UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from            to                 .

Commission file number 333-106666

Jafra Worldwide Holdings (Lux), S.àR.L.

(Exact name of Registrant as specified in its charter)

382-386 Route de Longwy

L-2212 Luxembourg

Luxembourg

(352) 226027

(Address, including zip code, and telephone number, including area code, of

registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o          No þ

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

      As of March 15, 2005 the registrant had outstanding 316,420 shares of common stock, par value $100.00 per share.

Documents Incorporated by Reference

None

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

TABLE OF CONTENTS

PART I

General

      Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourg société à responsabilité limitée (the “Parent”) is an intermediate holding company that conducts all of its operations through its U.S. and non-U.S. subsidiaries. Prior to the Parent’s recapitalization on May 20, 2003, the historical operations of CDRJ Investments (Lux) S.A. (“CDRJ”) were equivalent to the operations of the Parent. CDRJ and its subsidiaries and the Parent and its subsidiaries are referred to collectively as “the Company” or “Jafra.”

      The Company is a direct seller of skin and body care products, color cosmetics, fragrances and other personal care products. The Company sells its Jafra brand products through a network of approximately 410,000 independent consultants, who market and sell the Company’s products to their customers. The Company generated approximately 67% of its total net sales in 2004 in Mexico and approximately 24% of its total net sales in the United States and the Dominican Republic.

      The Jafra business was incorporated in 1956 and was subsequently purchased by the Gillette Company. In 1998, the Jafra business was sold by the Gillette Company to CD&R Fund V and then was acquired from CD&R Fund V (the “Acquisition”) on May 27, 2004 by Vorwerk & Co. eins GmbH (“Vorwerk”). Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. Vorwerk holds its interest in the Company through Jafra S.A., a Luxembourg société anonyme, formerly known as CDRJ North Atlantic (Lux) S.àr.l. (“Jafra S.A.”).

      The Parent agreed to file periodic reports with the Securities and Exchange Commission (“SEC”) in connection with the issuance in May 2003 of $200 million of 10³/4% Senior Subordinated Notes due 2011 (the “10³/4% Notes”) by its subsidiaries Jafra Cosmetics International, Inc. (“JCI”) and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution” and together with JCI, the “issuers), so long as the 10³/4% Notes are outstanding. The 10³/4% Notes, of which approximately $172 million principal amounts are outstanding, after giving effect to a voluntary redemption in February 2005, are guaranteed by the Parent. JCI and Jafra Distribution are also borrowers (and the Parent is the Guarantor) under a $60 million amended and restated revolving credit facility entered into in August 2004, which can be increased by the Company under certain circumstances.

      Jafra conducts its operations through one channel, direct selling, and its reportable segments are based on geography: Mexico, United States and the Dominican Republic and Europe. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 to the consolidated financial statements.

Strategy

      The Company’s strategy consists primarily of the following key initiatives:

      Continue Core Strategy of Expanding and Retaining Consultant Base. The Company intends to increase its business by focusing on sponsoring and retaining loyal consultants who sell product. The Company believes that the attractive income opportunities offered by its compensation structure and its operational and cultural focus on providing support to its consultants have been instrumental in achieving overall consultant and net sales growth over the past several years. The Company believes the emphasis it places on providing its consultants with focused customer service, training, effective sales and marketing materials, brochures, and new product demonstrations, will continue to differentiate Jafra from its competitors. Additionally, the Company intends to continue to stimulate net sales growth by motivating its consultant base at local recognition events and by offering travel rewards, gifts and other incentives to its most productive consultants.

      Capitalize on Leading Market Position and Brand Equity in Mexico. The Company believes its leading market position and the strength of the Jafra brand in Mexico position it to benefit from favorable demographic trends and will facilitate the Company’s efforts to continue to expand its consultant base and to

capture additional market share. As the Mexican population ages and more adults seek career and income opportunities, the Company believes that its brand equity and the size of its consultant base will position Jafra as an attractive career opportunity and facilitate consultant recruitment.

      Continue U.S. Divisional Strategy. In late 2000, the Company bifurcated its operations in the United States into a Hispanic Division and a U.S. Division. The establishment of two separate divisions in the United States has allowed the Company to customize its marketing efforts. The Company has focused on separate segments of the population and will continue to provide its U.S. Spanish and non-Spanish speaking consultants with tailored recruiting programs, training materials, seminars and product presentations. In particular, the Company believes that it will benefit from the growth of the U.S. Hispanic population and its increasing buying power.

