UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L.

174 Route de Longwy
L-1940 Luxembourg
Luxembourg
(Address, including zip code, of registrant’s principal executive offices)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES o NO x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

     The registrant does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 and there is no public market for voting stock of the registrant.

APPLICABLE ONLY TO CORPORATE ISSUERS

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

     Common stock, par value $100 per share, outstanding at August 10, 2004 150 shares.

JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. AND SUBSIDIARIES

Index to Financial Statements and Exhibits

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

For the Three and Six Months Ended June 30, 2004

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* Jafra Worldwide Holdings (Lux) S.àr.l. (the “Parent”) is the parent company of Distribuidora Comercial Jafra, S.A. de C.V. (“Jafra Distribution”) and Jafra Cosmetics International, Inc. (“JCI”), which severally issued $120 million and $80 million, respectively, of 10¾% Subordinated Notes (the “Notes”). The Parent has fully and unconditionally guaranteed the Notes on a senior subordinated basis. Jafra Distribution and JCI have fully and unconditionally guaranteed the obligations of the other under the Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. Jafra Cosmetics International, S.A. de C.V. and its subsidiaries (“Jafra Cosmetics S.A.”), additional indirect subsidiaries of the Parent, have fully and unconditionally guaranteed the obligations of Jafra Distribution under the Notes. As such, the Parent is filing separate financial statements of JCI, Jafra Distribution and Jafra Cosmetics S.A. in addition to its own financial statements, in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

5

JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES

(1) Basis of Presentation

     Jafra Worldwide Holdings (Lux) S.àr.l, a Luxembourg société à responsabilité limitée (the “Parent”) is a wholly-owned subsidiary of Jafra S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.). Jafra S.A., a Luxembourg société anonyme (“Jafra S.A.”), was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme (“CDRJ”).

     On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and outstanding capital stock of Jafra S.A. (the “Acquisition”). As a result of the Acquisition, 100% of the voting securities of the Parent are held indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The purchase transaction has not been pushed down to the Company due to the outstanding registered debt.

     On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (“JCI”) and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution” and together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into $90 million of new senior secured credit facilities, consisting of a $50 million senior secured term loan facility and a $40 million senior secured revolving credit facility and issuing $200 million of 10¾% Senior Subordinated Notes due 2011 (the “New Notes” and such transactions collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 11¾% Senior Subordinated Notes due 2008 (the “Old Notes”) of JCI and Jafra Cometics International, S.A. de C.V. (“Jafra Cosmetics S.A.”), to repay all amounts outstanding under the existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made an initial liquidating distribution of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution, to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

     Jafra Distribution was organized February 26, 2003 to conduct the distribution functions of the Parent’s Mexican operations. The Parent was organized on February 24, 2003 as a holding company to conduct the worldwide Jafra cosmetics business through its subsidiaries. CDRJ was a holding company that, until the Recapitalization, conducted the Jafra cosmetics business through its subsidiaries. Since the commencement of the liquidation, CDRJ has conducted no operations other than those incident to winding up its activities. The liquidation of CDRJ occurred during the second quarter of 2004.

     The accompanying unaudited interim consolidated financial statements as of and for the three and six months ended June 30, 2004 and 2003 and the accompanying audited consolidated balance sheet as of December 31, 2003 reflect the operations of the Parent and its subsidiaries and are referred to collectively as “the Company.”

     The unaudited interim consolidated financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s consolidated financial statements as of June 30, 2004 and for the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The functional currency of certain of the Company’s foreign subsidiaries generally consists of currencies other than the U.S. dollar. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive loss.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     Management Incentive Arrangements. The Company applied Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock issued to Employees” and related Interpretations in accounting for the issuance of stock options under the Stock Incentive Plan. As part of the Acquisition, the Management Incentive Plan was terminated. No options were granted during 2004 prior to the termination of the plan. Had the Company recorded compensation cost based on the fair value of options granted at the grant date, as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” the compensation expense for the three and six months ended June 30, 2004 and 2003 would be immaterial to the consolidated statements of operations.

     New Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements.” FIN 46 requires the consolidation of variable interest entities by the party considered to be the primary beneficiary of that entity. The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46 were effective for the Company in the first quarter of 2004. The adoption of FIN 46 did not have an impact on the Company’s financial position or results of operations as the Company had no variable interest entities.

(2) Inventories

     Inventories consist of the following (in thousands):

(3) Property and Equipment

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

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(4) Goodwill and Other Intangible Assets.

     The Company’s intangible assets consist of trademarks and goodwill. The Company has determined trademarks -- principally the Jafra name resulting from the acquisition of the Jafra business from Gillette -- to have an indefinite life. The carrying value of trademarks was $40,209,000 as of June 30, 2004. The changes in the carrying amount of goodwill for the year ended December 31, 2003 and for the six months ended June 30, 2004 are as follows (in thousands):

     In connection with the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company identified all reporting units and allocated all goodwill accordingly. During the year ended December 31, 2003, the Company identified impairment indicators regarding the Venezuelan operations given the Company’s decision to exit this market. The Company recorded an impairment loss of $137,000 for goodwill originally allocated to the Venezuelan reporting unit.

