit)
    
    
    2,555
    
    
    
    (3,571
    )
    
    
    2,555
    
    
    
    2,790Net income (loss)
    
    $
    13,378
    
    
    $
    (2,119
    )
    
    $
    8,299
    
    
    $
    4,242
 See accompanying notes to financial statements 30




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    8,299
    
    
    $
    4,242Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    497
    
    
    
    385Write off and amortization of deferred financing fees
    
    
    3,372
    
    
    
    131Unrealized foreign exchange and derivative loss
    
    
    1,989
    
    
    
    9,056Deferred income taxes
    
    
    2,594
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (170
    )
    
    
    (149
    )Inventories
    
    
    (3,670
    )
    
    
    (8,834
    )Prepaid expenses and other current assets
    
    
    (78
    )
    
    
    223Intercompany receivables and payables
    
    
    (9,126
    )
    
    
    (4,723
    )Other assets
    
    
    51
    
    
    
    15Accounts payable and accrued liabilities and value added taxes
    
    
    10,460
    
    
    
    263Income taxes payable
    
    
    (3,902
    )
    
    
    (758
    )Net cash
provided by (used in) operating activities
    
    
    10,316
    
    
    
    (149
    )Cash flows from investing activities:Purchase of preferred shares of affiliate
    
    
    
    
    
    
    (136,420
    )Purchases of property and equipment
    
    
    (391
    )
    
    
    (66
    )Net cash used in investing activities
    
    
    (391
    )
    
    
    (136,486
    )Cash flows from financing activities:Proceeds from issuance of subordinated debt due 2011
    
    
    
    
    
    
    120,000Proceeds from term loan
    
    
    
    
    
    
    30,000Repurchase of subordinated debt
    
    
    (300
    )
    
    
    Payment of debt guarantee fee to affiliate
    
    
    
    
    
    
    (4,000
    )Borrowings under revolving credit facility
    
    
    56,750
    
    
    
    Repayments under revolving credit facility
    
    
    (38,000
    )
    
    
    Deferred financing costs
    
    
    (428
    )
    
    
    (8,628
    )Repayments under term loan facility
    
    
    (28,500
    )
    
    
    (750
    )Net cash (used in) provided by financing activities
    
    
    (10,478
    )
    
    
    136,622Effect of exchange rate changes on cash
    
    
    50
    
    
    
    (16
    )Net decrease in cash
    
    
    (503
    )
    
    
    (29
    )Cash at beginning of period
    
    
    523
    
    
    
    38Cash at end of period
    
    $
    20
    
    
    $
    9
 See accompanying notes to financial statements 31




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




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS  (continued)
(Unaudited) considered to be the primary beneficiary of that entity. The FASB amended FIN
46 in December of 2003. The revised provisions of FIN 46 were effective for
Jafra Distribution in the first quarter of 2004. The adoption of FIN 46 did
not have an impact on Jafra Distributions financial position or results of
operations as Jafra Distribution had no variable interest entities. (2) Inventories Inventories consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    9,858
    
    
    $
    5,578Finished goods
    
    
    20,543
    
    
    
    21,605Total inventories
    
    $
    30,401
    
    
    $
    27,183
 (3) Machinery and Equipment Machinery and equipment consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Machinery, equipment and other
    
    $
    2,256
    
    
    $
    1,898Less accumulated depreciation
    
    
    400
    
    
    
    251Machinery and equipment, net
    
    $
    1,856
    
    
    $
    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 $12,372,000,
Jafra Distribution carries the investment on its balance sheet at cost. (5) Income Taxes During the three and nine months ended September 30, 2004, Jafra
Distribution released its valuation allowances against certain pretax losses as
Jafra Distribution is reporting pretax income for the three and nine months
ended September 30, 2004. (6) Debt On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes due 2011, (the New Notes), pursuant to
an Indenture dated May 20, 2003 (the Indenture) and entered into a $90
million senior credit agreement (the Senior Credit Agreement). The New Notes
represent the several obligations of Jafra Distribution and JCI in the amount
of $120 million and $80 million, respectively. The New Notes mature in 2011 and
bear a fixed interest rate of 103⁄4% payable semi-annually. Jafra Distribution is an indirect wholly-owned subsidiary of the Parent
and JCI is a direct wholly-owned subsidiary of the Parent. The Parent has fully
and unconditionally guaranteed the obligations under the New Notes 33




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) 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. 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 such that at least 65% of the original aggregate principal
amount of the New Notes is outstanding, 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. In connection with
the Acquisition, holders of $300,000 principal amount of the New
Notes redeemed such notes and as a result, $119.7 million principal
amount of New Notes was outstanding at September 30, 2004. In addition, in May 2003, the Issuers entered into the Senior Credit
Agreement, which provided for senior secured credit facilities in an aggregate
principal amount of up to $90 million, consisting of a $50 million senior
secured term loan facility and a $40 million senior secured revolving credit
facility. The Senior Credit Agreement was allocated 40% to JCI and 60% to
Jafra Distribution. 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 September 30, 2004, approximately $2,679,000 was
classified as a non-current asset and the remaining unamortized amount was
classified as a current asset in the accompanying balance sheets. In connection with closing the Acquisition, the Issuers, the Company and
the requisite lenders under the Issuers Senior Credit Agreement entered into
an amendment to the Senior Credit Agreement which provided that for a period of
90 days following the closing of the Acquisition, the Acquisition would not
constitute an event of default under the Credit Agreement. On August 16, 2004,
prior to the expiration of the 90 day period, the Company and the Issuers
entered into a Restated Senior Credit Agreement (the Restated Credit Agreement) which
provides for a revolving credit facility of up to an aggregate of $60 million
at any one time outstanding, which can be increased by the Company to $90
million under certain circumstances. The Restated Credit Agreement matures on August 16,
2008. JCI can borrow up to 100% and Jafra Distribution can borrow up
to 60% of the total Restated Credit Agreement. On August 16, 2004, Jafra Distribution borrowed $26,750,000 of the loans.
Borrowings under the Restated Credit Agreement bear interest at an annual rate
of Libor plus 2.625%. As of September 30, 2004, the applicable interest rate
was 4.3%, subject to periodic adjustment based on certain levels of financial
performance. Borrowings under the Restated Credit Agreement are secured by
substantially all of the assets of JCI and Jafra Distribution. With the borrowings from the Restated Credit Agreement, Jafra Distribution
paid in full all existing amounts under the Senior Credit Agreement. In
connection with the full repayment of the Senior Credit Agreement and the
purchase of $300,000 of the outstanding New Notes, Jafra Distribution wrote off
approximately $2,559,000 of capitalized deferred financing fees and recorded
the write off as loss on extinguishment of debt on the accompanying
consolidated statements of operations during the three and nine months ended
September 30, 2004. Jafra Distribution capitalized approximately $428,000 of costs related to
the Restated Credit Agreement. As of September 30, 2004, approximately
$4,666,000 of unamortized deferred financing fees were reported as a 34




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) noncurrent
asset in the accompanying consolidated balance sheets (excluding translation
effects). These deferred
financing fees are being amortized on a basis that approximates the
interest method over the term of the New Notes and the Restated Credit
Agreement. Both the Indenture and the Restated Credit Agreement contain certain
covenants that limit Jafra Distribution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 September 30, 2004, the Parent and its subsidiaries
were in compliance with all covenants. The Restated 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 Restated 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 Restated Credit
Agreement) to block payments on the New 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 Restated Credit Agreement contain similar
restrictions. The Restated 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 Restated Credit Agreement), accruing from July 1, 2004, plus up to $5.0 million so long
as the consolidated leverage ratio (as defined in the Restated Credit
Agreement) does not exceed 3 to 1 after giving effect to such payment and the
sum of unused borrowing availability under the Restated Credit Agreement plus
cash is not less than $5 million. (7) Comprehensive Income (Loss) Comprehensive income (loss) is summarized as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    13,378
    
    
    $
    (2,119
    )
    
    $
    8,299
    
    
    $
    4,242Foreign currency translation adjustments
    
    
    354
    
    
    
    (1,932
    )
    
    
    (319
    )
    
    
    (1,827
    )Comprehensive income (loss)
    
    $
    13,732
    
    
    $
    (4,051
    )
    
    $
    7,980
    
    
    $
    2,415
 35




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DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) (8) Related Party Transactions Jafra Distribution sells color cosmetics and fragrance products, and in
2004 certain skin and body care products, to other affiliates of the Parent
(affiliates). Sales to affiliates, primarily in the United States and
Germany, were $4,522,000 and $10,467.000 for the three and nine months ended
September 30, 2004, respectively, and $3,068,000 and $8,738,000 for the three
and nine months ended September 30, 2003, respectively. These sales were made
at cost plus a markup ranging from 0 to 11%. Jafra Distribution purchased skin
and body care products from an affiliate. Purchases were $1,767,000 and
$7,031,000 for the three and nine months ended September 30, 2004,
respectively and $3,018,000 and $11,445,000 for the three and nine months ended
September 30, 2003, respectively. Jafra Distribution sells products purchased
from an affiliate and other purchased inventory to its Mexico affiliate, Jafra
Cosmetics S.A., at a markup. Sales to Jafra Cosmetics S.A. were $29,886,000
and $99,984,000 for the three and nine months ended September 30, 2004,
respectively, and $25,736,000 and $84,150,000 for the three and nine months
ended September 30, 2003, respectively. Jafra Distribution receives certain administrative and other services from
Jafra Cosmetics S.A. The cost of these services is included in service fee
expense to affiliate in the accompanying statements of operations. Jafra
Distribution believes the amounts are reasonable and approximate the cost of
the actual services received. In addition, Jafra Distribution is provided with certain management
services, such as legal, accounting and treasury, management oversight, and
other administrative functions from affiliates, including JCI. The cost of
these services is included in management fee expense to affiliates in the
accompanying statements of operations. Jafra Distribution is charged a portion
of these management expenses based upon charges identified to Jafra
Distribution and a formula using the percentage of revenues of the subsidiaries
to the total consolidated revenues of the Parent. Jafra Distribution believes
the amounts and methods of allocation are reasonable and approximate the cost
of the actual services received. (9) Foreign Currency Forward Contracts Jafra Distribution is exposed to currency risk related to its U.S.
dollar-denominated debt and related principal and interest payments. As part of
its overall strategy to reduce the risk of adverse potential exchange rate
fluctuations, Jafra Distribution enters into foreign currency forward contracts
(forward contracts) with Jafra Cosmetics S.A. Pursuant to SFAS No. 133, the
contracts are remeasured based on fair value and the gains and losses are
included as a component of exchange loss on the accompanying statements of
operations. During the three and nine months ended September 30, 2004, Jafra
Distribution recognized gains of $18,167,000 and $14,892,000 related to the
forward contracts. As of September 30, 2004, there were no outstanding forward
contracts between Jafra Distribution and Jafra Cosmetics S.A. The following
provides information about the details of Jafra Distributions forward contract
as of December 31, 2003 (in thousands): Forward Position
    
    
    
    
    
    WeightedIn Mexican
    
    Maturity
    
    Average
    
    Fair Value inForeign Currency
    
    Pesos(1)
    
    Date
    
    Contract Rate
    
    U.S. Dollars(1)Buy U.S. dollar/sell Mexican peso
    
    
    1,677,924
    
    
    