      Maintain Strong New Product Pipeline. The development and introduction of new products serve to motivate consultants by providing them with new and exciting products to demonstrate and market to their customers. As part of each of the Company’s consecutive two-month marketing and promotion cycles, the Company regularly introduces line extensions, such as new colors within the existing color cosmetics lines, and new products that employ the latest technology and capitalize on the face-to-face interaction between consultants and their customers. In the development of new products, the Company employs a strategy that minimizes research costs and focuses development efforts on innovative products that have already proven successful in the marketplace.

      Leverage Brand Strength into Complementary Categories and Markets. The Company is primarily focused on maintaining and growing its loyal consultant base and establishing a cost-effective distribution infrastructure and superior support structure for its consultants. The Company’s measured strategy is to develop selective products in complementary categories with the consultants’ core customer in mind and that will specifically lend themselves to the one-on-one meetings and product demonstrations that are fundamental to the direct selling business model. The Company also continues to evaluate the possibility of expanding into other direct selling markets.

      Continue to Identify Operating Efficiencies and Benefit from Economies of Scale. Management has increased the Company’s gross profit margin and reduced selling, general and administrative expenses, less one-time charges related to transactions and restructuring, as a percentage of net sales, primarily by reducing manufacturing and overhead costs, streamlining marketing efforts and improving working capital management. The Company intends to continue to pursue additional opportunities to realize cost savings and operating efficiencies in order to increase profitability. Further, the Company believes its direct selling business model will continue to generate significant organic growth and that the resulting scale will afford increasing opportunities to leverage the fixed cost base and increase efficiencies in the Company’s purchasing, manufacturing, marketing, training and technology functions.

Research and Development

      The Company continuously introduces new and revitalized products based on changes in consumer demand and technological advances in order to enhance the quality, image and price positioning of its products. During 2004, the Company launched 22 new product concepts. Research and development is conducted at the Jafra Skin, Body and Color Laboratory, located in the Westlake Village, California facility. Amounts incurred on research activities relating to the development of new products and improvement of existing products were $1.4 million in the year ended December 31, 2004, $1.3 million in the year ended December 31, 2003 and $1.5 million in the year ended December 31, 2002.

      Employees in the Research and Development Department formulate products and analyze them for chemical purity and microbial integrity. A separate small-scale pilot batch is produced and tested prior to full scale manufacture. The Company continues to invest in the development of one product line for use in all current markets and upgrading of its product lines by adding new formulations and contemporary fragrances.

Products

      The following table sets forth the net sales of the Company’s principal product lines for the years ended December 31, 2004, 2003 and 2002:

      Skin Care. The Company sells personalized skin programs in a free matrix skincare system that allows individuals to select a regimen to meet individual needs. Skin care products include cleansers, skin fresheners, masks, and moisturizers for day and night. In addition to basic skin care products, the Company offers specialty products to enhance skin texture and encourage cell revitalization, including the Company’s signature product, Royal Jelly Milk Balm Moisture Lotion, and products for maturing skin (Time Protector and Time Corrector), eye care (Optimeyes) and elasticity (Elasticity Recovery Hydrogel). The Company is committed to maintaining contemporary formulas and routinely evaluating and updating its product offerings.

      Body Care and Personal Care. The Company markets a broad selection of body, bath, sun and personal care products, including deodorants and shampoos. The Company’s signature body care product, Royal Jelly Body Complex, contains “royal jelly” (a substance produced by queen bees) in an oil-free deep moisturizing formula with natural botanical extracts and vitamins. Other offerings in the body care line include sunscreens, hand care lotions, revitalizing sprays, and bath products. While the Company varies its product offerings and continues to develop new products, Royal Almond and Precious Protein products have been top sellers for many years. In 2002, the Company leveraged the success of the Royal Almond brand by introducing Royal Ginger, a scent extension to the body care family. Also, the Company launched the Define Your Body line of four products, a complete line of body treatment products. The Company continued to build on the success of the Jafra Spa line with the launches of the Spa fragrances and the Scalp Massage and Hair Treatment. The Tender Moments baby line was enhanced with the launch of pediatrician-tested Baby Bottom Balm, formulated with soothing ingredients. In 2003, Jafra continued to promote body and personal care products with limited life fragrance-driven line extensions that leverage successful existing fragrance brands and also introduced a line of peppermint scented foot care products. In 2004, the Company launched a Honey Body Line and a brand leverage line with the Royal Rose Body line.

