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 September 30, 2002

OR

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

For the transition period from ___________ to ___________

Commission File Number 333-62989

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 o NO x

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

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 November 8, 2002 831,888 shares

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
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
CERTIFICATIONS

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 Nine Months Ended September 30, 2002


		Page No.

PART I — FINANCIAL INFORMATION
Item 1.(*)	Financial Statements (Unaudited):
	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
Item 4.	Controls and Procedures		40
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
	Certifications		43

Jafra S.A. and JCI have fully and unconditionally guaranteed the obligations under the Notes of the other on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. 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 September 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)


			September 30,			December 31,
			2002			2001

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	11,009		$	6,748
	Receivables, net			45,506			43,898
	Inventories			39,220			40,515
	Prepaid income taxes			75			—
	Prepaid expenses and other current assets			5,468			7,851
	Deferred income taxes			2,392			55

		Total current assets		103,670			99,067
Property and equipment, net				59,540			59,598
Other assets:
	Goodwill			66,981			71,148
	Trademarks			45,224			50,560
	Deferred financing fees and other, net			8,067			10,763

		Total	$	283,482		$	291,136

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	6,748		$	6,188
	Accounts payable			19,807			26,516
	Accrued liabilities			41,171			40,916
	Income taxes payable			5,806			7,130
	Deferred income taxes			4,914			4,094

		Total current liabilities		78,446			84,844
Long-term debt				78,554			86,901
Deferred income taxes				17,477			20,311
Other long-term liabilities				3,496			3,088

		Total liabilities		177,973			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			33,211			18,373
	Accumulated other comprehensive loss			(11,287	)		(5,966	)

		Total stockholders’ equity		105,509			95,992

		Total	$	283,482		$	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						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Net sales		$	94,926		$	92,423		$	292,123		$	274,423
Cost of sales			21,991			20,194			67,878			62,824

	Gross profit		72,935			72,229			224,245			211,599
Selling, general and administrative expenses			59,048			57,871			180,456			172,973

	Income from operations		13,887			14,358			43,789			38,626
Other income (expense):
	Exchange loss, net		(5,049	)		(1,261	)		(10,472	)		(7,963	)
	Interest expense, net		(2,878	)		(3,160	)		(8,735	)		(10,006	)
	Other, net		(28	)		32			268			(198	)

Income before income taxes and cumulative effect of accounting change			5,932			9,969			24,850			20,459
Income tax expense			4,966			4,582			9,768			10,649

Income before cumulative effect of accounting change			966			5,387			15,082			9,810
Cumulative effect of accounting change, net of income tax expense of $82 in 2001			—			—			(244	)		126

Net income		$	966		$	5,387		$	14,838		$	9,936

See accompanying notes to consolidated financial statements

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


					Nine Months Ended
					September 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	14,838		$	9,936
		Cumulative effect of accounting change, net of taxes				244			(126	)

	Income before cumulative effect of accounting change					15,082			9,810
	Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities:
		Gain on sale of property and equipment				(88	)		—
		Depreciation and amortization				3,834			5,983
		Amortization of deferred financing fees				1,063			1,073
		Provision for uncollectible accounts receivable				9,831			4,087
		Unrealized foreign exchange and derivative loss				9,042			1,320
		Deferred realized foreign exchange gain (loss)				515			(721	)
		Deferred income taxes				(3,504	)		—
		Changes in operating assets and liabilities:
			Receivables			(15,117	)		(15,529	)
			Inventories			(1,604	)		(594	)
			Prepaid expenses and other current assets			3,086			4,158
			Other assets			1,323			1,067
			Accounts payable and accrued liabilities			(528	)		(6,748	)
			Income taxes payable/prepaid			(517	)		6,428
			Other long-term liabilities			408			626

				Net cash provided by operating activities		22,826			10,960

Cash flows from investing activities:
	Proceeds from sale of property and equipment					231			—
	Purchases of property and equipment					(7,605	)		(6,463	)
	Other					(303	)		(160	)

				Net cash used in investing activities		(7,677	)		(6,623	)

Cash flows from financing activities:
	Repayments under term loan facility					(5,375	)		(3,375	)
	Net borrowings (repayments) under revolving credit facility					(1,800	)		200
	Net (repayments) borrowings under bank debt					(479	)		1,367
	Issuance of common stock					—			33
	Net repurchase of common stock					—			(654	)

				Net cash used in financing activities		(7,654	)		(2,429	)

Effect of exchange rate changes on cash						(3,234	)		(1,261	)

Net increase in cash and cash equivalents						4,261			647
Cash and cash equivalents at beginning of period						6,748			5,838

Cash and cash equivalents at end of period					$	11,009		$	6,485

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., a Luxembourg société anonyme, (the “Parent”) and subsidiaries (together with the Parent, the “Company”) as of September 30, 2002 and for the three and nine months ended September 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, including normal recurring adjustments, necessary to present fairly the Company’s consolidated financial statements as of September 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 functional currency of certain of the Company’s foreign subsidiaries generally consists of currencies other than the U.S. dollar. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive loss.

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 respect 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 nine months ended September 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 has been 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 nine months ended September 30, 2002 are 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		—		(3,418	)		(389	)		(116	)		(3,923	)
Impairment losses		—		—			—			(244	)		(244	)

Balance as of September 30, 2002	$	32,188	$	28,983		$	5,548		$	262		$	66,981

The Company’s other intangible assets consist of trademarks. During the nine months ended September 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 $45,224,000 as of September 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				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Net income	$	966	$	5,387	$	14,838	$	9,936
Goodwill amortization, net of tax		—		387		—		1,206
Trademark amortization, net of tax		—		230		—		669

Adjusted net income	$	966	$	6,004	$	14,838	$	11,811

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 $877,000 and $2,793,000 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 nine months ended September 30, 2001, respectively.

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 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) Inventories

Inventories consist of the following (in thousands):


	September 30,		December 31,
	2002		2001

Raw materials and supplies	$	4,922	$	7,780
Finished goods		34,298		32,735

Total inventories	$	39,220	$	40,515

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

(3) Property and Equipment

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


	September 30,		December 31,
	2002		2001

Land	$	16,605	$	17,833
Buildings		17,450		18,523
Machinery, equipment and other		39,438		34,640

		73,493		70,996
Less accumulated depreciation		13,953		11,398

Property and equipment, net	$	59,540	$	59,598

(4) Income Taxes

The actual income tax rate of the Company differs from the U.S. and Mexico federal corporate rate of 35% to income before income taxes, for the three and nine months ended September 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 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 the current 35% to 32% beginning January 1, 2003 through 2005.

(5) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2002			2001			2002			2001

Net income	$	966		$	5,387		$	14,838		$	9,936
Unrealized and deferred realized (loss) gain on derivatives		(137	)		1,429			203			(2,598	)
Reclassification of deferred realized (loss) gain to exchange loss		539			186			882			481
Reclassification of deferred realized (loss) gain to cost of sales		522			227			2,421			240
Tax benefit (expense) on unrealized and deferred realized (loss) gain on derivatives		(323	)		(721	)		(1,227	)		721
Foreign currency translation adjustments		(254	)		(2,819	)		(7,600	)		(62	)

Comprehensive income	$	1,313		$	3,689		$	9,517		$	8,718

(6) 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”.

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

The accounting policies used to prepare the information reviewed by the Company’s chief operating decision makers are the same as those described in the summary of significant accounting policies included in the Company’s audited consolidated financial statements as of and for the year ended December 31, 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.


