CDRJ INVESTMENTS LUX S A - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

¨ 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 333-62989

CDRJ INVESTMENTS (LUX) S.A.

(Exact name of Registrant as specified in its charter)


Luxembourg (State or other jurisdiction of incorporation or organization)		98-0185444 (I.R.S. Employer Identification Number)
	174 Route de Longwy L-1941 Luxembourg Luxembourg

(Address, including zip code, of registrant’s principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 3 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ]

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 $2.00 per share, outstanding at August 9, 2002 831,888 shares

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
		CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
		CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
		CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
		JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
		JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
		JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
		JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
		JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE

CDRJ INVESTMENTS (LUX) S.A. 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, 2002


PART I — FINANCIAL INFORMATION

Item 1.	(*) Financial Statements (Unaudited):	Page No.

	Consolidated Financial Statements — CDRJ Investments (Lux) S.A. and Subsidiaries
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6

	Consolidated Financial Statements — Jafra Cosmetics International, Inc. and Subsidiaries
	Consolidated Balance Sheets	12
	Consolidated Statements of Operations	13
	Consolidated Statements of Cash Flows	14
	Notes to Consolidated Financial Statements	15

	Consolidated Financial Statements — Jafra Cosmetics International, S.A. de C.V. and Subsidiaries
	Consolidated Balance Sheets	19
	Consolidated Statements of Operations	20
	Consolidated Statements of Cash Flows	21
	Notes to Consolidated Financial Statements	22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 2.	Changes in Securities and Use of Proceeds	41

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 5.	Other Information	41

Item 6.	Exhibits and Reports on Form 8-K	41

	Signature	42

Jafra S.A. 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. As cross-guarantors, Jafra S.A. and JCI are subject to a 30-day standstill period. As such, the Parent is filing separate financial statements of JCI and Jafra S.A. in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


			June 30,			December 31,
			2002			2001

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	10,051		$	6,748
	Receivables, net			38,611			43,898
	Inventories			36,270			40,515
	Prepaid income taxes			58			—
	Prepaid expenses and other current assets			6,095			7,851
	Deferred income taxes			2,392			55

		Total current assets		93,477			99,067
Property and equipment, net				59,071			59,598
Other assets:
	Goodwill			67,762			71,148
	Trademarks			46,466			50,560
	Deferred financing fees and other, net			8,994			10,763

		Total	$	275,770		$	291,136

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	6,516		$	6,188
	Accounts payable			16,187			26,516
	Accrued liabilities			34,366			40,916
	Income taxes payable			4,302			7,130
	Deferred income taxes			4,653			4,094

		Total current liabilities		66,024			84,844
Long-term debt				84,224			86,901
Deferred income taxes				17,861			20,311
Other long-term liabilities				3,464			3,088

		Total liabilities		171,573			195,144

Commitments and contingencies				—			—
Stockholders’ equity:
	Common stock, par value $2.00; authorized, 1,020,000 shares; issued and outstanding, 831,888 shares in 2002 and 2001			1,664			1,664
	Additional paid-in capital			81,921			81,921
	Retained earnings			32,246			18,373
	Accumulated other comprehensive loss			(11,634	)		(5,966	)

		Total stockholders’ equity		104,197			95,992

		Total	$	275,770		$	291,136

See accompanying notes to consolidated financial statements

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2002			2001			2002			2001

Net sales		$	98,091		$	95,827		$	197,195		$	182,000
Cost of sales			22,889			22,311			45,887			42,630

	Gross profit		75,202			73,516			151,308			139,370
Selling, general and administrative expenses			61,043			60,418			121,406			115,102

	Income from operations		14,159			13,098			29,902			24,268
Other income (expense):
	Exchange loss, net		(5,909	)		(4,522	)		(5,423	)		(6,702	)
	Interest expense, net		(2,925	)		(3,359	)		(5,855	)		(6,847	)
	Other, net		285			(117	)		295			(229	)

Income before income taxes and cumulative effect of accounting change			5,610			5,100			18,919			10,490
Income tax expense			1,638			3,123			4,802			6,067

Income before cumulative effect of accounting change			3,972			1,977			14,117			4,423
Cumulative effect of accounting change, net of income tax expense of $82 in 2001			—			—			(244	)		126

Net income		$	3,972		$	1,977		$	13,873		$	4,549

See accompanying notes to consolidated financial statements

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


					Six Months Ended
					June 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	13,873		$	4,549
		Cumulative effect of accounting change, net of taxes				244			(126	)

	Income before cumulative effect of accounting change					14,117			4,423
	Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities:
			Gain on sale of property and equipment			(65	)		—
			Depreciation and amortization			2,411			3,933
			Amortization of deferred financing fees			717			713
			Provision for uncollectible accounts receivable			6,103			2,746
			Unrealized foreign exchange and derivative loss			4,311			2,398
			Deferred realized foreign exchange loss			385			(550	)
			Deferred income taxes			(3,504	)		—
			Changes in operating assets and liabilities:
				Receivables		(3,418	)		(7,175	)
				Inventories		2,121			5,879
				Prepaid expenses and other current assets		2,046			4,016
				Other assets		852			1,724
				Accounts payable and accrued liabilities		(12,107	)		(14,116	)
				Income taxes payable/prepaid		(2,344	)		4,303
				Other long-term liabilities		376			229

				Net cash provided by operating activities		12,001			8,523

Cash flows from investing activities:
	Proceeds from sale of property and equipment					211			—
	Purchases of property and equipment					(4,885	)		(4,360	)
	Other					(265	)		(123	)

				Net cash used in investing activities		(4,939	)		(4,483	)

Cash flows from financing activities:
	Repayments under term loan facility					(4,625	)		(2,250	)
	Net borrowings (repayments) under revolving credit facility					2,700			(2,100	)
	Net (repayments) borrowings under bank debt					(318	)		2,584
	Issuance of common stock					—			33
	Net repurchase of common stock					—			(575	)

				Net cash used in financing activities		(2,243	)		(2,308	)

Effect of exchange rate changes on cash and cash equivalents						(1,516	)		256

Net increase in cash and cash equivalents						3,303			1,988
Cash and cash equivalents at beginning of period						6,748			5,838

Cash and cash equivalents at end of period					$	10,051		$	7,826

See accompanying notes to consolidated financial statements

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The unaudited interim consolidated financial statements of CDRJ Investments (Lux) S.A. (the “Parent”) and subsidiaries (the “Company”) as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 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 the Company’s consolidated financial statements as of June 30, 2002 and for the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Parent, a Luxembourg société anonyme, Jafra Cosmetics International, Inc., a Delaware corporation (''JCI’’), Jafra Cosmetics International, S.A. de C.V., a sociedad anonima de capital variable organized under the laws of the United Mexican States (''Jafra S.A.’’), and certain other subsidiaries of the Parent were organized by Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership managed by Clayton, Dubilier & Rice, Inc. (''CD&R’’), to acquire (the ''Acquisition’’) the worldwide Jafra Cosmetics business (the ''Jafra Business’’). JCI and Jafra S.A. are indirect, wholly-owned subsidiaries of the Parent. The Parent is a holding company that conducts all its operations through its subsidiaries. The Parent and its subsidiaries are collectively referred to as the “Company.”

The functional currency of certain of the Company’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.

In July 2001, the Financial Accounting Standards Board (“FASB”) approved two new statements: Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and other Intangible Assets.” SFAS No. 141 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized, but be tested for impairment at least annually. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 with regards to all goodwill and other intangible assets recognized in an entity’s statement of financial position at that date, regardless of when those assets were initially recognized. The Company adopted SFAS No. 142 on January 1, 2002. In accordance with such adoption, the Company identified all reporting units in conjunction with the provisions of SFAS No. 142 and allocated all goodwill accordingly. During the six months ended June 30, 2002, the Company completed the transitional goodwill impairment test required by SFAS No. 142. Due to the general market uncertainty in Colombia, the Company revised its projections and recorded an impairment loss of $244,000 associated with its Colombia reporting unit. No other impairment was identified. The impairment loss was recorded as a cumulative effect of accounting change on the accompanying Consolidated Statements of Operations. The changes in the carrying amount of goodwill for the six months ended June 30, 2002 were as follows (in thousands):


	United								All			Consolidated
Goodwill	States		Mexico			Europe			Others			Total

Balance as of December 31, 2001	$	32,188	$	32,401		$	5,937		$	622		$	71,148
Translation effect		—		(2,630	)		(403	)		(109	)		(3,142	)
Impairment losses		—		—			—			(244	)		(244	)

Balance as of June 30, 2002	$	32,188	$	29,771		$	5,534		$	269		$	67,762

The Company’s other intangible assets consist of trademarks. During the six months ended June 30, 2002, the Company determined trademarks to have an indefinite life and performed the transitional impairment test as required under SFAS No. 142. Based upon the transitional test, the Company determined that there was no impairment of trademarks. The carrying value of trademarks was $46,466,000 as of June 30, 2002.

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In accordance with SFAS No. 142, the Company discontinued amortization of goodwill and other intangible assets with an indefinite life. A reconciliation of previously reported net income to amounts adjusted for the exclusion of goodwill and trademark amortization, net of the related income tax effects, where applicable, is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Net income	$	3,972	$	1,977	$	13,873	$	4,549
Goodwill amortization, net of tax		—		464		—		819
Trademark amortization, net of tax		—		223		—		439

Adjusted net income	$	3,972	$	2,664	$	13,873	$	5,807

On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 retains substantially all of the requirements of SFAS No. 121, while resolving certain implementation issues and addressing the accounting for a component of a business accounted for as a discontinued operation. SFAS No. 144 was adopted with no significant impact on the financial position or results of operations of the Company.

In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This new guidance provides that consideration from a vendor to a reseller is generally presumed to be a reduction of the selling prices of the vendor’s products, and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement. On January 1, 2002, the Company adopted EITF Issue No. 01-9 and reclassified commissions paid to consultants of $994,000 and $1,916,000 on their personal sales, previously reported as a component of selling, general and administrative expenses, as a reduction in net sales for the three and six months ended June 30, 2001, respectively.

In June 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company is currently evaluating the impact that this statement may have on any potential future exit or disposal activities.

Certain reclassifications were made to the prior period financial statements to conform to current period presentation.

(2) Property and Equipment

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


	June 30,		December 31,
	2002		2001

Land	$	16,888	$	17,833
Buildings		17,543		18,523
Machinery, equipment and other		37,699		34,640

		72,130		70,996
Less accumulated depreciation		13,059		11,398

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Property and equipment, net	$	59,071	$	59,598

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(3) Income Taxes

The actual income tax rate of the Company differs from the U.S. and Mexico federal corporate rates of 35% to income before income taxes, for the three and six months ended June 30, 2002 principally as a result of (i) a lower effective tax rate in the Mexico entity, Jafra S.A., as the result of the enactment of changes in Mexico’s future corporate statutory tax rates and the related impact on Jafra S.A.’s net deferred income tax liabilities of $1,167,000 and (ii) the release of valuation allowances of $2,337,000 against certain foreign tax credits in the United States. These were partially offset by state income taxes in the United States and valuation allowances provided against certain operating losses in South America and Europe. The enactment in Mexico will reduce the Mexico corporate income tax rate annually in one-percent increments from 35% to 32% beginning January 1, 2003 through 2005.