      Color Cosmetics. The Company sells a range of color cosmetics for the face, eyes, lips, cheeks and nails. The Company internally develops lipstick formulas, foundations and mascaras. In 1999, the Company implemented a new color palette strategy by introducing seasonal color products through innovative fashion color statements in the spring and fall shade product offerings. This has been a consistent strategy for 2000 through 2004, and has continued to drive the sales of color products. In 2004, the Company introduced B-Twin to target the teenage color cosmetics market.

      Fragrance. Direct selling is a significant distribution channel for fragrances, and the Company’s new scents have enabled the Company to participate on an increasingly larger scale in this channel. The Company introduces new fragrances into its product line regularly and has introduced at least one new fragrance a year since 1996. In 2002, three new fragrances were launched. Navîgo was launched as a master brand and two fragrances were launched simultaneously for men and women. JF9 Black, a sub brand of JF9, was launched for a limited time. In 2003, the Company launched six fragrance brands. One new men’s fragrance, J-Sport, was introduced, and the Company re-launched the Hamilton fragrance for men. The Company also introduced an extension of the women’s fragrance brand Le Moiré, called Le Moiré (cerisse). Additionally, a new teen fragrance, Double Nature, was launched in Mexico along with a new baby fragrance called One 2 Four. In 2004, three new fragrance brand concepts were launched with Inegale for women, Xenium for men and Coretato target the young girls market.

      Other Products. This category includes sales aids, such as party hostess gifts, demonstration products, etc., and promotional materials, which typically do not qualify for commissions or overrides.

Marketing

      Strategy and Product Positioning. The Company positions its products to appeal to a relatively wide range of market categories, demographic groups and lifestyles. The Company’s products generally price at the higher end of the mass market category, but slightly below prestige brands.

      Product Strategy. The Company’s product strategy is to provide customers with exciting and prestige quality product lines that fit into the Company’s value-added demonstration sales techniques and promote the sale of multiple products per sales call. To that end, the Company develops integrated products and actively promotes cross-selling among categories, thus encouraging multi-product sales and repeat purchases. Product variety and modernization are keys to the Company’s success. The Company continues to look for ways to expand product offerings and broaden its appeal in the marketplace.

      Marketing Material & Corporate Image. The Company supports its identity and corporate image through its network of consultants and word-of-mouth. The Company uses a sophisticated and integrated promotional approach that includes meetings, marketing literature, and the Internet to create strong corporate imagery and support corporate identity.

Independent Consultants

      The Company had approximately 410,000 consultants worldwide as of December 31, 2004. Approximately 313,000 of these consultants were in Mexico, 71,000 were in the United States, 19,000 were in Europe, 5,000 were in the Dominican Republic and 2,000 were in Argentina. Of the 71,000 consultants in the United States, 45,000 were in the Hispanic Division and 26,000 were in the General Division. These consultants are not agents or employees of Jafra; they are independent contractors or dealers. They purchase products directly from the Company and sell them directly to their customers.

      The Company provides training to senior consultants, who have experience managing their own consultant networks, and recruit and train the Company’s field level organization. In addition, the Company provides special training to a select group of senior consultants, or field leaders, who, in turn, provide training to the remaining field leaders. The Company sells substantially all of its products directly to its consultants. Each consultant conducts her Jafra sales operations as a stand-alone business, purchasing Jafra goods and reselling them to customers, as well as offering free personal care consultations. The Company’s independent sales force constitutes its primary marketing contact with the general public.

      Selling. The primary role of a Jafra consultant is to sell Jafra products. Although the majority of sales occur as a result of person-to-person sales, the Company also encourages its consultants to arrange sales parties at customers’ homes. Sales parties permit a more efficient use of a consultant’s time, allowing the consultant to offer products and cosmetic advice to multiple potential customers at the same time, and provide a comfortable selling environment in which clients can learn about skin care and sample the Jafra product line.

Such parties also provide an introduction to potential recruits and the opportunity for referrals to other potential clients, party hostesses and recruits.

      The Company does not require consultants to maintain any inventory. The Company believes that inventory requirements can be onerous to consultants. Instead, Jafra consultants can wait to purchase products from the Company until they have a firm customer order to fill. Consultants generally personally deliver orders to their customers. By delivering products directly to the customer, the Jafra consultant creates an additional sales opportunity.

      Recruiting. The Company believes that it presents an attractive proposition for prospective consultants due to its low start-up costs and policy of providing retail discounts. Other major attractions to prospective recruits include flexible hours, increased disposable income, an attractive incentive program (including international travel, national and regional meetings, awards and free products), personal and professional recognition, social interaction, product discounts and career development opportunities.