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

	(in thousands)
For the Three Months Ended September 30, 2002
Net sales	$	62,622	$	22,098	$	5,544		$	4,662		$	94,926	$	—		$	94,926
Operating income (loss)		15,731		3,797		(137	)		(1,497	)		17,894		(4,007	)		13,887
Depreciation and amortization		599		589		123			112			1,423		—			1,423
For the Three Months Ended September 30, 2001
Net sales	$	62,172	$	18,812	$	5,703		$	5,736		$	92,423	$	—		$	92,423
Operating income (loss)		17,924		2,852		(60	)		(1,420	)		19,296		(4,938	)		14,358
Depreciation and amortization		1,127		759		25			128			2,039		11			2,050
As of and for the Nine Months Ended September 30, 2002
Net sales	$	190,502	$	66,882	$	18,599		$	16,140		$	292,123	$	—		$	292,123
Operating income (loss)		49,953		10,865		185			(4,253	)		56,750		(12,961	)		43,789
Depreciation and amortization		1,511		1,719		289			315			3,834		—			3,834
Capital expenditures		2,026		5,197		78			304			7,605		—			7,605
Segment assets		176,641		79,712		18,332			10,445			285,130		(1,648	)		283,482
Goodwill		28,983		32,188		5,548			262			66,981		—			66,981
As of and for the Nine Months Ended September 30, 2001
Net sales	$	181,365	$	57,687	$	18,431		$	16,940		$	274,423	$	—		$	274,423
Operating income (loss)		52,977		6,829		389			(4,608	)		55,587		(16,961	)		38,626
Depreciation and amortization		3,354		1,931		308			276			5,869		114			5,983
Capital expenditures		2,039		4,060		200			164			6,463		—			6,463
Segment assets		181,885		70,490		18,118			14,312			284,805		(974	)		283,831

(7) 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 nine months ended September 30, 2002, all payments related to restructuring items have been charged against this accrual. As of September 30, 2002, there is no remaining restructuring liability.

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

(8) 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.

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 or option 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.

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

The Company recognized losses on forward contracts of approximately $83,000 and $949,000 during the three and nine months ended September 30, 2002, respectively, as a component of exchange loss on the accompanying consolidated statements of operations. During the three months ended September 30, 2001, the Company recognized approximately $1,544,000 of gains, and during the nine months ended September 30, 2001, the Company recognized approximately $8,070,000 of losses on forward contracts as a component of exchange loss on the accompanying consolidated statements of operations. The Company recognized gains on option contracts of approximately $22,000 and $755,000 during the three and nine months ended September 30, 2002, respectively, as a component of exchange loss on the accompanying consolidated statements of operations. 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 nine months ended September 30, 2002, the Company deferred as a component of other comprehensive income (loss) an additional $1,779,000 of losses on forward contracts and $1,982,000 of gains on option contracts qualifying for hedge accounting under SFAS No. 133. During the nine months ended September 30, 2002, approximately $882,000 of other comprehensive income (loss) was reclassified as exchange loss and $2,421,000 was reclassified as cost of sales upon recognition of the underlying hedged exposure. The Company expects that substantially all of the remaining loss of $240,000 deferred as a component of other comprehensive income (loss) at September 30, 2002 will be recognized into net income within the next twelve months. The fair value of the forward contracts was $1,191,000 at September 30, 2002 and has been recorded as an offset to other receivables in the consolidated balance sheets. The fair value of the forward contracts was $3,427,000 at September 30, 2001 and has been recorded in accrued liabilities in the consolidated balance sheets. The fair value of the option contacts was $1,655,000 at September 30, 2002 and has been recorded as other receivables in the consolidated balance sheets.

During the three and nine months ended September 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 nine months ended September 30, 2002 and 2001, approximately $162,000 of gains and $382,000 of losses, respectively, were reclassified into earnings.

The outstanding foreign currency forward contracts had notional values denominated in Mexican pesos of $140,000,000 in equal offsetting buy and sell positions at September 30, 2002 and $899,000,000 in a buy position at September 30, 2001. The contracts outstanding at September 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at September 30, 2001 matured at various dates through August 2002. The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of $545,000,000 in put and call positions at September 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)


				September 30,			December 31,
				2002			2001

				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	5,806		$	4,081
	Receivables, net				5,990			6,447
	Inventories				14,063			8,677
	Receivables from affiliates				19,641			23,633
	Prepaid expenses and other current assets				2,359			1,665
	Deferred income taxes				2,392			55

		Total current assets			50,251			44,558
Property and equipment, net					26,261			22,742
Other assets:
	Goodwill				37,736			38,125
	Notes receivable from affiliates				9,027			3,902
	Deferred financing fees, net				2,532			3,004
	Other				3,584			3,716

			Total	$	129,391		$	116,047

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
	Current portion of long-term debt			$	3,750		$	3,000
	Accounts payable				5,181			5,591
	Accrued liabilities				13,939			12,709
	Income taxes payable				3,338			965
	Payables to affiliates				5,537			2,639

		Total current liabilities			31,745			24,904
Long-term debt					48,108			52,908
Deferred income taxes					3,353			3,353
Other long-term liabilities					3,496			3,088

		Total liabilities			86,702			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)				5,807			(5,376	)
	Accumulated other comprehensive loss				(2,767	)		(2,479	)

		Total stockholder’s equity			42,689			31,794

			Total	$	129,391		$	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						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Net sales to third parties		$	28,877		$	25,617		$	90,296		$	78,934
Sales to affiliates			4,679			4,097			12,587			10,278

Net sales			33,556			29,714			102,883			89,212
Cost of sales			10,838			9,441			31,644			26,800

	Gross profit		22,718			20,273			71,239			62,412
Selling, general and administrative expenses			23,509			22,679			74,035			72,106
Management fee income from affiliates			(1,814	)		(2,119	)		(6,180	)		(6,555	)
Royalty income from affiliates, net			(4,895	)		(5,230	)		(14,923	)		(15,203	)

	Income from operations		5,918			4,943			18,307			12,064
Other income (expense):
	Exchange (loss) gain, net		(78	)		140			466			137
	Interest expense, net		(1,540	)		(1,660	)		(4,657	)		(5,110	)
	Other, net		1			190			295			(224	)

Income before income taxes			4,301			3,613			14,411			6,867
Income tax expense			2,311			1,277			3,228			3,170

Net income		$	1,990		$	2,336		$	11,183		$	3,697

See accompanying notes to consolidated financial statements

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


					Nine Months Ended
					September 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	11,183		$	3,697
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				2,139			2,265
		Provision for uncollectible accounts receivable				535			215
		Amortization of deferred financing fees				471			471
		Unrealized foreign exchange (gain) loss				(269	)		20
		Deferred income taxes				(2,337	)		—
		Changes in operating assets and liabilities:
			Receivables			(78	)		(1,301	)
			Inventories			(5,386	)		(1,214	)
			Prepaid expenses and other current assets			(694	)		700
			Intercompany receivables and payables			7,159			(15,756	)
			Other assets			435			168
			Accounts payable and accrued liabilities			820			1,925
			Income taxes payable/prepaid			2,373			1,039
			Other long-term liabilities			408			626

				Net cash provided by (used in) operating activities		16,759			(7,145	)

Cash flows from investing activities:
	Purchases of property and equipment					(5,505	)		(4,270	)
	Other					(303	)		(160	)

				Net cash used in investing activities		(5,808	)		(4,430	)

Cash flows from financing activities:
	Repayments under term loan facility					(2,250	)		(1,875	)
	Net repayments under revolving credit facility					(1,800	)		(3,800	)
	(Lending) repayment of note receivable from affiliate					(5,125	)		16,988

				Net cash (used in) provided by financing activities		(9,175	)		11,313

Effect of exchange rate changes on cash						(51	)		(301	)

Net increase (decrease) in cash and cash equivalents						1,725			(563	)
Cash and cash equivalents at beginning of period						4,081			3,382

Cash and cash equivalents at end of period					$	5,806		$	2,819

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 September 30, 2002 and for the three and nine months ended September 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 September 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 respect 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 nine months ended September 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 nine months ended September 30, 2002. JCI’s other intangible assets consist of trademarks. During the nine months ended September 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 was $223,000 at September 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				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Net income	$	1,990	$	2,336	$	11,183	$	3,697
Goodwill amortization, net of tax		—		139		—		387
Trademark amortization, net of tax		—		11		—		30

Adjusted net income	$	1,990	$	2,486	$	11,183	$	4,114

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

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 $322,000 and $1,027,000 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 nine months ended September 30, 2001, respectively.

