##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
Commission File Number 333-106666 JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. 
  Luxembourg
    
    98-0399297(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification Number)
 382-386 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. Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. Common stock, par value $100 per share, outstanding at May 9, 2005: 316,420.




---



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 Months Ended March 31, 2005 Page No.PART I - FINANCIAL INFORMATIONItem 1.(*)
    
    Financial Statements (Unaudited):Consolidated Financial Statements  Jafra Worldwide Holdings (Lux) S.àR.L.Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Consolidated Financial Statements  Jafra Cosmetics International, Inc. and SubsidiariesConsolidated Balance Sheets
    
    
    15Consolidated Statements of Operations
    
    
    16Consolidated Statements of Cash Flows
    
    
    17Notes to Consolidated Financial Statements
    
    
    18Financial Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    
    24Statements of Operations
    
    
    25Statements of Cash Flows
    
    
    26Notes to Financial Statements
    
    
    27Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and SubsidiariesConsolidated Balance Sheets
    
    
    32Consolidated Statements of Income
    
    
    33Consolidated Statements of Cash Flows
    
    
    34Notes to Consolidated Financial Statements
    
    
    35Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    40Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4.
    
    Controls and Procedures
    
    
    51PART II - OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    52Item 2.
    
    Unregistered
Sale of Equity Securities and Use of Proceeds
    
    
    52Item 6.
    
    Exhibits
    
    
    52Signature
    
    
    53Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




---



##### Table of Contents



3




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,563
    
    
    $
    10,586Receivables, net
    
    
    39,305
    
    
    
    42,904Inventories
    
    
    41,356
    
    
    
    40,375Prepaid income taxes
    
    
    4,781
    
    
    
    767Prepaid expenses and other current assets
    
    
    6,894
    
    
    
    6,847Deferred income taxes
    
    
    16,066
    
    
    
    16,865Assets from discontinued operations
    
    
    102
    
    
    
    133Total current assets
    
    
    121,067
    
    
    
    118,477Property and equipment, net
    
    
    58,781
    
    
    
    61,763Other assets:Goodwill
    
    
    63,017
    
    
    
    62,838Trademarks
    
    
    41,363
    
    
    
    41,463Deferred financing fees and other, net
    
    
    11,706
    
    
    
    13,877Total
    
    $
    295,934
    
    
    $
    298,418LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    18,838
    
    
    $
    17,866Accrued liabilities
    
    
    48,303
    
    
    
    53,499Income taxes payable
    
    
    412
    
    
    
    2,463Deferred income taxes
    
    
    
    
    
    
    1,063Due to Vorwerk
    
    
    
    
    
    
    20,000Liabilites from discontinued operations
    
    
    121
    
    
    
    129Total current liabilities
    
    
    67,674
    
    
    
    95,020Long-term debt
    
    
    164,250
    
    
    
    220,250Deferred income taxes
    
    
    21,322
    
    
    
    18,178Other long-term liabilities
    
    
    5,564
    
    
    
    5,131Total liabilities
    
    
    258,810
    
    
    
    338,579Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (deficit):Common stock, par value $100; 316,420 and 150 shares
authorized, issued and outstanding in 2005
and 2004, respectively
    
    
    31,642
    
    
    
    15Additional paid-in capital
    
    
    51,769
    
    
    
    4,296Retained deficit
    
    
    (37,380
    )
    
    
    (35,001
    )Accumulated other comprehensive loss
    
    
    (8,907
    )
    
    
    (9,471
    )Total stockholders equity (deficit)
    
    
    37,124
    
    
    
    (40,161
    )Total
    
    $
    295,934
    
    
    $
    298,418
 See accompanying notes to consolidated financial statements 4




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Net sales
    
    $
    96,818
    
    
    $
    103,122Cost of sales
    
    
    21,565
    
    
    
    24,183Gross profit
    
    
    75,253
    
    
    
    78,939Selling, general and administrative expenses
    
    
    60,196
    
    
    
    63,245Transaction related expenses
    
    
    
    
    
    
    3,409Restructuring and impairment charges
    
    
    
    
    
    
    1,909Income from operations
    
    
    15,057
    
    
    
    10,376Other income (expense):Exchange (loss) gain, net
    
    
    (493
    )
    
    
    551Interest expense
    
    
    (5,202
    )
    
    
    (6,794
    )Interest income
    
    
    110
    
    
    
    47Loss on extinguishment of debt
    
    
    (9,753
    )
    
    
    Other expense
    
    
    (116
    )
    
    
    (58
    )Other income
    
    
    29
    
    
    
    40(Loss) income before income taxes
    
    
    (368
    )
    
    
    4,162Income tax expense
    
    
    2,001
    
    
    
    2,946(Loss) income from continuing operations
    
    
    (2,369
    )
    
    
    1,216Loss on discontinued operations, net of income tax
expense of $0.0 million in 2005 and 2004
    
    
    (10
    )
    
    
    (132
    )Net (loss) income
    
    $
    (2,379
    )
    
    $
    1,084
 See accompanying notes to consolidated financial statements 5




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net (loss) income
    
    $
    (2,379
    )
    
    $
    1,084Loss on discontinued operations, net of income tax
    
    
    10
    
    
    
    132(Loss) income from continuing operations
    
    
    (2,369
    )
    
    
    1,216Adjustments to reconcile (loss) income from continuing operations to
net cash provided by operating activities:Depreciation
    
    
    3,440
    
    
    
    1,611Amortization and write off of deferred financing fees
    
    
    2,571
    
    
    
    490Provision for uncollectible accounts receivable
    
    
    1,572
    
    
    
    2,375Unrealized foreign exchange and derivative losses (gains)
    
    
    664
    
    
    
    (486
    )Deferred income taxes
    
    
    1,484
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    1,947
    
    
    
    (3,726
    )Inventories
    
    
    (1,041
    )
    
    
    1,687Prepaid expenses and other current assets
    
    
    (637
    )
    
    
    (2,368
    )Other assets
    
    
    123
    
    
    
    (113
    )Accounts payable and accrued liabilities
    
    
    (3,445
    )
    
    
    2,233Income taxes payable/prepaid
    
    
    (4,665
    )
    
    
    (923
    )Other long-term liabilities
    
    
    433
    
    
    
    (42
    )Net operating activities of discontinued operations
    
    
    23
    
    
    
    (131
    )Net cash provided by operating activities
    
    
    100
    
    
    
    1,823Cash flows from investing activities:Purchases of property and equipment
    
    
    (695
    )
    
    
    (1,971
    )Other
    
    
    (515
    )
    
    
    53Net cash used in investing activities
    
    
    (1,210
    )
    
    
    (1,918
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    (69,500
    )
    
    
    Repayments under term loan facility
    
    
    
    
    
    
    (1,875
    )Borrowings under revolving credit facility
    
    
    43,000
    
    
    
    Repayments under revolving credit facility
    
    
    (29,500
    )
    
    
    Repayment of Vorwerk note
    
    
    (20,000
    )
    
    
    Equity issuance to shareholder
    
    
    79,100
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    42Net cash provided by (used in) financing activities
    
    
    3,100
    
    
    
    (1,833
    )Effect of exchange rate changes on cash
    
    
    (13
    )
    
    
    (414
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,977
    
    
    
    (2,342
    )Cash and cash equivalents at beginning of period
    
    
    10,586
    
    
    
    16,120Cash and cash equivalents at end of period
    
    $
    12,563
    
    
    $
    13,778
 See accompanying notes to consolidated financial statements 6




---



##### Table of Contents



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., a Luxembourg société anonyme(Jafra S.A.).
Vorwerk & Co. eins GmbH (Vorwerk) owns substantially all of the issued and outstanding capital
stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a
family-owned company based in Wuppertal, Germany. The accompanying unaudited interim consolidated financial statements as of March 31, 2005 and
for the three months ended March 31, 2005 and 2004 and the accompanying audited consolidated
balance sheet as of December 31, 2004 reflect the operations of the Parent and its subsidiaries and
are referred to collectively as the Company. Jafra Cosmetics International, S.A. de C.V. (Jafra
Cosmetics S.A.) and Distribuidora Comercial Jafra, S.A. de C.V. (Jafra Distribution) are
collectively referred to as Jafra Mexico. The unaudited interim consolidated financial statements have been prepared in accordance with
Article 10 of the Securities and Exchange Commissions Regulation S-X. In the opinion of
management, the accompanying unaudited interim financial statements contain all adjustments,
including normal recurring adjustments, necessary to present fairly the Companys consolidated
financial statements as of March 31, 2005 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. New Accounting Pronouncements.In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, An
Amendment of ARB No. 42, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility
expense, freight, handling cost and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of
SFAS No. 151 is not expected to have a material impact on the operations of the Company. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or
other share-based payments. The standard is effective for the Company beginning in the first
quarter of 2006. The adoption of SFAS No. 123(R) is not expected to impact the Company at this
time as there are currently no outstanding options and no share-based payments have been made in
the current fiscal year. 7




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (2) Inventories Inventories consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials and supplies
    
    $
    9,502
    
    
    $
    10,744Finished goods
    
    
    31,854
    
    
    
    29,631Total inventories
    
    $
    41,356
    
    
    $
    40,375
 (3) Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Land
    
    $
    15,713
    
    
    $
    15,733Buildings
    
    
    16,841
    
    
    
    16,805Machinery, equipment and other
    
    
    52,975
    
    
    
    52,75485,529
    
    
    
    85,292Less accumulated depreciation
    
    
    26,748
    
    
    
    23,529Property and equipment, net
    
    $
    58,781
    
    
    $
    61,763
 During the three months ended March 31, 2005, the Company determined that certain software at
its United States subsidiary will not be utilized for the original estimated useful life and
therefore accelerated the depreciation expense so that the software will be fully depreciated by
the end of 2005. During the three months ended March 31, 2005, the Company recorded $1,510,000 of
incremental depreciation expense related to these assets. (4) Goodwill and Other Intangible Assets. The Companys intangible assets consist of trademarks and goodwill. The Company has
determined trademarks, principally the Jafra name resulting from the acquisition of the Jafra
business from Gillette, to have an indefinite life. The carrying value of trademarks was
$41,363,000 as of March 31, 2005. The changes in the carrying amount of goodwill for the year ended
December 31, 2004 and for the three months ended March 31, 2005 are as follows (in thousands): United
    
    
    
    
    
    
    
    
    
    
    All
    
    
    ConsolidatedGoodwill
    
    States
    
    
    Mexico
    
    
    Europe
    
    
    Others
    
    
    TotalBalance as of December 31, 2003
    
    $
    32,188
    
    
    $
    26,428
    
    
    $
    4,480
    
    
    $
    
    
    
    $
    63,096Translation effect
    
    
    
    
    
    
    130
    
    
    
    (388
    )
    
    
    
    
    
    
    (258
    )Balance as of December 31, 2004
    
    
    32,188
    
    
    
    26,558
    
    
    
    4,092
    
    
    
    
    
    
    
    62,838Translation effect
    
    
    
    
    
    
    (55
    )
    
    
    234
    
    
    
    
    
    
    
    179Balance as of March 31, 2005
    
    $
    32,188
    
    
    $
    26,503
    
    
    $
    4,326
    
    
    $
    
    
    