      The Company also emphasizes a commitment to consultants’ personal and professional training, thereby building consultants’ management and entrepreneurial skills.

      Consultant Management and Training.

      At December 31, 2004, the Company had approximately 16,000 managers, 2,000 district managers and 1,000 district directors. To become a manager, a consultant must sponsor a specified number of recruits who meet certain minimum sales levels. Once a consultant becomes a manager, she is eligible to earn commissions on her personal sales plus overrides on the sales of her downline consultants. A manager continues to gain seniority in the Jafra sales force by meeting the prescribed recruitment and sales requirements at each level of management. At more senior levels, managers may have several junior managers who in turn sponsor and manage other managers and consultants. The most successful managers have many such downline managers and consultants, and earn commissions on their personal sales plus overrides on their downline group’s sales. During 2004, the Company recorded $68.1 million as override expense within selling, general and administrative expenses and $4.2 million of commissions on personal sales paid to consultants as a reduction of net sales.

      Training for new consultants focuses first on the personalized selling of the Jafra product line, beginning with skin care and the administration of a Jafra business. Training is conducted primarily by the Company’s consultant managers. Managers train their downline consultants at monthly meetings often using materials prepared by the Company. In training managers, the Company seeks to improve leadership and management skills, while teaching managers to motivate downline consultants to higher sales levels.

      Income Opportunities and Recognition. Consultants earn income by purchasing products from the Company at wholesale prices and selling to consumers at suggested retail prices. The commissions earned by consultants on sales typically range from approximately 30% to 50% of suggested retail prices. Once a consultant becomes a manager, her compensation also includes overrides, or a percentage of the sales of the consultants she has recruited. These overrides range from 10% to 30% of the wholesale sales value of her downline consultants, depending of the level of the manager. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Additionally, managers often perform collection efforts on behalf of the Company as the overrides paid on a consultant’s downline productivity are paid only upon the collection of the receivables. The Company believes that its structure of discounts, commissions and overrides to consultants is generous.

      The Company also believes that public recognition of sales accomplishments serves the dual purpose of identifying successful role models and boosting consultant morale. Each year the Company sponsors major events in each of its geographic markets to recognize and reward sales and recruiting achievements and strengthen the bond between the independent sales force and the Company. Consultants and managers must meet certain minimum levels of sales and new consultant sponsorship in order to receive invitations to attend these events.

International Operations

      The Company’s international operations are subject to certain customary risks inherent in carrying on business abroad, including the risk of adverse currency fluctuations, the effect of regulatory and legal restrictions imposed by foreign governments, and unfavorable economic and political conditions.

      Due to the challenging macroeconomic environment that has affected the Company’s results in selected markets in which the Company operated, the Company adopted a strategic plan to focus on the strengths of the Mexican, U.S. and European markets. The Company terminated its direct selling operations in Brazil in 2004 and in certain markets in South America and Thailand in 2003. However, the Company will evaluate expansion opportunities into other international markets.

      The Company’s most important markets are Mexico, the United States (including the Dominican Republic) and Europe, which represented approximately 67%, 24% and 8%, respectively, of total 2004 consolidated net sales. The Company has entered into foreign currency exchange contracts to help mitigate the risk that a potential currency devaluation in Mexico would have on operations and liquidity. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”

      In certain European markets, including Czech Republic, Denmark/ Norway, Greece, Hungary, Ireland, Poland, Slovenia and Sweden the Company operates through distributors. The Company also entered into a distributor agreement with a third party in Brazil during 2004 who sells the Company’s products to consultants. The Company has the contractual right to terminate these arrangements if it chooses to operate directly in a given market.

Manufacturing

      The Company owns an approximately 38,000 square foot manufacturing facility in Naucalpan, Mexico, which is near Mexico City. This facility has produced substantially all of the Company’s product requirements since June 2004. Immediately prior to that time, substantially all of the Company’s requirements for certain cosmetic and skin care products were manufactured by a third-party contractor pursuant to a manufacturing agreement that expired on July 1, 2004. On July 2, 2004, JCI entered into a new manufacturing agreement pursuant to which the same third-party manufacturer manufactures a limited number cosmetic and skin care products for JCI.

      The Company purchases from other third-party suppliers certain finished goods and raw materials for use in its manufacturing operations. In general, the Company does not have written contracts with other suppliers. Finished goods and raw materials used in the Company’s products, such as glass, plastics, and chemicals, generally are available stock items or can be obtained to the Company’s specifications from more than one potential supplier.