    3/04/04
    
    
    
    10.97
    
    
    $
    3,213
   (1)
    
    The fair value of the forward position presented above, an unrealized
gain of $3,213,000 at December 31, 2003, represents the carrying value of
the forward contract and has been recorded in receivables from affiliates
in the accompanying balance sheets. 36




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,939
    
    
    $
    5,833Receivables, net
    
    
    35,166
    
    
    
    34,065Receivables from affiliates
    
    
    2,862
    
    
    
    2,880Current deferred income taxes
    
    
    2,608
    
    
    
    Prepaid expenses and other current assets
    
    
    2,172
    
    
    
    497Total current assets
    
    
    44,747
    
    
    
    43,275Property and equipment, net
    
    
    33,533
    
    
    
    33,399Other assets:Goodwill
    
    
    26,010
    
    
    
    26,428Trademarks
    
    
    40,461
    
    
    
    41,111Other
    
    
    1,698
    
    
    
    4,083Total
    
    $
    146,449
    
    
    $
    148,296LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    2,903
    
    
    
    4,073Accrued liabilities
    
    
    25,057
    
    
    
    31,930Income taxes payable
    
    
    5,317
    
    
    
    6,093Payables to affiliates
    
    
    37,608
    
    
    
    24,611Deferred income taxes
    
    
    
    
    
    
    2,941Other current liabilities
    
    
    391
    
    
    
    458Total current liabilities
    
    
    71,276
    
    
    
    70,106Deferred income taxes
    
    
    11,673
    
    
    
    12,651Other long-term liabilities
    
    
    3,159
    
    
    
    3,209Total liabilities
    
    
    86,108
    
    
    
    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
    
    
    17,238
    
    
    
    17,687Accumulated other comprehensive loss
    
    
    (11,231
    )
    
    
    (9,691
    )Total stockholders equity
    
    
    60,341
    
    
    
    62,330Total
    
    $
    146,449
    
    
    $
    148,296
 See accompanying notes to
consolidated financial statements 37




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    63,265
    
    
    $
    51,844
    
    
    $
    201,694
    
    
    $
    172,057Cost of sales
    
    
    25,082
    
    
    
    20,990
    
    
    
    79,746
    
    
    
    72,502Gross profit
    
    
    38,183
    
    
    
    30,854
    
    
    
    121,948
    
    
    
    99,555Selling, general and administrative expenses
    
    
    32,914
    
    
    
    27,821
    
    
    
    102,567
    
    
    
    86,347Management fee expense to affiliates
    
    
    1,307
    
    
    
    1,486
    
    
    
    6,621
    
    
    
    5,806Service fee income from affiliate
    
    
    (4,764
    )
    
    
    (3,989
    )
    
    
    (19,410
    )
    
    
    (7,694
    )Restructuring charges
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    Royalty expense to affiliates, net
    
    
    4,779
    
    
    
    3,720
    
    
    
    15,297
    
    
    
    12,638Income from operations
    
    
    3,947
    
    
    
    1,816
    
    
    
    16,711
    
    
    
    2,458Other income (expense):Exchange loss, net
    
    
    (14,791
    )
    
    
    (139
    )
    
    
    (15,303
    )
    
    
    (43
    )Interest expense
    
    
    (27
    )
    
    
    (37
    )
    
    
    (173
    )
    
    
    (2,079
    )Interest income
    
    
    20
    
    
    
    44
    
    
    
    97
    
    
    
    240Loss on
extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,842
    )Other expense
    
    
    (69
    )
    
    
    (88
    )
    
    
    (241
    )
    
    
    (205
    )(Loss) income before income taxes
    
    
    (10,920
    )
    
    
    1,596
    
    
    
    1,091
    
    
    
    (1,471
    )Income tax (benefit) expense
    
    
    (2,298
    )
    
    
    1,668
    
    
    
    1,540
    
    
    
    (877
    )Net loss
    
    $
    (8,622
    )
    
    $
    (72
    )
    
    $
    (449
    )
    
    $
    (594
    )
 See accompanying notes to
consolidated financial statements 38




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (449
    )
    
    $
    (594
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,338
    
    
    
    1,303Write off and amortization of deferred financing fees
    
    
    
    
    
    
    435Provision for uncollectible accounts receivable
    
    
    5,515
    
    
    
    6,308Unrealized foreign exchange and derivative loss
    
    
    888
    
    
    
    120Deferred realized derivative loss
    
    
    
    
    
    
    646Deferred
income taxes
    
    
    (6,318
    )
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (7,493
    )
    
    
    (962
    )Prepaid expenses and other current assets
    
    
    75
    
    
    
    (117
    )Intercompany receivables and payables
    
    
    14,750
    
    
    
    1,399Other assets
    
    
    (340
    )
    
    
    18Accounts payable and accrued liabilities and value added taxes
    
    
    (9,815
    )
    
    
    (5,106
    )Income taxes payable/prepaid
    
    
    (683
    )
    
    
    (3,700
    )Net cash used in operating activities
    
    
    (2,532
    )
    
    
    (250
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,633
    )
    
    
    (1,748
    )Net cash used in investing activities
    
    
    (1,633
    )
    
    
    (1,748
    )Cash flows from financing activities:Repurchase of subordinated debt due 2008
    
    
    
    
    
    
    (30,072
    )Repayments under term loan facility
    
    
    
    
    
    
    (2,375
    )Receipt of guarantee fee from affiliate
    
    
    
    
    
    
    4,000Repayments under bank debt
    
    
    
    
    
    
    (828
    )Sale of Series C preferred stock
    
    
    
    
    
    
    20,150Net cash used in financing activities
    
    
    
    
    
    
    (9,125
    )Effect of exchange rate changes on cash
    
    
    271
    
    
    
    26Net decrease in cash and cash equivalents
    
    
    (3,894
    )
    
    
    (11,097
    )Cash and cash equivalents at beginning of period
    
    
    5,833
    
    
    
    13,356Cash and cash equivalents at end of period
    
    $
    1,939
    
    
    $
    2,259
 See accompanying notes to
consolidated financial statements 39




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (1) Basis of Presentation Jafra Cosmetics International, S.A. de C.V., a sociedad anonima de capital
variable, organized under the laws of the United Mexican States, is owned by
five indirect wholly-owned subsidiaries of Jafra Worldwide Holdings (Lux),
S.àr.l., a Luxembourg société à responsabilité limitée(the Parent). The
Parent is the wholly-owned subsidiary of Jafra S.A. (formerly known as CDRJ
North Atlantic (Lux) S.àr.l.), a Luxembourg société
anonyme(Jafra S.A.).
Jafra S.A. was formerly a wholly-owned subsidiary of CDRJ Investments (Lux)
S.A., a Luxembourg société anonyme(CDRJ). A minority interest of Jafra
Cosmetics International S.A. de C.V. is owned by Distribuidora Comercial Jafra
S.A. de C.V. (Jafra Distribution). On
May 27, 2004, Vorwerk & Co. eins GmbH acquired substantially all of the issued and
outstanding capital stock of Jafra S.A. (the Acquisition). As a result of
the Acquisition, 100% of the voting securities of the Parent are held
indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned
subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal,
Germany. The purchase transaction has not been pushed down to Jafra Cosmetics
S.A. due to the outstanding registered debt. The accompanying unaudited interim consolidated financial statements as of
September 30, 2004 and for the three and nine months ended September 30, 2004
and 2003 reflect the operations of Jafra Cosmetics International S.A. de C.V.
and its subsidiaries (Jafra Cosmetics S.A.), excluding the carved-out
distribution operations of Distribuidora Venus, S.A. de C.V. (Venus) and have
been prepared in accordance with Article 10 of the Securities and Exchange
Commissions Regulation S-X. In the opinion of management, the accompanying
unaudited interim consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly Jafra
Cosmetics S.A.s consolidated financial statements as of September 30, 2004 and
for the interim periods presented. All significant intercompany accounts and
transactions between entities comprising Jafra Cosmetics S.A. have been
eliminated in consolidation. Jafra Distribution was organized under the laws of the United Mexican
States in February 2003 to conduct the Parents distribution business in
Mexico. The distribution business was previously conducted by Venus, a
wholly-owned subsidiary of Jafra Cosmetics S.A. Jafra Distribution is owned by
five indirect wholly-owned subsidiaries of the Parent. On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (JCI)
and Jafra Distribution (together with JCI, the Issuers) completed a
recapitalization of their operations by entering into $90 million of new senior
credit facilities, consisting of a $50 million senior secured term loan
facility and a $40 million senior secured revolving credit facility and issuing
$200 million of 103⁄4% Senior Subordinated Notes due 2011 (the New Notes
and such transactions collectively, the Recapitalization). The proceeds from
the Recapitalization were used to redeem the 113⁄4% Senior Subordinated
Notes due 2008 (the Old Notes), of JCI and Jafra Cosmetics S.A. to repay all
amounts outstanding under the existing credit facilities of JCI and Jafra
Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and
Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be
liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ
made liquidating distributions of such proceeds to its stockholders. In
connection with the liquidation of CDRJ, Jafra S.A. transferred all of its
assets and liabilities, including its direct and indirect holdings of JCI,
Jafra Cosmetics S.A. and Jafra Distribution to the Parent in exchange for
additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra
Distribution are collectively referred to as Jafra Mexico. The New Notes represent several obligations of Jafra Distribution and JCI.
Jafra Cosmetics S.A. has fully and unconditionally guaranteed the obligations
of Jafra Distribution under the New Notes. As Jafra Cosmetics S.A. is not a
consolidated subsidiary of Jafra Distribution, the Parent is filing these
separate financial statements of Jafra Cosmetics S.A. in its Report on Form
10-Q. The functional currency for Jafra Cosmetics S.A. is the Mexican peso. For
presentation purposes, assets and liabilities are translated into U.S. dollars
at current exchange rates, and related revenues and expenses are translated at
average exchange rates in effect during the period. Resulting translation
adjustments are recorded as a component of other comprehensive loss. 40




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)(Unaudited) New Accounting Pronouncements.In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated
Financial Statements. FIN 46 requires the consolidation of variable interest
entities by the party considered to be the primary beneficiary of that entity.
The FASB amended FIN 46 in December of 2003. The revised
provisions of FIN 46
were effective for Jafra Cosmetics S.A. in the first quarter of 2004. The
adoption of FIN 46 did not have an impact on Jafra Cosmetics S.A.s financial
position or results of operations as Jafra Cosmetics S.A. had no variable
interest entities. (2) Property and Equipment Property and equipment consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Land
    
    $
    9,348
    
    
    $
    9,498Buildings
    
    
    9,395
    
    
    
    9,545Machinery, equipment and other
    
    
    23,211
    
    
    
    21,30441,954
    
    
    
    40,347Less accumulated depreciation
    
    
    8,421
    
    
    