(4) Comprehensive Income (Loss)

Comprehensive income (loss) is summarized as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2002			2001			2002			2001

Net income	$	3,972		$	1,977		$	13,873		$	4,549
Unrealized and deferred realized (loss) gain on derivatives		2,535			(3,111	)		340			(4,027	)
Reclassification to exchange loss		208			295			343			295
Reclassification to cost of sales		962			(14	)		1,899			13
Tax benefit (expense) on unrealized and deferred realized (loss) gain on derivatives		(2,607	)		1,109			(903	)		1,442
Foreign currency translation adjustments		(6,009	)		2,838			(7,347	)		2,757

Comprehensive income (loss)	$	(939	)	$	3,094		$	8,205		$	5,029

(5) 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, and Europe. Business results for subsidiaries in South America, the Dominican Republic, and Thailand are combined and included in the following table under the caption “All Others”.

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, 2001 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, unusual gains and losses, and amortization of goodwill and intangibles. 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 related captions below and from the computation of segment operating income.

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


												Corporate,
	United						All			Total		Unallocated			Consolidated
	States		Mexico		Europe		Others			Segments		and Other			Total

							(in thousands)
For the Three Months Ended June 30, 2002
Net sales	$	23,909	$	61,392	$	7,245	$	5,545		$	98,091	$	—		$	98,091
Operating income (loss)		4,206		16,634		274		(1,927	)		19,187		(5,028	)		14,159
Depreciation and amortization		565		470		101		132			1,268		—			1,268

For the Three Months Ended June 30, 2001
Net sales	$	20,646	$	63,116	$	6,498	$	5,567		$	95,827	$	—		$	95,827
Operating income (loss)		3,186		18,069		358		(1,617	)		19,996		(6,898	)		13,098
Depreciation and amortization		627		1,143		190		43			2,003		100			2,103

As of and for the Six Months Ended June 30, 2002
Net sales	$	44,784	$	127,879	$	13,056	$	11,476		$	197,195	$	—		$	197,195
Operating income (loss)		7,068		34,222		321		(2,755	)		38,856		(8,954	)		29,902
Depreciation and amortization		1,130		912		166		203			2,411		—			2,411
Capital expenditures		3,637		1,025		30		193			4,885		—			4,885
Segment assets		73,620		172,710		19,673		11,132			277,135		(1,365	)		275,770
Goodwill		32,188		29,771		5,534		269			67,762		—			67,762

As of and for the Six Months Ended June 30, 2001
Net sales	$	38,875	$	119,194	$	12,728	$	11,203		$	182,000	$	—		$	182,000
Operating income (loss)		3,977		35,053		449		(3,188	)		36,291		(12,023	)		24,268
Depreciation and amortization		1,172		2,227		283		148			3,830		103			3,933
Capital expenditures		3,276		935		78		71			4,360		—			4,360
Segment assets		70,002		179,902		17,100		14,067			281,071		(674	)		280,397

(6) Restructuring Charges and Related Accruals

At December 31, 2001, restructuring liabilities of approximately $200,000 were reflected on the Company’s consolidated balance sheet. During the six months ended June 30, 2002, payments of approximately $100,000 related to restructuring items have been charged against this accrual. As of June 30, 2002, the remaining restructuring liability is approximately $100,000.

(7) Foreign Currency Forward and Option Contracts

The Company is exposed to currency risk relating to its forecasted U.S. dollar-denominated expenditures at Jafra S.A. As part of its overall strategy to reduce the risk of potential adverse exchange rate fluctuations in Mexico, the Company enters into foreign currency exchange contracts (“forward contracts”). Beginning in 2002, the Company also enters into foreign currency option contracts (“option contracts” or “options”). The Company places forward contracts or option contracts based on its rolling 12 month forecasted U.S. dollar cash outflows from Jafra S.A. and hedges transactions included in the forecast on the date the forward contract or 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.

CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivative instruments be recorded based on fair value. In connection with the adoption of SFAS No. 133, at January 1, 2001, the Company recorded a net gain of $126,000 (net of a tax effect of $82,000) as a cumulative transition adjustment to earnings. This adjustment relates to derivatives not designated as hedges prior to adoption of SFAS No. 133, and represents the difference between the carrying value and the fair value of such instruments. Under SFAS No. 133, the Company’s use of forward contracts or option contracts to hedge certain forecasted transactions qualifies for hedge accounting. Gains and losses from such derivatives are deferred as a separate component of other comprehensive income (loss), and are recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such forward contracts with the corresponding gains and losses generated by the underlying hedged transactions. Contracts that do not qualify for hedge accounting under SFAS No. 133 are remeasured based on fair value and the gains and losses included as a component of net income.

The Company currently designates certain of its forward contracts and 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 S.A., forecasted management fee charges from JCI to Jafra S.A., 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 income (loss). Such amounts will be reclassified from other comprehensive income (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 S.A.

The Company recognized losses on forward contracts of approximately $511,000 and $866,000 during the three and six months ended June 30, 2002, respectively, and approximately $6,206,000 and $9,614,000 during the three and six months ended June 30, 2001, respectively, as a component of exchange loss on the accompanying consolidated statements of operations. The Company recognized gains on option contracts of approximately $737,000 during each of the three and six month periods ended June 30, 2002. As of December 31, 2001, the Company had deferred as a component of other comprehensive income (loss) $3,746,000 of losses on forward contracts. During the six months ended June 30, 2002, the Company deferred as a component of other comprehensive income (loss) an additional $1,814,000 of losses on forward contracts and $2,154,000 of gains on option contracts qualifying for hedge accounting under SFAS No. 133. During the six months ended June 30, 2002, approximately $343,000 of other comprehensive income (loss) was reclassified as exchange loss and $1,899,000 was reclassified as cost of sales upon recognition of the underlying hedged exposure. The Company expects that substantially all of the remaining loss of $1,164,000 deferred as a component of other comprehensive income (loss) at June 30, 2002 will be recognized into net income within the next twelve months. The fair value of the forward contracts was $2,936,000 and $10,103,000 at June 30, 2002 and 2001, respectively and has been recorded in accrued liabilities in the consolidated balance sheets. The fair value of the option contacts was $2,390,000 at June 30, 2002, and was recorded as an offset to accrued liabilities in the consolidated balance sheets.

During the three and six months ended June 30, 2002 and 2001, the ineffectiveness generated by the Company’s forward and option contracts designated as hedges was insignificant. Certain hedged forecasted transactions appear probable of not occurring due to timing differences between the original and current forecasts, and accordingly during the six months ended June 30, 2002 and 2001, approximately $123,000 of gains and $456,000 of losses, respectively, were reclassified into earnings.

The outstanding foreign currency forward contracts had notional values denominated in Mexican pesos of $333,000,000 in equal offsetting buy and sell positions at June 30, 2002 and $976,000,000 in a buy position at June 30, 2001. The contracts outstanding at June 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at June 30, 2001 matured at various dates through June 2002. The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of $644,000,000 in put and call positions at June 30, 2002. Notional amounts do not quantify market or credit exposure or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. (See Item 3 “Quantitative and Qualitative Disclosures About Market Risk”).

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


				June 30,			December 31,
				2002			2001

				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	4,050		$	4,081
	Receivables, net				6,762			6,447
	Inventories				10,613			8,677
	Receivables from affiliates				22,298			23,633
	Prepaid expenses and other current assets				2,336			1,665
	Deferred income taxes				2,392			55

		Total current assets			48,451			44,558
Property and equipment, net					25,322			22,742
Other assets:
	Goodwill				37,722			38,125
	Notes receivable from affiliates				7,724			3,902
	Deferred financing fees, net				2,689			3,004
	Other				3,943			3,716

			Total	$	125,851		$	116,047

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
	Current portion of long-term debt			$	3,500		$	3,000
	Accounts payable				4,563			5,591
	Accrued liabilities				13,256			12,709
	Income taxes payable				2,055			965
	Payables to affiliates				4,224			2,639

		Total current liabilities			27,598			24,904
Long-term debt					50,608			52,908
Deferred income taxes					3,353			3,353
Other long-term liabilities					3,464			3,088

		Total liabilities			85,023			84,253

Commitments and contingencies					—			—
Stockholder’s equity:
	Common stock, par value $.01; authorized, issued and outstanding, 1,000 shares in 2002 and 2001				—			—
	Additional paid-in capital				39,649			39,649
	Retained earnings (deficit)				3,817			(5,376	)
	Accumulated other comprehensive loss				(2,638	)		(2,479	)

		Total stockholder’s equity			40,828			31,794

			Total	$	125,851		$	116,047

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2002			2001			2002			2001

Net sales to third parties		$	32,746		$	28,033		$	61,419		$	53,317
Sales to affiliates			4,368			3,677			7,908			6,181

Net sales			37,114			31,710			69,327			59,498
Cost of sales			11,505			9,421			20,806			17,359

	Gross profit		25,609			22,289			48,521			42,139
Selling, general and administrative expenses			25,896			25,327			50,526			49,427
Management fee income from affiliates			(2,241	)		(2,182	)		(4,366	)		(4,436	)
Royalty income from affiliates, net			(5,390	)		(5,281	)		(10,028	)		(9,973	)

	Income from operations		7,344			4,425			12,389			7,121
Other income (expense):
	Exchange (loss) gain, net		678			(203	)		543			(3	)
	Interest expense, net		(1,529	)		(1,714	)		(3,117	)		(3,450	)
	Other, net		281			(322	)		295			(416	)

Income before income taxes			6,774			2,186			10,110			3,252
Income tax expense			727			1,219			917			1,893

Net income		$	6,047		$	967		$	9,193		$	1,359

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


					Six Months Ended
					June 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	9,193		$	1,359
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				1,392			1,427
		Provision for uncollectible accounts receivable				441			265
		Amortization of deferred financing fees				314			314
		Unrealized foreign exchange loss				(540	)		58
		Deferred income taxes				(2,337	)		—
		Changes in operating assets and liabilities:
			Receivables			(756	)		(641	)
			Inventories			(1,936	)		403
			Prepaid expenses and other current assets			(671	)		(366	)
			Receivables from and Payables to affiliates			3,460			(9,930	)
			Other assets			38			566
			Accounts payable and accrued liabilities			(481	)		(828	)
			Income taxes payable/prepaid			1,090			465
			Other long-term liabilities			376			228

				Net cash provided by (used in) operating activities		9,583			(6,680	)

Cash flows from investing activities:
	Purchases of property and equipment					(3,808	)		(3,354	)
	Other					(265	)		(123	)

				Net cash used in investing activities		(4,073	)		(3,477	)

Cash flows from financing activities:
	Repayments under term loan facility					(1,500	)		(1,250	)
	Net repayments under revolving credit facility					(300	)		(4,100	)
	(Lending) repayment of note receivable from affiliate					(3,822	)		15,986

				Net cash (used in) provided by financing activities		(5,622	)		10,636

Effect of exchange rate changes on cash and cash equivalents						81			(816	)

Net decrease in cash and cash equivalents						(31	)		(337	)
Cash and cash equivalents at beginning of period						4,081			3,382

Cash and cash equivalents at end of period					$	4,050		$	3,045

See accompanying notes to consolidated financial statements

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

(1) Basis of Presentation

Jafra Cosmetics International, Inc., a Delaware corporation (“JCI”) is an indirect wholly-owned subsidiary of CDRJ North Atlantic (Lux) S.a.r.L., a Luxembourg société a responsabilité limitée, which is a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme (the “Parent”). JCI, its subsidiaries, and certain other subsidiaries of the Parent were organized by Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership managed by Clayton, Dubilier & Rice, Inc. (“CD&R”) to acquire (the “Acquisition”) the worldwide Jafra Cosmetics business (the “Jafra Business”).