(5) Income Taxes

     The actual income tax rate of the Company differs from the “expected” tax rate, computed by applying the federal corporate rate to loss before income taxes for the six months ended June 30, 2004 and for the three and six months ended June 30, 2003. For the six months ended June 30, 2004, the effective tax benefit rate was approximately 26% primarily as a result of tax benefits on pretax losses in the United States subsidiary and a valuation allowance against certain tax losses in one of the Company’s Mexican subsidiaries, partially offset by income tax expense on pretax income at another Mexican subsidiary. The income tax rate during the second quarter of 2003 was negatively impacted by certain withholding taxes in connection with the Recapitalization. During the six months ended June 30, 2003, income tax expense was approximately $1,619,000 on a pretax losses of $1,589,000 primarily due to income tax expense on pretax net income at the Company’s Mexican subsidiaries, partially offset by an income tax benefit in the United States subsidiary based on pretax net losses. Additionally, the European subsidiaries recorded valuation allowances against certain pretax net losses during the six months ended June 30, 2003.

(6) Debt and Distribution to Shareholders

     On May 20, 2003, the Issuers issued $200 million aggregate principal amount of 10¾% Subordinated Notes (the “New Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”) and entered into a $90 million senior credit agreement (the “Senior Credit Agreement”). The New Notes represent the several obligations of JCI and Jafra Distribution in the amount of $80 million and $120 million, respectively. The New Notes mature in 2011 and bear a fixed interest rate of 10¾% payable semi-annually.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the obligations under the New Notes on a senior subordinated basis on the terms provided in the Indenture governing the New Notes. Each Issuer has fully and unconditionally guaranteed the obligations of the other under the New Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S. portion of New Notes jointly and severally, on a senior subordinated basis. Each acquired or organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally guarantee the Mexican portion of the New Notes jointly and severally, on a senior subordinated basis. Jafra Cosmetics S.A. has also fully and unconditionally guaranteed the obligations of Jafra Distribution under the New Notes. Each existing and subsequently acquired or organized subsidiary of Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee the Mexican portion of the New Notes jointly and severally, on a senior subordinated basis.

     The New Notes are unsecured and are generally not redeemable for four years from their issue date. Thereafter, the New Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. Prior to May 16, 2006, the Issuers at their option may concurrently redeem the New Notes in an aggregate principal amount equal to up to 35% of the original aggregate principal amount of the New Notes, with funds in an aggregate amount not exceeding the aggregate cash proceeds of one or more equity offerings, at a redemption price of 110.75 plus accrued interest. On September 15, 2003, the Issuers consummated a registered exchange of the New Notes under the Securities Act of 1933. As the Acquisition constituted a change of control as defined in the indenture governing the Company’s 10¾% Notes, the Issuers and the Parent sent a notice to noteholders of their right to require the repurchase of the outstanding notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of such repurchase. Subsequent to June 30, 2004, holders of the 10¾% notes exercised their option to sell an aggregate of $500,000 of the outstanding Notes to the Issuers.

     In addition, the Issuers entered into the Senior Credit Agreement, which provides for senior secured credit facilities in an aggregate principal amount of $90 million, consisting of a $50 million senior secured term loan facility maturing in 2008 and a $40 million senior secured revolving credit facility, also maturing in 2008, of which $20 million is available as letters of credit. The Senior Credit Agreement is allocated 40% to JCI and 60% to Jafra Distribution. On May 20, 2003, JCI borrowed $20 million and Jafra Distribution borrowed $30 million of the loans under the term facility. Borrowings under the term loan facility are payable in quarterly installments of principal and interest over five years through May 20, 2008. Borrowings under the revolving credit facility mature on May 20, 2008. Borrowings under the Senior Credit Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed 3.75% or an alternate base rate plus an applicable margin not to exceed 2.75%. As of June 30, 2004, the applicable interest rates were 7.0% and 5.13% for base rate loans and 30 day LIBOR loans, respectively, subject in each case to periodic adjustment based on certain levels of financial performance. Borrowings under the Senior Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

     In connection with closing the Acquisition, the Issuers, the Company and the requisite lenders under the Issuers’ Senior Credit Agreement entered into an amendment to the Senior Credit Agreement which provides that for a period of 90 days following the closing of the Acquisition ending August 25, 2004, the Acquisition will not constitute an event of default under the Credit Agreement. The Company is seeking refinancing of the indebtedness outstanding under the Senior Credit Agreement. The Company believes that the new senior facility will be obtained.