    $
    63,017
 8




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (5) Income Taxes The actual income tax rate of the Company differs from the expected tax rate, computed by
applying the federal corporate rates to income before taxes for the three months ended March 31,
2005 primarily due to (i) state income taxes and other permanent and temporary differences
including foreign tax and research and development credits in the Companys U.S. subsidiary and
(ii) temporary and permanent differences in the Companys Mexican subsidiaries. The actual income
tax rate of the Company differs from the expected tax rate, computed by applying the federal
corporate rate to income before income taxes for the three months ended March 31, 2004 primarily
due to (i) valuation allowances recorded against pretax losses at Jafra Distribution and at the
Companys European and South American entities, (ii) state income taxes and (iii) certain permanent
differences, including inflation, at Jafra Cosmetics S.A. (6) Debt On May 20, 2003, Jafra Cosmetics International, Inc. (JCI) and Jafra Distribution
(collectively, the Issuers) issued $200 million aggregate principal amount of 10 3/4% Subordinated
Notes (the 10 3/4% Notes) due 2011 pursuant to an Indenture dated May 20, 2003 (the Indenture).
The 10 3/4% Notes represent the several obligations of JCI and Jafra Distribution in the original
amount of $80 million and $120 million, respectively. The 10 3/4% Notes mature in 2011 and bear
interest at a fixed rate of 10 3/4% payable semi-annually. 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. Borrowings under the Restated Credit Agreement
current bear interest at an annual rate of Libor plus 2.5% and are subject to periodic adjustment
based on certain levels of financial performance. As of March 31, 2005, the applicable interest
rate was 5.2%. Borrowings under the Restated Credit Agreement are secured by substantially all of
the assets of JCI and Jafra Distribution. At March 31, 2005, the Company had $34,250,000
outstanding under the Restated Credit Agreement. 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 4.8%. The Loan Contract was
allocated 100% to JCI and was paid in full on January 6, 2005. JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect
wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the
obligations under the 10 3/4% Notes on a senior subordinated basis on the terms provided in the
Indenture governing the 10 3/4% Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the 10 3/4% Notes on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired
or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S.
portion of the 10 3/4% Notes, jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally
guarantee the Mexican portion of the 10 3/4% 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 10 3/4% 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 10 3/4% Notes, jointly and severally, on a senior subordinated basis. The
10 3/4% Notes are unsecured and are generally not redeemable for four years from their issue
date of May 20, 2003. Thereafter, the 10 3/4% Notes will be redeemable on a pro rata basis at premiums
declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, the Issuers
redeemed $69,500,000 of the 10 3/4% Notes at a redemption price of 110.75 with the cash proceeds from
an equity contribution from Vorwerk of $79,100,000. As a result of this redemption and the
redemption of $500,000 of the 10 3/4% Notes during 2004, $130.0 million principal amount of the 10 3/4%
Notes was outstanding at March 31, 2005. 9




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) In connection with the February 17, 2005 redemption, the Company paid $7,472,000 of premiums
and wrote off approximately $2,281,000 of previously capitalized deferred financing fees. As a
result, the Company recorded $9,753,000 as loss on extinguishment of debt in the accompanying
consolidated statements of operations during the three months ended March 31, 2005. As of March 31, 2005, approximately $5,066,000 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 10 3/4% 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 Company and certain of its subsidiaries, including without
limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of March 31, 2005, the Company and
its subsidiaries were in compliance with all covenants. The Restated Credit Agreement contains provisions whereby (i) the default by the Company, 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 Company, 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 Company, 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 10 3/4% Notes during the continuance of certain defaults
that would allow the holders of such senior indebtedness to accelerate the relevant senior
indebtedness. The terms of the Indenture significantly restrict the Company and its other subsidiaries from
paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Company 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 Company 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 (i) an 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 Company to dividends
necessary to fund specified costs and expenses, but permits the Company 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. 10




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited) (7) Equity During the three months ended March 31, 2005, through a series of transactions, Jafra S.A.
subscribed to 316,270 newly issued shares of the Company for approximately $79,100,000. The
proceeds of the equity offering were used to redeem a portion of the 10 3/4% Notes (See Note 6). (8) Transaction Related Expense The Company incurred $3,409,000 of transaction related expenses during the three months ended
March 31, 2004 related to certain equity and acquisition transactions contemplated but subsequently
abandoned. (9) Restructuring Charges During the year ended December 31, 2004, the Company recorded a total of $5,017,000 of
restructuring and impairment charges. Of these charges, $2,838,000 related primarily to the
transfer of substantially all of its skin and body care manufacturing operations to its facilities
in Mexico from the United States. The Company recorded $1,909,000 of restructuring charges during
the first quarter of 2004 related to the transfer. The transfer of these operations was
substantially complete during the second quarter of 2004. Additionally, during the year ended
December 31, 2004, the Company recorded $2,179,000 of severance related charges related to the
resignation of four members of management. A rollforward of the activity of the restructuring
accruals is summarized as follows (in thousands): Three months endedMarch 31,2005
    
    
    2004Opening balance
    
    $
    2,391
    
    
    $
    Additions
    
    
    
    
    
    
    1,909Charges against reserves
    
    
    (454
    )
    
    
    (689
    )Ending balance
    
    $
    1,937
    
    
    $
    1,220
 (10) Comprehensive (Loss) Income Comprehensive (loss) income is summarized as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net (loss) income
    
    $
    (2,379
    )
    
    $
    1,084Unrealized and deferred realized gain (loss) on derivatives
    
    
    3
    
    
    
    (435
    )Reclassification of deferred realized loss to
exchange gain (loss)
    
    
    8
    
    
    
    Reclassification of deferred realized loss to cost of sales
    
    
    12
    
    
    
    Foreign currency translation adjustments
    
    
    541
    
    
    
    (460
    )Comprehensive (loss) income
    
    $
    (1,815
    )
    
    $
    189
 (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. 11




---



##### 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, 2004 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 StatesAnd the
    
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    
    All
    
    
    Unallocated
    
    
    ConsolidatedMexico
    
    
    Republic
    
    
    Europe
    
    
    Others
    
    
    and Other
    
    
    Total(in thousands)As of and for the three months
ended March 31, 2005Net sales
    
    $
    66,568
    
    
    $
    22,332
    
    
    $
    7,728
    
    
    $
    191
    
    
    $
    
    
    
    $
    96,818Income (loss) from operations
    
    
    17,415
    
    
    
    1,202
    
    
    
    474
    
    
    
    (92
    )
    
    
    (3,942
    )
    
    
    15,057Depreciation
    
    
    1,009
    
    
    
    2,313
    
    
    
    112
    
    
    
    6
    
    
    
    
    
    
    
    3,440Capital expenditures
    
    
    242
    
    
    
    403
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    695Segment assets
    
    
    191,470
    
    
    
    87,521
    
    
    
    16,436
    
    
    
    1,253
    
    
    
    (848
    )
    
    
    295,832Discontinued operations assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    102Goodwill
    
    
    26,503
    
    
    
    32,188
    
    
    
    4,326
    
    
    
    
    
    
    
    
    
    
    
    63,017As of December 31, 2004Segment assets
    
    $
    188,832
    
    
    $
    91,861
    
    
    $
    17,571
    
    
    $
    1,376
    
    
    $
    (1,355
    )
    
    $
    298,285Assets from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133
    
    
    
    
    
    
    
    133Goodwill
    
    
    26,558
    
    
    
    32,188
    
    
    
    4,092
    
    
    
    
    
    
    
    
    
    
    
    62,838For the three months ended March
31, 2004Net sales
    
    $
    70,848
    
    
    $
    22,747
    
    
    $
    8,294
    
    
    $
    1,233
    
    
    $
    
    
    
    $
    103,122Income (loss) from operations
    
    
    18,659
    
    
    
    2,063
    
    
    
    267
    
    
    
    (657
    )
    
    
    (9,956
    )
    
    
    10,376Depreciation
    
    
    579
    
    
    
    896
    
    
    
    111
    
    
    
    25
    
    
    
    
    
    
    
    1,611Capital expenditures
    
    
    1,002
    
    
    
    894
    
    
    
    56
    
    
    
    19
    
    
    
    
    
    
    
    1,971
 Corporate, unallocated and other includes (in thousands): Three months ended March 31,2005
    
    
    2004Corporate expenses
    
    $
    (3,241
    )
    
    $
    (4,044
    )Transaction related expenses
    
    
    
    
    
    
    (3,409
    )Restructuring charges
    
    
    
    
    
    
    (1,909
    )Unusual charges(1)
    
    
    (701
    )
    
    
    (594
    )Total corporate, unallocated and other
    
    $
    (3,942
    )
    
    $
    (9,956
    )
   (1)
    
    Unusual charges include holding company expenses, severance, loss or gain on sale of assets and
other charges not related to the normal operations of the business. 12




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (12) Foreign Currency Option Contracts The Company is exposed to currency risk relating to its forecasted U.S. dollar-denominated
expenditures at Jafra Mexico. As part of its overall strategy to reduce the risk of potential
adverse exchange rate fluctuations in Mexico, the Company enters 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 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 can be deferred as a component of
other comprehensive loss. Such amounts will then be reclassified from other comprehensive loss
into net (loss) income when the underlying hedged exposure is recognized in income. For U.S.
dollar-denominated inventory purchases, this will occur upon sale to an outside party of the
related inventory. For intercompany charges and interest, this will occur at the date such charges
are paid by Jafra Mexico. During the three months ended March 31, 2005 and 2004, the Company recognized losses of
approximately $42,000, and $420,000 on option contracts, respectively, as a component of exchange
loss (gain) on the accompanying consolidated statements of operations. As of December 31, 2004, the Company had deferred as a component of other comprehensive loss
$65,000 of losses on option contracts. During the three months ended March 31, 2005, the Company
deferred as a component of other comprehensive loss $20,000 of gains on option contracts qualifying
for hedge accounting under SFAS No. 133. The Company expects that substantially all of the
remaining loss of $45,000 deferred as a component of other comprehensive loss at March 31, 2005
will be recognized into net (loss) income within the next six months. The fair value of the option contracts was $1,296,000 and $1,433,000 at March 31, 2005 and
December 31, 2004, respectively, and has been recorded in accrued liabilities in the consolidated
balance sheets. Substantially all of these contracts are not qualifying or highly effective
hedges, and as such, changes in fair value will be included in earnings. During the three months ended March 31, 2005 and 2004, the ineffectiveness generated by the
Companys option contracts designated as hedges was insignificant and accordingly nothing was
reclassified into earnings during either period. The outstanding foreign currency option contracts had a notional value denominated in Mexican
pesos of 587,000,000 and 545,000,000 in put and call positions at March 31, 2005 and December 31,
2004, respectively, and mature at various dates through June 30, 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 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. 13




---



##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Net sales and loss on discontinued operations was as follows: Venezuela
    
    
    Colombia
    
    
    Chile
    
    
    Peru
    
    
    Total(in thousands)For the three months ended March 31, 2005Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontnued operations
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    
    
    
    (3
    )
    
    
    (10
    )For the three months ended March 31, 2004Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss on discontnued operations
    
    
    (83
    )
    
    
    (17
    )
    
    
    (8
    )
    
    
    (24
    )
    
    
    (132
    )
 The components of assets and liabilities of the discontinued operations is as follows: Venezuela
    
    
    Colombia
    
    
    Chile
    
    
    Peru
    
    
    Total(in thousands)As of March 31, 2005Assets:Cash
    
    $
    
    
    
    $
    44
    
    
    $
    30
    
    
    $
    
    
    
    $
    74Receivables, net
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Total assets
    
    $
    
    
    
    $
    72
    
    
    $
    30
    
    
    $
    
    
    
    $
    102Liabilities:Accounts payable
    
    $
    
    
    
    $
    12
    
    
    $
    
    
    
    $
    
    
    
    $
    12Accrued liabilities
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    109Total liabilities
    
    $
    
    
    
    $
    121
    
    
    $
    
    
    
    $
    
    
    
    $
    121As of December 31, 2004Assets:Cash
    
    $
    
    
    
    $
    45
    
    
    $
    32
    
    
    $
    7
    
    
    $
    84Receivables, net
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Prepaid and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21Total assets
    
    $
    
    
    
    $
    73
    
    
    $
    32
    
    
    $
    28
    
    
    $
    133Liabilities:Accounts payable
    
    $
    
    
    
    $
    12
    
    
    $
    
    
    
    $
    7
    
    
    $
    19Accrued liabilities
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    110Total liabilities
    
    $
    
    
    
    $
    122
    
    
    $
    
    
    
    $
    7
    
    
    $
    129
 14




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,134
    
    
    $
    5,748Receivables, net
    
    
    4,272
    
    
    
    4,775Inventories
    
    
    10,343
    
    
    