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 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):


	September 30,		December 31,
	2002		2001

Land	$	6,188	$	6,188
Buildings		6,982		6,763
Machinery, equipment and other		21,336		15,971

		34,506		28,922
Less accumulated depreciation		8,245		6,180

Property and equipment, net	$	26,261	$	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 nine months ended September 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					Nine Months Ended
	September 30,					September 30,

	2002			2001		2002			2001

Net income	$	1,990		$	2,336	$	11,183		$	3,697
Foreign currency translation adjustments		(129	)		812		(288	)		(533	)

Comprehensive income	$	1,861		$	3,148	$	10,895		$	3,164

(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 $4,679,000 and $12,587,000 for the three and nine months ended September 30, 2002, respectively, and $4,097,000 and $10,278,000 for the three and nine months ended September 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 $3,763,000 and $11,406,000 for the three and nine months ended September 30, 2002, respectively, and $2,630,000 and $7,537,000 for the three and nine months ended September 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 $1,814,000 and $6,180,000 for the three and nine months ended September 30, 2002, respectively, and $2,119,000 and $6,555,000 for the three and nine months ended September 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 $582,000 and $1,774,000 for the three and nine months ended September 30, 2002, respectively, and $410,000 and $1,261,000 for the three and nine months ended September 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 $5,477,000 and $16,697,000 for the three and nine months ended September 30, 2002, respectively, and $5,640,000 and $16,464,000 for the three and nine months ended September 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 September 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 $96,000 and $231,000 for the three and nine months ended September 30, 2002, respectively, and $140,000 and $605,000 for the three and nine months ended September 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 September 30, 2002
Net sales	$	22,098	$	5,544		$	1,235		$	28,877	$	4,679	$	33,556
Operating income (loss)		3,797		(99	)		(101	)		3,597		2,321		5,918
Depreciation and amortization		589		100			58			747		—		747
For the Three Months ended September 30, 2001
Net sales	$	18,812	$	5,703		$	1,102		$	25,617	$	4,097	$	29,714
Operating income (loss)		2,852		(60	)		(54	)		2,738		2,205		4,943
Depreciation and amortization		759		22			56			837		—		837
As of and for the Nine Months ended September 30, 2002
Net sales	$	66,882	$	18,598		$	4,816		$	90,296	$	12,587	$	102,883
Operating income		10,865		269			(78	)		11,056		7,251		18,307
Depreciation and amortization		1,719		260			160			2,139		—		2,139
Capital expenditures		5,197		78			230			5,505		—		5,505
Segment assets		79,712		18,093			2,918			100,723		28,668		129,391
Goodwill		32,188		5,548			—			37,736		—		37,736
As of and for the Nine Months ended September 30, 2001
Net sales	$	57,687	$	18,397		$	2,850		$	78,934	$	10,278	$	89,212
Operating income (loss)		6,829		479			(848	)		6,460		5,604		12,064
Depreciation and amortization		1,931		300			34			2,265		—		2,265
Capital expenditures		4,060		200			10			4,270		—		4,270
Segment assets		70,490		17,830			2,873			91,193		31,652		122,845

(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 nine months ended September 30, 2002, all payments related to restructuring items have been charged against this accrual. As of September 30, 2002, there is no remaining restructuring liability.

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


			September 30,			December 31,
			2002			2001

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	4,301		$	920
	Receivables, net			37,397			34,430
	Inventories			23,774			29,622
	Receivables from affiliates			7,734			5,938
	Value-added tax receivables			—			2,308
	Prepaid expenses and other current assets			2,292			3,206

		Total current assets		75,498			76,424
Property and equipment, net				32,786			36,121
Other assets:
	Goodwill			28,983			32,401
	Trademarks			45,085			50,402
	Deferred financing fees, net			585			1,270
	Other			1,440			2,699

		Total	$	184,377		$	199,317

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	2,998		$	3,188
	Accounts payable			13,797			20,205
	Accrued liabilities			26,162			27,299
	Income taxes payable			2,445			6,122
	Payables to affiliates			15,924			21,373
	Deferred income taxes			4,914			4,094

		Total current liabilities		66,240			82,281
Long-term debt				30,446			33,993
Deferred income taxes				14,124			16,958

		Total liabilities		110,810			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			46,446			32,194
	Accumulated other comprehensive loss			(7,063	)		(293	)

		Total stockholders’ equity		73,567			66,085

		Total	$	184,377		$	199,317

See accompanying notes to consolidated financial statements

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Net sales to third parties		$	62,622		$	62,172		$	190,502		$	181,365
Sales to affiliates			4,167			3,015			12,576			9,036

Net sales			66,789			65,187			203,078			190,401
Cost of sales			18,553			16,443			57,338			50,685

	Gross profit		48,236			48,744			145,740			139,716
Selling, general and administrative expenses			31,877			30,864			94,337			87,304
Management fee expense to affiliates			1,814			2,118			6,178			6,555
Royalty expense to affiliates, net			4,895			5,230			14,923			15,203

	Income from operations		9,650			10,532			30,302			30,654
Other income (expense):
	Exchange loss, net		(1,459	)		(620	)		(5,826	)		(6,862	)
	Interest expense, net		(1,172	)		(1,389	)		(3,785	)		(4,613	)
	Other, net		3			47			3			(41	)

Income before income taxes and cumulative effect of accounting change			7,022			8,570			20,694			19,138
Income tax expense			2,630			3,282			6,442			7,380

Income before cumulative effect of accounting change			4,392			5,288			14,252			11,758
Cumulative effect of accounting change, net of income tax expense of $82			—			—			—			126

Net income		$	4,392		$	5,288		$	14,252		$	11,884

See accompanying notes to consolidated financial statements

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


					Nine Months Ended
					September 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	14,252		$	11,884
		Cumulative effect of accounting change, net of taxes				—			(126	)

	Income before cumulative effect of accounting change					14,252			11,758
	Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities:
		Gain on sale of property and equipment				(88	)		—
		Depreciation and amortization				1,511			3,354
		Amortization of deferred financing fees				592			602
		Provision for uncollectible accounts receivable				8,680			3,872
		Unrealized foreign exchange and derivative loss				4,325			175
		Deferred realized derivative gain (loss)				515			(721	)
		Deferred income taxes				(1,167	)		—
		Changes in operating assets and liabilities:
			Receivables			(15,325	)		(13,630	)
			Inventories			2,949			102
			Prepaid expenses and other current assets			625			(41	)
			Value-added tax receivables			3,359			3,931
			Intercompany receivables and payables			(7,331	)		15,362
			Other assets			1,055			1,019
			Accounts payable and accrued liabilities			(1,619	)		(7,925	)
			Income taxes payable/prepaid			(2,856	)		5,489