     Both the Indenture and the Senior Credit Agreement contain certain covenants that limit the Company’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Company to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Parent and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of June 30, 2004, the Company was in compliance with all covenants.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The senior credit agreement contains provisions whereby (i) the default by the Parent, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in any payment under debt obligations in an aggregate principal amount of $5.0 million or more beyond any applicable grace period, or (ii) any default by the Parent, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in the observance or performance of any other agreement or condition under such other debt obligations that allows the holder(s) of such debt obligations to accelerate the maturity of such obligations after the expiration of any grace period or the provision of notice, and such grace period has expired or notice has been given, will allow the lenders under the senior credit agreement to terminate their commitments to lend thereunder and/or declare any amounts outstanding thereunder to be immediately due and payable. The Indenture contains similar provisions that apply upon the failure by the Parent, or the failure by JCI, Jafra Distribution or any of their significant subsidiaries (as defined in the Indenture), to pay any indebtedness for borrowed money when due, or on the acceleration of any other debt obligations exceeding $10.0 million. The Indenture also contains provisions that, under certain circumstances, permit the holders of certain senior indebtedness (including the loans made under the senior credit agreement) to block payments on the 10¾% Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

     The terms of the Indenture significantly restrict the Parent and its other subsidiaries from paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Parent to make such restricted payments or transfers is generally limited to an amount determined by a formula based on 50% of its consolidated net income (which, as defined in the Indenture, excludes goodwill impairment charges and any after-tax extraordinary, unusual or nonrecurring gains and losses) accruing from October 1, 2002, plus specified other amounts. In addition, as a condition to making such payments to Jafra S.A. based on such formula, the Parent must have a consolidated coverage ratio (as defined in the Indenture) of at least 2.25 to 1 after giving effect to any such payments. Notwithstanding such restrictions, the Indenture permits an (i) aggregate of $5.0 million of such payments and (ii) payments for certain specific uses, such as the payment of consolidated taxes or holding company expenses, to be made whether or not there is availability under the formula or the conditions to its use are met. The terms of the senior credit agreement contain similar restrictions. The senior credit agreement generally limits dividends by the Parent to dividends necessary to fund specified costs and expenses, but permits the Parent to pay dividends of up to 50% of consolidated net income (as defined in the Indenture) plus up to $5.0 million so long as the term loans have been repaid in full, the aggregate exposure of the lenders under the revolving portion of the senior credit facilities does not exceed $25 million and the consolidated leverage ratio (as defined in the senior credit agreement) does not exceed 3 to 1 after giving effect to such payment.

     On May 23, 2003, with proceeds from the issuance of the New Notes and borrowings under the Senior Credit Agreement, JCI and Jafra Cosmetics S.A. redeemed the Old Notes in the aggregate outstanding principal amount of $75,180,000 at a premium of approximately $4,417,000. Additionally, JCI and Jafra Cosmetics S.A. repaid $7,375,000 under its existing credit agreement (the “Old Credit Agreement”) and terminated the Old Credit Agreement. In connection with the redemption of the Old Notes and the termination of the Old Credit Agreement, the Company wrote off approximately $2,203,000 of capitalized deferred financing fees. Total costs related to the redemption of the Old Notes and the repayment of amounts outstanding under the Old Credit Agreement were $6,620,000 and were recorded as loss on extinguishment of debt on the accompanying consolidated statements of operations during the three months ended June 30, 2003.

     After the redemption of the Old Notes and repayment of all outstanding amounts under the Old Credit Agreement, the shareholders of CDRJ resolved to liquidate CDRJ. As a result, CDRJ made an initial liquidating distribution of $157,609,000 to its shareholders of record at May 20, 2003. Additionally, CDRJ reserved $1,405,000 to pay subsequent distributions or expenses associated with its liquidation. JCI also made a special payment to the holders of CDRJ options and certain members of management and non-employee directors.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The Company capitalized $14,647,000 of costs related to the issuance of the New Notes and the Senior Credit Agreement as deferred financing fees. These deferred financing fees are reported as a noncurrent asset in the accompanying consolidated balance sheets and are being amortized on a basis that approximates the interest method over the term of the New Notes and the Senior Credit Agreement. As of June 30, 2004, approximately $2,311,000 of the deferred financing fees were amortized. Upon expiration of the Senior Credit Agreement on August 25, 2004, the Company will have approximately $4,656,000 of unamortized deferred financing fees related to the Senior Credit Agreement. The Company expects to write off these deferred financing fees upon expiration of the Senior Credit Agreement and to record that write off as a loss on extinguishment of debt during the third quarter of 2004.

(7) Non-Cash Equity Contribution

     During the second quarter of 2004, the former primary shareholder of Jafra S.A. paid certain members of management and non-employee board of director members a special bonus of $4,922,000. As this amount was paid directly to the recipients from the former primary shareholder, Jafra S.A. recorded $4,922,000 as deemed contributed capital and as a non-cash transaction expense representing compensation. Jafra S.A. then contributed $4,922,000 to the Company. This contribution was partially offset by a cash distribution of $626,000 to Jafra S.A.