The accompanying unaudited interim consolidated financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 reflect the operations of 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 financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly JCI’s consolidated financial statements as of June 30, 2002 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.

In July 2001, the Financial Accounting Standards Board (“FASB”) approved two new statements: Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and other Intangible Assets.” SFAS No. 141 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized, but be tested for impairment at least annually. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 with regards to all goodwill and other intangible assets recognized in an entity’s statement of financial position at that date, regardless of when those assets were initially recognized. JCI adopted SFAS No. 142 on January 1, 2002. In accordance with such adoption, JCI identified all reporting units in conjunction with the provisions of SFAS No. 142 and allocated all goodwill accordingly. During the six months ended June 30, 2002, JCI completed the transitional goodwill impairment test required by SFAS No. 142. No impairment was identified. There were no changes, except for translation effects, to the carrying amount of goodwill for the six months ended June 30, 2002. JCI’s other intangible assets consist of trademarks. During the six months ended June 30, 2002, JCI determined trademarks to have an indefinite life and performed the transitional impairment test as required under SFAS No. 142. Based upon the transitional test, JCI determined that there was no impairment of trademarks. The trademark valuation was performed in conjunction with the valuation of the Parent’s consolidated trademarks. The carrying value of trademarks is $223,000 as of June 30, 2002 and is included in other on the accompanying consolidated balance sheets.

In accordance with SFAS No. 142, JCI discontinued amortization of goodwill and other intangible assets with an indefinite life. A reconciliation of previously reported net income to amounts adjusted for the exclusion of goodwill and trademark amortization, net of the related income tax effects, where applicable, is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Net income	$	6,047	$	967	$	9,193	$	1,359
Goodwill amortization, net of tax		—		126		—		248
Trademark amortization, net of tax		—		8		—		19

Adjusted net income	$	6,047	$	1,101	$	9,193	$	1,626

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

On January 1, 2002, JCI adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 retains substantially all of the requirements of SFAS No. 121, while resolving certain implementation issues and addressing the accounting for a component of a business accounted for as a discontinued operation. SFAS No. 144 was adopted with no significant impact on the financial position or results of operations of JCI.

In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue no. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This new guidance provides that consideration from a vendor to a reseller is generally presumed to be a reduction of the selling prices of the vendor’s products, and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement. On January 1, 2002, JCI adopted EITF Issue No. 01-9 and reclassified commissions paid to consultants of $365,000 and $705,000 on their personal sales, previously reported as a component of selling, general and administrative expenses, as a reduction in net sales for the three and six months ended June 30, 2001, respectively.

In June 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. JCI is currently evaluating the impact that this statement may have on any potential future exit or disposal activities.

Certain reclassifications were made to the prior period financial statements to conform to current period presentation.

(2) Property and Equipment

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


	June 30,		December 31,
	2002		2001

Land	$	6,188	$	6,188
Buildings		6,790		6,763
Machinery, equipment and other		19,927		15,971

		32,905		28,922
Less accumulated depreciation		7,583		6,180

Property and equipment, net	$	25,322	$	22,742

(3) Income Taxes

The actual income tax rate of JCI differs from the U.S. federal corporate rate of 35% to income before income taxes, for the three and six months ended June 30, 2002 principally as a result of the release of valuation allowances against certain foreign tax credits in the United States, partially offset by state income tax and valuation allowances provided against certain operating losses in Europe.

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

(4) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2002			2001			2002			2001

Net income	$	6,047		$	967		$	9,193		$	1,359
Foreign currency translation adjustments		(165	)		(440	)		(159	)		(1,345	)

Comprehensive income	$	5,882		$	527		$	9,034		$	14

(5) Related Party Transactions

JCI distributes skin and body products to other affiliates of the Parent (“Affiliates”). Sales to Affiliates, primarily in Mexico and South America, were $4,368,000 and $7,908,000 for the three and six months ended June 30, 2002, respectively, and $3,677,000 and $6,181,000 for the three and six months ended June 30, 2001, respectively. These sales were made at cost plus a markup ranging from 0 to 11%. JCI purchased color and fragrance products from Jafra S.A. (the indirect wholly owned Mexican subsidiary of the Parent) totaling $2,719,000 and $7,643,000 for the three and six months ended June 30, 2002, respectively, and $2,670,000 and $4,907,000 for the three and six months ended June 30, 2001, respectively.

In addition, JCI provides certain management services, such as legal, accounting and treasury, management oversight, and other administrative functions to Affiliates. 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, which consists of amounts billed to Affiliates in Mexico and South America, was $2,241,000 and $4,366,000 for the three and six months ended June 30, 2002, respectively, and $2,182,000 and $4,436,000 for the three and six months ended June 30, 2001, respectively.

JCI is charged a royalty by Jafra S.A. for the right to use the Jafra trademark in the United States and Europe. The total royalty expense charged by Jafra S.A. to JCI was $640,000 and $1,192,000 for the three and six months ended June 30, 2002, respectively, and $449,000 and $851,000 for the three and six months ended June 30, 2001, respectively, and is 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 S.A. were $6,030,000 and $11,220,000 for the three and six months ended June 30, 2002, respectively, and $5,730,000 and $10,824,000 for the three and six months ended June 30, 2001, respectively, and are based upon a percentage of Jafra S.A.’s sales.

JCI has granted loans to certain Affiliates at annual interest rates ranging from 6% to 9%. Such loans are due to be repaid five years from the date of grant, with no prepayment penalty. Notes receivable from Affiliates at December 31, 2001 and June 30, 2002 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 $80,000 and $135,000 for the three and six months ended June 30, 2002, respectively, and $176,000 and $465,000 for the three and six months ended June 30, 2001, respectively, and is included in interest expense, net on the accompanying consolidated statements of operations..

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

(6) 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 and Europe. Business results for subsidiaries in the Dominican Republic and Thailand are combined and included in the following table under the caption “All Others”.

The accounting policies used to prepare the information reviewed by JCI’s chief operating decision makers are the same as those described in the summary of significant accounting policies included in JCI’s audited consolidated financial statements as of and for the year ended December 31, 2001 included in the Parent’s Annual Report on Form 10-K. JCI evaluates performance based on segment operating income, excluding restructuring and impairment charges, unusual gains and losses, and amortization of goodwill and intangibles. 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 operating income. Sales and gross profit related to Affiliates (primarily in Mexico and South America) is included in the following table under the caption “Corporate, Unallocated and Other.” Segment assets exclude notes and accounts receivable from Affiliates.


										Corporate,
	United				All			Total		Unallocated		Consolidated
	States		Europe (1)		Others			Segments		And Other		Total

					(in thousands)
For the Three Months ended June 30, 2002
Net sales	$	23,909	$	7,245	$	1,592		$	32,746	$	4,368	$	37,114
Operating income (loss)		4,206		320		(89	)		4,437		2,907		7,344
Depreciation and amortization		565		99		67			731		—		731

For the Three Months ended June 30, 2001
Net sales	$	20,646	$	6,498	$	889		$	28,033	$	3,677	$	31,710
Operating income (loss)		3,186		358		(471	)		3,073		1,352		4,425
Depreciation and amortization		627		187		(38	)		776		—		776

As of and for the Six Months ended June 30, 2002
Net sales	$	44,784	$	13,056	$	3,579		$	61,419	$	7,908	$	69,327
Operating income		7,068		368		24			7,460		4,929		12,389
Depreciation and amortization		1,130		161		101			1,392		—		1,392
Capital expenditures		3,637		30		141			3,808		—		3,808
Segment assets		73,620		19,433		2,776			95,829		—		95,829
Goodwill		32,188		5,534		—			37,722		—		37,722

As of and for the Six Months ended June 30, 2001
Net sales	$	38,875	$	12,693	$	1,749		$	53,317	$	6,181	$	59,498
Operating income (loss)		3,977		448		(793	)		3,632		3,489		7,121
Depreciation and amortization		1,172		277		(22	)		1,427		—		1,427
Capital expenditures		3,276		78		—			3,354		—		3,354
Segment assets		70,002		16,738		2,727			89,467		—		89,467

(1) excludes Poland, an indirect wholly-owned subsidiary of the Parent, an affiliate of JCI

(7) Restructuring Charges and Related Accruals

At December 31, 2001, restructuring liabilities of approximately $100,000 were reflected on JCI’s consolidated balance sheet. During the six months ended June 30, 2002, nominal payments have been charged against this accrual. As of June 30, 2002, the remaining restructuring liability is approximately $100,000.

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


			June 30,			December 31,
			2002			2001

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	4,826		$	920
	Receivables, net			29,392			34,430
	Inventories			23,913			29,622
	Receivables from affiliates			6,323			5,938
	Value-added tax receivables			—			2,308
	Prepaid expenses and other current assets			2,900			3,206

		Total current assets		67,354			76,424
Property and equipment, net				33,224			36,121
Other assets:
	Goodwill			29,771			32,401
	Trademarks			46,312			50,402
	Deferred financing fees, net			790			1,270
	Other			1,582			2,699

		Total	$	179,033		$	199,317

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	3,016		$	3,188
	Accounts payable			10,837			20,205
	Accrued liabilities			20,107			27,299
	Income taxes payable			2,223			6,122
	Payables to affiliates			19,114			21,373
	Deferred income taxes			4,653			4,094

		Total current liabilities		59,950			82,281
Long-term debt				33,616			33,993
Deferred income taxes				14,508			16,958

		Total liabilities		108,074			133,232

Commitments and contingencies				—			—
Stockholders’ equity:
	Series B common stock, no par value; authorized, issued and outstanding, 151 shares in 2002 and 2001			—			—
	Additional paid-in capital			34,184			34,184
	Retained earnings			42,054			32,194
	Accumulated other comprehensive loss			(5,279	)		(293	)

		Total stockholders’ equity		70,959			66,085

		Total	$	179,033		$	199,317

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2002			2001			2002			2001

	Net sales to third parties		$	61,392		$	63,116		$	127,879		$	119,194
	Sales to affiliates			3,211			3,288			8,409			6,021

	Net sales			64,603			66,404			136,288			125,215
	Cost of sales			17,684			18,285			38,786			34,242

		Gross profit		46,919			48,119			97,502			90,973
	Selling, general and administrative expenses			30,734			30,242			62,459			56,440
	Management fee expense to affiliates			2,238			2,197			4,364			4,437
	Royalty expense to affiliates, net			5,390			5,281			10,028			9,973

		Income from operations		8,557			10,399			20,651			20,123
Other income (expense):
		Exchange loss, net		(4,714	)		(4,084	)		(4,367	)		(6,242	)
		Interest expense, net		(1,320	)		(1,541	)		(2,613	)		(3,224	)
		Other, net		—			(95	)		—			(89	)