				Net cash provided by operating activities		9,477			23,347

Cash flows from investing activities:
	Proceeds from sale of property and equipment					231			—
	Purchases of property and equipment					(2,026	)		(2,039	)

				Net cash used in investing activities		(1,795	)		(2,039	)

Cash flows from financing activities:
	Repayments under term loan facility					(3,125	)		(1,500	)
	Net borrowings under revolving credit facility					—			4,000
	Net (repayments) borrowings under bank debt					(479	)		1,367
	Payment of note payable to affiliate					—			(20,712	)
	Payment of dividends					—			(2,800	)

				Net cash used in financing activities		(3,604	)		(19,645	)

Effect of exchange rate changes on cash						(697	)		(245	)

Net increase in cash and cash equivalents						3,381			1,418
Cash and cash equivalents at beginning of period						920			561

Cash and cash equivalents at end of period					$	4,301		$	1,979

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 September 30, 2002 and for the three and nine months ended September 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 September 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 respect 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 nine months ended September 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 nine months ended September 30, 2002. Jafra S.A.’s other intangible assets consist of trademarks. During the nine months ended September 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 net carrying value of trademarks was $45,085,000 as of September 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				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Net income	$	4,392	$	5,288	$	14,252	$	11,884
Goodwill amortization		—		220		—		651
Trademark amortization, net of tax		—		213		—		624

Adjusted net income	$	4,392	$	5,721	$	14,252	$	13,159

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

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 $497,000 and $1,572,000 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 nine months ended September 30, 2001, respectively.

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 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) Inventories

Inventories consist of the following (in thousands):


	September 30,		December 31,
	2002		2001

Raw materials and supplies	$	4,636	$	7,574
Finished goods		19,138		22,048

Total inventories	$	23,774	$	29,622

(3) Property and Equipment

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


	September 30,		December 31,
	2002		2001

Land	$	10,417	$	11,645
Buildings		10,468		11,703
Machinery, equipment and other		17,226		17,532

		38,111		40,880
Less accumulated depreciation		5,325		4,759

Property and equipment, net	$	32,786	$	36,121

(4) 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 nine months ended September 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 the current 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)

(5) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2002			2001			2002			2001

Net income	$	4,392		$	5,288		$	14,252		$	11,884
Unrealized and deferred realized (loss) gain on derivatives		(137	)		1,429			203			(2,598	)
Reclassification of deferred realized (loss) gain to exchange loss		539			186			882			481
Reclassification of deferred realized (loss) gain to cost of sales		522			227			2,421			240
Tax benefit (expense) on unrealized and deferred realized (loss) gain on derivatives		(323	)		(721	)		(1,227	)		721
Foreign currency translation adjustments		(2,385	)		(3,797	)		(9,049	)		455

Comprehensive income	$	2,608		$	2,612		$	7,482		$	11,183

(6) 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 $4,167,000 and $12,576,000 for the three and nine months ended September 30, 2002, respectively, and $3,015,000 and $9,036,000 for the three and nine months ended September 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 $4,112,000 and $11,445,000 for the three and nine months ended September 30, 2002, respectively, and $3,687,000 and $9,109,000 for the three and nine months ended September 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 $1,814,000 and $6,178,000 for the three and nine months ended September 30, 2002, respectively, and $2,118,000 and $6,555,000 for the three and nine months ended September 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 $582,000 and $1,774,000 for the three and nine months ended September 30, 2002, respectively, and $410,000 and $1,261,000 for the three and nine months ended September 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 $5,477,000 and $16,697,000 for the three and nine months ended September 30, 2002, respectively, and $5,640,000 and $16,464,000 for the three and nine months ended September 30, 2001, respectively, and are based upon a percentage of Jafra S.A.’s sales.

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

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 nine months ended September 30, 2002, Jafra S.A. did not incur any interest expense to affiliates. Net interest expense to affiliates, primarily JCI, was $257,000 for the nine months ended September 30, 2001, which 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.

(7) 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 or option 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 $83,000 and $949,000 during the three and nine months ended September 30, 2002, respectively, as a component of exchange loss on the accompanying consolidated statements of operations. During the three months ended September 30, 2001, Jafra S.A. recognized approximately $1,544,000 of gains, and during the nine months ended September 30, 2001, Jafra S.A. recognized approximately $8,070,000 of losses on forward contracts as a component of exchange loss in the accompanying consolidated statements of operations. Jafra S.A. recognized gains on option contracts of approximately $22,000 and $755,000 during the three and nine months ended September 30, 2002, respectively, as a component of exchange loss in the accompanying consolidated statements of operations. 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 nine months ended September 30, 2002, Jafra S.A. deferred as a component of other comprehensive income (loss) an additional $1,779,000 of losses on forward contracts and $1,982,000 of gains on option contracts qualifying for hedge accounting under SFAS No. 133. During the nine months ended September 30, 2002, approximately $882,000 of other comprehensive income (loss) was reclassified as exchange loss and $2,421,000 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 $240,000 deferred as a component of other comprehensive income (loss) at September 30, 2002 will be recognized into net income within the next twelve months. The fair value of the forward contracts was $1,191,000 at September 30, 2002 and has been recorded as an offset to other receivables in the consolidated balance sheets. The fair value of the forward contracts was $3,427,000 at September 30, 2001 and has been recorded in accrued liabilities in the consolidated balance sheets. The fair value of the option contacts was $1,655,000 at September 30, 2002, and has been recorded as other receivables in the consolidated balance sheets.

During the three and nine months ended September 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 nine months ended September 30, 2002 and 2001, approximately $162,000 of gains and $382,000 of losses, respectively, were reclassified into earnings.

The outstanding foreign currency forward contracts had notional values denominated in Mexican pesos of $140,000,000 in equal offsetting buy and sell positions at September 30, 2002 and $899,000,000 in a buy position at September 30, 2001. The contracts outstanding at September 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at September 30, 2001 matured at various dates through August 2002. The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of $545,000,000 in put and call positions at September 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 CDRJ Investments (Lux) S.A., a Luxembourg société anonyme, and its subsidiaries (together, 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 nine months ended September 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 nine months ended September 30, 2002 and 2001.


	Three Months Ended September 30,										Nine Months Ended September 30,

	2002					2001(1)					2002					2001(1)

Net sales	$	94.9		100.0	%	$	92.4		100.0	%	$	292.1		100.0	%	$	274.4		100.0	%
Cost of sales		22.0		23.2			20.2		21.9			67.9		23.2			62.8		22.9

Gross profit		72.9		76.8			72.2		78.1			224.2		76.8			211.6		77.1
Selling, general and administrative expenses		59.0		62.2			57.9		62.7			180.4		61.8			173.0		63.0

Income from operations		13.9		14.6			14.3		15.4			43.8		15.0			38.6		14.1
Exchange loss, net		(5.1	)	(5.4	)		(1.3	)	(1.4	)		(10.5	)	(3.6	)		(8.0	)	(3.0	)
Interest, net		(2.9	)	(3.0	)		(3.1	)	(3.4	)		(8.7	)	(2.9	)		(10.0	)	(3.7	)
Other, net		0.0		0.0			0.0		0.0			0.2		0.0			(0.2	)	(0.0	)

Income before income taxes and cumulative effect of accounting change		5.9		6.2			9.9		10.6			24.8		8.5			20.4		7.4
Income tax expense		4.9		5.1			4.5		4.8			9.8		3.4			10.6		3.8

Income before cumulative effect of accounting change		1.0		1.1			5.4		5.8			15.0		5.1			9.8		3.6
Cumulative effect of accounting change, net of income tax expense of $0.1 in 2001		—		—			—		—			(0.2	)	(0.0	)		0.1		0.0

Net income	$	1.0		1.1	%	$	5.4		5.8	%	$	14.8		5.1	%	$	9.9		3.6	%

(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 $0.9 million and $2.8 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 nine months ended September 30, 2001, respectively.