    11,464Receivables from affiliates
    
    
    24,028
    
    
    
    24,644Prepaid expenses and other current assets
    
    
    3,165
    
    
    
    2,934Deferred income taxes
    

    
    12,598
    
    
    
    14,430Total current assets
    
    
    60,540
    
    
    
    63,995Property and equipment, net
    
    
    22,859
    
    
    
    24,988Other assets:Goodwill
    
    
    36,514
    
    
    
    36,280Notes receivable from affiliates
    
    
    12,331
    
    
    
    20,082Deferred financing fees, net
    
    
    2,172
    
    
    
    3,262Other
    
    
    5,638
    
    
    
    5,276Total
    
    $
    140,054
    
    
    $
    153,883LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    2,598
    
    
    $
    3,497Accrued liabilities
    
    
    18,743
    
    
    
    20,389Income taxes payable
    
    
    458
    
    
    
    2,463Payables to affiliates
    
    
    11,463
    
    
    
    18,349Due to Vorwerk
    
    
    
    
    
    
    20,000Total current liabilities
    
    
    33,262
    
    
    
    64,698Long-term debt
    
    
    79,500
    
    
    
    91,800Deferred income taxes
    
    
    6,339
    
    
    
    6,339Other long-term liabilities
    
    
    5,564
    
    
    
    5,131Total liabilities
    
    
    124,665
    
    
    
    167,968Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (deficit):Common stock, par value $.01: 1,000 shares authorized, issued
and outstanding in 2005 and 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    35,958
    
    
    
    4,296Retained deficit
    
    
    (18,629
    )
    
    
    (16,275
    )Accumulated other comprehensive loss
    
    
    (1,940
    )
    
    
    (2,106
    )Total stockholders equity
(deficit)
    
    
    15,389
    
    
    
    (14,085
    )Total
    
    $
    140,054
    
    
    $
    153,883
 See accompanying notes to consolidated financial statements 15




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Net sales to third parties
    
    $
    30,060
    
    
    $
    31,041Sales to affiliates
    
    
    220
    
    
    
    2,890Net sales
    
    
    30,280
    
    
    
    33,931Cost of sales
    
    
    6,632
    
    
    
    9,309Gross profit
    
    
    23,648
    
    
    
    24,622Selling, general and administrative expenses
    
    
    25,741
    
    
    
    27,096Transaction related expenses
    
    
    
    
    
    
    3,409Restructuring charges
    
    
    
    
    
    
    1,747Management fee income from affiliates
    
    
    (1,596
    )
    
    
    (1,919
    )Royalty income from affiliates, net
    
    
    (5,586
    )
    
    
    (5,448
    )Market subsidy expense
    
    
    
    
    
    
    250Income (loss) from operations
    
    
    5,089
    
    
    
    (513
    )Other income (expense):Exchange loss, net
    
    
    (109
    )
    
    
    (39
    )Interest expense
    
    
    (2,058
    )
    
    
    (2,651
    )Interest income
    
    
    150
    
    
    
    89Loss on extinguishment of debt
    
    
    (3,963
    )
    
    
    Other expense
    
    
    (1
    )
    
    
    (2
    )Other income
    
    
    27
    
    
    
    41Loss before income taxes
    
    
    (865
    )
    
    
    (3,075
    )Income tax expense (benefit)
    
    
    1,489
    
    
    
    (1,106
    )Net loss
    
    $
    (2,354
    )
    
    $
    (1,969
    )
 See accompanying notes to consolidated financial statements 16




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (2,354
    )
    
    $
    (1,969
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation
    
    
    2,425
    
    
    
    1,007Provision for uncollectible accounts receivable
    
    
    159
    
    
    
    259Write off and amortization of deferred financing fees
    
    
    1,094
    
    
    
    214Unrealized foreign exchange loss
    
    
    66
    
    
    
    38Deferred income taxes
    
    
    1,832
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    344
    
    
    
    (467
    )Inventories
    
    
    1,121
    
    
    
    1,052Prepaid expenses and other current assets
    
    
    (231
    )
    
    
    (1,960
    )Intercompany receivables and payables
    
    
    (74
    )
    
    
    7,211Other assets
    
    
    153
    
    
    
    (8
    )Accounts payable and accrued liabilities
    
    
    (2,545
    )
    
    
    319Income taxes payable/prepaid
    
    
    (2,005
    )
    
    
    91Other long-term liabilities
    
    
    433
    
    
    
    (42
    )Net cash provided by operating activities
    
    
    418
    
    
    
    5,745Cash flows from investing activities:Purchases of property and equipment
    
    
    (453
    )
    
    
    (950
    )Other
    
    
    (515
    )
    
    
    53Net cash used in investing activities
    
    
    (968
    )
    
    
    (897
    )Cash flows from financing activities:Repayments of subordinated debt
    
    
    (27,800
    )
    
    
    Repayment of Vorwerk note
    
    
    (20,000
    )
    
    
    Repayments under term loan facility
    
    
    
    
    
    
    (750
    )Borrowings under revolving credit facility
    
    
    43,000
    
    
    
    Repayments under revolving credit facility
    
    
    (27,500
    )
    
    
    Repayments from (advances to) affiliates
    
    
    1,489
    
    
    
    (980
    )Equity contribution from Parent
    
    
    31,662
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    42Net cash provided by (used in) financing activities
    
    
    851
    
    
    
    (1,688
    )Effect of exchange rate changes on cash
    
    
    85
    
    
    
    59Net increase in cash and cash equivalents
    
    
    386
    
    
    
    3,219Cash and cash equivalents at beginning of period
    
    
    5,748
    
    
    
    8,879Cash and cash equivalents at end of period
    
    $
    6,134
    
    
    $
    12,098
 See accompanying notes to consolidated financial statements 17




---



##### 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., a Luxembourg société
anonyme(Jafra S.A.).Vorwerk & Co. eins GmbH (Vorwerk) owns substantially all of the issued
and outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of
Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The accompanying unaudited interim consolidated financial statements as of March 31, 2005 and
for the three months ended March 31, 2005 and 2004 reflect the operations of Jafra Cosmetics
International, Inc. and its subsidiaries (JCI) and have been prepared in accordance with Article
10 of the Securities and Exchange Commissions Regulation S-X. In the opinion of management, the
accompanying unaudited interim consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly JCIs consolidated
financial statements as of March 31, 2005 and for the interim periods presented. All significant
intercompany accounts and transactions between entities comprising JCI have been eliminated in
consolidation. 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. New Accounting Pronouncements.In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, An
Amendment of ARB No. 42, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle
facility expense, freight, handling cost and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of
SFAS No. 151 is not expected to have a material impact on the operations of JCI. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or
other share based payments. The standard is effective for JCI beginning in the first quarter of
2006. The adoption of SFAS No. 123(R) is not expected to impact JCI at this time as there are
currently no outstanding options and no share-based payments have been made in the current fiscal
year. (2) Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    7,268
    
    
    
    7,212Machinery, equipment and other
    
    
    25,179
    
    
    
    25,13138,635
    
    
    
    38,531Less accumulated depreciation
    
    
    15,776
    
    
    
    13,543Property and equipment, net
    
    $
    22,859
    
    
    $
    24,988
 During the three months ended March 31, 2005, JCI determined that certain software at its
United States subsidiary will not be utilized for the original estimated useful life and therefore
accelerated the depreciation expense so that the software will be fully depreciated by the end of
2005. During the three months ended March 31, 2005, JCI recorded $1,510,000 of incremental
depreciation expense related to these assets. 18




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (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 $286,000 as of March 31, 2005. The
changes in the carrying amount of goodwill for the year ended December 31, 2004 and for the three
months ended March 31, 2005 are as follows (in thousands): United
    
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    
    Europe
    
    
    TotalBalance as of December 31, 2003
    
    $
    32,188
    
    
    $
    4,480
    
    
    $
    36,668Translation effect
    
    
    
    
    
    
    (388
    )
    
    
    (388
    )Balance as of December 31, 2004
    
    $
    32,188
    
    
    $
    4,092
    
    
    $
    36,280Translation effect
    
    
    
    
    
    
    234
    
    
    
    234Balance as of March 31, 2005
    
    $
    32,188
    
    
    $
    4,326
    
    
    $
    36,514
 (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 months ended March
31, 2005 and 2004, principally as the result of state income tax and certain permanent and
temporary differences, including foreign tax and research and development credits. (5) Debt On May 20, 2003, JCI and Distribuidora Comercial Jafra, S.A. de C.V. (Jafra Distribution and
collectively with JCI, the Issuers) issued $200 million aggregate principal amount of 10 3/4%
Subordinated Notes (the 10 3/4% Notes) due 2011 pursuant to an Indenture dated May 20, 2003 (the
Indenture). The 10 3/4% Notes represent the several obligations of JCI and Jafra Distribution in
the original amount of $80 million and $120 million, respectively. The 10 3/4% Notes mature in 2011
and bear a fixed interest rate of 10 3/4% payable semi-annually. On August 16, 2004, 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 Parent 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. Borrowings under the Restated Credit
Agreement current bear interest at an annual rate of Libor plus 2.5% and are subject to periodic
adjustment based on certain levels of financial performance. As of March 31, 2005, the applicable
interest rate was 5.2%. Borrowings under the Restated Credit Agreement are secured by
substantially all of the assets of JCI and Jafra Distribution. At March 31, 2005, JCI had
$27,500,000 outstanding under the Restated Credit Agreement. 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 4.8%. The Loan Contract was paid in full on
January 6, 2005. JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect
wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the
obligations under the 10 3/4% Notes on a senior subordinated basis on the terms provided in the
Indenture governing the 10 3/4% Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the 10 3/4% Notes on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired
or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S.
portion of the 10 3/4% Notes, jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally
guarantee the Mexican portion of the 10 3/4% Notes, jointly and severally, on a senior subordinated
basis. 19




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The 10 3/4% Notes are unsecured and are generally not redeemable for four years from their issue
date of May 20, 2003. Thereafter, the 10 3/4% Notes will be redeemable on a pro rata basis at
premiums declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, JCI
redeemed $27,800,000 of the 10 3/4% Notes at a redemption price of 110.75 with the cash proceeds from
an equity contribution from the Parent. As a result of this redemption and the redemption of
$200,000 of the 10 3/4% Notes during 2004, $52.0 million
principal amount of the 10 3/4% Notes was
outstanding at March 31, 2005. In connection with the February 17, 2005 redemption, JCI paid $2,989,000 of premiums and wrote
off approximately $974,000 of previously capitalized deferred financing fees. As a result, JCI
recorded $3,963,000 as loss on extinguishment of debt in the accompanying consolidated statements
of operations during the three months ended March 31, 2005. As of March 31, 2005, approximately $2,172,000 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 10 3/4% 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. de C.V. (Jafra Cosmetics S.A.). As of March 31, 2005,
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 10 3/4% Notes during the continuance of certain defaults
that would allow the holders of such senior indebtedness to accelerate the relevant senior
indebtedness. 20




---



##### Table of Contents



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 (i) an 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) Equity During the three months ended March 31, 2005, the Parent contributed $31,662,000 to JCI in
order for JCI to redeem a portion of the 10 3/4% Notes (See Note 5). (7) Transaction Related Expenses JCI incurred $3,409,000 of transaction related expenses during the three months ended March
31, 2004 related to certain equity and acquisition transactions contemplated but subsequently
abandoned. (8) Restructuring Charges During the year ended December 31, 2004, JCI recorded a total of $4,790,000 of restructuring
and impairment charges. Of these charges, $2,611,000 related primarily to the transfer of
substantially all of its skin and body care manufacturing operations to the Parents facilities in
Mexico from the United States. JCI recorded $1,747,000 of restructuring charges during the first
quarter of 2004 related to the transfer. The transfer of these operations was substantially
complete during the second quarter of 2004. Additionally, during the year ended December 31, 2004,
JCI recorded $2,179,000 of severance related charges related to the resignation of four members of
management. A rollforward of the activity of the restructuring accruals is summarized as follows
(in thousands): Three months endedMarch 31,2005
    