	Income before income taxes and cumulative			2,523			4,679			13,671			10,568
		effect of accounting change
	Income tax expense			876			1,835			3,811			4,098

	Income before cumulative effect of accounting change			1,647			2,844			9,860			6,470
	Cumulative effect of accounting change, net of income tax expense of $82			—			—			—			126

	Net income		$	1,647		$	2,844		$	9,860		$	6,596

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


					Six Months Ended
					June 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	9,860		$	6,596
		Cumulative effect of accounting change, net of taxes				—			(126	)

	Income before cumulative effect of accounting change					9,860			6,470
	Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities:
			Gain on sale of property and equipment			(65	)		—
			Depreciation and amortization			912			2,227
			Amortization of deferred financing fees			403			399
			Provision for uncollectible accounts receivable			5,082			2,175
			Unrealized foreign exchange and derivative (gain) loss			3,347			2,299
			Deferred realized derivative loss			385			(550	)
			Deferred income taxes			(1,167	)		—
			Changes in operating assets and liabilities:
				Receivables		(2,646	)		(5,432	)
				Inventories		3,585			5,185
				Prepaid expenses and other current assets		49			(210	)
				Value-added tax receivables		2,900			4,753
				Receivables from and Payables to affiliates		(2,794	)		11,081
				Other assets		974			1,193
				Accounts payable and accrued liabilities		(11,788	)		(13,109	)
				Income taxes payable/prepaid		(3,402	)		4,064

				Net cash provided by operating activities		5,635			20,545

Cash flows from investing activities:
	Proceeds from sale of property and equipment					211			—
	Purchases of property and equipment					(1,025	)		(935	)

				Net cash used in investing activities		(814	)		(935	)

Cash flows from financing activities:
	Repayments under term loan facility					(3,125	)		(1,000	)
	Net borrowings under revolving credit facility					3,000			2,000
	Net (repayments) borrowings under bank debt					(318	)		2,584
	Payment of note payable to affiliate					—			(21,276	)

				Net cash used in financing activities		(443	)		(17,692	)

Effect of exchange rate changes on cash and cash equivalents						(472	)		585

Net increase in cash and cash equivalents						3,906			2,503
Cash and cash equivalents at beginning of period						920			561

Cash and cash equivalents at end of period					$	4,826		$	3,064

See accompanying notes to consolidated financial statements

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 (“Jafra S.A.”) is an indirect wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg société anonyme (the “Parent”). Jafra S.A., its subsidiaries, and certain other subsidiaries of the Parent were organized by Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership managed by Clayton, Dubilier & Rice, Inc. (''CD&R’’) to acquire (the ''Acquisition’’) the worldwide Jafra Cosmetics business (the ''Jafra Business’’).

The accompanying unaudited interim consolidated financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 reflect the operations of Jafra S.A. and its subsidiaries (collectively, “Jafra 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 financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly Jafra S.A.’s consolidated financial statements as of June 30, 2002 and for the interim periods presented. All significant intercompany accounts and transactions between entities comprising Jafra S.A. have been eliminated in consolidation.

The functional currency for Jafra 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.

In July 2001, the Financial Accounting Standards Board (“FASB”) approved two new statements: Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and other Intangible Assets.” SFAS No. 141 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized, but be tested for impairment at least annually. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 with regards to all goodwill and other intangible assets recognized in an entity’s statement of financial position at that date, regardless of when those assets were initially recognized. Jafra S.A. adopted SFAS No. 142 on January 1, 2002. In accordance with such adoption, Jafra S.A. identified all reporting units in conjunction with the provisions of SFAS No. 142 and allocated all goodwill accordingly. During the six months ended June 30, 2002, Jafra S.A. completed the transitional goodwill impairment test required by SFAS No. 142. No impairment was identified. There were no changes, except for translation effects, to the carrying amount of goodwill for the six months ended June 30, 2002. Jafra S.A.’s other intangible assets consist of trademarks. During the six months ended June 30, 2002, Jafra S.A. determined trademarks to have an indefinite life and performed the transitional impairment test as required under SFAS No. 142. Based upon the transitional test, Jafra S.A. determined that there was no impairment of trademarks. The trademark valuation was performed in conjunction with the valuation of the Parent’s consolidated trademarks. The carrying value of trademarks was $46,312,000 as of June 30, 2002.

In accordance with SFAS No. 142, Jafra S.A. discontinued amortization of goodwill and other intangible assets with an indefinite life. A reconciliation of previously reported net income to amounts adjusted for the exclusion of goodwill and trademark amortization, net of the related income tax effects, where applicable, is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Net income	$	1,647	$	2,844	$	9,860	$	6,596
Goodwill amortization		—		220		—		431
Trademark amortization, net of tax		—		209		—		411

Adjusted net income	$	1,647	$	3,273	$	9,860	$	7,438

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On January 1, 2002, Jafra S.A. adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 retains substantially all of the requirements of SFAS No. 121, while resolving certain implementation issues and addressing the accounting for a component of a business accounted for as a discontinued operation. SFAS No. 144 was adopted with no significant impact on the financial position or results of operations of Jafra S.A..

In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This new guidance provides that consideration from a vendor to a reseller is generally presumed to be a reduction of the selling prices of the vendor’s products, and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement. On January 1, 2002, Jafra S.A. adopted EITF Issue No. 01-9 and reclassified commissions paid to consultants of $550,000 and $1,075,000 on their personal sales, previously reported as a component of selling, general and administrative expenses, as a reduction in net sales for the three and six months ended June 30, 2001, respectively.

In June 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Jafra S.A. is currently evaluating the impact that this statement may have on any potential future exit or disposal activities.

(2) Property and Equipment

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


	June 30,		December 31,
	2002		2001

Land	$	10,700	$	11,645
Buildings		10,753		11,703
Machinery, equipment and other		16,736		17,532

		38,189		40,880
Less accumulated depreciation		4,965		4,759

Property and equipment, net	$	33,224	$	36,121

(3) Income Taxes

The actual income tax rate of Jafra S.A. differs from the Mexican federal corporate rate of 35% to income before income taxes, for the three and six months ended June 30, 2002 principally as the result of the enactment of changes in the Mexico corporate statutory tax rate and the related impact on Jafra S.A.’s net deferred income tax liabilities. The enactment will reduce the corporate income tax rate annually in one-percent increments from 35% to 32% beginning January 1, 2003 through 2005.

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(4) Comprehensive Income (Loss)

Comprehensive income (loss) is summarized as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2002			2001			2002			2001

Net income	$	1,647		$	2,844		$	9,860		$	6,596
Unrealized and deferred realized (loss) gain on derivatives		2,535			(3,111	)		340			(4,027	)
Reclassification to exchange loss		208			295			343			295
Reclassification to cost of sales		962			(14	)		1,899			13
Tax benefit (expense) on unrealized and deferred realized (loss) gain on derivatives		(2,607	)		1,109			(903	)		1,442
Foreign currency translation adjustments		(6,383	)		3,301			(6,665	)		4,252

Comprehensive income (loss)	$	(3,638	)	$	4,424		$	4,874		$	8,571

(5) Related Party Transactions

Jafra S.A. manufactures and distributes color cosmetics and fragrance products to other affiliates of the Parent (“Affiliates”). Sales to Affiliates, primarily in the United States and Germany, were $3,211,000 and $8,409,000 for the three and six months ended June 30, 2002, respectively, and $3,288,000 and $6,021,000 for the three and six months ended June 30, 2001, respectively. These sales were made at cost plus a markup ranging from 0 to 11%. Jafra S.A. purchased skin and body products from JCI (the indirect, wholly owned United States subsidiary of the Parent). Purchases were $4,075,000 and $7,333,000 for the three and six months ended June 30, 2002, respectively, and $3,204,000 and $5,422,000 for the three and six months ended June 30, 2001, respectively.

In addition, Jafra S.A. is provided with certain management services, such as legal, accounting and treasury, management oversight, and other administrative functions from an Affiliate. The cost of these services is included in management fee expense to affiliates in the accompanying consolidated statements of operations. Jafra S.A. is charged a portion of these management expenses based upon charges identified to Jafra S.A. and a formula using the percentage of revenues of Jafra S.A. to the total consolidated revenues of the Parent. Jafra S.A. believes the amounts and methods of allocation are reasonable and approximate the cost of the actual services received. The management fee expense charged by JCI to Jafra S.A. was $2,238,000 and $4,364,000 for the three and six months ended June 30, 2002, respectively, and $2,197,000 and $4,437,000 for the three and six months ended June 30, 2001, respectively.

Jafra 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 S.A. from JCI and its Germany affiliate was $640,000 and $1,192,000 for the three and six months ended June 30, 2002, respectively, and $449,000 and $851,000 for the three and six months ended June 30, 2001, respectively, and is offset against royalty expense to affiliates in the accompanying consolidated statements of operations.

JCI owns the worldwide rights to its multi-level sales know-how (referred to as the “Jafra Way”). The Jafra Way was initially developed in the United States for lineage, training, and compensation of consultants. The royalty fees charged by JCI to Jafra S.A. for the use of the Jafra Way were $6,030,000 and $11,220,000 for the three and six months ended June 30, 2002, respectively, and $5,730,000 and $10,824,000 for the three and six months ended June 30, 2001, respectively, and are based upon a percentage of Jafra S.A.’s sales.

Jafra S.A. has obtained loans from certain Affiliates at annual interest rates ranging from 6% to 9%. Such loans are due to be repaid five years from the date of grant, with no prepayment penalty. For the six months ended June 30, 2002, Jafra S.A. did not incur any interest expense to Affiliates. Net interest expense to Affiliates, primarily JCI, was $47,000 and $257,000 for the three months and six months ended June 30, 2001, respectively, which

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

resulted primarily from notes payable to Affiliates as a result amounts billed to Jafra S.A. in connection with the Jafra Way royalty. In the second quarter of 2001, notes payable to Affiliates were repaid.

(6) Foreign Currency Forward and Option Contracts

Jafra S.A. is exposed to currency risk relating to its forecasted U.S. dollar-denominated expenditures. As part of its overall strategy to reduce the risk of potential adverse exchange rate fluctuations, Jafra S.A. enters into foreign currency exchange contracts (“forward contracts”). Beginning in 2002, Jafra S.A. also enters into foreign currency option contracts (“option contracts” or “options”). Jafra S.A. places forward contracts or option contracts based on its rolling 12 month forecasted U.S. dollar cash outflows and hedges transactions included in the forecast on the date the forward contract or option contract is initiated. As a matter of policy, Jafra S.A. does not hold or issue forward contracts or option contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features.

Effective January 1, 2001, Jafra S.A. adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivative instruments be recorded based on fair value. In connection with the adoption of SFAS No. 133, at January 1, 2001, Jafra S.A. recorded a net gain of $126,000 (net of a tax effect of $82,000) as a cumulative transition adjustment to earnings. This adjustment relates to derivatives not designated as hedges prior to adoption of SFAS No. 133, and represents the difference between the carrying value and the fair value of such instruments. Under SFAS No. 133, Jafra S.A.’s use of forward contracts or option contracts to hedge certain forecasted transactions qualifies for hedge accounting. Gains and losses from such derivatives are deferred as a separate component of other comprehensive income (loss), and are recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such forward contracts with the corresponding gains and losses generated by the underlying hedged transactions. Contracts that do not qualify for hedge accounting under SFAS No. 133 are remeasured based on fair value and the gains and losses included as a component of net income.