Distribution Centers

      As of December 31, 2004, the Company used four primary distribution centers in the United States, Mexico and Europe. The U.S. warehouses in Bridgeport, New Jersey and Westlake Village, California currently stock the entire Jafra product line. In 2002, the Company opened a distribution center in Lerma, Mexico that services all consultants in Mexico. In addition, the Company has a distribution center in Kaufbeuren, Germany that services all of the European markets. Management believes that its facilities are adequate to meet demand in its existing markets for the foreseeable future.

      Typically, owned or leased distribution centers are located in an area that allows for direct delivery to consultants by either post or carrier. Maintaining a short delivery cycle in direct selling is an important competitive advantage.

Competition

      The Company sells all of its products in highly competitive markets. The principal bases of competition in the cosmetics direct selling industry are price, quality and range of product offerings. On the basis of information available to it from industry sources, management believes that there are a significant number of

companies (including both direct sales and cosmetic manufacturing companies) that compete with the Company’s products. Several direct sales companies compete with Jafra in sales of cosmetic products, and at least two such competitors, Mary Kay and Avon, are substantially larger than the Company in terms of total independent salespersons, sales volume and resources. In addition, the Company’s products compete with cosmetics and toiletry items manufactured by cosmetic companies that sell their products in retail or department stores. Several of such competitors are substantially larger than the Company in terms of sales and have substantially more resources. The Company also faces competition in recruiting independent salespersons from other direct selling organizations whose product lines may or may not compete with the Company’s products.

Patents and Trademarks

      The Company’s operations do not depend to any significant extent upon any single trademark other than the Jafra trademark. Some of the trademarks Jafra uses, however, are identified with and important to the sale of its products. One of its most significant lines of products, Royal Jelly, is not protected by any registered trademark because it is a generic term. The Company’s operations do not depend to any significant extent on any single or related group of patents, although the Company has applied for or received patent protection in its major markets for certain skin cream dispensers and product containers, nor does it rely upon any single or related group of licenses, franchises or concessions. The Company has in the past licensed know-how from Gillette relating to the design, development and manufacture of its products and is permitted to continue to use such know-how in connection with its products.

      In 1998, a former employee of Gillette filed applications to register the “Jafra” trademark in various jurisdictions in which the Company does not currently operate. In 1998, Gillette obtained a court order prohibiting this employee from transferring or licensing such trademark applications and registrations and requiring that the trademark applications and registrations be assigned to Gillette. Gillette has since completed the relevant documentation relating to the transfer of these trademarks to the Company. The Company has filed the documents obtained from this former employee in those jurisdictions in which the documentation will be accepted in order to secure the abandonment and cancellation of this employee’s applications and registrations. The Company has not been able to definitively verify abandonment or cancellation of these “Jafra” trademark applications or registrations in the jurisdictions of Bangladesh, Guyana, India, Nigeria, Pakistan and Sudan. If the Company is not able to secure cancellation or abandonment of the applications and registrations in these jurisdictions, it may be prohibited from distributing its products in these jurisdictions.

Information and E-Commerce Systems

      During 2001, the Company redefined its Internet strategy and continued to develop and implement an expanded e-commerce system. The expanded e-commerce platform became operational in the United States during June 2001, with the consultant utilization rate of 45% of order volume at year end 2004. In Mexico, an e-commerce platform was launched during the second half of 2001 with an average consultant utilization rate of 33% during 2004. During the 2004, the Company appointed a Chief Information Officer to evaluate global management information systems.

Seasonality

      The Company’s net sales, as measured in local currencies, during the fourth quarter of the year are typically slightly higher than in the other three quarters of the year due to seasonal holiday purchases. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Sales Cycles.”

Environmental Matters

      The Company’s operations are subject to various federal, state, local and foreign laws or regulations governing environmental, health and safety matters. Some of its operations require environmental permits and

controls and these permits are subject to modification, renewal and revocation by issuing authorities. Violations of or liabilities under environmental laws could result in fines or penalties, obligations to clean up contaminated properties or claims for property damage or personal injury. The Company believes that it is in material compliance with all such laws, regulations and permits, and under present conditions, it does not foresee that such laws and regulations will have a material adverse effect on its capital expenditures, earnings or competitive position.