(8) Transaction Related Expense

     During the three and six months ended June 30, 2004, the Company incurred $26,114,000 and $29,523,000 of transaction fees related to the Acquisition and to certain other transactions contemplated but not completed. Included in these amounts was $20,282,000 of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,922,000 of special bonus payments paid directly by the former shareholder. During the three and six months ended June 30, 2003, the Company recorded $14,354,000 and $15,124,000 of transaction expenses related to the Recapitalization and to other transactions contemplated but not completed. In connection with the Recapitalization, the Board of Directors authorized CDRJ to reprice all existing outstanding stock options. In order to compensate option holders for any diminished value of the outstanding options, the Board of Directors further authorized $10,391,000 in bonus payments to current option holders during the three and six months ended June 30, 2003. Additionally, the Company authorized a special bonus of $2,715,000 to certain members of management and to non-employee directors for contributions to completing the Recapitalization of CDRJ.

(9) Restructuring and Asset Impairment Charges

     During the three and six months ended June 30, 2004 the Company recorded $864,000 and $2,773,000, respectively, of restructuring and asset impairment charges primarily related to the transfer of substantially all of its skin and body care manufacturing operations to its facilities in Mexico. The transfer of these operations was substantially complete during the second quarter of 2004. Of these charges, approximately $423,000 was for the impairment of certain assets not transferred and the remaining amount was primarily termination benefits. A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):

     The Company does not expect to incur any additional significant charges in connection with the transfer of these manufacturing operations to Mexico.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(10) Comprehensive Loss

     Comprehensive loss is summarized as follows (in thousands):

(11) Financial Reporting for Business Segments

     The Company’s business is comprised of one industry segment, direct selling, with worldwide operations. The Company is organized into geographical business units that each sell the full line of Jafra cosmetics, skin care, body care, fragrances, and other products. Jafra has three reportable business segments: Mexico, the United States including the Dominican Republic, and Europe. Business results for subsidiaries in South America and Thailand are combined and included in the following table under the caption “All Others.” As of the beginning of 2004, the Company includes the results of the Dominican Republic with the results of the United States as they are under common management and the Company’s chief operating decision makers evaluate the results of the Dominican Republic with the results of the United States. All prior period results have been reclassified to be consistent with the 2004 presentation.

     The accounting policies used to prepare the information reviewed by the Company’s chief operating decision makers are the same as those described in the summary of significant accounting policies included in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K. The Company evaluates performance based on segment operating income, excluding restructuring and impairment charges and unusual gains and losses. Consistent with the information reviewed by the Company’s chief operating decision makers, corporate costs, foreign exchange gains and losses, interest expense, other nonoperating income or expense, and income taxes are not allocated to operating segments for purposes of this presentation. The effects of intersegment sales (net sales and related gross profit) are excluded from the computation of segment net sales and segment income (loss) from operations. The elimination of intercompany profit from inventory within segment assets is included in “Corporate, Unallocated and Other.”

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Corporate, unallocated and other includes (in thousands):

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(12) Foreign Currency Option Contracts

     The Company is exposed to currency risk relating to its forecasted U.S. dollar-denominated expenditures at Jafra Mexico. As part of its overall strategy to reduce the risk of potential adverse exchange rate fluctuations in Mexico, the Company entered into foreign currency option contracts (“option contracts” or “options”). The Company places option contracts based on its rolling forecasted cash outflows from Jafra Mexico and hedges transactions included in the forecast on the date the option contract is initiated. As a matter of policy, the Company does not hold or issue forward contracts or option contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features.

     The Company currently designates certain of its option contracts as cash flow hedges of forecasted U.S. dollar-denominated inventory purchases, forecasted U.S. dollar-denominated intercompany charges from JCI to Jafra Mexico, forecasted management fee charges from JCI to Jafra Mexico, and U.S. dollar-denominated interest payments. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative are deferred as a component of other comprehensive loss. Such amounts will be reclassified from other comprehensive loss into net income when the underlying hedged exposure is recognized in income. For U.S. dollar-denominated inventory purchases, this will occur upon sale to an outside party of the related inventory. For intercompany charges and interest, this will occur at the date such charges are paid by Jafra Mexico.

     During the three and six months ended June 30, 2004, the Company recognized $387,000 of gains and $33,000 of losses on option contracts, respectively, and during the three and six months ended June 30, 2003, the Company recognized $627,000 of gains on option contracts as a component of exchange (loss) gain, net on the accompanying consolidated statements of operations.

     As of December 31, 2003, the Company had deferred as a component of other comprehensive loss $278,000 of gains on option contracts. During the six months ended June 30, 2004, the Company deferred as a component of other comprehensive loss $199,000 of losses on option contracts qualifying for hedge accounting under SFAS No. 133. The Company expects that substantially all of the remaining loss of $79,000 deferred as a component of other comprehensive loss at June 30, 2004 will be recognized into net loss within the next twelve months.

     The fair value of the option contracts was $208,000 at June 30, 2004 and has been recorded in other receivables in the consolidated balance sheets. The fair value of the option contracts was $440,000 at December 31, 2003, and was recorded in other receivables in the consolidated balance sheets.