    6,948Property and equipment, net
    
    $
    33,533
    
    
    $
    33,399
 (3) Goodwill and Other Intangible Assets. Jafra Cosmetics S.A.s intangible assets consist of trademarks and
goodwill. Jafra Cosmetics S.A. has determined trademarks, principally the
Jafra name resulting from the acquisition of the Jafra business from Gillette,
to have an indefinite life. The carrying value of trademarks was $40,461,000
and $41,111,000 as of September 30, 2004 and December 31, 2003, respectively.
Except for translation adjustments, there were no changes in the carrying
amount of goodwill during the three and nine months ended September 30, 2004
and the year ended December 31, 2003. Goodwill was $26,010,000 and $26,428,000
at September 30, 2004 and December 31, 2003. (4) Income Taxes The actual income tax rate of Jafra Cosmetics S.A. for the three and nine
months ended September 30, 2004 from the expected tax rate, computed by
applying the Mexico federal corporate rate of 33% to income before income taxes
due to certain permanent differences, including inflation and the effect of
temporary differences, including prepayment of inventory, on taxable income. (5) Restructuring Charges Jafra Cosmetics S.A. recorded and paid out $162,000 of restructuring
charges during the first nine months of 2004 related to the Parents transfer
of substantially all of its skin and body care manufacturing operations to its
facilities in Mexico. The transfer of these operations was substantially
complete during the second quarter of 2004. These restructuring expenses
related primarily to termination benefits. Jafra Cosmetics S.A. does not
expect to incur any additional restructuring costs in connection with this
transfer. (6) Debt On May 20, 2003, the Issuers issued $200 million aggregate principal
amount of 103⁄4% Subordinated Notes due 2011 pursuant to an Indenture dated
May 20, 2003 (the Indenture) and entered into a $90 million senior credit
agreement (the Senior Credit Agreement). The New Notes represent the several
obligations of JCI and Jafra Distribution in the amount of $80 million and $120
million, respectively. The New Notes mature in 2011 and bear a fixed interest
rate of 103⁄4% payable semi-annually. 41




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)(Unaudited) JCI is a direct wholly-owned subsidiary of the Parent and Jafra
Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent
has fully and unconditionally guaranteed the obligations under the New Notes on
a senior subordinated basis on the terms provided in the Indenture governing
the New Notes. The Issuers have fully and unconditionally guaranteed of the
other the obligations under the New Notes on a senior subordinated basis,
subject to a 30-day standstill period prior to enforcement of such guarantees.
Each existing and subsequently acquired or organized U.S. subsidiary of JCI is
also required to fully and unconditionally guarantee the New Notes jointly and
severally, on a senior subordinated basis. Each existing and subsequently
acquired or organized Mexican subsidiary of Jafra Distribution is also required
to fully and unconditionally guarantee the Mexican portion of the New Notes
jointly and severally, on a senior subordinated basis. On May 20, 2003, Jafra Cosmetics S.A. received $4,000,000 from Jafra
Distribution to fully and unconditionally guarantee the obligations of Jafra
Distribution under the New Notes on a senior subordinated basis and under the
Senior Credit Agreement. Each existing and subsequently acquired or organized
subsidiary of Jafra Cosmetics S.A. is also required to fully and
unconditionally guarantee the Mexican portion of the New Notes jointly and
severally, on a senior subordinated basis. The guarantee fee is being amortized
into income over an eight year period, the term of the New Notes. At September
30, 2004, approximately $2,679,000 was classified as a non-current liability
and the remaining unamortized amount was classified as a current liability in
the accompanying consolidated balance sheets. On May 23, 2003, with the proceeds from the guarantee fee paid by Jafra
Distribution, an equity contribution by Jafra Distribution and available cash,
Jafra Cosmetics S.A. redeemed its Old Notes in the aggregate principal amount
of $30,072,000 at a premium of approximately $1,767,000. Additionally, Jafra
Cosmetics S.A. repaid $2,375,000 under the Old Credit Agreement and terminated
the Old Credit Agreement. In connection with the redemption of the Old Notes
and the termination of the Old Credit Agreement, Jafra Cosmetics S.A. wrote off
approximately $75,000 of capitalized deferred financing fees. Total costs
related to the recall of the previous debt was $1,842,000 and was recorded as
loss on extinguishment of debt in the accompanying consolidated statements of
operations during the nine months ended September 30, 2003. (7) Comprehensive Loss Comprehensive loss is summarized as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (8,622
    )
    
    $
    (72
    )
    
    $
    (449
    )
    
    $
    (594
    )Unrealized and deferred realized (loss) gain on derivatives
    
    
    (130
    )
    
    
    146
    
    
    
    (329
    )
    
    
    303Reclassification
of deferred realized loss (gain) toexchange loss
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (549
    )Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654Tax benefit on unrealized and deferred realized (loss)
gain on derivatives
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Foreign currency translation adjustments
    
    
    656
    
    
    
    (3,148
    )
    
    
    (1,211
    )
    
    
    (3,893
    )Comprehensive loss
    
    $
    (8,096
    )
    
    $
    (3,122
    )
    
    $
    (1,989
    )
    
    $
    (4,128
    )
 (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 $11,549,000 and
$36,506,000 for the three and nine months ended September 30, 2004,
respectively, and $9,421,000 and $32,287,000 for the three and nine months
ended September 30, 2003, respectively. 42




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)(Unaudited) 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 $746,000 and $2,340,000 for the three and nine
months ended September 30, 2004, respectively, and $819,000 and $2,445,000 for
the three and nine months ended September 30, 2003, respectively, and is offset
against royalty expense to affiliates in the accompanying consolidated
statements of operations. JCI owns the worldwide rights to its multi-level sales know-how (referred
to as the Jafra Way). The Jafra Way was initially developed in the United
States for lineage, training, and compensation of consultants. The royalty fees
charged by JCI to Jafra Cosmetics S.A. for the use of the Jafra Way were
$5,525,000,000 and $17,637,000 for the three and nine months ended September
30, 2004, respectively, and $4,539,000 and $15,083,000 for the three and nine
months ended September 30, 2003, respectively, and are based upon a percentage
of Jafra Cosmetics S.A.s third party sales. (9) Foreign Currency Forward and Option Contracts Jafra Cosmetics S.A. is exposed to currency risk relating to its
forecasted U.S. dollar-denominated expenditures. As part of the Parents
overall strategy to reduce the risk of potential adverse exchange rate
fluctuations in Mexico, Jafra Cosmetics S.A. entered into foreign currency
option contracts (option contracts or options). Jafra Cosmetics S.A.
places option contracts based on its rolling forecasted cash outflows and
hedges transactions included in the forecast on the date the option contract is
initiated. As a matter of policy, Jafra Cosmetics S.A. does not hold or issue
forward contracts or option contracts for trading or speculative purposes nor
does it enter into contracts or agreements containing embedded derivative
features. Jafra Cosmetics S.A. currently designates certain of its option contracts
as cash flow hedges of forecasted U.S. dollar-denominated inventory purchases,
forecasted U.S. dollar-denominated intercompany charges from JCI, forecasted
management fee charges from JCI, and U.S. dollar-denominated interest payments
made by Jafra Cosmetics S.A. or Jafra Distribution. For all qualifying and
highly effective cash flow hedges, the changes in the fair value of the
derivative are deferred as a component of other comprehensive loss. Such
amounts will be reclassified from other comprehensive loss into net income
(loss) when the underlying hedged exposure is recognized in income. For U.S.
dollar-denominated inventory purchases, this will occur upon sale to an outside
party of the related inventory. For intercompany charges and interest, this
will occur at the date such charges are paid. During the three and nine months ended September 30, 2004, Jafra Cosmetics
S.A. recognized $496,000 and $529,000 of losses, respectively, on option
contracts and during the nine months ended September 30, 2003, Jafra Cosmetics
S.A. recognized $627,000 of gains on option contracts as a component of
exchange loss, net on the accompanying consolidated statements of operations. 43




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIESNOTES 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
nine months ended September 30, 2004, Jafra Cosmetics S.A. deferred as a
component of other comprehensive loss $329,000 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 $51,000 deferred as a
component of other comprehensive loss at September 30, 2004 will be recognized
into net income (loss) within the next sixteen months. The fair value of the option contracts was $418,000 at September 30, 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 and nine months ended September 30, 2004 and 2003 the
ineffectiveness generated by Jafra Cosmetics S.A.s option contracts designated
as hedges was insignificant. Certain hedged forecasted transactions do not
appear probable of occurring due to timing differences between the original and
current forecasts, and accordingly during the three and nine months ended
September 30, 2004 and 2003, $0 and $230,000, respectively, of gains, were
reclassified into earnings. The outstanding foreign currency option contracts had a notional value
denominated in Mexican pesos of 657,000,000 and 831,000,000 in put and call
positions at September 30, 2004 and December 31, 2003, respectively, and mature
at various dates through January 31, 2006. 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 loss on the accompanying consolidated
statements of operations. During the three and nine months ended September 30,
2004, Jafra Cosmetics S.A. recognized losses of $18,167,000 and $14,892,000
related to the forward contracts. As of September 30, 2004, there were no
outstanding forward contracts between Jafra Distribution and Jafra Cosmetics
S.A. The following provides information about the details of Jafra Cosmetics
S.A.s forward contract as of December 31, 2003 (in thousands): Forward Position
    
    
    
    
    
    WeightedIn Mexican
    
    Maturity
    
    Average
    
    Fair Value inForeign Currency
    
    Pesos(1)
    
    Date
    
    Contract Rate
    
    U.S. Dollars(1)Sell Mexican peso/buy U.S. dollar
    
    
    1,677,924
    
    
    
    3/04/04
    
    
    
    10.97
    
    
    $
    (3,213
    )
   (1)
    
    The fair value of the forward position presented above, an unrealized
loss of $3,213,000 at December 31, 2003, represents the carrying value of
the forward contract and has been recorded in payables to affiliates in
the accompanying consolidated balance sheets. 44




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion of the consolidated results of operations,
financial condition and liquidity of Jafra Worldwide Holdings (Lux)
S.àr.l., a Luxembourg société à responsabilité limitée(the Parent or the
Company), and its subsidiaries should be read in conjunction with the
accompanying unaudited interim consolidated financial statements and notes
thereto and with the audited consolidated financial statements as of and for
the year ended December 31, 2003 included in the Annual Report on Form 10-K.
The results of operations for the three and nine months ended September 30,
2004 are not necessarily indicative of results that may be expected for future
periods. On May 27, 2004 Vorwerk & Co. eins GmbH
(Vorwerk) acquired substantially all of the
issued and outstanding common stock of Jafra S.A. (formerly known as CDRJ North
Atlantic (Lux) S.àr.l.), which is the Companys immediate
holding company, from
its shareholders. The purchase transaction by Vorwerk has not been pushed down
to the Company due to the outstanding registered debt. Foreign Operations Net sales outside of the United States constituted approximately 76% and
72% of the Companys total net sales for the nine months ended September 30,
2004 and 2003, respectively. In addition, as of September 30, 2004, non-U.S.
subsidiaries comprised approximately 70% of the Companys consolidated total
assets. Accordingly, the Company has experienced and continues to be exposed
to foreign exchange risk. The Company has implemented a hedging program to
protect against potential devaluation of the Mexican peso. The Companys subsidiaries in Mexico generated approximately 67% and 62%
of the Companys net sales for the nine months ended September 30, 2004 and
2003, respectively, substantially all of which were denominated in Mexican
pesos. During the first nine months of 2004 and in 2003, the Mexican peso has
devalued compared to the U.S. dollar. During the first nine months of 2004,
the remeasurement of U.S. dollar-denominated debt resulted in an exchange loss
of $2.1 million, most of which was unrealized. Jafra Distribution had $138.5
million of outstanding U.S. dollar denominated debt at September 30, 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
in Brazil; and its largest European operation is in Germany. During the nine
months ended September 30, 2004, the Brazilian real revalued 1.1% and the euro
devalued 1.1%. The Company does not currently have a hedging program to
protect against any further devaluation of the real or the euro. A further
devaluation of either currency could have a negative impact on the Companys
results. Subsequent to the end of the third quarter, the Company ceased direct
selling operations at its Brazil subsidiary. The Company entered into a
distributorship agreement with a third party to sell Jafra products in Brazil
and has begun shut down procedures at Jafra Brazil. As a group doing more than 76% of its business in international markets
during the first nine months of 2004, the Company is subject to foreign taxes
and intercompany pricing laws, including those relating to the flow of funds
between its subsidiaries pursuant to purchase agreements,
licensing agreements or other arrangements. Regulations in the United States,
Mexico and in other foreign markets may result in monitoring of the Companys corporate
structure and how it effects intercompany fund transfers. Information Concerning Forward-Looking Statements Certain of the statements contained in this report are forward-looking
statements made based on managements or the Companys expectations or beliefs
concerning future developments and their potential effects upon the Company.
There can be no assurance that future developments will be in accordance with
managements 45