    
    2004Opening balance
    
    $
    2,391
    
    
    $
    Additions
    
    
    
    
    
    
    1,747Charges against reserves
    
    
    (454
    )
    
    
    (527
    )Ending balance
    
    $
    1,937
    
    
    $
    1,220
 21




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (9) Comprehensive Loss Comprehensive loss is summarized as follows (in thousands): Three months endedMarch 31,2005
    
    
    2004Net loss
    
    $
    (2,354
    )
    
    $
    (1,969
    )Foreign currency translation adjustments
    
    
    166
    
    
    
    (272
    )Comprehensive loss
    
    $
    (2,188
    )
    
    $
    (2,241
    )
 (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 starting in late 2004, most skin and body care products from Jafra Mexico
totaling $3,619,000 and $2,783,000 for the three months ended March 31, 2005 and 2004,
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
$782,000 and $750,000 for the three months ended March 31, 2005 and 2004, and was offset against
royalty income from affiliates in the accompanying consolidated statements of operations. JCI owns the worldwide rights to its multi-level sales know-how (referred to as the Jafra
Way). The Jafra Way was initially developed in the United States for lineage, training, and
compensation of consultants. The royalty fees charged by JCI to Jafra Cosmetics S.A. for the use of
the Jafra Way were $6,368,000 and $6,198,000 for the three months ended March 31, 2005 and 2004,
respectively, and were based upon a percentage of Jafra Cosmetics S.A.s sales to third parties. JCI has granted loans to certain affiliates at annual interest rates ranging from 3% to 5%.
Such loans are due to be repaid five years from the date of grant, with no prepayment penalty.
Notes receivable from affiliates at December 31, 2004 and March 31, 2005 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 $123,000 and $89,000 for the three months ended
March 31, 2005 and 2004, respectively, and was included in interest income on the accompanying
consolidated statements of operations. (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. Business results for the Thailand subsidiary are included in the
following table under the caption All Others. 22




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The accounting policies used to prepare the information reviewed by JCIs chief operating
decision makers are the same as those described in the summary of significant accounting policies
included in JCIs audited consolidated financial statements as of and for the year ended December
31, 2004 included in the Parents Annual Report on Form 10-K. JCI evaluates performance based on
segment operating income, excluding restructuring and impairment charges and unusual gains and
losses. Consistent with the information reviewed by JCIs chief operating decision makers,
corporate costs, foreign exchange gains and losses, interest expense, other nonoperating income or
expense, and income taxes are not allocated to operating segments for purposes of this
presentation. The effects of intersegment sales (net sales and related gross profit) are excluded
from the computation of segment net sales and income (loss) from operations. The elimination of
intercompany profit from inventory within segment assets is included in Corporate, Unallocated and
Other. Gross Profit from affiliates, management fee income from affiliates, royalty income from
affiliates and market subsidy expense to affiliates are included in the following table under the
caption Corporate, Unallocated and Other. United Statesand the
    
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    
    All
    
    
    Unallocated
    
    
    ConsolidatedRepublic
    
    
    Europe (1)
    
    
    Others
    
    
    and Other
    
    
    TotalAs of and for the three
months ended March 31, 2005Net sales
    
    $
    22,332
    
    
    $
    7,728
    
    
    $
    
    
    
    $
    220
    
    
    $
    30,280Income from operations
    
    
    1,202
    
    
    
    474
    
    
    
    
    
    
    
    3,413
    
    
    
    5,089Depreciation
    
    
    2,313
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    2,425Capital expenditures
    
    
    403
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    453Segment assets
    
    
    87,521
    
    
    
    16,113
    
    
    
    64
    
    
    
    36,356
    
    
    
    140,054Goodwill
    
    
    32,188
    
    
    
    4,326
    
    
    
    
    
    
    
    
    
    
    
    36,514As of December 31, 2004Segment assets
    
    $
    91,861
    
    
    $
    17,233
    
    
    $
    63
    
    
    $
    44,726
    
    
    $
    153,883Goodwill
    
    
    32,188
    
    
    
    4,092
    
    
    
    
    
    
    
    
    
    
    
    36,280For the three months ended
March 31, 2004Net sales
    
    $
    22,747
    
    
    $
    8,294
    
    
    $
    
    
    
    $
    2,890
    
    
    $
    33,931Income (loss) from operations
    
    
    2,063
    
    
    
    267
    
    
    
    
    
    
    
    (2,843
    )
    
    
    (513
    )Depreciation
    
    
    896
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    1,007Capital expenditures
    
    
    894
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    950
   (1)  excludes Jafra Poland sp.zo.o, an indirect wholly-owned subsidiary of the Parent and
affiliate of JCI Corporate, unallocated and other includes (in thousands): Three months ended March 31,2005
    
    
    2004Corporate expenses
    
    $
    (3,544
    )
    
    $
    (4,134
    )Transaction related expenses
    
    
    
    
    
    
    (3,409
    )Transaction with affiliates
    
    
    7,182
    
    
    
    7,117Restructuring charges
    
    
    
    
    
    
    (1,747
    )Unusual charges(1)
    
    
    (225
    )
    
    
    (670
    )Total corporate, unallocated and other
    
    $
    3,413
    
    
    $
    (2,843
    )
   (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. 23




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash
    
    $
    21
    
    
    $
    83Receivables
    
    
    218
    
    
    
    297Inventories
    
    
    32,251
    
    
    
    29,583Receivables from affiliates
    
    
    15,579
    
    
    
    18,073Prepaid income taxes
    
    
    939
    
    
    
    1,267Prepaid expenses and other current assets
    
    
    5,913
    
    
    
    2,690Deferred income taxes
    
    
    2,787
    
    
    
    Total current assets
    
    
    57,708
    
    
    
    51,993Machinery and equipment, net
    
    
    2,100
    
    
    
    2,095Other assets:Deferred financing fees, net
    
    
    2,649
    
    
    
    4,119Investment in preferred shares of affiliated company
    
    
    126,401
    
    
    
    126,663Other
    
    
    2,559
    
    
    
    2,664Total
    
    $
    191,417
    
    
    $
    187,534LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,667
    
    
    $
    12,014Accrued liabilities
    
    
    3,555
    
    
    
    1,892Payables to affiliates
    
    
    412
    
    
    
    2,535Deferred income taxes
    
    
    
    
    
    
    1,063Total current liabilities
    
    
    16,634
    
    
    
    17,504Long-term debt
    
    
    84,750
    
    
    
    128,450Deferred income taxes
    
    
    5,322
    
    
    
    1,820Total liabilities
    
    
    106,706
    
    
    
    147,774Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 151 shares authorized,
issued and outstanding in 2005 and 2004
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    47,490
    
    
    
    Retained earnings
    
    
    42,700
    
    
    
    45,338Accumulated other comprehensive loss
    
    
    (5,484
    )
    
    
    (5,583
    )Total stockholders equity
    
    
    84,711
    
    
    
    39,760Total
    
    $
    191,417
    
    
    $
    187,534
 See accompanying notes to financial statements 24




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    

    
    2004Sales to affiliates
    
    $
    36,806
    
    
    $
    39,176Cost of sales
    
    
    22,290
    
    
    
    26,406Gross profit
    
    
    14,516
    
    
    
    12,770Selling, general and administrative expenses
    
    
    697
    
    
    
    905Management fee expense to affiliate
    
    
    398
    
    
    
    471Service fee expense to affiliate
    
    
    6,703
    
    
    
    6,469Income from operations
    
    
    6,718
    
    
    
    4,925Other expense:Exchange loss, net
    
    
    (517
    )
    
    
    (2,384
    )Interest expense
    
    
    (3,088
    )
    
    
    (4,081
    )Interest income
    
    
    21
    
    
    
    Loss on extinguishment of debt
    
    
    (5,790
    )
    
    
    Other expense
    
    
    3
    
    
    
    Loss before income taxes
    
    
    (2,653
    )
    
    
    (1,540
    )Income tax expense
    
    
    (15
    )
    
    
    Net loss
    
    $
    (2,638
    )
    
    $
    (1,540
    )
 See accompanying notes to financial statements 25




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V. 
 STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (2,638
    )
    
    $
    (1,540
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    186
    
    
    
    162Write off and amortization of deferred financing fees
    
    
    1,477
    
    
    
    276Unrealized foreign exchange and derivative loss (gain)
    
    
    375
    
    
    
    (918
    )Deferred income taxes
    
    
    (341
    )
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    79
    
    
    
    17Inventories
    
    
    (2,727
    )
    
    
    726Prepaid expenses and other current assets
    
    
    73
    
    
    
    195Intercompany receivables and payables
    
    
    138
    
    
    
    (7,946
    )Other assets
    
    
    (17
    )
    
    
    81Accounts payable and accrued liabilities and value added taxes
    
    
    (956
    )
    
    
    9,661Income taxes payable
    
    
    325
    
    
    
    4Net cash (used in) provided by operating activities
    
    
    (4,026
    )
    
    
    718Cash flows from investing activities:Purchases of property and equipment
    
    
    (80
    )
    
    
    (113
    )Net cash used in investing activities
    
    
    (80
    )
    
    
    (113
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    (41,700
    )
    
    
    Repayments under revolving credit facility
    
    
    (2,000
    )
    
    
    Contribution from shareholders
    
    
    47,490
    
    
    
    Repayments under term loan facility
    
    
    
    
    
    
    (1,125
    )Net cash provided by (used in) financing activities
    
    
    3,790
    
    
    
    (1,125
    )Effect of exchange rate changes on cash
    
    
    254
    
    
    
    26Net decrease in cash
    
    
    (62
    )
    
    
    (494
    )Cash at beginning of period
    
    
    83
    
    
    
    523Cash at end of period
    
    $
    21
    
    
    $
    29
 See accompanying notes to financial statements 26




---



##### Table of Contents



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., a Luxembourg société ananyme(Jafra S.A.). Vorwerk & Co. eins GmbH (Vorwerk) owns
substantially all of the issued and outstanding capital stock of Jafra S.A. Vorwerk is an indirect
wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. Jafra Distribution was organized to conduct the Parents distribution business in Mexico. The
distribution business was previously conducted by Distribuidora Venus, S.A. de C.V., (Venus), a
wholly-owned subsidiary of Jafra Cosmetics International, S.A. de C.V. (Jafra Cosmetics S.A.).
Jafra Cosmetics S.A. is also primarily owned by five indirect wholly-owned subsidiaries of the
Parent. Jafra Distribution owns a minority interest of Jafra Cosmetics S.A. The accompanying unaudited interim financial statements as of March 31, 2005 and for the three
months ended March 31, 2005 and 2004 reflect the operations of Jafra Distribution and have been
prepared in accordance with Article 10 of the Securities and Exchange Commissions Regulation S-X.
In the opinion of management, the accompanying unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present fairly Jafra
Distributions financial statements as of March 31, 2005 and for the interim periods presented. 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 November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, An
Amendment of ARB No. 42, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility
expense, freight, handling cost and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of
SFAS No. 151 is not expected to have a material impact on the operations of Jafra Distribution. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or
other share based payments. The standard is effective for Jafra Distribution beginning in the
first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to impact Jafra
Distribution at this time as there are currently no outstanding options and no share-based payments
have been made in the current fiscal year. (2) Inventories Inventories consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials and supplies
    
    $
    9,473
    
    
    $
    10,682Finished goods
    
    
    22,778
    
    
    
    18,901Total inventories
    
    $
    32,251
    
    
    $
    29,583
 27




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) (3) Machinery and Equipment Machinery and equipment consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Machinery, equipment and other
    
    $
    2,634
    
    
    $
    2,559Less accumulated depreciation
    
    
    534
    
    
    