     During the three and six months ended June 30, 2004 and 2003 the ineffectiveness generated by the Company’s option contracts designated as hedges was insignificant. Certain hedged forecasted transactions do not appear probable of occurring due to timing differences between the original and current forecasts, and accordingly during the three and six months ended June 30, 2004 and 2003, $0 and $230,000, respectively, of gains, were reclassified into earnings.

     The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 521,000,000 and 831,000,000 in put and call positions at June 30, 2004 and December 31, 2003, respectively, and mature at various dates through June 30, 2005. Notional amounts do not quantify the Company’s market or credit exposure or represent the Company’s assets or liabilities, but are used in the calculation of cash settlements under the contracts.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(13) Discontinued Operations/Markets to be Exited

     During 2003, the Company discontinued its operations in Venezuela, Colombia, Chile and Peru. The Company has terminated sales in these markets and has liquidated a majority of the assets in 2003. As such, the results of the operations of these markets have been classified as discontinued operations in all periods presented in the statements of operations. The assets and liabilities from the discontinued operations have been segregated in the accompanying consolidated balance sheets.

     Net sales and loss on discontinued operations is as follows:

     The components of assets and liabilities of the discontinued operations is as follows:

     In addition to the markets discontinued, the Company has ceased operating in Thailand and is in the process of liquidating all assets.

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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(14) Subsequent Events

     On August 3, 2004, Michael DiGregorio resigned from his position as Executive Vice President and Chief Financial Officer of the Company. On August 3, 2004, the Company named Gary Eshleman as Chief Financial Officer.

     Five lenders have signed commitments to participate in and syndicate a new senior credit facility. The balance of a proposed four-year $60 million amended and restated senior revolving credit facility which, together with an interim loan of up to $20 million from Vorwerk, would refinance outstanding borrowings and replace commitments under the Credit Agreement. The Company is seeking to consummate this refinancing prior to the expiration of the 90-day waiver under the Credit Agreement.

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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

18

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

19

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

20

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

(1) Basis of Presentation

     Jafra Cosmetics International, Inc. a Delaware corporation, is a direct wholly-owned subsidiary of Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourg société à responsabilité limitée (the “Parent”), which is a wholly-owned direct subsidiary of Jafra S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.), a Luxembourg société anonyme (“Jafra S.A.”). Jafra S.A. was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme (“CDRJ”).

     On May 27, 2004, Vorwerk & Co. eins GmbH acquired all of the issued and outstanding capital stock of Jafra S.A. (the “Acquisition”). As a result of the Acquisition, 100% of the voting securities of the Parent are held indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The purchase transaction has not been pushed down to JCI due to the outstanding registered debt.

     The accompanying unaudited interim consolidated financial statements as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 reflect the operations of JCI and its subsidiaries (“JCI”) and have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly JCI’s consolidated financial statements as of June 30, 2004 and for the interim periods presented. All significant intercompany accounts and transactions between entities comprising JCI have been eliminated in consolidation.

     On May 20, 2003, the Parent, JCI and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution” and together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into $90 million of new senior secured credit facilities, consisting of a $50 million senior secured term loan facility and a $40 million senior secured revolving credit facility and issuing $200 million of 10¾% Senior Subordinated Notes due 2011 (the “New Notes” and such transactions collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 11¾% Senior Subordinated Notes due 2008 (the “Old Notes”) of JCI and Jafra Cosmetics International, S.A. de C.V. (“Jafra Cosmetics S.A.”), to repay all amounts outstanding under the existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made an initial liquidating distribution of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution, to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

     The New Notes represent several obligations of JCI and Jafra Distribution. JCI and Jafra Distribution have fully and unconditionally guaranteed the obligations of the other under the New Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. As the cross-guarantee of Jafra Distribution and JCI is subject to a 30-day standstill period, the Parent is filing these separate financial statements of JCI on its Report on Form 10-Q.

     The functional currency of certain of JCI’s subsidiaries consists of currencies other than the U.S. dollar. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive loss.

     Management Incentive Arrangements. JCI applied Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock issued to Employees” and related Interpretations in accounting for the issuance of stock options under the Parent’s Stock Incentive Plan. As part of the Acquisition, the Management Incentive Plan was terminated. No options were granted during 2004 prior to the termination of the plan. Had JCI recorded compensation cost based on the fair value of options granted at the grant date, as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” the compensation expense for the three and six months ended June 30, 2004 and 2003 would be immaterial to the consolidated statements of operations.

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

     New Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements.” FIN 46 requires the consolidation of variable interest entities by the party considered to be the primary beneficiary of that entity. The FASB amended FIN 46 in December of 2003. The revised provisions of FIN 46 were effective for JCI in the first quarter of 2004. The adoption of FIN 46 did not have an impact on JCI’s financial position or results of operations as JCI had no variable interest entities.