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expectations or that the effect of future developments on the Company will
be those anticipated by management. The factors described in the Companys
Annual Report on Form 10-K for the year ended December 31, 2003 or in other
Securities and Exchange Commission filings, could affect (and in some cases
have affected) the Companys actual results and could cause such results to
differ materially from estimates or expectations reflected in such
forward-looking statements. While the Company periodically reassesses material trends and
uncertainties affecting the Companys results of operations and financial
condition in connection with its preparation of managements discussion and
analysis of results of operations and financial condition contained in its
quarterly and annual reports, the Company does not intend to review or revise
any particular forward-looking statement referenced in this report in light of
future events. Results of Operations The following table represents selected components of the Companys
results of operations, in millions of dollars and as percentages of net sales. Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    94.8
    
    
    
    100.0
    %
    
    $
    86.6
    
    
    
    100.0
    %
    
    $
    301.7
    
    
    
    100.0
    %
    
    $
    276.7
    
    
    
    100.0
    %Cost of sales
    
    
    20.4
    
    
    
    21.5
    
    
    
    19.6
    
    
    
    22.6
    
    
    
    68.5
    
    
    
    22.7
    
    
    
    63.8
    
    
    
    23.1Gross profit
    
    
    74.4
    
    
    
    78.5
    
    
    
    67.0
    
    
    
    77.4
    
    
    
    233.2
    
    
    
    77.3
    
    
    
    212.9
    
    
    
    76.9Selling, general and administrative expenses
    
    
    59.0
    
    
    
    62.2
    
    
    
    55.1
    
    
    
    63.6
    
    
    
    183.2
    
    
    
    60.7
    
    
    
    173.0
    
    
    
    62.5Transaction related expenses
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    29.7
    
    
    
    9.8
    
    
    
    15.5
    
    
    
    5.6Restructuring and impairment charges
    
    
    2.3
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    1.7
    
    
    
    
    
    
    
    Income from operations
    
    
    13.0
    
    
    
    13.7
    
    
    
    11.5
    
    
    
    13.3
    
    
    
    15.3
    
    
    
    5.1
    
    
    
    24.4
    
    
    
    8.8Exchange gain (loss), net
    
    
    1.7
    
    
    
    1.8
    
    
    
    (7.5
    )
    
    
    (8.6
    )
    
    
    (2.8
    )
    
    
    (0.9
    )
    
    
    (7.8
    )
    
    
    (2.8
    )Interest expense
    
    
    (6.8
    )
    
    
    (7.2
    )
    
    
    (6.9
    )
    
    
    (8.0
    )
    
    
    (20.6
    )
    
    
    (6.8
    )
    
    
    (14.4
    )
    
    
    (5.2
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.3
    
    
    
    0.1Loss on extinguishment of debt
    
    
    (4.5
    )
    
    
    (4.7
    )
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    (1.5
    )
    
    
    (6.6
    )
    
    
    (2.4
    )Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    3.3
    
    
    
    3.5
    
    
    
    (2.9
    )
    
    
    (3.3
    )
    
    
    (12.7
    )
    
    
    (4.2
    )
    
    
    (4.4
    )
    
    
    (1.7
    )Income tax expense (benefit)
    
    
    2.4
    
    
    
    2.6
    
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (1.7
    )
    
    
    (0.6
    )
    
    
    1.2
    
    
    
    0.3Income (loss) from continuing operations
    
    
    0.9
    
    
    
    0.9
    
    
    
    (2.4
    )
    
    
    (2.8
    )
    
    
    (11.0
    )
    
    
    (3.6
    )
    
    
    (5.6
    )
    
    
    (2.0
    )Loss on discontinued operations,
net of income tax expense
of $0 in 2004 and 2003
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (2.5
    )
    
    
    (0.9
    )Net income (loss)
    
    $
    0.9
    
    
    
    0.9
    %
    
    $
    (3.0
    )
    
    
    (3.5
    )%
    
    $
    (11.2
    )
    
    
    (3.7
    )%
    
    $
    (8.1
    )
    
    
    (2.9
    )%
 46




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##### Table of Contents



Three months ended September 30, 2004 compared to the three months ended September 30, 2003 Corporate,United
    
    
    
    
    
    
    
    
    
    Unallocated
    
    ConsolidatedDollars in millions
    
    Mexico
    
    States
    
    Europe
    
    All Others
    
    and Other
    
    TotalThree Months Ended September 30, 2004Net sales
    
    $
    63.3
    
    
    $
    23.1
    
    
    $
    7.2
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    94.8Cost of sales
    
    
    15.2
    
    
    
    4.9
    
    
    
    1.4
    
    
    
    0.5
    
    
    
    (1.6
    )
    
    
    20.4Gross profit
    
    
    48.1
    
    
    
    18.2
    
    
    
    5.8
    
    
    
    0.7
    
    
    
    1.6
    
    
    
    74.4Selling, general and
administrative expenses
    
    
    32.1
    
    
    
    14.3
    
    
    
    5.8
    
    
    
    1.2
    
    
    
    5.6
    
    
    
    59.0Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Restructuring and impairment
charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    2.3Income (loss) from operations
    
    $
    16.0
    
    
    $
    3.9
    
    
    $
    0.0
    
    
    $
    (0.5
    )
    
    $
    (6.4
    )
    
    $
    (13.0
    )Three Months Ended September 30, 2003Net sales
    
    $
    51.8
    
    
    $
    25.9
    
    
    $
    6.6
    
    
    $
    2.3
    
    
    $
    
    
    
    $
    86.6Cost of sales
    
    
    12.3
    
    
    
    6.0
    
    
    
    1.3
    
    
    
    1.0
    
    
    
    (1.0
    )
    
    
    19.6Gross profit
    
    
    39.5
    
    
    
    19.9
    
    
    
    5.3
    
    
    
    1.3
    
    
    
    1.0
    
    
    
    67.0Selling, general and
administrative expenses
    
    
    27.2
    
    
    
    15.4
    
    
    
    5.3
    
    
    
    2.5
    
    
    
    4.7
    
    
    
    55.1Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4Income (loss) from operations
    
    $
    12.3
    
    
    $
    4.5
    
    
    $
    0.0
    
    
    $
    (1.2
    )
    
    $
    (4.1
    )
    
    $
    11.5
 Net sales. Net sales in the third quarter of 2004 increased to $94.8
million from $86.6 million in the third quarter of 2003, an increase of $8.2
million, or 9.5%. Net sales in local currencies in the third quarter of 2004
increased by 13.0% over the comparable prior year period. The increase in net
sales measured in U.S. dollars was less than the increase measured in local
currencies, as a result of weaker average exchange rates during the third
quarter of 2004 compared to the third quarter of 2003, The increase in net
sales was driven by the increase in net sales in Mexico primarily as a result
of the increase in the average number of consultants in Mexico and an increase
in consultant productivity. The Companys average number of consultants in the
third quarter of 2004 increased to approximately 436,000, or 6.9% over the
average number of consultants in the third 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. Total
Company consultant productivity measured in U.S. dollars in the third quarter
of 2004 increased 2.4% compared to the third quarter of 2003. Measured in
local currencies, consultant productivity increased 5.7% compared to the third
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 third quarter of 2004 increased to $63.3
million from $51.8 million in the third quarter of 2003, an increase of $11.5
million, or 22.2%. Net sales in Mexico measured in local currency increased
30.0% in the third quarter of 2004 over the comparable 2003 period. The
period-over-period net sales increase measured in local currency was due
primarily to increases in the average number of consultants
and in consultant productivity. In Mexico the average number of
consultants in the third quarter of 2004 was approximately 319,000, an increase
of 22.1% compared to the third quarter of 2003, primarily as a result of a
larger beginning base and the success of retention and recruiting strategies. Consultant productivity measured in
local currency during the third quarter of 2004 increased 6.1% compared to
consultant productivity during the third quarter of 2003 as a result of
successful fragrance promotions. In the United States, including the Dominican Republic, net sales in the
third quarter of 2004 decreased to $23.1 million from $25.9 million in the
third quarter of 2003, a decrease of $2.8 million, or 10.8%. During 2004, 47