Jafra S.A. currently designates certain of its forward contracts and 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 S.A., forecasted management fee charges from JCI to Jafra S.A., 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 income (loss). Such amounts will be reclassified from other comprehensive income (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 S.A.

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Jafra S.A. recognized losses on forward contracts of approximately $511,000 and $866,000 during the three and six months ended June 30, 2002, respectively, and approximately $6,206,000 and $9,614,000 during the three and six months ended June 30, 2001, respectively, as a component of exchange loss on the accompanying consolidated statements of operations. Jafra S.A. recognized gains on option contracts of approximately $737,000 during each of the three and six month periods ended June 30, 2002. As of December 31, 2001, Jafra S.A. had deferred as a component of other comprehensive income (loss) $3,746,000 of losses on forward contracts. During the six months ended June 30, 2002, Jafra S.A. deferred as a component of other comprehensive income (loss) an additional $1,814,000 of losses on forward contracts and $2,154,000 of gains on option contracts qualifying for hedge accounting under SFAS No. 133. During the six months ended June 30, 2002, approximately $343,000 of other comprehensive income (loss) was reclassified as exchange loss and $1,899,000 was reclassified as cost of sales upon recognition of the underlying hedged exposure. Jafra S.A. expects that substantially all of the remaining loss of $1,164,000 deferred as a component of other comprehensive income (loss) at June 30, 2002 will be recognized into net income within the next twelve months. The fair value of the forward contracts was $2,936,000 and $10,103,000 at June 30, 2002 and 2001, respectively, and has been recorded in accrued liabilities in the consolidated balance sheets. The fair value of the option contacts was $2,390,000 at June 30, 2002, and was recorded as an offset to accrued liabilities in the consolidated balance sheets.

During the three and six months ended June 30, 2002 and 2001, the ineffectiveness generated by Jafra S.A.’s forward and option contracts designated as hedges was insignificant. Certain hedged forecasted transactions appear probable of not occurring due to timing differences between the original and current forecasts, and accordingly during the six months ended June 30, 2002 and 2001, approximately $123,000 of gains and $456,000 of losses were reclassified into earnings.

The outstanding foreign currency forward contracts had notional values denominated in Mexican pesos of $333,000,000 in equal offsetting buy and sell positions at June 30, 2002 and $976,000,000 in a buy position at June 30, 2001. The contracts outstanding at June 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at June 30, 2001 matured at various dates through June 2002. The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of $644,000,000 in put and call positions at June 30, 2002. Notional amounts do not quantify market or credit exposure or represent assets or liabilities of Jafra S.A., but are used in the calculation of cash settlements under the contracts. (See Item 3 “Quantitative and Qualitative Disclosures About Market Risk”).

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

General

The following discussion of the results of operations, financial condition and liquidity of the Company should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto and with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results that may be expected for future periods.

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. The table reflects the operations of the Company for the three and six months ended June 30, 2002 and 2001.


	Three Months Ended June 30,										Six Months Ended June 30,

	2002					2001 (1)					2002					2001 (1)

Net sales	$	98.1		100.0	%	$	95.8		100.0	%	$	197.2		100.0	%	$	182.0		100.0	%
Cost of sales		22.9		23.3			22.3		23.3			45.9		23.3			42.6		23.4

Gross profit		75.2		76.7			73.5		76.7			151.3		76.7			139.4		76.6
Selling, general and administrative expenses		61.0		62.2			60.4		63.0			121.4		61.6			115.1		63.2

Income from operations		14.2		14.5			13.1		13.7			29.9		15.1			24.3		13.4
Exchange loss		(5.9	)	(6.0	)		(4.5	)	(4.7	)		(5.4	)	(2.7	)		(6.7	)	(3.7	)
Interest, net		(2.9	)	(3.0	)		(3.4	)	(3.6	)		(5.9	)	(3.0	)		(6.9	)	(3.8	)
Other, net		0.2		0.2			(0.1	)	(0.1	)		0.3		0.2			(0.2	)	(0.1	)

Income before income taxes and cumulative effect of accounting change		5.6		5.7			5.1		5.3			18.9		9.6			10.5		5.8
Income tax expense		1.6		1.6			3.1		3.2			4.8		2.4			6.1		3.4

Income before cumulative effect of accounting change		4.0		4.1			2.0		2.1			14.1		7.2			4.4		2.4
Cumulative effect of accounting change, net of income tax expense of $0.1 in 2001		—		—			—		—			(0.2	)	(0.2	)		0.1		0.1

Net income	$	4.0		4.1	%	$	2.0		2.1	%	$	13.9		7.0	%	$	4.5		2.5	%

(1)

On January 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” As a result of the adoption, the Company reclassified $1.0 million and $1.9 million of commissions paid on personal sales as a reduction of net sales, previously reported as selling, general and administrative expenses, in the consolidated statement of operations for the three and six months ended June 30, 2001, respectively.

Three months ended June 30, 2002 compared to the three months ended June 30,2001


Dollars in millions	United States		Mexico		Europe		All others			Total Segments		Corporate, Unallocated and Other			Consolidated Total

Three Months Ended June 30, 2002
Net sales	$	23.9	$	61.4	$	7.2	$	5.6		$	98.1	$	—		$	98.1
Cost of sales		5.5		14.0		1.6		1.6			22.7		0.2			22.9

Gross profit		18.4		47.4		5.6		4.0			75.4		(0.2	)		75.2
Selling, general and administrative expenses		14.2		30.8		5.3		5.9			56.2		4.8			61.0

Operating income (loss)	$	4.2	$	16.6	$	0.3	$	(1.9	)	$	19.2	$	(5.0	)	$	14.2

Three Months Ended June 30, 2001
Net sales	$	20.6	$	63.1	$	6.5	$	5.6		$	95.8	$	—		$	95.8
Cost of sales		4.5		15.5		1.2		1.2			22.4		(0.1	)		22.3

Gross profit		16.1		47.6		5.3		4.4			73.4		0.1			73.5
Selling, general and administrative expenses		12.9		29.5		4.9		6.1			53.4		7.0			60.4

Operating income (loss)	$	3.2	$	18.1	$	0.4	$	(1.7	)	$	20.0	$	(6.9	)	$	13.1

Net sales. Net sales in the second quarter of 2002 increased to $98.1 million from $95.8 million in the second quarter of 2001, an increase of $2.3 million or 2.4%. Net sales in local currencies in the second quarter of 2002 increased by 4.3% over the comparable prior year period. The sales increase in local currencies was higher than the increase measured in U.S. dollars primarily as a result of the weaker average exchange rates of the Mexican peso in the second quarter of 2002. The Company’s average number of consultants worldwide for the second quarter of 2002 increased to approximately 384,000, or 5.2% over the 2001 average. Consultant productivity for the second quarter of 2002 decreased 2.7% compared to the second quarter of 2001, a significant portion of which related to weaker local currencies compared to U.S. dollars. Consultant productivity is generally defined as annualized sales divided by the average number of consultants.

In Mexico, net sales in the second quarter of 2002 decreased to $61.4 million from $63.1 million in the second quarter of 2001, a decrease of $1.7 million, or 2.7%. The decrease in sales measured in U.S. dollars was primarily due to weaker exchange rates in the second quarter of 2002, as sales in local currency were relatively constant compared to the second quarter of 2001. In Mexico, the average number of consultants for the second quarter of 2002 increased to approximately 242,000, or by 5.4% over the average number of consultants in the comparable prior year period. In local currency, consultant productivity decreased approximately 5.3% over consultant productivity in the second quarter of 2001, largely due to declining liquidity as a result of a slow-down in the economy.

In the United States, net sales in the second quarter of 2002 increased to $23.9 million from $20.6 million in the second quarter of 2001, an increase of $3.3 million or 16.0%. The increase was primarily driven by the Hispanic Division. Net sales in the second quarter of 2002 for the Hispanic Division increased 22.4% to $16.2 million due to a combination of improved consultant productivity, an increase in the average consultant base achieved by improved sponsoring and retention and increased ordering activity. Net sales in the second quarter of 2002 for the General Division increased 3.9% to $7.7 million. In the U.S., the average number of consultants remained constant at 68,000, however, in the Hispanic Division, the average number of consultants increased 7.6% to approximately 38,000. Productivity in the Hispanic Division increased 13.8% and the number of ordering consultants improved in the Hispanic Division, as approximately 62.3% of all consultants were considered active during the period, largely due to productivity based changes in the program during the period.

In Europe, net sales increased to $7.2 million in the second quarter of 2002, from $6.5 million in the second quarter of 2001, an increase of $0.7 million, or 10.8%. The increase was the result of increased activity and productivity, partially offset by a smaller average consultant base. The number of ordering consultants increased 5.4%, and 66.7% of all consultants were considered active. Consultant productivity increased 16.1% in the second quarter of 2002 compared to the second quarter of 2001, a portion of which was attributable to the

strengthening of the euro compared to the U.S. dollar. The average consultant base decreased approximately 3.5% to 16,000.

Sales in South America and Thailand remained constant at $5.6 million. In local currencies, sales in South America increased 20.3% and sales in Thailand increased 25.1%.

Gross profit. Consolidated gross profit in the second quarter of 2002 increased to $75.2 million from $73.5 million in the comparable prior year period, an increase of $1.7 million, or 2.3%. Gross profit as a percentage of sales (gross margin) remained constant at 76.7%.

In Mexico, gross margin in the second quarter of 2002 increased to 77.2% from 75.4% in the second quarter of 2001. The increase in gross margin was a due to a more favorable product mix. Resale sale products, specifically regular and redesigned products, and set promotions sold during the second quarter of 2002 contributed a greater gross margin than those sold during the second quarter of 2001.

In the United States, gross margin in the second quarter of 2002 decreased to 77.0% from 78.2% in the second quarter of 2001. The difference was due to incrementally greater charges to cost of sales for the slow moving inventory reserve during the second quarter of 2002 compared to the second quarter of 2001. Excluding the impact of these charges, gross margin would have been 77.8% in the second quarter of 2002 compared to 77.7% in the second quarter of 2001.

In Europe, gross margin in the second quarter of 2002 decreased to 77.8% from 81.5% in the second quarter of 2001 due to more favorable product mix in 2001.

Selling, general and administrative expenses. SG&A expenses in the second quarter of 2002 increased to $61.0 million from $60.4 million in the second quarter of 2001, an increase of $0.6 million, or 1.0%. SG&A expenses, as a percentage of net sales, decreased in the second quarter of 2002 to 62.2% from 63.0% in the second quarter of 2001, due primarily to cost reductions in the United States and in the Company’s corporate headquarters, and the discontinuation of amortization of goodwill and trademarks pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142 (See “Recent Accounting Pronouncements”.)