(2) Property and Equipment

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

(3) Goodwill and Other Intangible Assets

     JCI’s intangible assets consist of trademarks and goodwill. JCI has determined trademarks, principally the Jafra name resulting from the acquisition of the Jafra business from Gillette, to have an indefinite life. The carrying value of trademarks was $271,000 as of June 30, 2004. The changes in the carrying amount of goodwill for the year ended December 31, 2003 and for the six months ended June 30, 2004 are as follows (in thousands):

(4) Income Taxes

     The actual income tax rate of JCI differs from the “expected” tax rate, computed by applying the U.S. federal corporate rate of 35% to loss before income taxes for the three and six months ended June 30, 2004 and 2003 principally as the result of (i) state income tax, and (ii) valuation allowances against certain operating losses in Europe and the Dominican Republic.

(5) Debt and Distribution to Shareholder

     On May 20, 2003, the Issuers issued $200 million aggregate principal amount of 10¾% Subordinated Notes (the “New Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”) and entered into a $90 million senior credit agreement (the “Senior Credit Agreement”). The New Notes represent the several obligations of JCI and Jafra Distribution in the amount of $80 million and $120 million, respectively. The New Notes mature in 2011 and bear a fixed interest rate of 10¾% payable semi-annually.

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

     JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the obligations under the New Notes on a senior subordinated basis on the terms provided in the Indenture governing the New Notes. Each Issuer has fully and unconditionally guaranteed the obligations of the other under the New Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S. portion of New Notes jointly and severally, on a senior subordinated basis. Each acquired or organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally guarantee the Mexican portion of the New Notes jointly and severally, on a senior subordinated basis.

     The New Notes are unsecured and are generally not redeemable for four years from their issue date. Thereafter, the New Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. Prior to May 16, 2006, the Issuers at their option may concurrently redeem the New Notes in an aggregate principal amount equal to up to 35% of the original aggregate principal amount of the New Notes, with funds in an aggregate amount not exceeding the aggregate cash proceeds of one or more equity offerings, at a redemption price of 110.75 plus accrued interest. On September 15, 2003, the Issuers consummated a registered exchange of the New Notes under the Securities Act of 1933. As the Acquisition constituted a change of control as defined in the indenture governing the Company’s 10¾% Notes, the Issuers and the Parent sent a notice to noteholders of their right to require the repurchase of the outstanding notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of such repurchase. Subsequent to June 30, 2004, holders of the 10¾% notes exercised their option to sell an aggregate of $500,000 of the outstanding Notes to the Issuers.

     In addition, the Issuers entered into the Senior Credit Agreement, which provides for senior secured credit facilities in an aggregate principal amount of $90 million, consisting of a $50 million senior secured term loan facility maturing in 2008 and a $40 million senior secured revolving credit facility, also maturing in 2008, of which $20 million is available as letters of credit. The Senior Credit Agreement is allocated 40% to JCI and 60% to Jafra Distribution. On May 20, 2003, JCI borrowed $20 million and Jafra Distribution borrowed $30 million of the loans under the term facility. Borrowings under the term loan facility are payable in quarterly installments of principal and interest over five years through May 20, 2008. Borrowings under the revolving credit facility mature on May 20, 2008. Borrowings under the Senior Credit Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed 3.75% or an alternate base rate plus an applicable margin not to exceed 2.75%. As of June 30, 2004, the applicable interest rates were 7.0% and 5.13% for base rate loans and 30 day LIBOR loans, respectively, subject in each case to periodic adjustment based on certain levels of financial performance. Borrowings under the Senior Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

     In connection with closing the Acquisition, the Issuers, the Parent and the requisite lenders under the Issuers’ Senior Credit Agreement entered into an amendment to the Senior Credit Agreement which provides that for a period of 90 days following the closing of the Acquisition ending August 25, 2004, the Acquisition will not constitute an event of default under the Credit Agreement. The Parent and Issuers are seeking refinancing of the indebtedness outstanding under the Senior Credit Agreement. JCI believes that the new senior facility will be obtained.

     Both the Indenture and the Senior Credit Agreement contain certain covenants that limit JCI’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Parent to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Parent and certain of its subsidiaries, including without limitation, JCI and Jafra Distribution. As of June 30, 2004, the Parent and its subsidiaries were in compliance with all covenants.

     The senior credit agreement contains provisions whereby (i) the default by the Parent, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in any payment under debt obligations in an aggregate principal amount of $5.0 million or more beyond any applicable grace period, or (ii) any default by the Parent, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in the observance or performance of any other agreement or condition under such other debt obligations that allows the holder(s) of such debt obligations to accelerate the maturity of such obligations after the expiration of any grace period or the provision of notice, and such grace period has expired or notice has been given, will allow the lenders under the senior credit

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

agreement to terminate their commitments to lend thereunder and/or declare any amounts outstanding thereunder to be immediately due and payable. The Indenture contains similar provisions that apply upon the failure by the Parent, or the failure by JCI, Jafra Distribution or any of their significant subsidiaries (as defined in the Indenture), to pay any indebtedness for borrowed money when due, or on the acceleration of any other debt obligations exceeding $10.0 million. The Indenture also contains provisions that, under certain circumstances, permit the holders of certain senior indebtedness (including the loans made under the senior credit agreement) to block payments on the 10¾% Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