    464Machinery and equipment, net
    
    $
    2,100
    
    
    $
    2,095
 (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 $10,019,000, Jafra Distribution
carries the investment on its balance sheet at cost. (5) Income Taxes During the three months ended
March 31, 2005, the income tax expense differed from the
statutory income tax rate as a result of certain permanent and timing differences. During the
three months ended March 31, 2004, Jafra Distribution recorded valuation allowances against certain
pretax losses. (6) Debt On May 20, 2003, Jafra Distribution and Jafra Cosmetics International, Inc. (JCI and
collectively with Jafra Distribution, the Issuers) issued $200 million aggregate principal amount
of 10 3/4% Subordinated Notes (the 10 3/4% Notes) due 2011 pursuant to an Indenture dated May 20,
2003 (the Indenture). The 10 3/4% Notes represent the several obligations of Jafra Distribution and
JCI in the original amount of $120 million and $80 million, respectively. The 10 3/4% Notes mature in
2011 and bear a fixed interest rate of 10 3/4% payable semi-annually. On August 16, 2004, 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 Parent 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. Borrowings under the Restated Credit
Agreement current bear interest at an annual rate of Libor plus 2.5% and are subject to periodic
adjustment based on certain levels of financial performance. As of March 31, 2005, the applicable
interest rate was 5.2%. Borrowings under the Restated Credit Agreement are secured by
substantially all of the assets of Jafra Distribution and JCI. At March 31, 2005, Jafra
Distribution had $6,750,000 outstanding under the Restated Credit Agreement. 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 10 3/4% Notes on a senior subordinated basis on the terms provided in the
Indenture governing the 10 3/4% Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the 10 3/4% Notes on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. Each acquired or organized Mexican
subsidiary of Jafra Distribution is required to fully and unconditionally guarantee the Mexican
portion of the 10 3/4% Notes, jointly and severally, on a senior subordinated basis. Each existing
and subsequently acquired or organized U.S. subsidiary of JCI is required to fully and
unconditionally guarantee the U.S. portion of the 10 3/4% Notes, jointly and severally, on a senior
subordinated basis. 28




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) The
10 3/4% Notes are unsecured and are generally not redeemable for four years from their issue
date of May 20, 2003. Thereafter, the 10 3/4% Notes will be redeemable on a pro rata basis at premiums
declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, Jafra
Distribution redeemed $41,700,000 of the 10 3/4% Notes at a redemption price of 110.75 with the cash
proceeds from an equity contribution from the Parent. As a result of this redemption and the
redemption of $300,000 of the 10 3/4% Notes during 2004,
$78.0 million principal amount of the 10 3/4%
Notes was outstanding at March 31, 2005. In connection with the February 17, 2005 redemption, Jafra Distribution paid $4,483,000 of
premiums and wrote off approximately $1,307,000 of previously capitalized deferred financing fees.
As a result, Jafra Distribution recorded a $5,790,000 loss on extinguishment of debt in the
accompanying statements of operations during the three months ended March 31, 2005. As of March 31, 2005, approximately $2,894,000 of unamortized deferred financing fees
(excluding translation effects) were reported as a noncurrent asset in the accompanying balance
sheets. These deferred financing fees are being amortized on a basis that approximates the
interest method over the term of the 10 3/4% 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 March 31, 2005, 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 10 3/4% Notes during the continuance of certain defaults
that would allow the holders of such senior indebtedness to accelerate the relevant senior
indebtedness. The terms of the Indenture significantly restrict the Parent and its other subsidiaries from
paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Parent to make
such restricted payments or transfers is generally limited to an amount determined by a formula
based on 50% of its consolidated net income (which, as defined in the Indenture, excludes goodwill
impairment charges and any after-tax extraordinary, unusual or nonrecurring gains and losses)
accruing from October 1, 2002, plus specified other amounts. In addition, as a condition to making
such payments to Jafra S.A. based on such formula, the Parent must have a consolidated coverage
ratio (as defined in the Indenture) of at least 2.25 to 1 after giving effect to any such payments.
Notwithstanding such restrictions, the Indenture permits (i) an 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 29




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) 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. 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 10 3/4%
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 10 3/4% 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 10 3/4% Notes.
At March 31, 2005 and December 31, 2004, approximately $2,559,000 and $2,664,000, respectively,
were classified as non-current assets and the remaining unamortized amount was classified as
current assets on the accompanying balance sheets. (7) Equity During the three months ended March 31, 2005, the Parent, through a series of equity
transactions, indirectly contributed $47,490,000 to Jafra Distribution in order for Jafra
Distribution to redeem a portion of the 10 3/4% Notes (See Note 6). (8) Comprehensive Loss Comprehensive loss is summarized as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net loss
    
    $
    (2,638
    )
    
    $
    (1,540
    )Foreign currency translation adjustments
    
    
    99
    
    
    
    206Comprehensive loss
    
    $
    (2,539
    )
    
    $
    (1,334
    )
 (9) Related Party Transactions Jafra Distribution sells color cosmetics and fragrance products, and beginning 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 $3,644,000 and $2,783,000 for the
three months ended March 31, 2005 and 2004, 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 $220,000 and $2,811,000 for the three months ended March 31, 2005 and
2004, respectively. Jafra Distribution sells products purchased from an affiliate and other
purchased inventory to its Mexico affiliate, Jafra Cosmetics S.A., at a markup. Sales to Jafra
Cosmetics S.A. were $33,162,000 and $36,393,000 for the three months ended March 31, 2005 and 2004,
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. 30




---



##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited) In addition, Jafra Distribution is provided with certain management services, such as legal,
accounting and treasury, management oversight, and other administrative functions from affiliates,
including JCI. The cost of these services is included in management fee expense to affiliates in
the accompanying statements of operations. Jafra Distribution is charged a portion of these
management expenses based upon charges identified to Jafra Distribution and a formula using the
percentage of revenues of the subsidiaries to the total consolidated revenues of the Parent. Jafra
Distribution believes the amounts and methods of allocation are reasonable and approximate the cost
of the actual services received. (10) 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 months ended March
31, 2004, Jafra Distribution recognized losses of $3,275,000 related to forward contracts. As of
March 31, 2005, there were no outstanding forward contracts between Jafra Distribution and Jafra
Cosmetics S.A. 31




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,471
    
    
    $
    4,153Receivables, net
    
    
    34,226
    
    
    
    37,146Receivables from affiliates
    
    
    3,613
    
    
    
    3,499Current deferred income taxes
    
    
    680
    
    
    
    2,435Prepaid expenses and other current assets
    
    
    4,968
    
    
    
    2,272Total current assets
    
    
    48,958
    
    
    
    49,505Property and equipment, net
    
    
    33,751
    
    
    
    34,600Other assets:Goodwill
    
    
    26,503
    
    
    
    26,558Trademarks
    
    
    41,228
    
    
    
    41,314Other
    
    
    1,533
    
    
    
    1,520Total
    
    $
    151,973
    
    
    $
    153,497LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,352
    
    
    $
    2,200Accrued liabilities
    
    
    27,543
    
    
    
    30,040Income taxes payable
    
    
    692
    
    
    
    929Payables to affiliates
    
    
    30,053
    
    
    
    32,516Other current liabilities
    
    
    355
    
    
    
    371Total current liabilities
    
    
    61,995
    
    
    
    66,056Deferred income taxes
    
    
    9,660
    
    
    
    10,019Other long-term liabilities
    
    
    2,559
    
    
    
    2,664Total liabilities
    
    
    74,214
    
    
    
    78,739Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 139,373 shares authorized,
issued and outstanding in 2005 and 2004
    
    
    
    
    
    
    Series C preferred stock, no par value: 13,642 shares authorized,
issued and outstanding in 2005 and 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    54,334
    
    
    
    54,334Retained earnings
    
    
    33,007
    
    
    
    29,878Accumulated other comprehensive loss
    
    
    (9,582
    )
    
    
    (9,454
    )Total stockholders equity
    
    
    77,759
    
    
    
    74,758Total
    
    $
    151,973
    
    
    $
    153,497
 See accompanying notes to consolidated financial statements 32




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Net sales
    
    $
    66,567
    
    
    $
    70,847Cost of sales
    
    
    28,492
    
    
    
    28,755Gross profit
    
    
    38,075
    
    
    
    42,092Selling, general and administrative expenses
    
    
    34,093
    
    
    
    35,210Management fee expense to affiliates
    
    
    1,198
    
    
    
    1,448Service fee income from affiliate
    
    
    (6,703
    )
    
    
    (6,469
    )Restructuring charges
    
    
    
    
    
    
    162Royalty expense to affiliates, net
    
    
    5,586
    
    
    
    5,448Income from operations
    
    
    3,901
    
    
    
    6,293Other income (expense):Exchange (loss) gain, net
    
    
    (158
    )
    
    
    2,971Interest expense
    
    
    (31
    )
    
    
    (19
    )Interest income
    
    
    55
    
    
    
    46Other expense
    
    
    (112
    )
    
    
    (57
    )Income before income taxes
    
    
    3,655
    
    
    
    9,234Income tax expense
    
    
    526
    
    
    
    4,053Net income
    
    $
    3,129
    
    
    $
    5,181
 See accompanying notes to consolidated financial statements 33




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    3,129
    
    
    $
    5,181Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    823
    
    
    
    417Provision for uncollectible accounts receivable
    
    
    1,413
    
    
    
    1,962Unrealized foreign exchange and derivative loss
    
    
    71
    
    
    
    400Deferred income taxes
    
    
    1,410
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    1,427
    
    
    
    (3,207
    )Inventories
    
    
    693
    
    
    
    Prepaid expenses and other current assets
    
    
    (408
    )
    
    
    (594
    )Intercompany receivables and payables
    
    
    (2,708
    )
    
    
    896Other assets
    
    
    (14
    )
    
    
    (187
    )Accounts payable and accrued liabilities and value added taxes
    
    
    29
    
    
    
    (7,816
    )Income taxes payable/prepaid
    
    
    (4,402
    )
    
    
    (1,005
    )Net cash provided by (used in) operating activities
    
    
    1,463
    
    
    
    (3,953
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (162
    )
    
    
    (889
    )Net cash used in investing activities
    
    
    (162
    )
    
    
    (889
    )Effect of exchange rate changes on cash
    
    
    17
    
    
    
    78Net increase (decrease) in cash and cash equivalents
    
    
    1,318
    
    
    
    (4,764
    )Cash and cash equivalents at beginning of period
    
    
    4,153
    
    
    
    5,833Cash and cash equivalents at end of period
    
    $
    5,471
    
    
    $
    1,069
 See accompanying notes to consolidated financial statements 34




---



##### Table of Contents



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., a Luxembourg société ananyme
(Jafra S.A.). Vorwerk & Co. eins GmbH (Vorwerk) owns substantially all of the issued and
outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk
& Co. KG, a family-owned company based in Wuppertal, Germany. The accompanying unaudited interim consolidated financial statements as of March 31, 2005 and
for the three months ended March 31, 2005 and 2004 reflect the operations of Jafra Cosmetics
International S.A. de C.V. and its subsidiaries (Jafra Cosmetics S.A.) and have been prepared in
accordance with Article 10 of the Securities and Exchange Commissions Regulation S-X. In the
opinion of management, the accompanying unaudited interim consolidated financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary to present fairly Jafra
Cosmetics S.A.s consolidated financial statements as of March 31, 2005 and for the interim periods
presented. All significant intercompany accounts and transactions between entities comprising
Jafra Cosmetics S.A. have been eliminated in consolidation. 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. New Accounting Pronouncements.In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, An
Amendment of ARB No. 42, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility
expense, freight, handling cost and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of
SFAS No. 151 is not expected to have a material impact on the operations of Jafra Cosmetics S.A. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or
other share based payments. The standard is effective for Jafra Cosmetics S.A. beginning in the
first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to impact Jafra Cosmetics
S.A. at this time as there are currently no outstanding options and no share-based payments have
been made in the current fiscal year. (2) Property and Equipment Property and equipment consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Land
    
    $
    9,525
    
    
    $
    9,545Buildings
    
    
    9,573
    
    
    
    9,593Machinery, equipment and other
    
    
    24,949
    
    
    
    24,84244,047
    
    
    