In Mexico, SG&A expenses in the second quarter of 2002 increased by $1.3 million, or 4.4% compared to the second quarter of 2001. SG&A expenses, as a percentage of net sales, in Mexico were 50.2% in the second quarter of 2002, compared to 46.8% in the second quarter of 2001. The increased SG&A expenses in Mexico related primarily to certain administrative expenses which increased primarily due to $1.8 million incremental bad debt expense in the second quarter of 2002, compared to the second quarter of 2001, due to declining consultant liquidity as a result of the general economic condition.

In the United States, SG&A expenses in the second quarter of 2002 increased by $1.3 million, or 10.1% from the second quarter of 2001. SG&A expenses, as a percentage of net sales, in the U.S. were 59.4% in the second quarter of 2002, compared to 62.6% in the second quarter of 2001. The increased SG&A expenses were primarily attributable to additional selling expenses related to the expanded e-commerce platform during the second quarter of 2002 compared to the second quarter of 2001. Override expense also increased in total and as a percentage of sales in the second quarter of 2002 compared to the second quarter of 2001 due to increased sales of resale products and improved collections. Sales promotional expenses increased due to timing and mix of promotional programs. Administrative expenses decreased as a result of cost savings measures employed during the second quarter of 2002, compared to the second quarter of 2001.

In Europe, SG&A expenses in the second quarter of 2002 increased by $0.4 million, or 8.2% from the second quarter of 2001 primarily due to increased administrative expenses partially related to increased bad debt expenses in Italy and the unfavorable impact of strengthening local currencies compared to U.S. dollars on expenses.

SG&A expenses in other selling markets (South America and Thailand) and at corporate headquarters in the second quarter of 2002 decreased $2.4 million, or 18.3%, primarily as the result of administrative cost savings in corporate headquarters, the favorable impact of weakening South American currencies compared to U.S. dollars on

expenses, and no trademark or goodwill amortization expense pursuant to SFAS No. 142 (See “Recent Accounting Pronouncements”) in the second quarter of 2002, compared to $0.9 million of amortization expense in the second quarter of 2001.

Exchange loss. The Company’s foreign exchange loss was $5.9 million in the second quarter of 2002 compared to $4.5 million in the second quarter of the prior year, an increase of $1.4 million, or 31.1%. Foreign exchange losses and gains result from three primary sources; gains and losses on forward and option contracts, including the amortization of other comprehensive income (loss) into exchange loss, gains and losses due to the remeasurement of U.S. dollar-denominated debt, and gains and losses arising from other foreign currency denominated transactions. Most of the Company’s foreign exchange gains and losses result from its foreign currency exposure to the Mexican peso. During the second quarter of 2002, the Company recognized $4.0 million of exchange losses on the remeasurement of U.S. dollar-denominated debt, $1.9 million of exchange losses on other foreign currency transactions, $0.9 million of exchange losses (including amortization of other comprehensive income (loss)) on forward contracts and $0.9 million of exchange gains (including amortization of other comprehensive income (loss)) on option contracts. During the second quarter of 2001, the Company recognized $6.2 million of exchange losses on forward contracts, resulting from the strengthening of the Mexican peso against the U.S. dollar during the period and exchange losses of $0.3 million on other foreign currency transactions. These exchange losses were partially offset by an exchange gain of $2.0 million on the remeasurement of U.S. dollar-denominated debt. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

Interest expense. Net interest expense (including amortization of deferred financing fees) in the second quarter of 2002 decreased to $2.9 million from $3.4 million, a decrease of $0.5 million, or 14.7%. The decrease was due to a combination of lower average balances on the term loan and revolving credit line, and lower interest rates on those borrowings. The lower interest rates reflected a decrease in the general market interest rates.

Income tax expense. Income tax expense decreased to $1.6 million in the second quarter of 2002, compared to $3.1 million in the second quarter of 2001, a decrease of $1.5 million, or 48.4%. The Company’s effective income tax rate decreased to approximately 28.6% compared to 60.8% for the comparable period of the prior year. The reduced effective tax rate was primarily due to the release of valuation allowances against certain deferred tax assets in the United States. Excluding the impact of the release of the valuation allowance of $1.1 million, the effective tax rate would have been 48.2% for the three months ended June 30, 2002.

Net income. Net income was $4.0 million for the second quarter of 2002, a $2.0 million increase compared to $2.0 million in 2001. The increase was due to a $1.7 million increase in gross profit, a $0.5 million decrease in interest expense, $0.3 million of increase in other, net, a $1.5 million decrease in income tax expense, partially offset by a $0.6 million increase in SG&A, and a $1.4 million increase in exchange loss.

Six months ended June 30, 2002 compared to the Six months ended June 30, 2001

Corporate,

United All Total Unallocated Consolidated

Dollars in millions States Mexico Europe others Segments and Other Total

Six Months Ended June 30, 2002

Net sales $ 44.8 $ 127.9 $ 13.0 $ 11.5 $ 197.2 $ — $ 197.2

Cost of sales 9.8 30.8 2.8 3.4 46.8 (0.9 ) 45.9

Gross profit 35.0 97.1 10.2 8.1 150.4 0.9 151.3

Selling, general and administrative expenses 27.9 62.8 9.9 10.9 111.5 9.9 121.4

Operating income (loss) $ 7.1 $ 34.3 $ 0.3 $ (2.8 ) $ 38.9 $ (9.0 ) $ 29.9

Six Months Ended June 30, 2001

Net sales $ 38.9 $ 119.2 $ 12.7 $ 11.2 $ 182.0 $ — $ 182.0

Cost of sales 8.7 29.1 2.4 3.0 43.2 (0.6 ) 42.6

Gross profit 30.2 90.1 10.3 8.2 138.8 0.6 139.4

Selling, general and administrative expenses 26.2 55.0 9.9 11.4 102.5 12.6 115.1


												Corporate,
												Unallocated and
Dollars in millions	United States		Mexico		Europe		All others			Total Segments		Other			Consolidated Total

Operating income (loss)	$	4.0	$	35.1	$	0.4	$	(3.2	)	$	36.3	$	(12.0	)	$	24.3

Net sales. Net sales for the six months ended June 30, 2002 increased to $197.2 million from $182.0 million for the six months ended June 30, 2001, an increase of $15.2 million or 8.4%. The effects of foreign currency translation had no material impact on total sales growth during the first six months of 2002 compared to the first six months of 2001. The Company’s average number of consultants worldwide for the six months ended June 30, 2002 increased to approximately 379,000 or 7.7% over the 2001 average. Consultant productivity remained constant for each period.

In Mexico, net sales for the six months ended June 30, 2002 increased to $127.9 million from $119.2 million for the six months ended June 30, 2001, an increase of $8.7 million or 7.3%. In local currency, sales increased 5.8% over the comparable prior year period. In Mexico, the average number of consultants for the six months ended June 30, 2002 increased to approximately 240,000, or by 9.3% over the average number of consultants in the comparable prior year period. In local currency, consultant productivity decreased 3.2% over consultant productivity during the first six months of 2001 and the number of ordering consultants decreased to 47.2% of consultants compared to 51.1% in the prior year.

In the United States, net sales for the six months ended June 30, 2002 increased to $44.8 million from $38.9 million for the six months ended June 30, 2001, an increase of $5.9 million or 15.2%. Sales in the Hispanic Division increased 19.1% and sales in the General Division increased 8.6% for the first six months of 2002 compared to the first six months of 2001. The period to period sales increase was primarily due to a larger consultant base and improved consultant productivity. In the U.S., the average number of consultants increased 2.9% to 68,000. Consultant productivity increased 10.5% for the six months ended June 30, 2002, compared to the six months ended June 30, 2001. The increased productivity was due to certain productivity related changes in the program during the second quarter of 2002, as well as the favorable impact on productivity from the e-commerce program launched in June 2001. The number of ordering consultants also increased to 61.0% of consultants in the Hispanic Division and 49.8% of consultants in the General Division.

In Europe, net sales for the six months ended June 30, 2002 increased to $13.0 million from $12.7 million for the six months ended June 30, 2001, an increase of $0.3 million, or 2.4%. The increase was the result of increased activity and productivity, partially offset by a smaller average consultant base. Consultant productivity increased 3.8% in the first six months of 2002, compared to the first six months of 2001, partially due to more favorable exchange rates. The number of ordering consultants increased and 64.3% of all consultants were considered active. The average number of consultants decreased 1.1% to approximately 16,000 for the six months ended June 30, 2002.

Sales in South America and Thailand for the six months ended June 30, 2002 increased to $11.5 million from $11.2 million for the six months ended June 30, 2001, an increase of $0.3 million, or 2.7%. In local currencies, sales in South America increased 20.0% and sales in Thailand increased 25.5%.

Gross profit. Consolidated gross profit for the six months ended June 30, 2002 increased to $151.3 million from $139.4 million in the comparable prior year period, an increase of $11.9 million, or 8.5%. Gross profit as a percentage of sales (gross margin) increased to 76.7% from 76.6%.

In Mexico, gross margin for the six months ended June 30, 2002 increased to 75.9% from 75.6% in the comparable prior year period. The increase in gross margin was primarily attributable to a more favorable product mix. Resale sale products, including new products, contributed a greater gross margin during the six months ended June 30, 2002, than those sold during the six months ended June 30, 2001. The increased margin due to a more favorable product mix was partially offset by the amortization of deferred exchange losses into cost of sales and incrementally higher expenses related to slow moving inventory reserve charges. During the first six months of 2002, approximately $0.6 million of losses were reclassified into cost of sales from other comprehensive income in conjunction with hedge accounting pursuant to SFAS 133, compared to a nominal amount for the first six months of 2001. Additionally, during the first six months of 2002, $0.4 million of incremental slow moving inventory reserve charges were recorded.

In the United States, gross margin for the six months ended June 30, 2002 increased to 78.1% from 77.6% in the comparable prior year period. The increase in gross margin was related to increased sales of new products, which contributed a greater gross margin.

In Europe, gross margin for the six months ended June 30, 2002 decreased to 78.5% from 81.1% for the comparable prior year period. The decrease in gross margin was due to more favorable product mix in 2001.

Selling, general and administrative expenses. SG&A expenses for the six months ended June 30, 2002 increased to $121.4 million from $115.1 million for the six months ended June 30, 2001, an increase of $6.3 million, or 5.5%. SG&A expenses, as a percentage of net sales, decreased for the first six months of 2002 to 61.6% from 63.2% for the first six months of 2001, due primarily to cost savings in the United States and in the Company’s corporate headquarters, and the discontinuation of amortization of goodwill and trademarks pursuant to SFAS No. 142 (See “Recent Accounting Pronouncements”.)

In Mexico, SG&A expenses for the six months ended June 30, 2002 increased by $7.8 million, or 14.2% compared to the six months ended June 30, 2001. SG&A expenses, as a percentage of net sales, in Mexico were 49.1% during the first six months of 2002, compared to 46.1% for the first six months of 2001. The increased SG&A expenses in Mexico related primarily to sales promotional expenses, freight expenses and certain administrative expenses. Sales promotional expenses and freight expenses tend to increase proportionally with sales. However, sale promotional expenses increased proportionally more than sales due to increased promotional activity to combat the difficult economic environment. Freight expenses increased proportionally more than sales due to increased orders, average higher packaging costs and certain transitional expenses related to opening a new distribution center. Administrative expenses increased primarily due to $2.9 million incremental bad debt expense in the first six months of 2002, compared to the first six months of 2001, due to declining consultant liquidity as a result of the general economic condition.