     The terms of the Indenture significantly restrict the Parent and its other subsidiaries from paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Parent to make such restricted payments or transfers is generally limited to an amount determined by a formula based on 50% of its consolidated net income (which, as defined in the Indenture, excludes goodwill impairment charges and any after-tax extraordinary, unusual or nonrecurring gains and losses) accruing from October 1, 2002, plus specified other amounts. In addition, as a condition to making such payments to Jafra S.A. based on such formula, the Parent must have a consolidated coverage ratio (as defined in the Indenture) of at least 2.25 to 1 after giving effect to any such payments. Notwithstanding such restrictions, the Indenture permits an (i) aggregate of $5.0 million of such payments and (ii) payments for certain specific uses, such as the payment of consolidated taxes or holding company expenses, to be made whether or not there is availability under the formula or the conditions to its use are met. The terms of the senior credit agreement contain similar restrictions. The senior credit agreement generally limits dividends by the Parent to dividends necessary to fund specified costs and expenses, but permits the Parent to pay dividends of up to 50% of consolidated net income (as defined in the Indenture) plus up to $5.0 million so long as the term loans have been repaid in full, the aggregate exposure of the lenders under the revolving portion of the senior credit facilities does not exceed $25 million and the consolidated leverage ratio (as defined in the senior credit agreement) does not exceed 3 to 1 after giving effect to such payment.

     On May 23, 2003, with proceeds from the issuance of the New Notes and its borrowings under the Senior Credit Agreement, JCI redeemed its Old Notes in the aggregate outstanding principal amount of $45,108,000 at a premium of approximately $2,650,000. Additionally, JCI repaid $5,000,000 under its existing credit agreement (the “Old Credit Agreement”) and terminated the Old Credit Agreement. In connection with the redemption of the Old Notes and the termination of the Old Credit Agreement, JCI wrote off approximately $2,128,000 of capitalized deferred financing fees. Total costs related to the recall of the previous debt were $4,778,000 and were recorded as a loss on extinguishment of debt in the accompanying consolidated statements of operations during the three months ended June 30, 2003.

     After the redemption of the Old Notes and repayment of all outstanding amounts under the Old Credit Agreement, JCI distributed a total of $44,311,000 to its sole shareholder, Jafra S.A. In addition, JCI made a special payment to the holder of its options and to certain members of management and non-employee directors. Upon completion of the Recapitalization and the distribution, Jafra S.A. contributed all of its assets and liabilities, including its investment in JCI to the Parent.

     JCI capitalized approximately $6,007,000 of costs related to the issuance of the New Notes and the Senior Credit Agreement as deferred financing fees. These deferred financing fees are reported as a noncurrent asset in the accompanying consolidated balance sheets and are being amortized on a basis that approximates the interest method over the term of the New Notes and the Senior Credit Agreement. As of June 30, 2004, approximately $949,000 of the deferred financing fees were amortized. Upon expiration of the Senior Credit Agreement on August 25, 2004, JCI will have approximately $1,899,000 of unamortized deferred financing fees related to the Senior Credit Agreement. JCI expects to write off these deferred financing fees upon expiration of the Senior Credit Agreement and to record that write off as a loss on extinguishment of debt during the third quarter of 2004.

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

(6) Non-Cash Equity Contribution

     During the second quarter of 2004, the former primary shareholder of Jafra S.A. paid certain members of management and non-employee board of director members a special bonus of $4,922,000. As this amount was paid directly to the recipients from the former primary shareholder, Jafra S.A. recorded $4,922,000 as deemed contributed capital and as a non-cash transaction expense representing compensation. Jafra S.A. then contributed $4,922,000 to the Parent who then contributed the amount to JCI. This contribution was partially offset by a cash distribution of $626,000 to the Parent.

(7) Transaction Related Expenses

     During the three and six months ended June 30, 2004, JCI incurred $23,393,000 and $26,802,000, respectively, of transaction fees related to the Acquisition and to certain other transactions contemplated but not completed. Included in these amounts was $20,282,000 of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,125,000 of special bonus payments paid directly by the former shareholder. During the three and six months ended June 30, 2003, JCI recorded $13,037,000 and $13,807,000, respectively, of transaction expenses related to the Recapitalization and to other transactions contemplated but not completed. In connection with the Recapitalization, the Board of Directors authorized CDRJ to reprice all existing outstanding stock options. In order to compensate option holders for any diminished value of the outstanding options, the Board of Directors further authorized $9,445,000 in bonus payments to current option holders during the three and six months ended June 30, 2003. Additionally, JCI authorized a special bonus of $2,365,000 to certain members of management and to non-employee directors for contributions to completing the Recapitalization of CDRJ.