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##### Table of Contents



the Company classified its Dominican Republic operations within the United
States segment for all periods presented as the operations in the Dominican
Republic are under the same management as operations in the United States and
the Companys key financial decision makers evaluate the results of the
Dominican Republic within the United States segment. Operations in the United
States (inclusive of the Dominican Republic) are bifurcated into two separate
units: the Hispanic Group, which represents approximately two-thirds of the
United States segment and includes the Dominican Republic, and the U.S.
Division. In the United States, the decrease in net sales was primarily the
result of a decrease in the average number of consultants and a decrease in
consultant productivity. Net sales in the Hispanic Group (including the Dominican Republic)
decreased to $16.5 million in the third quarter of 2004 from $17.9 million in
the third quarter of 2003, a decrease of $1.4 million or 7.8%. The decrease in
net sales was primarily the result of a decrease in the number of consultants
and a decrease in consultant productivity. The average number of consultants
in the Hispanic Group decreased 5.3% to approximately 56,000 in the third
quarter of 2004 compared to the third quarter of 2003 as a result of a smaller
consultant base at the beginning of the period. The consultant base at the
beginning of the period was negatively impacted by issues associated
with implementing a new commercial system primarily experienced during the latter part of 2003 and
the first couple months of 2004. Consultant productivity decreased 2.7% in the
third quarter of 2004 compared to the third quarter of 2003 as a result of
greater net sales in the third quarter of 2003 driven by the launch of the
microdermabrasion products. Overall the Hispanic Division had a less active
base during the third quarter of 2004 over the comparable prior year period due
to the replacement of part of the more established base with new consultants
that historically are not as active. In the Dominican Republic, program
changes were implemented aimed at a smaller more productive consultant base.
Although consultant productivity increased in the Dominican Republic,
the program changes also contributed to the decrease in the average number of consultants. The decreased productivity in the Hispanic Division
was partially offset by the increase in the Dominican Republic. Net sales in the U.S. Division decreased 17.5% to approximately $6.6
million in the third quarter of 2004 compared to $8.0 million the third quarter
of 2003, due to decreases in the average number of consultants and decreases in
consultant productivity. The average number of consultants in the period was
approximately 26,000, a 10.3% decrease compared to the third quarter of 2003,
as a result of a smaller consultant base at the beginning of the period as a
result of the same system implementation issues experience by the Hispanic
Division. During the third quarter of 2004, consultant productivity decreased
8.4% compared to the third quarter of 2003 as a result of the same factors,
which affected the Hispanic Division during the third quarter of 2004. In Europe, net sales increased to $7.2 million in the third quarter of
2004 from $6.6 million in the third quarter of 2003, an increase of $0.6
million, or 9.1%, as a result of stronger average local currencies compared to
the U.S. dollar. On a local currency basis, net sales were relatively constant
during the third quarter of 2004 compared to the third quarter of 2003. The
average number of consultants in Europe decreased 4.5% to approximately 18,000
over the comparable prior year period. This was offset by increased consultant
productivity, as productivity measured in local currencies increased 5.6%
during the third quarter of 2004 compared to the third quarter of 2003. Net sales in the other markets decreased to $1.2 million in the third
quarter of 2004 compared to $2.3 million in the third quarter of 2003, a
decrease of $1.1 million, or 47.8%. Other markets consist of Brazil, Argentina
and, in 2003, Thailand. Brazilian net sales were $1.1 million in the third
quarter of 2004 compared to $1.9 million in the third quarter of 2003, a
decrease of $0.8 million, or 42.1%. The decrease was as a result of the Companys plans to cease
direct selling operations in Brazil. Net sales in
Argentina were constant during the third quarter of 2004 compared to the third
quarter of 2003. The Company ceased operations in Thailand during the fourth
quarter of 2003 and therefore, there were no sales in Thailand in 2004 compared
to $0.3 million during the third quarter of 2003. Gross profit.Consolidated gross profit in the third quarter of 2004
increased to $74.4 million from $67.0 million in the comparable prior year
period, an increase of $7.4 million, or 11.0%. Gross profit as a percentage of
net sales (gross margin) increased to 78.5% in the third quarter of 2004 from
77.4% in the third quarter of 2003. The increase in gross margin in the
third quarter of 2004 was primarily a result of increased favorable
manufacturing and other direct cost variances in the Companys manufacturing
operations. In Mexico, gross margin in the third quarter of 2004 decreased
slightly to 76.0%
from 76.3% in the third quarter of 2003. The decreased gross margin in Mexico
was primarily the result of additional charges to the reserve for slow 48




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##### Table of Contents



moving inventory and the unfavorable impact of a greater promotional
product mix, partially offset by more favorable direct cost variances in the
third quarter of 2004 compared to the third quarter of 2003. In the United States, gross margin in the third quarter of 2004 increased
to 78.8% from 76.8% as a result of the mix of products with fewer promotional
items (which normally have a lower margin), sales of consultant cases in 2004 which
had a higher margin, more sales of hostess promotions with a higher margin
and less need for charges to the reserve for slow moving inventory during the
third quarter of 2004 compared to the third quarter of 2003. In Europe, gross margin in the third quarter of 2004 increased to 80.6%
from 80.3% in the third quarter of 2004 due to a favorable product mix and
stronger local currencies compared to the U.S. dollar at the time of the
purchase of the goods. Selling, general and administrative expenses.SG&A expenses in the third
quarter of 2004 increased to $59.0 million from $55.1 million in the third
quarter of 2003, an increase of $3.9 million, or 7.1%. SG&A expenses as a
percentage of net sales decreased to 62.2% in the third quarter of 2004
compared to 63.6% in the third quarter of 2003, due primarily to reduced SG&A
expenses, as a percentage of net sales, at the Companys Mexican subsidiary, offset in part by higher SG&A expenses, as
a percentage of net sales, at the Companys U.S. subsidiary. In Mexico, SG&A expenses in the third quarter of 2004 increased by $4.9
million, or 18.0%, to $32.1 million compared to $27.2 million in the third
quarter of 2003. SG&A expenses decreased as a percentage of net sales to 50.7%
in the third quarter of 2004 compared to 52.5% in the third quarter of 2003.
The decrease in SG&A expenses as a percentage of net sales was primarily due to
decreased bad debt expenses and personnel related expense savings.
As a result of improvements in the collection of receivables, bad debt
expense as a percentage of net sales has decreased to 3.1% during the third
quarter of 2004 compared to 3.6% during the third quarter of 2003.
Additionally, administrative and selling expenses were favorably impacted by
the impact of a larger sales base on fixed expenses. This was partially offset
by increased sales promotional expense as a percentage of sales due to
increased promotional activity. In the United States, SG&A expenses in the third quarter of 2004 decreased
by $1.1 million, or 7.1%, to $14.3 million from $15.4 million in the third
quarter of 2003. SG&A expenses as a percentage of net sales were 61.9% in the
third quarter of 2004 compared to 59.5% in the third 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 reduced sales on fixed costs. In Europe, SG&A expenses in the third quarter of 2004 increased by $0.5
million, or 9.4%, to $5.8 million from $5.3 million in the third quarter of
2003. SG&A expenses as a percentage of net sales in Europe increased nominally
to 80.6% in the third quarter of 2004 compared to 80.3% in the third quarter of
2003. SG&A expenses in the Companys other markets in the third quarter of 2004
decreased by $1.3 million, or 52.0%, to $1.2 million
compared to $2.5 million
in the third quarter of 2003. During the third quarter of 2004, the Company
began winding down operations in Brazil as the Company has made a decision to
cease direct selling operations in that market. As a result, selling and
administrative expenses in Brazil were significantly less during the third
quarter of 2004 compared to the third quarter of 2003. SG&A expenses in Corporate, Unallocated and Other increased to $5.6
million in the third quarter of 2004 compared to $4.7 million in the third
quarter of 2003 as a result of the timing of incremental costs in the Companys
corporate headquarters and more unusual charges not allocated to the reporting
units during the third quarter of 2004 compared to the third quarter of 2003. Transaction Related Expenses. During the second quarter of 2004, Vorwerk acquired substantially all
of the outstanding capital stock of Jafra S.A., the Companys
parent. During the third quarter of 2004, the
Company incurred $0.1 million of transaction related expenses compared to $0.4
million in the third quarter of 2003.
The Company does not expect to incur any additional material
transaction related expenses related to the acquisition. 49




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##### Table of Contents



Restructuring and impairment charges.During the third quarter of 2004
the Company recorded $2.3 million of restructuring charges related severance
benefits for certain members of management who departed from the Company. Exchange gain (loss).The Companys foreign exchange gain was $1.7 million
in the third quarter of 2004 compared to a foreign exchange loss of $7.5
million in the third quarter of 2003, a favorable change of $9.2 million.
Foreign exchange losses and gains result from three primary sources: gains and
losses on option contracts, gains and losses due to the remeasurement of U.S.
dollar-denominated debt at Jafra Distribution and gains and losses arising from
other foreign currency-denominated transactions, including remeasurement of
U.S. dollar-denominated intercompany accounts. During the third quarter of
2004, the Company recognized $1.7 million of exchange gains related to the
remeasurement of U.S. dollar-denominated debt and $0.5 million of exchange
gains on other foreign currency transactions. This was partially offset by
$0.5 million of exchange losses on option contracts. During the third quarter
of 2003, the Company recognized $7.5 million of exchange losses on the
remeasurement of U.S. dollar-denominated debt and did not recognized any gains
or losses on forward contracts, option contracts or other foreign currency
denominated transactions. See Item 3, Quantitative and Qualitative Disclosures
about Market Risk. Interest expense.Net interest expense (including interest income) in the
third quarter of 2004 decreased to $6.8 million from $6.9 million in the third
quarter of 2003, a nominal decrease of $0.1 million. Loss on extinguishment of debt.During the third quarter of 2004, the
Company entered into a Restated Credit Agreement and a Loan Contract. With the
proceeds from those borrowings, the Company repaid all amounts outstanding
under its Senior Credit Agreement. In addition, during the third quarter of
2004, the Company repurchased $500,000 of its outstanding 103⁄4%
subordinated notes. In connection with the repayment of the Senior Credit
Agreement and the repurchase of the subordinated notes, the Company wrote off
approximately $4.5 million of capitalized deferred financing fees. Income tax expense (benefit).Income tax expense was $2.4 million during
the third quarter of 2004 compared to income tax benefit of $0.5 million during
the third quarter of 2003. The Companys effective income tax rate from
continuing operations was 72.7% in the third quarter of 2004, compared to 17.2%
in the third quarter of 2003. The Companys United States subsidiary
effective tax rate was impacted by certain permanent differences, which
resulted in a higher effective tax rate in the quarter. The Companys Mexican
subsidiaries effective tax rate benefited from the release of valuation
allowances against certain operating losses. Additionally, the Company
recorded additional valuation allowances on certain operating losses in its
Brazilian subsidiaries. During the third quarter of 2003, the Company had
pretax losses in Mexico with an income tax benefit. This was partially offset
by pretax income and income tax expense in the United States. Additionally,
the Company recorded valuation allowances against certain pretax losses in
Europe and South America, which resulted in pretax loss without any tax benefit
in these jurisdictions. Loss on discontinued operations.During 2003 the Company discontinued its
operations in Venezuela, Colombia, Chile and Peru. The results of these
markets were included in the statements of operations as losses on discontinued
operations. Losses on discontinued operations were $0.6 million during the
third quarter of 2003, a favorable change of $0.6 million during the third
quarter of 2004. Net income (loss).Net income was $0.9 million in the third quarter of
2004 compared to net loss of $3.0 million in the third quarter of 2003, a
favorable change of $3.9 million. The favorable change was the result of a
$7.4 million increase in gross profit, a $0.3 million decrease in transaction
related expenses, $9.2 million favorable change in exchange gain (loss), a
$0.1 million decrease in interest expense, a $0.6 million decrease in loss on
discontinued operations partially offset by a $3.9 million increase in selling,
general and administrative expenses, $2.3 million of restructuring charges, a $4.5 million loss on extinguishment of
debt, a $0.1 million increase in other expense and a $2.9 million unfavorable
change in income tax expense (benefit). 50




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##### Table of Contents



Nine months ended September 30, 2004 compared to the Nine months ended September 30, 2003 Corporate,United
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedDollars in millions
    
    Mexico
    
    States
    
    Europe
    
    Others
    
    and Other
    
    TotalNine Months Ended September 30, 2004Net sales
    
    $
    201.7
    
    
    $
    71.8
    
    
    $
    24.2
    
    
    $
    4.0
    
    
    $
    
    
    
    $
    301.7Cost of sales
    
    
    48.9
    
    
    
    15.8
    
    
    
    4.6
    
    
    
    1.5
    
    
    
    (2.3
    )
    
    
    68.5Gross profit
    
    
    152.8
    
    
    
    56.0
    
    
    
    19.6
    
    
    
    2.5
    
    
    
    2.3
    
    
    
    233.2Selling, general and
administrative expenses
    
    
    96.9
    
    
    
    47.9
    
    
    
    18.8
    
    
    
    4.3
    
    
    
    15.3
    
    
    
    183.2Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.7
    
    
    
    29.7Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    5.0Income (loss) from operations
    
    $
    55.9
    
    
    $
    8.1
    
    
    $
    0.8
    
    
    $
    (1.8
    )
    