    43,980Less accumulated depreciation
    
    
    10,296
    
    
    
    9,380Property and equipment, net
    
    $
    33,751
    
    
    $
    34,600
 35




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (3) Goodwill and Other Intangible Assets. Jafra Cosmetics S.A.s intangible assets consist of trademarks and goodwill. Jafra Cosmetics
S.A. has determined trademarks, principally the Jafra name resulting from the acquisition of the
Jafra business from Gillette, to have an indefinite life. The carrying value of trademarks was
$41,228,000 and $41,314,000 as of March 31, 2005 and December 31, 2004, respectively. Except for
translation adjustments, there were no changes in the carrying amount of goodwill during the three
months ended March 31, 2005 and the year ended December 31, 2004. Goodwill was $26,503,000 and
$26,558,000 at March 31, 2005 and December 31, 2004, respectively. (4) Income Taxes The actual income tax rate of Jafra Cosmetics S.A. for the three months ended March 31, 2005
differs from the expected tax rate, computed by applying the Mexico federal corporate rate to
income before income taxes due to certain permanent differences, including inflation and the effect
of temporary differences. (5) Restructuring Charges Jafra Cosmetics S.A. recorded and paid out $162,000 of restructuring charges during the three
months ended March 31, 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. (6) Debt On May 20, 2003, Distribuidora Comercial Jafra, S.A. de C.V. (Jafra Distribution) and Jafra
Cosmetics International, Inc. (JCI) (collectively, the Issuers) issued $200 million aggregate
principal amount of 10 3/4% Subordinated Notes (the 10 3/4% Notes) due 2011 pursuant to an Indenture
dated May 20, 2003 (the Indenture). The 10 3/4% Notes represent the several obligations of JCI and
Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10 3/4%
Notes mature in 2011 and bear a fixed interest rate of 10 3/4% payable semi-annually. JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect
wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the
obligations under the 10 3/4% Notes on a senior subordinated basis on the terms provided in the
Indenture governing the 10 3/4% Notes. The Issuers have fully and unconditionally guaranteed of the
other the obligations under the 10 3/4% Notes on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired
or organized U.S. subsidiary of JCI is also required to fully and unconditionally guarantee the 10
3/4% 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 10 3/4% Notes, jointly and severally, on a
senior subordinated basis. 36




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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 10 3/4% 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
10 3/4% 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 10 3/4% Notes. At March 31, 2005 and
December 31, 2004, approximately $2,559,000 and $2,664,000, respectively was classified as
non-current liabilities and the remaining unamortized amount was classified as current liabilities
in the accompanying consolidated balance sheets. (7) Comprehensive Income Comprehensive income is summarized as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    3,129
    
    
    $
    5,181Unrealized and deferred realized (loss) gain on derivatives
    
    
    3
    
    
    
    (435
    )Reclassification of deferred realized loss (gain) to
exchange loss
    
    
    8
    
    
    
    Reclassification of deferred realized loss to cost of sales
    
    
    12
    
    
    
    Foreign currency translation adjustments
    
    
    (151
    )
    
    
    341Comprehensive income
    
    $
    3,001
    
    
    $
    5,087
 (8) Related Party Transactions Jafra Cosmetics S.A. purchases products from its Mexican affiliate, Jafra Distribution at a
markup. The cost of these purchases was $12,325,000 and $12,388,000 for the three months ended
March 31, 2005 and 2004 respectively. Jafra Cosmetics S.A. provides certain administrative and other services to Jafra Distribution.
The income from these services is included in service fee income from affiliate on the
accompanying consolidated statements of income. 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 income. 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
$782,000 and $750,000 for the three months ended March 31, 2005 and 2004, respectively, and is
offset against royalty expense to affiliates in the accompanying consolidated statements of income. JCI owns the worldwide rights to its multi-level sales know-how (referred to as the Jafra
Way). The Jafra Way was initially developed in the United States for lineage, training, and
compensation of consultants. The royalty fees charged by JCI to Jafra Cosmetics S.A. for the use of
the Jafra Way were $6,368,000 and $6,198,000 for the three months ended March 31, 2005 and 2004,
respectively, and were based upon a percentage of Jafra Cosmetics S.A.s third party sales. 37




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) (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 at Jafra Mexico. As part of its overall strategy to reduce the
risk of potential adverse exchange rate fluctuations in Mexico, Jafra Cosmetics S.A. enters into
foreign currency option contracts (option contracts or options). Jafra Cosmetics S.A. 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, Jafra Cosmetics S.A. does not hold or issue 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 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 can be deferred as a component of
other comprehensive loss. Such amounts will then be reclassified from other comprehensive loss
into net income when the underlying hedged exposure is recognized in income. For U.S.
dollar-denominated inventory purchases, this will occur upon sale to an outside party of the
related inventory. For intercompany charges and interest, this will occur at the date such charges
are paid by Jafra Mexico. During the three months ended March 31, 2005 and 2004, Jafra Cosmetics S.A. recognized losses
of approximately $42,000 and $420,000 on option contracts, respectively, as a component of exchange
loss (gain) on the accompanying consolidated statements of income. As of December 31, 2004, Jafra Cosmetics S.A. had deferred as a component of other
comprehensive loss $65,000 of losses on option contracts. During the three months ended March 31,
2005, Jafra Cosmetics S.A. deferred as a component of other comprehensive loss $20,000 of gains on
option contracts qualifying for hedge accounting under SFAS No. 133. Jafra Cosmetics S.A. expects
that substantially all of the remaining loss of $45,000 deferred as a component of other
comprehensive loss at March 31, 2005 will be recognized into net income within the next six months. The fair value of the option contracts was $1,296,000 and $1,433,000 at March 31, 2005 and
December 31, 2004, respectively, and has been recorded in accrued liabilities in the consolidated
balance sheets. Substantially all of these contracts are not qualifying or highly effective
hedges, and as such, changes in fair value will be included in earnings. During the three months ended March 31, 2005 and 2004, the ineffectiveness generated by Jafra
Cosmetics S.A.s option contracts designated as hedges was insignificant and accordingly nothing
was reclassified into earnings during either period. The outstanding foreign currency option contracts had a notional value denominated in Mexican
pesos of 587,000,000 and 545,000,000 in put and call positions at March 31, 2005 and December 31,
2004, respectively, and mature at various dates through June 30, 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. 38




---



##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) 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 income. During the three months ended March
31, 2004, Jafra Distribution recognized losses of $3,275,000 related to forward contracts with
Jafra Distribution. As of March 31, 2005, there were no outstanding forward contracts between
Jafra Distribution and Jafra Cosmetics S.A.   39




---



##### Table of Contents



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, 2004 included
in the Annual Report on Form 10-K. The results of operations for the three months ended March 31,
2005 are not necessarily indicative of results that may be expected for future periods. Foreign Operations Net sales outside of the United States constituted approximately 77% and 78% of the Companys
total net sales for the three months ended March 31, 2005 and 2004, respectively. In addition, as
of March 31, 2005 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 reduce the risk of a devaluation
of the Mexican peso, however, a devaluation of the Mexican peso could have a negative impact on the
Companys results. The Companys subsidiaries in Mexico generated approximately 69% of the Companys net sales
for each of the three month periods ending March 31, 2005 and 2004, substantially all of which were
denominated in Mexican pesos. During the first three months of 2005, the Mexico peso was
relatively stable. However, in prior periods the Mexican peso has devalued which resulted in
exchange losses on the remeasurement of U.S. dollar-denominated debt. Jafra Distribution had $84.8
million of outstanding U.S. dollar denominated debt at March 31, 2005. The Company is exposed to foreign exchange risk due to its operations in Europe. The Company
also has exposure related to the outstanding intercompany notes and payables in Brazil which are
denominated in U.S. dollars. The Company does not currently have a hedging program to protect
against any devaluation of the real or the euro. A devaluation of either currency could have a
negative impact on the Companys results. As a group doing more than 77% of its business in international markets during the first three
months of 2005, 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 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, 2004 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. 40




---



##### Table of Contents



Results of Operations The following table represents selected components of the Companys results of operations, in
millions of dollars and as percentages of net sales. Three Months Ended March 31,2005
    
    
    2004Net sales
    
    $
    96.8
    
    
    
    100.0
    %
    
    $
    103.1
    
    
    
    100.0
    %Cost of sales
    
    
    21.5
    
    
    
    22.2
    
    
    
    24.2
    
    
    
    23.5Gross profit
    
    
    75.3
    
    
    
    77.8
    
    
    
    78.9
    
    
    
    76.5Selling, general and administrative expenses
    
    
    60.2
    
    
    
    62.2
    
    
    
    63.2
    
    
    
    61.3Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    3.3Restructuring and impairment charges
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    1.8Income from operations
    
    
    15.1
    
    
    
    15.6
    
    
    
    10.4
    
    
    
    10.1Exchange (loss) gain, net
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    0.5
    
    
    
    0.5Interest expense
    
    
    (5.2
    )
    
    
    (5.4
    )
    
    
    (6.8
    )
    
    
    (6.6
    )Interest income
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Loss on extinguishment of debt
    
    
    (9.8
    )
    
    
    (10.1
    )
    
    
    
    
    
    
    Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Other income
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1(Loss) income before income taxes
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    4.2
    
    
    
    4.1Income tax expense
    
    
    2.0
    
    
    
    2.1
    
    
    
    3.0
    
    
    
    2.9(Loss) income from continuing operations
    
    
    (2.4
    )
    
    
    (2.5
    )
    
    
    1.2
    
    
    
    1.2Loss on discontinued operations,
net of income tax expense of $0
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Net (loss) income
    
    $
    (2.4
    )
    
    
    (2.5)1
    %
    
    $
    1.1
    
    
    
    1.1
    %
 41




---



##### Table of Contents



Three months ended March 31, 2005 compared to the three months ended March 31, 2004 Corporate,United
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    ConsolidatedDollars in millions
    
    Mexico
    
    
    States
    
    
    Europe
    
    
    All Others
    
    
    and Other
    
    
    TotalThree Months Ended March 31, 2005Net sales
    
    $
    66.6
    
    
    $
    22.3
    
    
    $
    7.7
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    96.8Cost of sales
    
    
    15.9
    
    
    
    4.7
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    (0.4
    )
    
    
    21.5Gross profit
    
    
    50.7
    
    
    
    17.6
    
    
    
    6.5
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    75.3Selling, general and
administrative expenses
    
    
    33.3
    
    
    
    16.4
    
    
    
    6.0
    
    
    
    0.2
    
    
    
    4.3
    
    
    
    60.2Income (loss) from operations
    
    $
    17.4
    
    
    $
    1.2
    
    
    $
    0.5
    
    
    $
    (0.1
    )
    
    $
    (3.9
    )
    
    $
    15.1Three Months Ended March 31, 2004Net sales
    
    $
    70.9
    
    
    $
    22.7
    
    
    $
    8.3
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    103.1Cost of sales
    
    
    17.5
    
    
    
    5.0
    
    
    
    1.3
    
    
    
    0.4
    
    
    
    
    
    
    
    24.2Gross profit
    
    
    53.4
    
    
    
    17.7
    
    
    
    7.0
    
    
    
    0.8
    
    
    
    
    
    
    
    78.9Selling, general and
administrative expenses
    
    
    34.7
    
    
    
    15.6
    
    
    
    6.7
    
    
    
    1.5
    
    
    
    4.7
    
    
    
    63.2Transaction related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    3.4Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    1.9Income (loss) from operations
    
    $
    18.7
    
    
    $
    2.1
    
    
    $
    0.3
    
    
    $
    (0.7
    )
    
    $
    (10.0
    )
    