(8) Restructuring and Asset Impairment Charges

     During the three and six months ended June 30, 2004 JCI recorded $864,000 and $2,611,000, respectively, of restructuring and asset impairment charges primarily related to the transfer of substantially all of its skin and body care manufacturing operations to its facilities in Mexico. The transfer of these operations was substantially complete during the second quarter of 2004. Of these charges, approximately $423,000 was for the impairment of assets not transferred and the remaining amount was primarily termination benefits. A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):

     JCI does not expect to incur any additional significant charges in connection with the transfer of these manufacturing operations to Mexico.

(9) Comprehensive Loss

     Comprehensive loss is summarized as follows (in thousands):

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

(10) Related Party Transactions

     JCI distributes skin and body products to other affiliates of the Parent (“affiliates”). Sales to affiliates were made at cost plus a markup ranging from 0 to 11%. JCI purchased color and fragrance products from Jafra Mexico totaling $3,163,000 and $5,946,000 for the three and six months ended June 30, 2004, respectively, and $2,942,000 and $5,626,000 for the three and six months ended June 30, 2003, respectively.

     In addition, JCI provides certain management services, such as legal, accounting and treasury, management oversight, and other administrative functions to affiliates, primarily in Mexico and South America. The cost of these services is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. JCI charges out a portion of these management expenses to its affiliates based upon charges identified to specific affiliates and a formula using the percentage of revenues of each affiliate to the total consolidated revenues of the Parent. JCI believes the amounts and methods of allocation are reasonable and approximate the cost of the actual services provided. Management fee income consists of amounts billed to affiliates in Mexico and South America.

     JCI is charged a royalty by Jafra Cosmetics S.A. for the right to use the Jafra trademark in the United States and Europe. The total royalty expense charged by Jafra Cosmetics S.A. to JCI was $844,000 and $1,594,000 for the three and six months ended June 30, 2004, respectively, and $842,000 and $1,626,000 for the three and six months ended June 30, 2003, respectively, and was offset against royalty income from affiliates in the accompanying consolidated statements of operations.

     JCI owns the worldwide rights to its multi-level sales know-how (referred to as the “Jafra Way”). The Jafra Way was initially developed in the United States for lineage, training, and compensation of consultants. The royalty fees charged by JCI to Jafra Cosmetics S.A. for the use of the Jafra Way were $5,914,000 and $12,112,000 for three and six months ended June 30, 2004, respectively, and $5,564,000 and $10,544,000 for the three and six months ended June 30, 2003, respectively, and are based upon a percentage of Jafra Cosmetics S.A.’s sales to third parties.

     JCI has granted loans to certain affiliates at annual interest rates ranging from 3% to 5%. Such loans are due to be repaid five years from the date of grant, with no prepayment penalty. Notes receivable from affiliates at December 31, 2003 and June 30, 2004 consist primarily of loans JCI has made to indirect subsidiaries of the Parent to fund certain of their operations in South America. Net interest income from affiliates was $144,000 and $234,000 for the three and six months ended June 30, 2004, respectively, and $151,000 and $282,000 for the three and six months ended June 30, 2003, respectively, and was included in interest income on the accompanying consolidated statements of operations.

     JCI reimburses certain foreign affiliates for the expenses that they incur in establishing a direct selling distribution system and customer base in new markets. Such market subsidies amounted to $350,000 and $600,000 for the three and six months ended June 30, 2004, respecitvely. Nothing was reimbursed during the three and six months ended June 30, 2003.

(11) Financial Reporting for Business Segments

     JCI’s business is comprised of one industry segment, direct selling, with worldwide operations, principally in the United States and Europe. JCI is organized into geographical business units that each sell the full line of Jafra cosmetics, skin care, body care, fragrances, and other products. JCI has two reportable business segments: the United States, including the Dominican Republic, and Europe. As of the beginning of 2004, JCI includes the results of the Dominican Republic with the results of the United States as JCI’s chief operating decision makers evaluate the results of the Dominican Republic with the results of the United States. All prior period results have been reclassified to be consistent with the 2004 presentation. Business results for the Thailand subsidiary are included in the following table under the caption “All Others.”

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

     The accounting policies used to prepare the information reviewed by JCI’s chief operating decision makers are the same as those described in the summary of significant accounting policies included in JCI’s audited consolidated financial statements as of and for the year ended December 31, 2003 included in the Parent’s Annual Report on Form 10-K. JCI evaluates performance based on segment operating income, excluding restructuring and impairment charges and unusual gains and losses. Consistent with the information reviewed by JCI’s chief operating decision makers, corporate costs, foreign exchange gains and losses, interest expense, other nonoperating income or expense, and income taxes are not allocated to operating segments for purposes of this presentation. The effects of intersegment sales (net sales and related gross profit) are excluded from the computation of segment net sales and income (loss) from operations. The elimination of intercompany profit from inventory within segment assets is included in “Corporate, Unallocated and Other.” Gross Profit from affiliates, management fee income from affiliates, royalty income from affiliates and market subsidy expense to affiliates are included in the following table under the caption “Corporate, Unallocated and Other.”