    $
    (47.7
    )
    
    $
    15.3Nine Months Ended September 30, 2003Net sales
    
    $
    172.1
    
    
    $
    76.7
    
    
    $
    22.7
    
    
    $
    5.2
    
    
    $
    
    
    
    $
    276.7Cost of sales
    
    
    41.5
    
    
    
    17.2
    
    
    
    4.7
    
    
    
    2.4
    
    
    
    (2.0
    )
    
    
    63.8Gross profit
    
    
    130.6
    
    
    
    59.5
    
    
    
    18.0
    
    
    
    2.8
    
    
    
    2.0
    
    
    
    212.9Selling, general and
administrative expenses
    
    
    85.7
    
    
    
    48.0
    
    
    
    17.5
    
    
    
    6.6
    
    
    
    15.2
    
    
    
    173.0Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.5
    
    
    
    15.5Income (loss) from operations
    
    $
    44.9
    
    
    $
    11.5
    
    
    $
    0.5
    
    
    $
    (3.8
    )
    
    $
    (28.7
    )
    
    $
    24.4
 Net sales. Net sales for the nine months ended September 30, 2004
increased to $301.7 million from $276.7 million for the nine months ended
September 30, 2003, an increase of $25.0 million, or 9.0%. Net sales measured
in local currencies for the nine months ended September 30, 2004 increased
12.4% compared to net sales measured in local currencies for the nine months
ended September 30, 2003. During the nine months ended September 30, 2004
there were weaker average exchange rates compared to the nine months ended
September 30, 2003, resulting in a lower net sales increase measured in U.S.
dollars compared to the increase measured in local currencies. The net sales
increase was primarily due to an increase in net sales in Mexico partially as a
result of an increase in the average number of consultants and an increase in
consultant productivity in Mexico. The Companys average number of consultants
worldwide for the nine months ended September 30, 2004 increased to
approximately 438,000, 8.3% over the average number of consultants for the nine
months ended September 30, 2003. Consultant productivity measured in local
currencies increased 3.4% for the nine months ended September 30, 2004 compared
to consultant productivity for the nine months ended September 30, 2003. In Mexico, net sales for the nine months ended September 30, 2004
increased to $201.7 million from $172.1 million for the nine months ended
September 30, 2003, an increase of $29.6 million, or 17.2% over the comparable
prior year period. Net sales measured in local currency increased 24.3% for
the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003. The increase measured in local currency was primarily due
to an increase in the average number of consultants and an increase in
consultant productivity. During the nine months ended September 30, 2004, the
average number of consultants in Mexico was approximately 320,000, an increase
of 22.9% over the comparable prior year period primarily as a result of a
larger consultant base at the beginning of the period and successful promotions
to recruit and retain consultants. Consultant productivity measured in local
currency during the nine months ended September 30, 2004 increased 1.1%
compared to consultant productivity during the nine months ended September 30,
2003. In the United States, including the Dominican Republic, net sales for the
nine months ended September 30, 2004 decreased to $71.8 million compared to
$76.7 million for the nine months ended September 30, 2003, a decrease of $4.9
million, or 6.4%. In the United States, the decrease in net sales was
primarily the result of a decrease in the average number of consultants,
partially offset by an increase in consultant productivity. 51




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Net sales in the Hispanic Group decreased to $50.8 million for the nine
months ended September 30, 2004 from $52.6 million for the nine months ended
September 30, 2003, a decrease of $1.8 million, or 3.4% as a result of a
decrease in the average number of consultants partially offset by an increase
in consultant productivity. During the nine months ended September 30, 2004,
the average number of consultants decreased to approximately 55,000
consultants, a decrease of 5.2% over the comparable prior year period primarily
as a result of a diminished beginning consultant base as a result of system
implementation issues experienced at the end of 2003 and first few months of
2004. Consultant productivity increased 1.8% for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003 as a
result of an increase in the minimum order size to receive the maximum
commission percentage. Additionally, the Dominican Republic implemented
program changes which resulted in a smaller but more productive consultant base. Net sales in the U.S. Division decreased 12.9% to approximately $21.0
million for the nine months ended September 30, 2004 compared to $24.1 million
for the nine months ended September 30, 2003 due to a decrease in the average
number of consultants and a decrease in consultant productivity. The
U.S.
Division had approximately 27,000 consultants during the nine months ended
September 30, 2004, a decrease of 11.5% over the comparable prior year. The
average number of consultants was also impacted by a diminished beginning base
due to the system implementation issues experienced at the end of 2003 and the first few
months of 2004. Consultant productivity decreased 1.6% during the nine months
ended September 30, 2004 compared to the nine months ended September 30, 2003
as a result of productivity declines in the third quarter of 2004, despite
productivity increases in the first six months of 2004 as a result of the
increase in the minimum order size in an effort to encourage a more productive
consultant base. In Europe, net sales increased to $24.2 million for the nine months ended
September 30, 2004 from $22.7 million for the nine months ended September 30,
2003, an increase of $1.5 million, or 6.6%. In local currencies, net sales
decreased 2.4% for the nine months ended September 30, 2004 over the comparable
prior year period as a result of a decrease in consultant productivity and in
the average number of consultants. Consultant productivity measured in local
currencies decreased approximately 1.2% for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003 as a result of  less
favorable general economic conditions faced by the consultants primarily in
Germany. The average number of consultants also decreased 1.2% to
approximately 18,000 for the nine months ended September 30, 2004 compared to
the nine months ended September 30, 2003. Net sales in the other markets decreased to $4.0 million for the nine
months ended September 30, 2004 compared to $5.2 million for the nine months
ended September 30, 2003, a decrease of $1.2 million or 23.1% primarily as a
result of the Companys decision to cease its direct selling operation in
Brazil. Net sales in Argentina were constant during the nine months ended
September 30, 2004 over the comparable prior year period. Additionally, the
Company ceased operations in Thailand at the end of 2003. There were no sales
in Thailand during 2004 compared to $0.2 million for the nine months ended September 30,
2003. Gross profit.Consolidated gross profit for the nine months ended
September 30, 2004 increased to $233.2 million from $212.9 million for the nine
months ended September 30, 2003, an increase of $20.3 million, or 9.5%. Gross
profit as a percentage of net sales (gross margin) increased to 77.3% for the
nine months ended September 30, 2004 compared to 76.9% for the nine months
ended September 30, 2003. In Mexico, gross margin for the nine months ended September 30, 2004
decreased to 75.8% from 75.9% for the nine months ended September 30, 2003.
The decrease in gross margin was primarily due lower gross margin on
non-commissionable sales and additional charges for the reserve for slow moving
inventory during the nine months ended September 30, 2004 over the comparable
prior year period. This was partially offset by the reclassification of
exchange losses to cost of sales in connection with hedge accounting pursuant
to SFAS No. 133 during the nine months ended September 30, 2003. There were no
such reclassification of losses during the nine months ended September 30,
2004. In the United States, gross margin for the nine months ended September 30,
2004 increased to 78.0% compared to 77.6% for the nine months ended September
30, 2003. The increase in gross margin was primarily the result of 52




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the sales mix of products with better margins in the nine months ended September 30, 2004
over the comparable prior year period. In Europe, gross margin for the nine months ended September 30, 2004
increased to 81.0% from 79.3% in the comparable prior year period due to the
favorable impact of exchange rates on the purchase of goods and favorable
product mix, including the sale of new products with better margins during the
nine months ended September 30, 2004 over the comparable prior year period. Selling, general and administrative expenses.SG&A expenses for the nine
months ended September 30, 2004 increased to $183.2 million compared to $173.0
million for the nine months ended September 30, 2003, an increase of $10.2
million, or 5.9%. SG&A expenses, as a percentage of net sales, decreased to
60.7% for the nine months ended September 30, 2004 from 62.5% for the nine
months ended September 30, 2003 due primarily to reduced SG&A expenses in
Mexico, partially offset by increased SG&A expenses in the United States and
Europe. In Mexico, SG&A expenses for the nine months ended September 30, 2004
increased by $11.2 million, or 13.1% to $96.9 million compared to $85.7 million
for the nine months ended September 30, 2003. SG&A expenses decreased, as a
percentage of net sales, to 48.0% for the nine months ended September 30, 2004
compared to 49.8% for the nine months ended September 30, 2003. The decrease
in SG&A expenses as a percentage of net sales was primarily due to decreased
administrative and selling expenses partially offset by increased sales
promotional expense. Administrative expenses decreased primarily as a
result of a
0.9 percentage point decrease in bad debt expenses because of better
collections and savings of personnel related costs due to position of vacancies.
Sales promotional expenses increased 1.4 percentage points during the first
nine months of 2004 compared to the first nine months of 2003 due to increased
promotional activity and the costs associated with more winners of a trip to
the annual conference. In the United States, SG&A expenses for the nine months ended September
30, 2004 decreased nominally by $0.1 million to $47.9 million from $48.0
million for the nine months ended September 30, 2003. SG&A expenses, as a
percentage of net sales, were 66.7% for the nine months ended September 30,
2004 compared to 62.6% for the nine months ended September 30, 2003. The
increase in SG&A expenses as a percentage of net sales was primarily
attributable to increased selling and administrative expenses as a result of
incremental system depreciation expenses and additional third party consulting
fees related to information technology system that was implemented at the end
of 2003 and the unfavorable impact of a reduced sales base on fixed expenses,
partially offset by reduced promotional expense as a result of reduced
promotional activity. In Europe, SG&A expenses for the nine months ended September 30, 2004
increased by $1.3 million, or 7.4% to $18.8 million from $17.5 million for the
nine months ended September 30, 2003. SG&A expenses, as a percentage of net
sales, in Europe increased to 77.7% from 77.1% for the nine months ended
September 30, 2003. The increase in SG&A expenses as a percentage of net sales
was due to increased administrative expenses and override expenses partially
offset by decreased sales promotional expenses. Incremental information
technology costs and the impact of reduced sales on fixed costs were the
primary cause of the increased administrative expenses as a percentage of
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. In 2003, promotional expenses were greater than in 2004 in an effort
to increase the consultant base and generate sales. SG&A expenses in the other markets decreased by $2.3 million or 34.8% to
$4.3 million for the nine months ended September 30, 2004 compared to $6.6
million for the nine months ended September 30, 2003 primarily as a result of
the Companys decision to cease direct selling operations in Brazil. SG&A expenses in Corporate, Unallocated and Other increased nominally to
$15.3 million for the nine months ended September 30, 2004 compared to $15.2
million for the nine months ended September 30, 2003. Transaction Related Expenses.During the nine months ended September 30,
2004, the Company incurred $29.7 million of transaction related expenses
compared to $15.5 million during the nine months ended September 30, 2003.
During the second quarter of 2004, Vorwerk
acquired substantially all of the outstanding stock of Jafra S.A.,
the Companys parent. As a part of this acquisition, all outstanding
employee stock options were repurchased and cancelled. This 53