In the United States, SG&A expenses for six months ended June 30, 2002 increased by $1.7 million, or 6.5% compared to the six months ended June 30, 2001. SG&A expenses, as a percentage of net sales, in the U.S. were 62.3% during the first six months of 2002, compared to 67.4% for the first six months of 2001. The increased SG&A expenses were primarily attributable to additional selling expenses, additional override expenses, partially offset by decreased sales promotional and administrative expenses. The expanded e-commerce platform was launched in June 2001, which resulted in incrementally more selling expenses for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Override payments, which tend to increase proportionally with sales, also increased in total, but were relatively constant as a percentage of sales. Sales promotional expenses decreased in total and as a percentage of sales due to timing and mix of sales promotional programs. Administrative expenses decreased due to cost saving measures implemented during the six months ended June 30, 2002.

In Europe, SG&A expenses in the first half of 2002 were relatively constant in total at $9.9 million. SG&A expenses, as a percentage of net sales, were 76.1% for the six months ended June 30, 2002, compared to 80.0% for the six months ended June 30, 2001.

SG&A expenses in other selling markets (South America and Thailand) and at corporate headquarters for the six months ended June 30, 2002 decreased $3.2 million, or 13.3%, primarily as the result of reduced sales promotional expenses and administrative expenses in the South American entities, administrative cost savings in corporate headquarters and no goodwill or trademark amortization expense pursuant to SFAS No. 142 (See “Recent Accounting Pronouncements”) in 2002, compared to $1.7 million of amortization expense in 2001.

Exchange loss. The Company’s foreign exchange loss was $5.4 million for the six months ended June 30, 2002 compared to $6.7 million for the six months ended June 30, 2001, a decrease of $1.3 million, or 19.4%. During the six months ended June 30, 2002, the Company recognized $1.4 million of exchange losses related to forward contracts, $0.9 million of exchange gains related to option contracts, $3.4 million of exchange losses on the remeasurement of U.S. dollar-denominated debt and $1.5 million of exchange losses on other foreign currency transactions. During the first six months of 2001, the Company recognized $9.6 million of exchange losses on forward contracts, resulting from the strengthening of the Mexican peso against the U.S. dollar, and exchange losses on other foreign currency

transactions of $0.1 million, partially offset by an unrealized exchange gain of $3.0 million on the remeasurement of U.S. dollar-denominated debt. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

Interest expense. Net interest expense (including amortization of deferred financing fees) for the first six months of 2002 decreased to $5.9 million from $6.9 million for the first six months of 2001, a decrease of $1.0 million, or 14.5%. The decrease was due to a combination of lower average balances on the term loan and revolving credit line, and lower interest rates on those borrowings. The lower interest rates reflected a decrease in the general market interest rates.

Income tax expense. Income tax expense decreased to $4.8 million for the first six months of 2002, compared to $6.1 million for the first six months of 2001, a decrease of $1.3 million, or 21.3%. The Company’s effective income tax rate decreased to approximately 25.7% compared to 56.6% for the comparable period of the prior year. The reduced effective tax rate was primarily due to the release of valuation allowances against certain deferred tax assets in the United States and the impact of the enactment of changes in Mexico’s future corporate statutory rates on net deferred tax liabilities during the first quarter of 2002. Excluding the impact of the release of the valuation allowance of $2.3 million and the impact of the enactment of changes in the Mexico rate of $1.2 million, the effective tax rate would have been 44.4% compared to 25.7% for the six months ended June 30, 2002.

Net income. Net income was $13.9 million for the first six months of 2002, a $9.4 million increase, compared to $4.5 million for the first six months of 2001. The increase was due to an $11.9 million increase in gross profit, a $1.3 million decrease in exchange loss, a $1.0 million decrease in interest expense, $0.5 million increase in other, net, a $1.3 million decrease in income tax expense, partially offset by $6.3 million increase in SG&A, and a $0.3 million increase in the cumulative effect of accounting change. .

Liquidity and Capital Resources

The Company’s liquidity needs arise primarily from principal and interest payments under its 11.75% Subordinated Notes due 2008 (“Notes”), and the Senior Credit Agreement consisting of the term loan facility and the revolving credit facility. The Notes represent several obligations of Jafra Cosmetics International, Inc. (“JCI”) and Jafra Cosmetics International, S.A. de C.V. (“Jafra S.A.”) in the original principal amount of $60 million and $40 million (currently at $45.1 million and $30.1 million), respectively, with each participating on a pro rata basis upon redemption. The Notes mature in 2008 and bear a fixed interest rate of 11.75% payable semi-annually.

The Notes are unsecured and are generally non-callable for five years. Thereafter, the Notes will be callable at premiums declining to par in the eighth year. The Company may from time to time repurchase the Notes in the open market. The Company has obtained Consent and Waivers to the Senior Credit Agreement that allow the Company to repurchase the Notes in the open market, with the aggregate purchase price for all such Notes repurchased not to exceed $50.0 million. Aggregate repurchases as of June 30, 2002 were $24.8 million.

Borrowings under the Senior Credit Agreement are payable in quarterly installments of principal and interest through April 30, 2004. Scheduled term loan principal payments under the term loan facility will be approximately $5.5 million, $4.5 million, and $2.0 million for each of the years from 2002 through 2004, respectively. During the six months ended June 30, 2002 the Company made an additional unscheduled principal payment on the term loan of $2.5 million. Borrowings under the revolving credit facility ($4.5 million as of June 30, 2002) mature on April 30, 2004. Borrowings under the Senior Credit Agreement bear interest at an annual rate of LIBOR plus a margin not to exceed 1.625% or an alternate base rate (the higher of the prime rate or federal funds rate plus 0.5%, plus an applicable margin not to exceed 0.625%). The interest rate in effect at June 30, 2002 was approximately 3.5% for the LIBOR-based borrowings, and approximately 5.4% for the prime-based borrowings. Borrowings under the Senior Credit Agreement are secured by substantially all of the assets of JCI and Jafra S.A. During the three and six months ended June 30, 2002, cash paid for interest was approximately $4.7 million and $5.0 million, respectively.

Both the indenture dated as of April 30, 1998 (the “Indenture”), under which the Notes were issued, 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. The Indenture and the Senior Credit Agreement 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. As of June 30, 2002, the Company was in compliance with all covenants. As of June 30, 2002, the Company had irrevocable standby letters of credit outstanding totaling $2.9 million.

The Company’s Mexican subsidiary, Jafra S.A., is party to an unsecured bank loan agreement. As of June 30, 2002, Jafra S.A. had an outstanding balance under the bank loan agreement of the peso equivalent of $1.2 million at a weighted average annual interest rate of 18.6%. Principal and interest payments are due monthly through January 25, 2005. As of June 30, 2002, $0.6 million of this loan is classified as short-term debt and $0.6 million of this loan is classified as long-term debt in the accompanying consolidated balance sheets.

The Company believes, but no assurance can be given, that its existing cash, cash flow from operations and availability under the Senior Credit Agreement will provide sufficient liquidity to meet the Company’s cash requirements and working capital needs over the next twelve months.

Cash Flows

Net cash provided by operating activities was $12.0 million for the six months ended June 30, 2002, consisting of $24.5 million provided by net income plus depreciation, amortization, and other non-cash items included in net income, partially offset by $12.5 million used in changes in operating assets and liabilities. The significant elements of net cash used in changes in operating assets and liabilities during the six months ended June 30, 2002 were an increase of $3.4 million in accounts receivable, a reduction of $12.1 million in accounts payable and accrued liabilities, and a reduction of $2.3 million in income taxes payable/prepaid, partially offset by a reduction in inventories of $2.1 million and a reduction in prepaid expenses and other current assets of $2.0 million.

Net cash used in investing activities was $4.9 million for the six months ended June 30, 2002, of which $4.9 million was used for capital expenditures, consisting primarily of information system upgrades. Capital expenditures in 2002 are expected to be approximately $11.0 million.

Net cash used in financing activities was $2.2 million for the six months ended June 30, 2002, and consisted of $4.6 million of repayment under the term loan facility, and $0.3 million net repayment of other bank debt, partially offset by $2.7 million of borrowings under the revolving credit facility.

The effect of exchange rate changes on cash was $1.5 million for the six months ended June 30, 2002, relating primarily to fluctuations in the exchange rates in Mexico and South America.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) approved two new statements: SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and other Intangible Assets.” SFAS No. 141 requires business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized, but be tested for impairment at least annually. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 with regards to all goodwill and other intangible assets recognized in an entity’s statement of financial position at that date, regardless of when those assets were initially recognized. The Company adopted SFAS No. 142 on January 1, 2002. In accordance with such adoption, the Company identified all reporting units in conjunction with the provisions of SFAS No. 142 and allocated all goodwill accordingly. During the six months ended June 30, 2002, the Company completed the transitional goodwill impairment test required by SFAS No. 142. Due to the general market uncertainty in Colombia, the Company revised its projections and recorded an impairment loss of $0.2 million associated with its Colombia reporting unit. No other impairment was identified. The impairment loss was recorded as a cumulative effect of accounting change on the accompanying Consolidated Statements of Operations. The changes in the carrying amount of goodwill for the six months ended June 30, 2002 were as follows (in millions):


	United								All			Consolidated
Goodwill	States		Mexico			Europe			Others			Total

Balance as of December 31, 2001	$	32.2	$	32.4		$	5.9		$	0.6		$	71.1
Translation effect		—		(2.6	)		(0.4	)		(0.1	)		(3.1	)
Impairment losses		—		—			—			(0.2	)		(0.2	)

Balance as of June 30, 2002	$	32.2	$	29.8		$	5.5		$	0.3		$	67.8


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Net income	$	4.0	$	2.0	$	13.9	$	4.5
Goodwill amortization, net of tax		—		0.5		—		0.8
Trademark amortization, net of tax		—		0.2		—		0.5

Adjusted net income	$	4.0	$	2.7	$	13.9	$	5.8

In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This new guidance provides that consideration from a vendor to a reseller is generally presumed to be a reduction of the selling prices of the vendor’s products, and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement. On January 1, 2002, the Company adopted EITF Issue No. 01-9 and reclassified commissions paid to consultants of $1.0 million and $1.9 million on their personal sales, previously reported as a component of selling, general and administrative expenses, as a reduction in net sales for the three and six months ended June 30, 2001, respectively.

Non-U.S. Operations

Sales outside of the United States aggregated approximately 76% and 77% of the Company’s total net sales for the three and six months ended June 30, 2002, respectively, and 78% and 79% for the three and six months ended June 30, 2001, respectively. In addition, as of June 30, 2002, non-U.S. subsidiaries comprised approximately 73% of the Company’s consolidated total assets. Accordingly, the Company has experienced and continues to be exposed to foreign exchange risk. In 2001 and 2002, the Company entered into foreign currency forward contracts in Mexican pesos and in 2002, the Company entered into foreign currency option contracts in Mexican pesos to reduce the effect of potentially adverse exchange rate fluctuations in Mexico.