    $
    10.4
 Net sales. Net sales in the first quarter of 2005 decreased to $96.8 million from
$103.1 million in the first quarter of 2004, a decrease of $6.3 million, or 6.1%. The decrease in
net sales was not significantly impacted by fluctuations in exchange rates. The decrease in net
sales was primarily caused by a decrease in the average number of consultants and a decrease in
consultant productivity. The Companys average number of consultants in the first quarter of 2005
decreased to approximately 426,000, or 2.6% over the average number of consultants in the first
quarter of 2004 in part due to the Companys decision to cease its direct selling operations in
Brazil. 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 first quarter of 2005 decreased 3.6% compared to the first quarter of 2004. Consultant
productivity refers to the average amount purchased by each consultant during the period and is
calculated by dividing net sales during the period by the average number of consultants during that
period. Quarterly productivity may increase or decrease significantly due to changes in the nature
and timing of certain promotions from one year to another. In Mexico, net sales in the first quarter of 2005 decreased to $66.6 million from $70.9
million in the first quarter of 2004, a decrease of $4.3 million, or 6.1%. Net sales in Mexico
measured in local currency decreased by 5.3% in the first quarter of 2005 over the comparable 2004
period. The period-over-period net sales decrease was due primarily to a decrease in consultant
productivity partially offset by an increase in the average number of consultants. The decrease in
consultant productivity was partially related to the timing of the Easter holiday. During 2005 the
holiday was in March and in 2004 the holiday was in April. The average number of consultants
during the first quarter of 2005 was 335,000 compared to 319,000 during the first quarter of 2004,
an increase of 5.0%. The increase in the number of consultants was partially due to more
consultants at the beginning of 2005 over the comparable prior year. In the United States, including the Dominican Republic, net sales in the first quarter of 2005
decreased to $22.3 million compared to $22.7 million in the first quarter of 2004, a decrease of
$0.4 million, or 1.8%. Operations in the United States (inclusive of the Dominican Republic) are
bifurcated into two separate units: the Hispanic Group, which includes the Hispanic Division and
the Dominican Republic and represents approximately two-thirds of the United States segment and the
U.S. Division. In the United States, the decrease in net sales was primarily the result of a
decrease in the U.S. Division as a result of a decrease in the average number of consultants
partially offset by an increase in Hispanic Group net sales. 42




---



##### Table of Contents



Net sales in the Hispanic Group (including the Dominican Republic) increased to $16.0 million
in the first quarter of 2005 compared to $15.5 million in the first quarter of 2004, an increase of
$0.5 million, or 3.2%. The net sales increase in the first quarter of 2005 compared to the first
quarter of 2004 was primarily due to an increase in consultant productivity partially offset by a
decrease in the average number of consultants. Consultant productivity increased 16.0% during the
first quarter of 2005 compared first quarter of 2004. During the first quarter of the 2005, the
Hispanic Division changed its program to increase the minimum order size in order to receive the
maximum commission, which resulted in an increase in consultant productivity. The Dominican
Republic consultant productivity increased as a result of the implementation of a new business
model during mid 2004 and favorable exchange rates in 2005 over the comparable prior year period.
The average number of consultants in the Hispanic Group during the first quarter of 2005 was
approximately 48,000 compared to 54,000 in the comparable prior year period, a decrease of 11.1%. Net sales in the U.S. Division decreased 12.5% to approximately $6.3 million in the first
quarter of 2005 compared to $7.2 million in the first quarter of 2004 as a result of a decrease in
the average number of consultants. During the first quarter of 2005, the U.S. Division had an
average of 24,000 consultants compared to 27,000 in the first quarter of 2004, a decrease of
approximately 3,000 consultants, or 11.1%. The decrease was a result of a renewed emphasis on long
term growth by the U.S. Division based on recruiting and retaining only consultants who are
interested in actively selling Jafra products and recruiting other Jafra consultants. As part of
this focus, the U.S. Division increased the minimum order size to receive the maximum commission
and also introduced a new professional consultant case. However, in the short term, the result was
a reduction in the consultant base as consultants who purchase Jafra products strictly for their
own use have dropped out of the base. Consultant productivity in the U.S. Division was relatively
constant period to period. In Europe, net sales decreased to $7.7 million in the first quarter of 2005 compared to $8.3
million in the first quarter of 2004, a decrease of $0.6 million, or 7.2%. The decrease was the
result of a decrease in consultant productivity. In several European markets, the Company will
launch a new career plan during the second quarter of 2005. This new plan was introduced during
the first quarter of 2005 and as a result consultant productivity decreased as consultants wait for
the new programs. The decrease in consultant productivity was partially offset by an increase in
the average number of consultants. The average number of consultants in Europe was approximately
19,000, an increase of 3% over the comparable prior year period. The increase in the average
number of consultants was driven by favorable recruiting promotions in the Companys Italian
subsidiary. Net sales in the other markets decreased to $0.2 million in the first quarter of 2005 compared
to $1.2 million in the first quarter of 2004. Other markets consist of Brazil and Argentina. In
2005, only Argentina contributed net sales as a result of the Company ceasing its direct selling
operations in Brazil during 2004. The Company will cease direct selling operations in Argentina
during 2005. Gross profit.Consolidated gross profit in the first quarter of 2005 decreased to $75.3
million from $78.9 million in the comparable prior year period, a decrease of $3.6 million, or
4.6%. Gross profit as a percentage of net sales (gross margin) increased to 77.8% in the first
quarter of 2005 from 76.5% in the first quarter of 2004. The increase in gross margin in the first
quarter of 2005 was primarily a result of increased margins in Mexico and the United States and
favorable manufacturing and other direct cost variances in the Companys manufacturing operations. In Mexico, gross margin in the first quarter of 2005 increased to 76.1% from 75.3% in the
first quarter of 2004. The increased gross margin in Mexico was primarily the result of a better
resale to promotional product mix and better margins on non-resale and promotional sets. In the United States, gross margin in the first quarter of 2005 increased to 78.9% compared to
78.0% in the first quarter of 2004 as result of the product mix with more regular line products and
more favorable margins on both regular line and promotional products. In Europe, gross margin in the first quarter of 2005 was relatively constant at 84.4% compared
to the first quarter of 2004. 43




---



##### Table of Contents



Selling, general and administrative expenses.SG&A expenses in the first quarter of 2005
decreased to $60.2 million from $63.2 million in the first quarter of 2004, a decrease of $3.0
million or 4.7%. SG&A expenses as a percentage of net sales increased to 62.2% in the first
quarter of 2005 compared to 61.3% in the first quarter of 2004, due primarily to increased SG&A
expenses, as a percentage of net sales, at the Companys Mexican and United States subsidiaries
partially offset in part by reduced SG&A expenses, as a percentage of net sales, at the Companys
Corporate headquarters and U.S. subsidiary. In Mexico, SG&A expenses in the first quarter of 2005 decreased by $1.4 million, or 4.0%, to
$33.3 million compared to $34.7 million in the first quarter of 2004. SG&A expenses increased as a
percentage of net sales to 50.0% in the first quarter of 2005 compared to 48.9% in the first
quarter of 2004. The increase in SG&A expenses as a percentage of net sales was primarily due to
the unfavorable impact of reduced sales on fixed costs. This was partially offset by decreased bad
debt expenses and personnel related expense savings. In the United States, SG&A expenses in the first quarter of 2005 increased by $0.8 million, or
5.2%, to $16.4 million from $15.6 million in the first quarter of 2004. SG&A expenses as a
percentage of net sales were 73.5% in the first quarter of 2005 compared to 68.7% in the first
quarter of 2004. The increase in SG&A expenses as a percentage of net sales and in total was
primarily attributable to increased depreciation expense related to the acceleration of the
depreciation as a result of the shortening of the useful life of the Companys commercial software
system. This was partially offset by savings in sales promotional expenses due to reduced
promotional activity. In Europe, SG&A expenses in the first quarter of 2005 decreased by $0.7 million, or 10.4% to
$6.0 million from $6.7 million in the first quarter of 2004. SG&A expenses as a percentage of net
sales in Europe decreased to 77.9% in the first quarter of 2005 from 80.7% in the first quarter of
2004 due to reduced sales promotional activity during 2005 and a focus on cost containment.
Germany and other European markets have delayed or eliminated certain expenditures during the first
quarter of 2005 as these prepare for the launch of the new career plan during the second quarter of
2005. SG&A expenses in the Companys other markets in the first quarter of 2005 decreased by $1.3
million, to $0.2 million compared to $1.5 million during the first quarter of 2004. The Company
began winding down its operations in Brazil during the third quarter of 2004 and as a result, the
only Brazilian expenses included in S,G&A during 2005 are those necessary to wind down the
operation. SG&A expenses in Corporate, Unallocated and Other decreased to $4.3 million during the first
quarter of 2005 compared to $4.7 million in the first quarter of 2004, a decrease of $0.4 million,
or 8.5%. The decrease was the result of the timing of incremental costs and the reduction of
certain personnel expenses in the Companys corporate headquarters during the first quarter of 2005
compared to the first quarter of 2004. Transaction Related Expenses.During the first quarter of 2004, the Company incurred $3.4
million of transaction expenses for certain equity and acquisition transactions contemplated but
subsequently abandoned. Restructuring and impairment charges.During the first quarter of the 2004, the Company
recorded $1.9 million of restructuring charges, primarily severance charges, related to
implementation of its plan to move substantially all of its manufacturing functions to its
facilities in Mexico. Exchange (loss) gain.The Companys foreign exchange loss was $0.5 million during the first
quarter of 2005 compared to an exchange gain of $0.5 million during the first quarter of 2004, an
unfavorable change of $1.0 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 first quarter of 2005, the Company recognized $0.2 million of losses related
to the remeasurement of U.S. dollar-denominated debt, $0.1 million of losses on option contracts
and $0.2 million of losses on other foreign currency transactions. During the first quarter of
2004, the Company recognized $0.9 million of exchange gains related to the remeasurement of U.S.
dollar-denominated debt. This was partially offset by $0.4 million of exchange losses on option
contracts. The net gains and losses related to other foreign currency- 44




---



##### Table of Contents



denominated transactions was nominal during the first quarter of 2004. See Item 3, Quantitative
and Qualitative Disclosures about Market Risk. Interest expense, net of interest income.Net interest expense (including interest income) in
the first quarter of 2005 decreased to $5.1 million from $6.7 million in the first quarter of 2004,
a decrease of $1.6 million. The decrease in net interest expense is primarily due to the decrease
in the debt balance and specifically the repurchase of
$69.5 million principal of 10 3/4% Notes
during the first quarter of 2005. Loss on extinguishment of debt.During the first quarter of 2005, the Company repurchased
$69.5 million of its outstanding 10 3/4% subordinated notes. In connection with the redemption, the
Company paid $7.5 million of premiums and wrote off approximately $2.3 million or previously
capitalized deferred financing fees. As a result, the Company recorded $9.8 million as loss on
extinguishment of debt during the first quarter of 2005. Income tax expense.Income tax expense was $2.0 million during the first quarter of 2005
compared to $3.0 million during the first quarter of 2004. During the first quarter of 2005, the
Company had pretax losses and an income tax expense in its U.S. subsidiary. The effective rate in the U.S. subsidiary was greater than the statutory rate because of reversal of certain tax
credits. In the Companys Mexican subsidiaries, the income tax rate was lower than the effective
tax rate because of certain permanent and temporary differences during the first quarter of 2005.
During the first quarter of 2004, the Companys effective tax rate from continuing operations was
71.4%. The effective tax rate was greater than the statutory rate during the first quarter of 2004
primarily as a result of valuation allowances against certain operating losses in its Mexican
subidiary and valuation allowances against operating losses in its European and South American
subsidiaries. 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 nominal
during the first quarter of 2005 compared to $0.1 million during the first quarter of 2004. Net loss.Net loss was $2.4 million in the first quarter of 2005 compared to net income of
$1.1 million in the first quarter of 2004, an unfavorable change of $3.5 million. The unfavorable
change was the result of a $3.6 million decrease in gross profit, a $1.0 unfavorable change in
exchange (loss) gain, a $9.8 million loss on extinguishment of debt and the absence of $0.1 million
of other income, partially offset by a $3.0 million decrease in selling, general and administrative
expenses, the absence of $3.4 million of transaction related expenses and $1.9 million of
restructuring and impairment charges, a $1.6 million decrease in interest expense, a $1.0 million
favorable change in income tax expense and a $0.1 million decrease in loss on discontiuned
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 various 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. 45