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


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

Three Months Ended September 30, 2002
Net sales	$	62.6	$	22.1	$	5.5		$	4.7		$	94.9	$	—		$	94.9
Cost of sales		14.9		5.0		1.4			1.4			22.7		(0.7	)		22.0

Gross profit		47.7		17.1		4.1			3.3			72.2		0.7			72.9
Selling, general and administrative expenses		32.0		13.3		4.2			4.8			54.3		4.7			59.0

Operating income (loss)	$	15.7	$	3.8	$	(0.1	)	$	(1.5	)	$	17.9	$	(4.0	)	$	13.9

Three Months Ended September 30, 2001
Net sales	$	62.2	$	18.8	$	5.7		$	5.7		$	92.4	$	—		$	92.4
Cost of sales		14.1		4.1		1.3			1.9			21.4		(1.2	)		20.2

Gross profit		48.1		14.7		4.4			3.8			71.0		1.2			72.2
Selling, general and administrative expenses		30.2		11.9		4.5			5.2			51.8		6.1			57.9

Operating income (loss)	$	17.9	$	2.8	$	(0.1	)	$	(1.4	)	$	19.2	$	(4.9	)	$	14.3

Net sales. Net sales in the third quarter of 2002 increased to $94.9 million from $92.4 million in the third quarter of 2001, an increase of $2.5 million or 2.7%. Net sales in local currencies in the third quarter of 2002 increased by 9.7% over the comparable prior year period. The net sales increase measured in local currencies was larger than the increase measured in U.S. dollars primarily as a result of weaker average exchange rates of the Mexican peso and South American currencies in the third quarter of 2002. The Company’s average number of consultants worldwide for the third quarter of 2002 increased to approximately 400,000, or 7.8% over the 2001 average. Consultant productivity for the third quarter of 2002 decreased 4.7% compared to the third quarter of 2001. A significant portion of the decrease in productivity related weaker local currencies compared to U.S. dollars, partially offset by increased productivity in the Company’s United States Divisions. Consultant productivity is generally defined as annualized quarterly sales divided by the average number of consultants during the period.

In Mexico, net sales in the third quarter of 2002 increased to $62.6 million from $62.2 million in the third quarter of 2001, an increase of $0.4 million, or 0.6%. In local currency, net sales in the third quarter of 2002 increased 8.9% compared to net sales in the third quarter of 2001. The increase measured in local currency was larger than the increase measured in U.S. dollars, primarily due to weaker exchange rates in the third quarter of 2002 compared to the third quarter of 2001. In Mexico, the average number of consultants for the third quarter of 2002 increased to approximately 256,000 or by 7.2% over the average number of consultants in the comparable prior year period. In local currency, consultant productivity increased 1.6% over consultant productivity in the third quarter of 2001.

In the United States, net sales in the third quarter of 2002 increased to $22.1 million from $18.8 million in the third quarter of 2001, an increase of $3.3 million or 17.6%. The increase was primarily driven by the Hispanic Division. Net sales in the third quarter of 2002 for the Hispanic Division increased 23.1% to $15.2 million due to a combination of improved consultant productivity, an increase in the average consultant base achieved by improved sponsoring and increased ordering activity. Net sales in the third quarter of 2002 for the General Division increased 6.7% to $6.9 million. In the U.S., the average number of consultants remained constant at 66,000, however, in the Hispanic Division, the average number of consultants increased 10.3% to approximately 38,000. Productivity increased 11.6% in the Hispanic Division and 20.3% in the General Division due primarily to productivity based changes to the program. The number of ordering consultants improved in the Hispanic Division, as approximately 59.9% of all consultants were considered active during the period, compared to 55.8% in the comparable prior year period.

In Europe, net sales decreased to $5.5 million in the third quarter of 2002, from $5.7 million in the third quarter of 2001, a decrease of $0.2 million, or 3.5%. In local currencies, net sales decreased 12.4% in the third quarter of 2002 compared to the third quarter of 2001. The decrease measured in local currencies is greater than the decrease measured in U.S. dollars due to strengthening of local currencies

compared to U.S. dollars during the period. The decrease was the result of a smaller average consultant base, decreased consultant activity, decreased productivity in local currencies and the impact of natural disasters in portions of Europe. The average number of consultants in Europe decreased 3.7% to approximately 16,000. In local currencies, consultant productivity during the third quarter of 2002 decreased 9.1% compared to the third quarter of 2001.

Sales in South America and Thailand decreased to $4.7 million in the third quarter of 2002, from $5.7 million in the third quarter of 2001, a decrease of $1.0 million, or 17.5%. In local currencies, sales in South America increased 15.2%. In South America, the average number of consultants increased 26.8% to 59,000.

Gross profit. Consolidated gross profit in the third quarter of 2002 increased to $72.9 million from $72.2 million in the comparable prior year period, an increase of $0.7 million, or 0.1%. Gross profit as a percentage of sales (gross margin) decreased to 76.8% in the third quarter of 2002 from 78.1% in the third quarter of 2001.

In Mexico, gross margin in the third quarter of 2002 decreased to 76.2% from 77.3% in the third quarter of 2001. The decrease in gross margin was a due to incrementally greater charges to cost of sales related to the reserve for slow moving inventory and a less favorable product mix. Excluding the impact of the reserve for slow moving inventory, gross margin in the third quarter of 2002 decreased to 76.7% from 77.5% in the third quarter of 2001. Non resale sale products sold during the third quarter of 2002 contributed a decreased gross margin than those sold during the third quarter of 2001.

In the United States, gross margin in the third quarter of 2002 decreased to 77.4% from 78.2% in the third quarter of 2001. The difference was due to a less favorable product mix and more aggressive promotional offers which helped to drive the net sales increase. During the third quarter of 2002, resale sale products, specifically new products, contributed a decreased gross margin, than comparable products during the third quarter of 2001.

In Europe, gross margin in the third quarter of 2002 decreased to 74.5% from 77.2% in the third quarter of 2001 due to more favorable product mix in 2001 and incrementally greater charges to cost of sales related to the reserve for slow moving inventory.

In South America, gross margin in the third quarter of 2002 increased to 66.7% from 65.5% in the third quarter of 2001.

Selling, general and administrative expenses. SG&A expenses in the third quarter of 2002 increased to $59.0 million from $57.9 million in the third quarter of 2001, an increase of $1.1 million, or 1.9%. SG&A expenses, as a percentage of net sales, decreased in the third quarter of 2002 to 62.2% from 62.7% in the third quarter 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 Statement of Financial Accounting Standards (“SFAS”) No. 142 (See “Recent Accounting Pronouncements”).

In Mexico, SG&A expenses in the third quarter of 2002 increased by $1.8 million, or 6.0% compared to the third quarter of 2001. SG&A expenses, as a percentage of net sales, in Mexico were 51.1% in the third quarter of 2002, compared to 48.6% in the third quarter of 2001. The increased SG&A expenses in Mexico related primarily to $1.7 million incremental bad debt expense in the third quarter of 2002, compared to the third 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 third quarter of 2002 increased by $1.4 million, or 11.8% from the third quarter of 2001. SG&A expenses, as a percentage of net sales, in the U.S. were 60.2% in the third quarter of 2002, compared to 63.3% in the third quarter of 2001. The increased SG&A expenses were primarily attributable to increased override expenses and sales promotional expense. Override expense increased in total and as a percentage of net sales in the third quarter of 2002 compared to the third quarter of 2001 due to increased sales of resale products and strong collections. Sales promotional expenses increased due to timing and mix of promotional programs. Certain variable expenses, such as distribution and freight out which tend to vary in proportion with sales, increased in total, but were relatively constant as a percentage of net sales.