The Company’s subsidiary in Mexico, Jafra S.A., generated approximately 63% and 65% of the Company’s net sales for the three and six months ended June 30, 2002, respectively, and 66% for each of the three and six month periods ended June 30, 2001, all of which were denominated in Mexican pesos. At June 30, 2002, Jafra S.A. had $35.4 million of U.S. dollar-denominated third party debt. Gains and losses from remeasuring such debt to the U.S. dollar from the peso are included as a component of net income. Jafra S.A. recognized a loss of $4.0 million and $3.4 million for the three and six months ended June 30, 2002, respectively, on the remeasurement of this U.S. dollar-denominated debt and a net loss of $0.5 on foreign currency forward and option contracts for each of the three and six months periods ended June 30, 2002.

European Economic and Monetary Union

On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro. The participating countries adopted the euro as their common legal currency on that day. The euro traded on currency exchanges and was available for non-cash transactions during the transition period between January 1, 1999 and January 1, 2002. During the transition period, the Company continued to utilize the respective country’s existing currency as the functional currency. The Company’s European subsidiaries, except for Switzerland, adopted the euro as the functional currency on January 1, 2002 without any material adverse affects on the business or operations.

Business Trends and Initiatives

The Company has experienced significant sales growth and an increased concentration of sales in Mexico over the last three years, due primarily to increases in the number of consultants. The Company’s Mexican subsidiary generated 63% and 65% of the Company’s consolidated net sales for the three and six months ended June 30, 2002, respectively, compared to 66% for the full year in 2001. The year-to-year sales growth in Mexico for the six months ended June 30, 2002 was approximately 7% in U.S. dollars and 6% in local currency. Mexico reported a quarter-to-quarter sales decline for the three months ended June 30, 2002 of 3% in U.S. dollars, and relatively constant sales in local currency. Assuming a continued stable economic environment, the Company intends to continue to grow its revenues and consultant base in Mexico at approximately 10% per year.

The Company is employing a strategy to leverage diversification through growth in other markets besides Mexico. The U.S. subsidiary has created distinct business divisions to recognize the distinct elements of its General and Hispanic customer groups. Net sales in the U.S. for the three and six months ended June 30, 2002 increased 16% and 15%, respectively, versus the comparable period of the prior year. The U.S. plans to implement a number of strategies in 2002, including continued focus on doing business via e-commerce and an emphasis on sponsoring new consultants, retaining current consultants, productivity related changes in the program and strengthening consultant leadership to stimulate sales growth in the mid double digits over 2001 levels.

Net sales in Europe had been on a downward trend for the past three years until this year. European sales have declined from approximately 11% of the Company’s business in 1999 to 7% of the Company’s business in the six months ended June 30, 2002. However, the European operations reported sales increases of 11% and 2% for the three and six months ended June 30, 2002, respectively and have reported stability in some key operating indicators including only a slight decline in the number of consultants compared to 2001. While no assurance can be given, the Company expects to achieve a slightly higher level of European sales in year 2002 than was achieved in 2001.

Sales in U.S. dollars in the South American region grew by approximately 1% in six months ended June 30, 2002 compared to the prior year, and were up approximately 20% in local currencies. In 2001, net sales generated by subsidiaries in the South American region were approximately 5% of consolidated sales. The Company expects the region to contribute approximately 6% of consolidated sales for 2002.

The Company expects, but no assurance can be given, that all major markets will report increases in sales in 2002, compared to 2001. The Company expects, but no assurance can be given, that as a percentage of 2002 consolidated net sales, sales in the U.S., Mexico, Europe and South America will remain relatively constant.

Information Concerning Forward-Looking Statements

Certain of the statements contained in this report (other than the Company’s consolidated financial statements and other statements of historical fact) are forward-looking statements, including, without limitation, (i) the statements in “—Liquidity and Capital Resources” concerning the Company’s belief that it will have sufficient liquidity to meet its cash requirements and working capital needs over the next twelve months; (ii) the statement in “—Cash Flows” that total capital expenditures in 2002 are expected to be approximately $11.0 million; (iii) the statements in “—Business Trends and Initiatives” that (a) assuming a continued stable economic environment, the Company intends to continue to grow its revenues and consultant base in Mexico at approximately 10% per year; (b) the Company’s expectation that U.S. sales growth will be in the mid double digits over 2001 levels; (c) the Company expects to achieve a slightly higher level of European sales in year 2002 than was achieved in 2001; (d) the Company’s expectation that the percentage of net sales in South America will increase to approximately 6% of consolidated sales for 2002; (e) the Company’s expectation that all major markets will report increases in sales in 2002; and (f) the Company’s expectation that as a percentage of 2002 consolidated net sales, sales in the U.S., Mexico, Europe and South America will remain relatively constant; and (iv) other statements as to management’s or the Company’s expectations or beliefs presented in this ''Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’

Forward-looking statements are based upon management’s current expectations and beliefs concerning future developments and their potential effects upon the Company. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management. The factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (including, without limitation, those discussed in “Business—Strategy,” “—International Operations,” “—Distribution,” “—Manufacturing,” “—Management Information Systems,” “—Environmental Matters,” “Properties,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Results of Operations,” “—Liquidity and Capital Resources,” “—Foreign Operations,” and “European Economic and Monetary Union”), or in other Securities and Exchange Commission filings, could affect (and in some cases have affected) the Company’s actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements.

While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with its preparation of management’s discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not intend to review or revise any particular forward-looking statement referenced in this report in light of future events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks arising from transactions in the normal course of its business, and from debt incurred in connection with the Acquisition. 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, 2001. During the first six months 2002, the Company received a favorable upgrade to its outlook rating from a particular credit agency. No other significant changes have occurred during the first six months of 2002 in relation to the interest rate risk or its credit standing.

Foreign Currency Risk

The Company operates globally, with manufacturing facilities in Mexico and distribution facilities in various locations around the world. All intercompany product sales are denominated in U.S. dollars. In addition, 77% of the Company’s revenue for first six months of 2002 was generated in countries with a functional currency other than the U.S. dollar. As a result, the Company’s earnings and cash flows for the six months ended June 30, 2002 are 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 and ensures that contract amounts do not exceed the amounts of the underlying exposures. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives.

The outstanding foreign currency forward contracts had notional values denominated in Mexican pesos of $333,000,000 in equal offsetting buy and sell positions at June 30, 2002 and $976,000,000 in a buy position at June 30, 2001. The contracts outstanding at June 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at June 30, 2001 matured at various dates through June 2002. Notional amounts do not quantify market or credit exposure or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The table below describes the forward contracts that were outstanding at June 30, 2002 and 2001 (in thousands):

June 30, 2002:


						Weighted
	Forward					Average
	Position in			Maturity		Contract		Fair Value in
Foreign Currency	Mexican Pesos(1)			Date		Rate		U.S. Dollars(1)

Buy US Dollar/sell Mexican Peso	$	48,000			7/31/02		10.07	$	36
Sell US Dollar/buy Mexican Peso		(48,000	)		7/31/02		9.16		435
Buy US Dollar/sell Mexican Peso		100,000			8/30/02		10.05		(18	)
Sell US Dollar/buy Mexican Peso		(100,000	)		8/30/02		9.21		917
Buy US Dollar/sell Mexican Peso		45,000			9/30/02		10.09		(20	)
Sell US Dollar/buy Mexican Peso		(45,000	)		9/30/02		9.25		418
Buy US Dollar/sell Mexican Peso		110,000			10/31/02		10.09		(128	)
Sell US Dollar/buy Mexican Peso		(110,000	)		10/31/02		9.31		1,014
Buy US Dollar/sell Mexican Peso		30,000			11/29/02		10.27		(4	)
Sell US Dollar/buy Mexican Peso		(30,000	)		11/29/02		9.33		286

	$	—						$	2,936

June 30, 2001:


					Weighted
	Forward				Average
	Position in		Maturity		Contract		Fair Value in
Foreign Currency	Mexican Pesos(1)		Date		Rate		U.S. Dollars(1)

Buy US Dollar/sell Mexican Peso	$	95,000		7/31/01		10.38	$	1,293
Buy US Dollar/sell Mexican Peso		122,000		8/31/01		10.32		1,490
Buy US Dollar/sell Mexican Peso		126,000		9/28/01		10.39		1,525
Buy US Dollar/sell Mexican Peso		25,000		10/30/01		10.70		349
Buy US Dollar/sell Mexican Peso		110,000		10/31/01		10.71		1,538
Buy US Dollar/sell Mexican Peso		69,716		11/30/01		10.24		631
Buy US Dollar/sell Mexican Peso		44,000		12/27/01		10.71		545
Buy US Dollar/sell Mexican Peso		41,000		12/31/01		10.90		573
Buy US Dollar/sell Mexican Peso		78,715		1/31/02		10.30		632
Buy US Dollar/sell Mexican Peso		51,787		02/28/02		10.38		413
Buy US Dollar/sell Mexican Peso		94,371		03/27/02		10.46		745
Buy US Dollar/sell Mexican Peso		49,000		04/30/02		10.29		270
Buy US Dollar/sell Mexican Peso		41,000		05/31/02		9.97		79
Buy US Dollar/sell Mexican Peso		28,000		06/28/02		9.91		20

	$	975,589					$	10,103

(1)

The Fair Value of the forward positions presented above, an unrealized loss of $2,936,000 and $10,103,000 at June 30, 2002 and 2001, respectively, has been recorded in accrued liabilities in the consolidated balance sheets.

The following table provides information about the details of the Company’s option contracts as of June 30, 2002 (in thousands):


	Coverage in				Fair Value in
Foreign Currency	Mexican Pesos(1)		Average Strike Price		U.S. Dollars(1)			Maturity Date

At June 30, 2002:
Purchased Puts (Company may sell Peso/buy USD)
Mexican Peso	$	193,000		9.60 – 9.83	$	(848	)	July – Sept. 2002
Mexican Peso		225,000		9.97 – 10.15		(863	)	Oct. – Dec. 2002
Mexican Peso		149,000		10.31 – 10.48		(635	)	Jan. – Mar. 2003
Mexican Peso		77,000		11.05 – 11.22		(155	)	Apr. – May 2003

	$	644,000			$	(2,501	)

Written Calls (Counterparty may buy Peso/sell USD)
Mexican Peso	$	193,000		9.02	$	3		July – Sept. 2002
Mexican Peso		225,000		9.01 – 9.02		10		Oct. – Dec. 2002
Mexican Peso		149,000		9.01 – 9.02		36		Jan. – Mar. 2003
Mexican Peso		77,000		9.50 – 9.58		62		Apr. – May 2003

	$	644,000			$	111

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, 2001.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

None.

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.

CDRJ Investments (Lux) S.A.

/s/   RONALD B. CLARK

Ronald B. Clark

Chief Executive Officer of the Advisory Committee and Director

/s/   MICHAEL A. DIGREGORIO

Michael A. DiGregorio

Senior Vice President and Chief Financial Officer of the Advisory Committee (Principal Financial Officer)

August 13, 2002


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


						CDRJ Investments (Lux) S.A.

						/s/ RONALD B. CLARK

						Ronald B. Clark
						Chief Executive Officer of the Advisory Committee and Director

						/s/ MICHAEL A. DIGREGORIO

						Michael A. DiGregorio
						Senior Vice President and Chief Financial Officer of the Advisory Committee (Principal Financial Officer)
August 13, 2002