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resulted in $20.3 million of compensation expense. Additionally, the former primary shareholder
of Jafra S.A. paid $4.9 million in special bonuses directly to certain members
of management and non-employee board of director members. This non-cash charge
has been accounted for as a deemed contribution by the former primary
shareholder. The remaining amount recorded in the nine months ended September
30, 2004 related primarily to expensing of insurance premiums due to change of
control provisions in the insurance contract and fees paid to professional
service providers for this transaction and other transactions contemplated but
not completed. During the nine months ended September 30, 2003, the Company
completed a recapitalization of its operations by the issuance of new debt. In
connection with the recapitalization, the Company paid and expensed $13.3
million in bonus payments to the then holders that held options to purchase
CDRJS common stock, certain members of management and non-employee board of
director members. Additionally, the Company expensed $1.1 million in
transaction related fees during the nine months ended September 30, 2003.
The Company does not expect to incur any additional material
transaction related expenses related to the acquisition. Restructuring and impairment charges.During the nine months ended
September 30, 2004, the Company recorded restructuring and impairment charges
of $5.0 million related to relocating substantially all of its manufacturing
functions to its facilities in Mexico and in termination benefit for the
departure of certain members of management. Of the total amount, approximately
$0.4 million related to asset impairment charges. Exchange gain (loss).The Companys foreign exchange loss was $2.8 million
for the nine months ended September 30, 2004 compared to $7.8 million for the
nine months ended September 30, 2003, a favorable change of $5.0 million.
During the nine months ended September 30, 2004, the Company recognized $2.1
million of exchange losses related to the remeasurement of U.S.
dollar-denominated debt, $0.5 million of losses related to option contracts and
$0.2 million of exchange losses on other foreign currency transactions. During
the nine months ended September 30, 2003, the Company recognized $9.3 million
of exchange losses on the remeasurement of U.S. dollar-denominated debt. The
loss was partially offset by $0.6 million of exchange gains related to option
contracts and $0.9 million of exchange gains on other foreign currency
transactions. See Item 3, Quantitative and Qualitative Disclosures about
Market Risk. Interest expense.Net interest expense (including interest income) for
the nine months ended September 30, 2004 increased to $20.5 million from $14.1
million for the nine months ended September 30, 2003, an increase of $6.4
million, or 45.4%. The increase was primarily due to a greater average amount
of debt outstanding during the nine months ended September 30, 2004 compared to
the nine months ended September 30, 2003 as a result of the recapitalization of
the Company during the second quarter of 2003. Loss on extinguishment of debt.During the nine months ended September
30, 2004, the Company entered into a Restated Credit Agreement and a Loan
Contract. With the proceeds from those borrowings, the Company repaid all
amounts outstanding under its Senior Credit Agreement. In addition, during the
nine months ended September 30, 2004 the Company repurchased $0.5 million of its
outstanding 103⁄4% subordinated notes. In connection with the repayment of
the Senior Credit Agreement and the repurchase of the subordinated notes, the
Company wrote off approximately $4.5 million of capitalized deferred financing
fees. During the nine months ended September 30, 2003, the
Company redeemed previously
outstanding Notes in the aggregate principal amount of $75.2 million at a
premium of approximately $4.4 million. Additionally, the Company repaid $7.4
million to terminate its then existing 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. The total
expense related to the extinguishment of the debt was $6.6 million and was
recorded during the nine months ended September 30, 2003. Income tax (benefit) expense.Income tax benefit was $1.7 million for
the nine months ended September 30, 2004 compared to an income tax expense of
$1.2 million for the nine months ended September 30, 2003, a $2.9 million
change. During the nine months ended September 30, 2004, the Companys United
States subsidiary recorded a reduced tax benefit, as a result of certain
non-deductible expenses, on pretax losses. This amount was
partially offset by income tax expense on pretax income in the Companys
Mexican subsidiaries. Additionally, the Company recorded valuation allowances
against certain pretax losses in the Companys Brazilian subsidiary. During the
nine months ended September 30, 2003, the Company reported a pretax loss of
$4.4 million and income tax expense of $1.2 million. The Companys Mexican
subsidiaries reported pretax income and income tax expense for the nine months
ended September 30, 2003. The income tax expense was partially offset by an
income tax benefit in 54




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the U.S. subsidiary based on pretax net loss.
Additionally, the European and other subsidiaries recorded valuation allowances
against pretax net losses for the nine months ended September 30, 2003. Loss on discontinued operations.During 2003 the Company discontinued its
operations in Venezuela, Colombia, Chile and Peru. The results of these
markets were included in the statements of operations as losses on discontinued
operations. Losses on discontinued operations were $0.2 million for the nine
months ended September 30, 2004 compared to $2.5 million for the nine months
ended September 30, 2003, a decrease of $2.3 million. As these markets were
substantially liquidated during 2003, the losses attributable to these markets
were less during 2004 compared to 2003. Net loss.Net loss was $11.2 million for the nine months ended September
30, 2004 compared to $8.1 million for the nine months ended September 30, 2003,
a $3.1 million decrease in income. The decrease in income was primarily due to a
$10.2 million increase in selling, general and administrative expenses, a $14.2
million increase in transaction related expenses, a $5.0 million restructuring
and impairment charge, a $6.4 million increase in interest expense, net, partially offset by a $2.1
million decrease in loss on extinguishment of debt, a $20.3
million increase in gross profit, a $5.0 million decrease in exchange loss,
$0.1 million of other income, a $2.9 million favorable change in income tax
(benefit) expense and a $2.3 million decrease in loss on discontinued
operations. Liquidity and Capital Resources Overview The Company has historically funded expenditures for operations,
administrative expenses, capital expenditures and debt service obligations with
internally generated funds from operations, with working capital needs being
satisfied from time to time with borrowings under the senior credit facilities.
On August 16, 2004 the Company entered into a Restated Senior
Credit Agreement (the
Restated Credit Agreement) which provides for a revolving credit facility of
up to an aggregate of $60 million at any one time outstanding, which can be
increased by the Company to $90 million under certain circumstances.
The Company continues to focus on
working capital management, including the collection of accounts receivable,
decreasing inventory levels and management of accounts payable. The May 2003 Recapitalization In May 2003 the Company entered into a series of transactions to replace
existing indebtedness, to provide funds for certain internal reorganizations,
including the separation of the distribution business in Mexico from certain
other operating businesses and to finance distributions to equityholders. As
part of these transactions, the Company took or caused to be taken the
following steps the affected liquidity.  
    
    JCI and Jafra Distribution entered into new senior credit
facilities
that were subsequently replaced by the Restated Credit Agreement.
    
    As further described below, Jafra Distribution and JCI issued $120
million and $80 million, respectively, in aggregate principal amount of
the 103⁄4% Senior Subordinated Notes due 2011, or the New Notes,
and used a portion of the proceeds from such issuance, together with
borrowings under the term loan facility described above, to repay the
indebtedness of JCI and Jafra Cosmetics S.A. then outstanding and to
consummate other corporate transactions.
    
    In order to compensate holders of then-outstanding options to
acquire the capital stock of CDRJ Investments (Lux) S.A. for the
diminution in the value of such options that would otherwise have
resulted from the recapitalization transactions, JCI and Jafra
Cosmetics S.A. made compensating payments in an aggregate amount of
approximately $10.4 million to such holders. Through a series of
inter-company transactions, the remaining proceeds from the issuance of
the 103⁄4% Notes and borrowings under the senior credit facilities
were paid and distributed to CDRJ Investments (Lux) S.A. 55




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
    
    CDRJ Investments (Lux) S.A. was then liquidated. In the course of
its liquidation, CDRJ Investments (Lux) S.A. made liquidating
distributions to its shareholders of approximately $159.0 million in
cash, of which approximately $7.2 million was paid to the Companys
executive officers and approximately $145.8 million was paid to the
Clayton Dubilier & Rice Fund V Limited Partnership, the Companys
primary shareholder, each in their respective capacities as
shareholders. In connection with the completion of the liquidation of CDRJ Investments
(Lux) S.A, all of the remaining assets of CDRJ Investments (Lux) S.A., and all
of the outstanding shares of Jafra S.A., was distributed to the shareholders of
CDRJ Investments (Lux) S.A. on a pro rata basis according to their
shareholdings. As a result, the shareholders of CDRJ Investments (Lux) S.A.
became shareholders of Jafra S.A. The shareholders of Jafra S.A. then sold
their shares to Vorwerk & Co. eins GmbH as described above. Liquidity On May 20, 2003, JCI and Jafra Distribution issued $200 million aggregate
principal amount of 103⁄4% Notes (the New Notes) pursuant to an indenture
dated May 20, 2003 and entered into a $90 million 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 and is guaranteed by
the Company and various other subsidiaries. The New Notes mature in 2011 and
bear a fixed interest rate of 103⁄4% payable semi-annually. The New 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 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 and unpaid interest. As the Acquisition constituted a change of control as defined in the
indenture governing the Companys New Notes, the Issuers and the Parent sent a
notice to noteholders of their right to require the repurchase of the
outstanding notes at a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of such repurchase. During the third
quarter of 2004, holders of the New Notes exercised their option to sell an
aggregate of $0.5 million of the outstanding Notes to the Issuers. On August 16, 2004,
the Company entered into a
Restated Senior Credit Agreement (the Restated Credit Agreement) which provides for a
revolving credit facility of up to an aggregate of $60 million at any one time
outstanding, which can be increased by the Company to $90 million under certain circumstances. The Restated Credit Agreement
matures on August
16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60%
of the total Restated Credit Agreement. On August 16, 2004, JCI borrowed $16,750,000 and Jafra Distribution
borrowed $26,750,000 of the loans. Borrowings under the Restated Credit
Agreement bear interest at an annual rate of Libor plus 2.625%. As of
September 30, 2004, the applicable interest rate was 4.3%, subject to periodic
adjustment based on certain levels of financial performance. Borrowings under
the Restated Credit Agreement are secured by substantially all of the assets of
JCI and Jafra Distribution. The
Company entered into a Loan Contract (the Loan Contract)
in August, 2004 to borrow
up to $20 million from Vorwerk at an annual interest rate of Libor plus 2.625%.
The Loan Contract is an obligation of JCI and will expire on December 20,
2004. On August 12, 2004, the Company borrowed the full amount under the Loan
Contract. 56




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With the borrowings from the Restated Credit Agreement and the Loan
Contract, the Company paid in full all existing amounts under its
prior  senior credit
agreement. In connection with the full repayment of the Senior Credit
Agreement and the purchase of $0.5 million of the outstanding New Notes, the
Company wrote off approximately $4.5 million of capitalized deferred financing
fees and recorded the write off as loss on extinguishment of debt on the accompanying
consolidated statements of operations during the three and nine months ended
September 30, 2004. The Company capitalized approximately $0.7 million of costs related to the
Restated Credit Agreement. As of September 30, 2004, approximately $7.9
million of unamortized deferred financing fees (excluding translation effects)
were reported as a noncurrent asset in the accompanying consolidated balance
sheets. These deferred financing fees are being amortized on a basis that
approximates the interest method over the term of the New Notes and the
Restated Credit Agreement. Both the Indenture and the Restated 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 September 30, 2004, the Company was in compliance with all covenants. The Restated 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 Restated 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 Restated Credit
Agreement) to block payments on the New Notes during the continuance of certain
defaults that would allow the holders of such senior indebtedness to accelerate
the relevant senior indebtedness. As of September 30, 2004, the Company had outstanding $253.5 million of
debt, consisting of $199.5 million of New Notes, $34.0 million outstanding
under the Restated Credit Agreement and $20.0 million outstanding under the
Loan Agreement. The Company believes  that its existing cash, cash flow from operations and availability under

the Restated Credit Agreement
 will provide sufficient liquidity to meet the Companys
cash requirements, working capital needs and debt service obligations over the next twelve months.
Reduced consultant liquidity could result in future reduced cash flows from
operations, which may require the Company to use funds under the credit
agreement. Cash Flows Net cash used
in operating activities was $8.8 million for the nine months
ended September 30, 2004 compared to $2.5 million for the nine months ended
September 30, 2003, an increase of $6.3 million. Net cash used in operating
activities for the nine months ended September 30, 2004 consisted of $10.6
million provided by net loss plus depreciation and other non-cash items
included in net loss offset by $19.4 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 nine months ended September 30,
2004 were an increase of $8.7 million in receivables,  $3.8 in
inventories, $3.6 million in prepaid expenses and  $4.9 million in
prepaid income taxes. 57