In Europe, SG&A expenses in the third quarter of 2002 decreased by $0.3 million, or 6.7% from the third quarter of 2001 primarily due to increased selling and administrative expenses. The increase is primarily due to the impact of favorable exchange rates in 2002 on expenses, additional information technology expenses and incremental bad debt expense.

SG&A expenses in other selling markets (South America and Thailand) and at corporate headquarters in the third quarter of 2002 decreased $1.8 million, or 15.9%, 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 third quarter of 2002, compared to $0.8 million of amortization expense in the third quarter of 2001.

Exchange loss. The Company’s foreign exchange loss was $5.1 million in the third quarter of 2002 compared to $1.3 million in the third quarter of the prior year, an increase of $3.8 million, or 292.3%. 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 and South American currencies. During the third quarter of 2002, the Company recognized $1.2 million of exchange losses on the remeasurement of U.S. dollar-denominated debt, $3.4 million of exchange losses on other foreign currency transactions, primarily related to the weakening of South American currencies, $0.8 million of exchange losses (including amortization of other comprehensive income (loss)) on forward contracts and $0.3 million of exchange gains (including amortization of other comprehensive income (loss)) on option contracts. During the third quarter of 2001, the Company recognized $1.5 million of exchange gains on forward contracts, resulting from the weakening of the Mexican peso against the U.S. dollar during the period. These exchange gains were offset by approximately $2.3 million of exchange losses on the remeasurement of U.S. dollar-denominated debt and other transactional losses of $0.5 million. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

Interest expense. Net interest expense (including amortization of deferred financing fees) in the third quarter of 2002 decreased to $2.9 million from $3.1 million in the third quarter of 2001, a decrease of $0.2 million, or 6.5%. 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 increased to $4.9 million in the third quarter of 2002, from $4.5 million in the third quarter of 2001. The Company’s effective income tax rate increased to approximately 83.1% compared to 45.5% for the comparable prior year period. The increased effective tax rate was primarily due valuation allowances against incrementally higher losses in the Company’s South American subsidiaries in 2002 as the result of the impact of devaluation of local currencies on U.S. dollar-denominated liabilities.

Net income. Net income was $1.0 million for the third quarter of 2002, a $4.4 million decrease compared to $5.4 million in 2001. The decrease was due to a $1.1 million increase in selling, general and administrative expenses, a $3.8 million increase in exchange loss, a $0.4 million increase in income tax expense, partially offset by a $0.7 million increase in gross profit, and a $0.2 million decrease in interest expense.

Nine months ended September 30, 2002 compared to the Nine months ended September 30, 2001


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

Nine Months Ended September 30, 2002
Net sales	$	190.5	$	66.9	$	18.6	$	16.1		$	292.1	$	—		$	292.1
Cost of sales		45.8		14.8		4.2		4.7			69.5		(1.6	)		67.9

Gross profit		144.7		52.1		14.4		11.4			222.6		1.6			224.2
Selling, general and administrative expenses		94.7		41.2		14.2		15.7			165.8		14.6			180.4

Operating income (loss)	$	50.0	$	10.9	$	0.2	$	(4.3	)	$	56.8	$	(13.0	)	$	43.8

Nine Months Ended September 30, 2001
Net sales	$	181.4	$	57.7	$	18.4	$	16.9		$	274.4	$	—		$	274.4
Cost of sales		43.1		12.7		3.8		4.8			64.4		(1.6	)		62.8

Gross profit		138.3		45.0		14.6		12.1			210.0		1.6			211.6
Selling, general and administrative expenses		85.3		38.2		14.2		16.7			154.4		18.6			173.0

Operating income (loss)	$	53.0	$	6.8	$	0.4	$	(4.6	)	$	55.6	$	(17.0	)	$	38.6

Net sales. Net sales for the nine months ended September 30, 2002 increased to $292.1 million from $274.4 million for the nine months ended September 30, 2001, an increase of $17.7 million or 6.5%. Measured in local currencies, net sales for the nine months ended September 30, 2002 increased 8.8%. The increase measured in local currencies was greater than the increase measured in U.S. dollars due to the weakening of the Mexican Peso and South American currencies. The Company’s average number of consultants worldwide for the nine months ended September 30, 2002 increased to approximately 386,000 or 7.8% over the 2001 average. Annualized consultant productivity for the first nine months of 2002 measured in U.S. dollars decreased 1.2% compared to the first nine months of 2001.

In Mexico, net sales for the nine months ended September 30, 2002 increased to $190.5 million from $181.4 million for the nine months ended September 30, 2001, an increase of $9.1 million or 5.0%. In local currency, net sales increased 6.9% over the comparable prior year period. In Mexico, the average number of consultants for the nine months ended September 30, 2002 increased to approximately 246,000, or by 8.6% over the average number of consultants in the comparable prior year period. In local currency, annualized consultant productivity for the first nine months of 2002 decreased 1.6% over consultant productivity during the first nine months of 2001 and the number of ordering consultants decreased to 47.6% of consultants compared to 50.8% in the prior year.

In the United States, net sales for the nine months ended September 30, 2002 increased to $66.9 million from $57.7 million for the nine months ended September 30, 2001, an increase of $9.2 million or 15.9%. In the Hispanic Division, net sales increased 20.4% and in the General Division, net sales increased 8.0% for the first nine months of 2002 compared to first nine months of 2001. The period to period sales increase was primarily due to improved consultant productivity and a larger consultant base in the Hispanic Division. In the Hispanic Division, consultant productivity increased 9.1% and in the General Division, consultant productivity increased 15.1% for the first nine months of 2002 compared to the first nine months of 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. For the nine months ended September 30, 2002, the average number of consultants in the Hispanic Division increased 9.5%, while the average number of consultants in the General Division decreased 6.1% compared to the nine months ended September 30, 2001. In the Hispanic Division, the average number of ordering consultants for the nine months ended September 30, 2002 increased to 60.6% of consultants compared to 56.4% for the nine months ended September 30, 2001 and in the General Division, the number of ordering consultants remained constant.

In Europe, net sales for the nine months ended September 30, 2002 increased to $18.6 million from $18.4 million for the nine months ended September 30, 2001, an increase of $0.2 million, or 1.1%. In local currencies, net sales decreased 3.1% for the nine months ended

September 30, 2002 compared to the nine months ended September 30, 2001. The increase in net sales measured in U.S. dollars compared to the decrease measured in local currencies was due to the strengthening of local currencies compared to the U.S. dollar in comparable periods. The average number of consultants decreased 2.0% to 16,000. In local currencies, annualized consultant productivity decreased 1.1% in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Measured in U.S. dollars, consultant productivity increased 3.0% in the comparable nine month periods.

Net sales in South America and Thailand for the nine months ended September 30, 2002 decreased to $16.1 million from $16.9 million for the nine months ended September 30, 2001, a decrease of $0.8 million, or 4.7%. In local currencies, net sales in South America increased 18.9% and net sales in Thailand increased 7.3% in the comparable nine month periods.

Gross profit. Consolidated gross profit for the nine months ended September 30, 2002 increased to $224.2 million from $211.6 million in the comparable prior year period, an increase of $12.6 million, or 6.0%. Gross profit as a percentage of net sales (gross margin) decreased to 76.8% for the nine months ended September 30, 2002 from 77.1% for the nine months ended September 30, 2001.