---



##### Table of Contents



Liquidity On May 20, 2003, the Issuers issued $200 million aggregate principal amount of 10 3/4%
Subordinated Notes (the 10 3/4% Notes) due 2011 pursuant to an Indenture dated May 20, 2003 (the
Indenture). The 10 3/4% Notes represent the several obligations of JCI and Jafra Distribution in
the original amount of $80 million and $120 million, respectively. The 10 3/4% Notes mature in 2011
and bear interest at a fixed rate of 10 3/4% payable semi-annually. The Restated Credit Agreement
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. Borrowings under the
Restated Credit Agreement current bear interest at an annual rate of Libor plus 2.5% and are
subject to periodic adjustment based on certain levels of financial performance. As of March 31,
2005, the applicable interest rate was 5.2%. Borrowings under the Restated Credit Agreement are
secured by substantially all of the assets of JCI and Jafra Distribution. At March 31, 2005, the
Company had $34.3 million outstanding under the Restated Credit Agreement. 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 4.8%. The Loan Contract was allocated
100% to JCI and was paid in full on January 6, 2005. JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect
wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the
obligations under the 10 3/4% Notes on a senior subordinated basis on the terms provided in the
Indenture governing the 10 3/4% Notes. Each Issuer has fully and unconditionally guaranteed the
obligations of the other under the 10 3/4% Notes on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired
or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S.
portion of the 10 3/4% Notes, jointly and severally, on a senior subordinated basis. Each acquired or
organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally
guarantee the Mexican portion of the 10 3/4% 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 10 3/4% 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 10 3/4% Notes, jointly and severally, on a senior subordinated basis. The
10 3/4% Notes are unsecured and are generally not redeemable for four years from their issue
date of May 20, 2003. Thereafter, the 10 3/4% Notes will be redeemable on a pro rata basis at premiums
declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, the Issuers
redeemed $69,500,000 of the 10 3/4% Notes at a redemption price of 110.75 with the cash proceeds from
an equity contribution from Vorwerk of $79.1 million. As a result of this redemption and the
redemption of $0.5 million of the 10 3/4% Notes during 2004, $130.0 million principal amount of the 10
3/4% Notes was outstanding at March 31, 2005. In connection with the February 17, 2005 redemption, the Company paid $7.5 million of premiums
and wrote off approximately $2.3 million of previously capitalized deferred financing fees. As a
result, the Company recorded $9.8 million as loss on extinguishment of debt in the accompanying
consolidated statements of operations during the three months ended March 31, 2005. As of March 31, 2005, approximately $5.1 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 10 3/4% 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 Company and certain of its subsidiaries, including without
limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of March 31, 2005, the 46




---



##### Table of Contents



Company and its subsidiaries were in compliance with all covenants. The Restated Credit Agreement contains provisions whereby (i) the default by the Company, 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 Company, 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 Company, 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 10 3/4% Notes during the continuance of certain defaults
that would allow the holders of such senior indebtedness to accelerate the relevant senior
indebtedness. The terms of the Indenture significantly restrict the Company and its other subsidiaries from
paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Company 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 Company 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 (i) an 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 Company to dividends
necessary to fund specified costs and expenses, but permits the Company 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. As of March 31, 2005, the Company had outstanding $164.3 million of debt, consisting of $130.0
million of 103/4% Notes and $34.3 million outstanding under the Restated Credit 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 disposable income could result in future reduced cash flows from operations,
which may require the Company to use funds under the Restated Credit Agreement. Cash Flows Net cash provided by operating activities was $0.1 million for the three months ended March
31, 2005 compared to $1.8 million for the three months ended March 31, 2004, a decrease of $1.7
million. Net cash provided by operating activities for the three months ended March 31, 2005
consisted of $7.4 million provided by net loss plus depreciation and other non-cash items included
in net loss offset by $7.3 million used in changes in operating assets and liabilities. The
significant elements of net cash used in changes in operating assets and liabilities during the
three months ended March 31, 2005 were an increase of $3.4 million in accounts payable and accrued
liabilities and a $4.7 increase in prepaid income taxes. 47




---



##### Table of Contents



Net cash used in investing activities was $1.2 million for the three months ended March 31,
2005 primarily related to the purchase of property and equipment and investments related to the
supplemental savings plan in the CompanyU.S. subsidiary. Net cash provided in financing activities was $3.1 million for the three months ended March
31, 2005 and included a $79.1 million equity contribution from the shareholder, Jafra S.A., and net
borrowings under the Restated Credit Agreement of $13.5 million, partially offset by $69.5 million
of repurchase of subordinated debt, $20.0 million repayment of the Vorwerk note. The effect of exchange changes on cash was nominal during the three months ended March 31,
2005. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs, An Amendment of ARB No. 42,
Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight,
handling cost and wasted materials (spoilage) should be recognized as current-period charges and
requires the allocation of fixed production overheads to inventory based on the normal capacity of
the production facilities. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after November 23, 2004. The adoption of SFAS No. 151 is not
expected to have a material impact on the operations of the Company. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R)
requires that companies recognize compensation expense equal to the fair value of stock options or
other share based payments. The standard is effective for the Company beginning in the first
quarter of 2006. The adoption of SFAS No. 123(R) is not expected to impact the Company at this
time as there are currently no outstanding options and no share-based payments have been made in
the current fiscal year. Business Trends and Initiatives The Companys Mexico subsidiary has reported net sales growth measured in local currencies
during the last several years despite the sales decline in the first quarter of 2005. The prior
year net sales increases have primarily been 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 69% of total net sales for the three months
ended March 31, 2005 and 67% of total net sales for the year ended December 31, 2004. In the United States, the Company has continued its strategy of focusing on the distinct
elements of its two basic customer groups. Net sales for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 decreased primarily as a result of a decrease in
the consultant base. Net sales in Europe have decreased in the first quarter of 2005 compared to the first quarter
of 2004. The programs in Germany and the other European markets are under evaluation and the
Company is implementing a new career plan during the second quarter of 2005 to focus on recruiting
and long term growth. During 2003, the Company discontinued it operations in Venezuela, Colombia, Chile and Peru and
has classified the results from these operations as discontinued operations in its financial
statements. During 2003 and 2004, the Company ceased direct selling operations in Thailand and
Brazil, respectively, and is currently only incurring costs necessary to wind down the operations.
The Company has entered into a third party agreement with a distributor in Brazil. The Company
intends to primarily service the distribution agreement from its subsidiaries in Mexico and the
United States. During 2005, the Company plans to cease operations in Argentina. 48




---



##### Table of Contents



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 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, 2004. No significant changes have occurred during the first three months
of 2005 in relation to the interest rate risk or the Companys 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, 77% of the Companys
revenue for first three months of 2005 was generated in countries with a functional currency other
than the U.S. dollar, and 69% of the Companys revenue for the first three months of 2005 was
denominated in Mexican pesos. As a result, the Companys earnings and cash flows for the three
months ended March 31, 2005 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 587,000,000
and 545,000,000 in put and call positions at March 31, 2005 and December 31, 2004, respectively.
The outstanding foreign currency option contracts outstanding at March 31, 2005 mature at various
dates through June 30, 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. 49




---



##### Table of Contents



The following tables provide information about the details of the Companys option contracts
as of March 31, 2005 (in thousands except for average strike price): Coverage inMexican
    
    
    Average Strike
    
    
    Fair Value inForeign Currency
    
    Pesos
    
    
    Price
    
    
    U.S. Dollars(1)
    
    
    Maturity DateAt March 31, 2005:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    179,000
    
    
    
    12.50-12.94
    
    
    $
    506
    
    
    Apr.-June 2005Mexican peso
    
    
    81,000
    
    
    
    12.68-13.07
    
    
    
    123
    
    
    July-Sept. 2005Mexican peso
    
    
    181,000
    
    
    
    12.39-13.32
    
    
    
    278
    
    
    Oct.-Dec. 2005Mexican peso
    
    
    70,000
    
    
    
    12.99-13.19
    
    
    
    78
    
    
    Jan.-Mar. 2005Mexican peso
    
    
    76,000
    
    
    
    12.74-12.87
    
    
    
    77
    
    
    Apr.-June 2006587,000
    
    
    
    
    
    
    $
    1,062Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    179,000
    
    
    
    11.34-11.73
    
    
    $
    (229
    )
    
    Apr.-June 2005Mexican peso
    
    
    81,000
    
    
    
    11.48-11.84
    
    
    
    123
    
    
    July-Sept. 2005Mexican peso
    
    
    181,000
    
    
    
    11.23-12.06
    
    
    
    148
    
    
    Oct.-Dec. 2005Mexican peso
    
    
    70,000
    
    
    
    11.77-11.95
    
    
    
    224
    
    
    Jan.-Mar. 2005Mexican peso
    
    
    76,000
    
    
    
    11.54-11.65
    
    
    
    (32
    )
    
    Apr.-June 2006587,000
    
    
    
    
    
    
    $
    234
 The following table provides information about the details of the Companys option contracts
as of December 31, 2004 (in thousands): Coverage inMexican
    
    
    Average Strike
    
    
    Fair Value inForeign Currency
    
    Pesos
    
    
    Price
    
    
    U.S. Dollars(1)
    
    
    Maturity DateAt December 31, 2004:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    107,000
    
    
    
    12.62-12.76
    
    
    $
    298
    
    
    Jan.-Mar. 2005Mexican peso
    
    
    179,000
    
    
    
    12.50-12.94
    
    
    
    443
    
    
    Apr.-June 2005Mexican peso
    
    
    81,000
    
    
    
    12.68-13.07
    
    
    
    87
    
    
    July-Sept. 2005Mexican peso
    
    
    108,000
    
    
    
    13.21-13.32
    
    
    
    163
    
    
    Oct.-Dec. 2005Mexican peso
    
    
    70,000
    
    
    
    12.99-13.19
    
    
    
    23
    
    
    Jan.-Mar. 2006545,000
    
    
    
    
    
    
    $
    1,014Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    107,000
    
    
    
    11.44-11.56
    
    
    $
    (29
    )
    
    Jan.-Mar. 2005Mexican peso
    
    
    179,000
    
    
    
    11.34-11.73
    
    
    
    (131
    )
    
    Apr.-June 2005Mexican peso
    
    
    81,000
    
    
    
    11.48-11.84
    
    
    
    136
    
    
    July-Sept. 2005Mexican peso
    
    
    108,000
    
    
    
    11.97-12.06
    
    
    
    210
    
    
    Oct.-Dec. 2005Mexican peso
    
    
    70,000
    
    
    
    11.77-11.95
    
    
    
    233
    
    
    Jan.-Mar. 2006545,000
    
    
    
    
    
    
    $
    419
   (1)
    
    The Fair Value of the option contracts presented above, an unrealized loss of $1,296,000 and
$1,433,000 at March 31, 2005 and December 31, 2004, respectively, represents the carrying
value and was recorded in accrued liabilities in the consolidated balance sheets. 50




---



##### Table of Contents



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 March 31, 2005 that has materially affected, or is reasonably likely to materially affect,
the registrants internal control over financial reporting. 51




---



##### 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, 2004. 
 Item 2. Unregistered
Sale of Equity Securities and Use of Proceeds On
January 28, 2005 and February 1, 2005, the Company issued a
combined 316,270 new shares of common stock to Jafra S.A., its
parent, in exchange for an aggregate of approximately $47,500,000 in
assets and $31,600,000 in cash. The issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. 
 Item 6. 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 2002.32.1
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 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.
   52




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Jafra Worldwide Holdings (Lux) S.àr.l./s/ RONALD B. CLARKRonald B. ClarkChief Executive Officer /s/ GARY ESHLEMANGary EshlemanChief Financial Officer (Principal Financial
Accounting Officer) /s/ STACY WOLFStacy WolfCorporate Controller (Principal Accounting
Officer) Date    May 16, 2005 53