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Net cash used in investing activities was $4.0 million for the nine months
ended September 30, 2004 primarily related to the purchase of property and
equipment. Net cash provided in financing activities was $4.7 million for the nine
months ended September 30, 2004 and included borrowings of $107.0 million under
the revolving credit facility, $20.0 million of borrowings under the Loan
Contract, partially offset by repayments of $47.5 million of the term loan and
$73.0 million of repayments under the revolving credit facility. The effect of exchange changes on cash was $0.4 million for the nine
months ended September 30, 2004. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, Consolidated Financial Statements. FIN 46
requires the consolidation of variable interest entities by the party
considered to be the primary beneficiary of that entity. The FASB amended FIN
46 in December of 2003. The revised provisions of FIN 46 were effective for the
Company in the first quarter of 2004. The adoption of FIN 46 did not have an
impact on the Companys financial position or results of operations as the
Company had no variable interest entities. Business Trends and Initiatives The Companys Mexico subsidiary has reported net sales growth measured in
local currencies during the last three years, primarily as a result of
increases in the consultant base. Additionally, the Mexico subsidiary
contributes a significant portion of the Companys consolidated net sales. The
Companys Mexican subsidiary generated 67% of total net sales for the nine
months ended September 30, 2004 and 63% of total net sales for the year ended
December 31, 2003. In the United States, the Company has continued its strategy of focusing
on the distinct elements of its two basic customer groups.
Additionally, the Company is including the results of the Dominican Republic
within the results of the United States. Net sales for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003
decreased primarily as a result of a decrease in the consultant base due to a
lower base at the beginning of the period because of certain issues associated
with a system implementation. However, in each of the past two years, net
sales in the United States have increased. Net sales in Europe have increased due to strengthening of the euro
compared to the U.S. dollar. For the first nine months of 2004, European sales
contributed 8% to consolidated sales. However, in local currencies, net sales
decreased for the first nine months of 2004 compared to the first nine months
of 2003. During third quarter of 2003, the Company discontinued it operations in
Venezuela, Colombia, Chile and Peru. During the fourth quarter of 2003, the
Company ceased operations in Thailand. During the third quarter of 2004, the
Company decided to cease direct selling operations in Brazil and subsequent to
the end of the third quarter, the Company entered into a distribution agreement
with a third party to distribute Jafra products in Brazil.


The Company continues to evaluate its operations in other countries. 58




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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks arising from transactions
in the normal course of its business and from debt incurred in connection with
the recapitalization discussed in Liquidity and Capital Resources under Item
2. Such risks are principally associated with interest rate and foreign
exchange fluctuations, as well as changes in the Companys credit standing. See
disclosures under Item 7a, Quantitative and Qualitative Disclosures About
Market Risks in the Companys annual report on Form 10-K for the year ended
December 31, 2003. No significant changes have occurred during
the first nine months of 2004 in relation to the interest rate risk or its credit standing. Foreign Currency Risk The Company operates globally, with manufacturing facilities in Mexico and
distribution facilities in various locations around the world. With the
exception of most intercompany product sales between European subsidiares and
intercompany sales between Mexican entities, substantially all intercompany
product sales are denominated in U.S. dollars. However, 76% of the Companys
revenue for first nine months of 2004 was generated in countries with a
functional currency other than the U.S. dollar, and 67% of the Companys
revenue for the first nine months of 2004 was denominated in Mexican pesos. As
a result, the Companys earnings and cash flows for the nine months ended
September 30, 2004 were exposed to fluctuations in foreign currency exchange
rates. The Company may reduce its primary market exposures to fluctuations in
foreign exchange rates and hedge contractual foreign currency cash flows or
obligations (including third party and intercompany foreign currency
transactions) by creating offsetting positions through the use of forward
exchange contracts or option contracts. The Company regularly monitors its
foreign currency exposures to ensure that contract amounts do not exceed the
amounts of the underlying exposures. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives. The Company uses foreign currency option contracts to hedge against the
adverse effects that exchange rate fluctuations may have on the earnings of its
foreign subsidiaries. The outstanding foreign currency option contracts had a
notional value denominated in Mexican pesos of 657,000,000 and 831,000,000 in
put and call positions at September 30, 2004 and December 31, 2003,
respectively. The outstanding foreign currency option contracts outstanding at
September 30, 2004 mature at various dates through January 31, 2006.
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. 59




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##### Table of Contents



The following tables provide information about the details of the
Companys option contracts as of September 30, 2004 (in thousands except for
average strike price): Coverage in
    
    
    
    
    
    Fair Value inForeign Currency
    
    Mexican Pesos
    
    Average Strike Price
    
    U.S.Dollars(1)
    
    Maturity DateAt September 30, 2004:Purchased Puts (Company may sell Peso/buy USD)Mexican Peso
    
    
    182,000
    
    
    12.24  12.38
    
    
    (399
    )
    
    Oct.  Dec. 2004Mexican Peso
    
    
    107,000
    
    
    12.62  12.76
    
    
    (256
    )
    
    Jan.  Mar. 2005Mexican Peso
    
    
    179,000
    
    
    12.50  12.94
    
    
    (338
    )
    
    Apr.  Jun. 2005Mexican Peso
    
    
    61,000
    
    
    12.76  13.07
    
    
    (46
    )
    
    Jul.  Sept. 2005Mexican Peso
    
    
    108,000
    
    
    13.21  13.32
    
    
    (102
    )
    
    Oct.  Dec. 2005Mexican Peso
    
    
    20,000
    
    
    13.19
    
    
    (6
    )
    
    Jan. 2006657,000
    
    
    
    
    
    
    $
    (1,147
    )Written Calls (Counterparty may buy Peso/sell
USD)Mexican Peso
    
    
    182,000
    
    
    11.09  11.22
    
    
    351
    
    
    Oct.  Dec. 2004Mexican Peso
    
    
    107,000
    
    
    11.43  11.56
    
    
    161
    
    
    Jan.  Mar. 2005Mexican Peso
    
    
    179,000
    
    
    11.34  11.73
    
    
    285
    
    
    Apr.  Jun. 2005Mexican Peso
    
    
    61,000
    
    
    11.56  11.84
    
    
    (20
    )
    
    Jul.  Sept. 2005Mexican Peso
    
    
    108,000
    
    
    11.97  12.06
    
    
    (41
    )
    
    Oct.  Dec. 2005Mexican Peso
    
    
    20,000
    
    
    
    11.95
    
    
    
    (7
    )
    
    Jan. 2006657,000
    
    
    
    
    
    
    $
    729
 60




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##### Table of Contents



The following table provides information about the details of the
Companys option contracts as of December 31, 2003 (in thousands): Coverage inMexican
    
    Average Strike
    
    Fair Value inForeign Currency
    
    Pesos
    
    Price
    
    U.S. Dollars(1)
    
    Maturity DateAt December 31, 2003:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    140,000
    
    
    
    11.54-12.75
    
    
    $
    136
    
    
    Jan.-Mar. 2004Mexican peso
    
    
    170,000
    
    
    
    12.03-12.35
    
    
    
    127
    
    
    Apr.-June 2004Mexican peso
    
    
    122,000
    
    
    
    12.41-12.60
    
    
    
    74
    
    
    July-Sept. 2004Mexican peso
    
    
    182,000
    
    
    
    12.24-12.38
    
    
    
    14
    
    
    Oct.-Dec. 2004Mexican peso
    
    
    85,000
    
    
    
    12.62-12.72
    
    
    
    76
    
    
    Jan.-Mar. 2005Mexican peso
    
    
    132,000
    
    
    
    12.50-12.60
    
    
    
    29
    
    
    Apr.-Jun. 2005831,000
    
    
    
    
    
    
    $
    456Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    140,000
    
    
    
    10.26-10.93
    
    
    $
    (167
    )
    
    Jan.-Mar. 2004Mexican peso
    
    
    170,000
    
    
    
    10.19-12.35
    
    
    
    (234
    )
    
    Apr.-June 2004Mexican peso
    
    
    122,000
    
    
    
    10.49-11.41
    
    
    
    (109
    )
    
    July-Sept. 2004Mexican peso
    
    
    182,000
    
    
    
    11.09-11.22
    
    
    
    (147
    )
    
    Oct.-Dec. 2004Mexican peso
    
    
    85,000
    
    
    
    11.44-11.53
    
    
    
    (68
    )
    
    Jan.-Mar. 2005Mexican peso
    
    
    132,000
    
    
    
    11.34-11.41
    
    
    
    (171
    )
    
    Apr.-Jun. 2005831,000
    
    
    
    
    
    
    $
    (896
    )
   (1)
    
    The Fair Value of the option contracts presented above, an unrealized
loss of $418,000 at September 30, 2004 and an unrealized gain of $440,000
at December 31, 2003 represents the carrying value and was recorded in
accrued liabilities and other receivables, respectively in the
consolidated balance sheets. 
 ITEM 4.     CONTROLS AND PROCEDURES The Companys principal executive officer and principal financial officer have
evaluated the effectiveness of the Companys disclosure controls and
procedures, as such term is defined in Rule 15d-15(e) of the Securities
Exchange Act of 1934, as amended. Based upon their evaluation, the principal
executive officer and principal financial officer concluded that the Companys
disclosure controls and procedures are effective as of the end of the period
covered by this Quarterly Report on Form 10-Q. There has been no change in the Companys internal controls or procedures
during the fiscal quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting. 61




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##### 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 6.     Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. The following documents are exhibits to this quarterly report
on Form 10-Q. ExhibitNumber31.1
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.3
    
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K A current Report on Form 8-K was filed on August 5, 2004, under Item 5,
Other Events announcing the resignation of Michael A. DiGregorio, Executive
Vice President and Chief Financial Officer, and the appointment of Gary
Eshleman as acting Chief Financial Officer. A current Report on Form 8-K was filed on August 6, 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 second
quarter results. A current Report on Form 8-K was filed on August 19, 2004 under Item 5,
Other Events and under Item 7, Financial Statements, Proforma Financial
Information and Exhibits announcing that the Companys entry
 into a Restated Credit Agreement. A copy of the Restated Credit Agreement was attached as Exhibit 10.1. 62




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Jafra Worldwide Holdings (Lux) S.àr.l./s/ RONALD B. CLARK
Ronald B. Clark
Chief Executive Officer/s/ GARY ESHLEMAN
Gary Eshleman
Chief Financial Officer (Principal
Financial Accounting Officer)/s/ STACY WOLF
Stacy Wolf
Corporate Controller (Principal
Accounting Officer)Date November 15, 2004
 63