In Mexico, gross margin for the nine months ended September 30, 2002 decreased to 76.0% from 76.2% in the comparable prior year period. The decrease in gross margin was primarily attributable to increased expenses related to the slow moving inventory reserve, and incrementally greater amortization of deferred exchange losses into cost of sales, partially offset by a more favorable product mix. During the nine months ended September 30, 2002, $0.6 million of incremental charges related to the reserve for slow moving inventory were recorded compared to prior year nine month period. Additionally, during the first nine months of 2002, $0.5 million of incremental deferred exchange losses were reclassified into cost of sales from other comprehensive income in conjunction with hedge accounting pursuant to SFAS No. 133 compared to the prior year nine month period. Excluding the impact of these charges, gross margin was 76.7% for the nine months ended September 30, 2002, compared to 76.4% for the nine months ended September 30, 2001.

In the United States, gross margin for the nine months ended September 30, 2002 decreased to 77.9% from 78.0% in the comparable prior year period. The decrease in gross margin is due to $0.2 million of incremental charges related to the reserve for slow moving inventory in the first nine months of 2002 compared to the first nine months of 2001, partially offset by a more favorable product mix.

In Europe, gross margin for the nine months ended September 30, 2002 decreased to 77.4% from 79.3% for the comparable prior year period. The decrease in gross margin was due to incrementally greater charges related to the reserve for slow moving inventory recorded during 2002, and a more favorable product mix in 2001.

In South America, gross margin for the nine months ended September 30, 2002 decreased to 69.7% from 70.7% for the comparable prior year period.

Selling, general and administrative expenses. SG&A expenses for the nine months ended September 30, 2002 increased to $180.4 million from $173.0 million for the nine months ended September 30, 2001, an increase of $7.4 million, or 4.3%. SG&A expenses, as a percentage of net sales, decreased for the first nine months of 2002 to 61.8% from 63.0% for the first nine 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 nine months ended September 30, 2002 increased by $9.4 million, or 11.0% compared to the nine months ended September 30, 2001. SG&A expenses, as a percentage of net sales, in Mexico were 49.7% during the first nine months of 2002, compared to 47.0% for the first nine 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. Sales promotional expenses increased in total but were relatively constant as a percentage of net sales. However, freight expenses increased proportionally more than net 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 $4.8 million incremental bad debt expense in the first nine months of 2002, compared to the first nine months of 2001, due to declining consultant liquidity as a result of the general economic condition.

In the United States, SG&A expenses for the nine months ended September 30, 2002 increased by $3.0 million, or 7.9% compared to the nine months ended September 30, 2001. SG&A expenses, as a percentage of net sales, in the United States were 61.6% during the first nine months of 2002, compared to 66.2% for the first nine months of 2001. The increased SG&A expenses were primarily attributable to additional selling expenses, override expenses and freight expenses, partially offset by decreased sales promotional expenses. The expanded e-commerce platform was launched in June 2001, which resulted in incrementally more selling expenses for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Override payments, which tend to increase proportionally with net sales, increased in total and as a percentage of net sales due to increased sale of resale items and better collections. Sales promotional expenses decreased in total and as a percentage of net sales due to timing and mix of sales promotional programs.

In Europe, SG&A expenses during the first nine months of 2002 and 2001 were relatively constant in total at $14.2 million. SG&A expenses, as a percentage of net sales, were 76.3% for the nine months ended September 30, 2002, compared to 77.2% for the nine months ended September 30, 2001. The decrease of SG&A expenses, as a percentage of net sales, is primarily due to reduced distribution and sales promotional expenses, as a percentage of sales, partially offset by incrementally greater charges related to the reserve for uncollectible accounts receivables in Italy.

SG&A expenses in other selling markets (South America and Thailand) and at corporate headquarters for the nine months ended September 30, 2002 decreased $5.0 million, or 14.2%, primarily as the result of reduced sales promotional expenses and administrative expenses in the South American entities, partially due to the favorable impact of weaker local currencies, 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 $2.5 million of amortization expense in 2001.

Exchange loss. The Company’s foreign exchange loss was $10.5 million for the nine months ended September 30, 2002 compared to $8.0 million for the nine months ended September 30, 2001, an increase of $2.5 million, or 31.3%. During the nine months ended September 30, 2002, the Company recognized $2.2 million of exchange losses related to forward contracts, $1.2 million of exchange gains related to option contracts, $4.6 million of exchange losses on the remeasurement of U.S. dollar-denominated debt and $4.9 million of exchange losses on other foreign currency transactions, primarily due to the weakening of South American currencies. During the first nine months of 2001, the Company recognized $8.1 million of exchange losses on certain forward contracts, resulting from the strengthening of the Mexican peso against the U.S. dollar and exchange losses on other foreign currency transactions of $0.6 million. These exchange losses were partially offset by an exchange gain of $0.7 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 nine months of 2002 decreased to $8.7 million from $10.0 million for the first nine months of 2001, a decrease of $1.3 million, or 13.0%. 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 $9.8 million for the first nine months of 2002, compared to $10.6 million for the first nine months of 2001, a decrease of $0.8 million, or 7.5%. The Company’s effective income tax rate decreased to approximately 39.7% compared to 51.9% for the comparable prior year period. 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, partially offset by increased pretax losses in some South American countries, as the result of the impact of devaluation of local currencies on U.S. dollar-denominated liabilities. 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 54.6% compared to 39.7% for the nine months ended September 30 2002.

Net income. Net income was $14.8 million for the first nine months of 2002, a $4.9 million increase, compared to $9.9 million for the first nine months of 2001. The increase was due to a $12.6 million increase in gross profit, a $1.3 million decrease in interest expense, a $0.5 million increase in other, net, a $0.8 million decrease in income tax expense, partially offset by a $7.4 million increase in SG&A, a $2.5 million increase in exchange loss, 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 (the “Notes”), and its credit agreement, which consists of a term loan facility and a revolving credit facility (the “Senior Credit Agreement”). 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 ($45.1 million and $30.1 million as of September 30, 2002), 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 September 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 nine months ended September 30, 2002 the Company made an additional unscheduled principal payment on the term loan of $2.5 million. Borrowings under the revolving credit facility ($0 as of September 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 September 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 nine months ended September 30, 2002, cash paid for interest was approximately $0.3 million and $5.3 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 September 30, 2002, the Company was in compliance with all covenants. As of September 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 September 30, 2002, Jafra S.A. had an outstanding balance under the bank loan agreement of the peso equivalent of $1.0 million at a weighted average annual interest rate of 18.6%. Principal and interest payments are due monthly through January 25, 2005. As of September 30, 2002, $0.6 million of this loan is classified as short-term debt and $0.4 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 $22.8 million for the nine months ended September 30, 2002, consisting of $35.8 million provided by net income plus depreciation, amortization, and other non-cash items included in net income, partially offset by $13.0 million used in changes in operating assets and liabilities. The significant elements of net cash used in changes in operating assets and liabilities during the nine months ended September 30, 2002 were an increase of $15.1 million in accounts receivable, an increase in inventories of $1.6 million, partially offset by a decrease in prepaid expenses and other current assets of $3.1 million, and a decrease in other assets of $1.4 million.

Net cash used in investing activities was $7.7 million for the nine months ended September 30, 2002, of which $7.6 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 $7.7 million for the nine months ended September 30, 2002, and consisted of $5.4 million of repayment under the term loan facility, $1.8 million net repayment under the revolving credit facility and $0.5 million net repayment of other bank debt.

The effect of exchange rate changes on cash was $3.2 million for the nine months ended September 30, 2002, related 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 respect 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 nine months ended September 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 nine months ended September 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		—		(3.4	)		(0.4	)		(0.1	)		(3.9	)
Impairment losses		—		—			—			(0.2	)		(0.2	)

Balance as of September 30, 2002	$	32.2	$	29.0		$	5.5		$	0.3		$	67.0

net of the related income tax effects, where applicable, is as follows (in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Net income	$	1.0	$	5.4	$	14.8	$	9.9
Goodwill amortization, net of tax		—		0.4		—		1.2
Trademark amortization, net of tax		—		0.2		—		0.7

Adjusted net income	$	1.0	$	6.0	$	14.8	$	11.8

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 $0.9 million and $2.8 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 nine months ended September 30, 2001, respectively.

Non-U.S. Operations

Net sales outside of the United States aggregated approximately 77% of the Company’s total net sales for each of the three and nine month periods ended September 30, 2002 and 80% and 79% for the three and nine months ended September 30, 2001, respectively. In addition, as of September 30, 2002, non-U.S. subsidiaries comprised approximately 72% 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 66% and 65% of the Company’s net sales for the three and nine months ended September 30, 2002, respectively, and 67% and 66% for the three and nine month ended September 30, 2001, respectively, all of which were denominated in Mexican pesos. At September 30, 2002, Jafra S.A. had $32.5 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 $1.2 million and $4.6 million for the three and nine months ended September 30, 2002, respectively, on the remeasurement of this U.S. dollar-denominated debt and a net loss of $0.5 million and $1.0 million on foreign currency forward and option contracts for the three and nine months ended September 30, 2002, respectively.

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 each 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 66% and 65% of the Company’s consolidated net sales for the three and nine months ended September 30, 2002, respectively, compared to 66% for the full year in 2001. The year-to-year sales growth in Mexico for the nine months ended September 30, 2002 was approximately 5% measured in U.S. dollars and 7% measured in local currency. Mexico reported a quarter-to-quarter sales growth of 1% measured in U.S. dollars and 9% measured in local currency for the three months ended September 30, 2002 compared to the three months ended September 30, 2001.

The Company is employing a strategy to leverage diversification through growth in markets other than 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 nine months ended September 30, 2002 increased 18% and 16%, respectively, versus the comparable prior year period. The U.S. implemented 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.

Net sales in Europe had been on a downward trend for the past three years and have improved slightly as measured in U.S. dollars in the current year. European sales have declined from approximately 11% of the Company’s business in 1999 to 6% of the Company’s business in the nine months ended September 30, 2002. The European operations reported a net sales decrease of 4% and net sales increases of 1% measured in U.S. dollars for the three and nine months ended September 30, 2002, respectively.

Net sales in U.S. dollars in the South American region decreased by 5% in the nine months ended September 30, 2002 compared to the prior year, and were up approximately 19% in local currencies. In 2001, net sales generated by subsidiaries in the South American region were approximately 5% of consolidated sales.

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; and (iii) 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 nine months of 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 nine 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 nine 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 nine months ended September 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.

outstanding at September 30, 2002 mature at various dates extending to November 2002 and the contracts outstanding at September 30, 2001 matured at various dates through August 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 September 30, 2002 and 2001 (in thousands):

September 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		110,000			10/31/02		10.09		(137	)
Sell US Dollar/buy Mexican Peso		(110,000	)		10/31/02		9.31		1,041
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		291

	$	—						$	1,191

September 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		25,000		10/30/01		10.70		272
Buy US Dollar/sell Mexican Peso		110,000		10/31/01		10.71		1,201
Buy US Dollar/sell Mexican Peso		69,716		11/30/01		10.24		412
Buy US Dollar/sell Mexican Peso		44,000		12/27/01		10.71		401
Buy US Dollar/sell Mexican Peso		41,000		12/31/01		10.90		440
Buy US Dollar/sell Mexican Peso		108,715		1/31/02		10.19		387
Buy US Dollar/sell Mexican Peso		71,787		2/28/02		10.26		247
Buy US Dollar/sell Mexican Peso		94,371		3/27/02		10.46		411
Buy US Dollar/sell Mexican Peso		85,000		4/30/02		10.23		121
Buy US Dollar/sell Mexican Peso		81,000		5/31/02		10.11		(40	)
Buy US Dollar/sell Mexican Peso		80,000		6/28/02		9.95		(222	)
Buy US Dollar/sell Mexican Peso		48,000		7/31/02		10.07		(115	)
Buy US Dollar/sell Mexican Peso		40,000		8/30/02		10.17		(88	)

	$	898,589					$	3,427

(1)

The Fair Value of the forward positions presented above, an unrealized loss of $1,191,000 and $3,427,000 at September 30, 2002 and 2001, respectively. The unrealized loss in 2002 has been recorded as an offset to other receivables and the unrealized loss in 2001 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 September 30, 2002 (in thousands):


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

At September, 2002:
Purchased Puts (Company may sell Peso/buy USD)
Mexican Peso	$	225,000		9.97 — 10.15	$	(778	)	Oct. — Dec. 2002
Mexican Peso		149,000		10.31 — 10.48		(582	)	Jan. — Mar. 2003
Mexican Peso		100,000		11.05 — 12.19		(238	)	Apr. — June 2003
Mexican Peso		71,000		11.76 — 11.99		(172	)	July — Aug 2003

	$	545,000			$	(1,770	)

Written Calls (Counterparty may buy Peso/sell USD)
Mexican Peso	$	225,000		9.01 — 9.02	$	1		Oct. — Dec. 2002
Mexican Peso		149,000		9.01 — 9.02		11		Jan. — Mar. 2003
Mexican Peso		100,000		9.50 — 9.84		50		Apr. — June 2003
Mexican Peso		71,000		9.69 — 9.90		53		July — Aug 2003

	$	545,000			$	115

ITEM 4. CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company performed the evaluation.

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

At an extraordinary general meeting of shareholders of the Company held on July 30, 2002, the shareholders resolved that the Company shall change its certified public accountants.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

On July 11, 2002, the Company filed a Current Report on form 8-K, dated July 10, 2002, with the Securities and Exchange Commission regarding the Company’s decision to change its certified public accountants, which information was reported under Item 4, “Changes in Certifying Accountant” and Item 7 “Financial Statements and Exhibits”.

On July 22, 2002, the Company filed a Current Report on form 8-K, dated July 15, 2002, with the Securities and Exchange Commission regarding the Company’s decision to change its certified public accountants, which information was reported under Item 4, “Changes in Certifying Accountant”.

On August 13, 2002, the Company filed a Current Report on form 8-K, dated August 13, 2002, with the Securities and Exchange Commission regarding fair disclosure, which information was reported under Item 7, “Financial Statements and Exhibits” and Item 9, “Regulation FD Disclosure”.

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)

Date November 13, 2002

CERTIFICATIONS

I, Ronald B. Clark, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of CDRJ Investments (Lux) S.A.;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report:

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date November 13, 2002

/s/ RONALD B. CLARK
Ronald B. Clark
Chief Executive Officer of the Advisory Committee and Director

CERTIFICATIONS

I, Michael A. DiGregorio, certify that:

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date November 13, 2002

/s/ MICHAEL A. DIGREGORIO
Michael A. DiGregorio
Senior Vice President and Chief Financial Officer
of the Advisory Committee (Principal Financial Officer)

1.		I have reviewed this quarterly report on Form 10-Q of CDRJ Investments (Lux) S.A.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report:

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date	November 13, 2002

	/s/ RONALD B. CLARK Ronald B. Clark Chief Executive Officer of the Advisory Committee and Director