Employees

      As of December 31, 2004, the Company had 901 full-time employees, of which 177 were employed in the United States, 606 were employed in Mexico and 118 were employed in other countries. The Company also had 346 outside contract employees. In Mexico, some of the Company’s employees are unionized. The Company has in the past experienced union-related work stoppages in Mexico. Within the past five years, none of these stoppages have had any material impact on operations. The Company believes its relations with its employees are generally good. The Company’s employees are not unionized in any market outside of Mexico.

Recent Development

      On February 17, 2005, the Company redeemed approximately $69.5 million of the outstanding 10³/4% Notes at a premium of $7.4 million. In connection with the redemption of the 10³/4% Notes, the Company wrote off $2.4 million of previously capitalized deferred financing fees. As a result, the Company expects to report $9.8 million as loss on extinguishment of debt in 2005. The redemption of the outstanding 10³/4% Notes was funded through a series of equity offerings which resulted in Jafra S.A. subscribing to 316,270 new shares of the Company.

      The Company is headquartered and maintains a distribution facility in Westlake Village, California, 40 miles north of Los Angeles. The Company’s Mexico offices are located in Mexico City, Mexico. The Company’s manufacturing operations are conducted at the Company’s facility in Naucalpan, Mexico. The Westlake Village, California, Mexico City, Mexico and Naucalpan, Mexico facilities are owned by the Company, except for a small portion of the Naucalpan facility that is leased. In addition, the Company leases certain distribution facilities, sales offices and service centers to facilitate its operations globally, including distribution facilities in Lerma, Mexico; Westlake Village, California; Bridgeport, New Jersey; and Kaufbeuren, Germany. The Company’s properties are suitable and adequate to meet its current and anticipated requirements.

      The Company is subject from time to time to various litigation and claims arising in the ordinary course of its business. The Company does not believe that any known litigation or claims pending against it would, if determined in a manner adverse to it, have a material adverse effect on its business, financial condition or results of operations.

      On November 11, 2004, the shareholders of the Company, by unanimous written consent in lieu of a special meeting, appointed Ronald Weber to the Board of Directors. All other directors will continue until their term expires or their successor is elected.

PART II

      There is no established public trading market for the Parent’s common stock (the “Common Stock”). The Parent is a wholly-owned subsidiary of Jafra S.A. The Parent has not paid in the past, and does not expect to pay for the foreseeable future, regular dividends on shares of its Common Stock. The declaration and payment of future dividends, if any, will be at the sole discretion of the Board of Directors of the Parent, subject to the restrictions set forth in the Restated Credit Agreement and the Indenture for its senior subordinated notes (the “Indenture”), which currently restrict the payment of cash dividends to stockholders, and restrictions, if any, imposed by other indebtedness outstanding from time to time. See Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Overview” and “— Liquidity and Capital Resources.”

      The following is a summary of selected consolidated financial data of the Company (amounts in millions except for consultant and consultant productivity data). The selected consolidated financial data, other than consultant data, as of December 31, 2004 and 2003 and for the year ended December 31, 2004 and 2003 are derived from the audited consolidated financial statements of Jafra Worldwide Holdings (Lux) S.àr.l. which appear in Item 8. “Financial Statements and Supplementary Data.” The selected consolidated financial data, other than data on consultants and consultant productivity, for the year ended December 31, 2002 is derived from the audited financial statements of CDRJ, the former parent company, which appear in Item 8. “Financial Statements and Supplementary Data.” The selected consolidated financial data as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 are derived from the audited financial statements of CDRJ which are not included herein. The related selected financial data should be read in conjunction with such financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

      The following discussion of the results of operations, financial condition and liquidity of the Company should be read in conjunction with the information contained in the consolidated financial statements and notes thereto included in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. These statements have been prepared in conformity with accounting principles generally accepted in the United States and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

      This Annual Report contains certain non-GAAP financial information, including disclosure of the portion of the Company’s SG&A, gross margins and net loss relating to, or affected by, certain restructuring charges, transformation expenses and integration expenses. This non-GAAP financial information is provided as supplementary information and is not an alternative to GAAP. This non-GAAP financial information is used by management to analyze the Company’s baseline performance before charges and expenses that are considered by management to be outside of Jafra’s core operating results, notwithstanding the fact that such restructuring charges and transformation expenses may be recurring. This non-GAAP information is among the primary indicators management uses as a basis for evaluating the Company’s financial performance as well as for forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for reported results determined in accordance with GAAP.

Overview

      The Company is a direct seller of skin and body care products, color cosmetics, fragrances and other personal care products. The Company sells its Jafra brand products through a direct selling network of approximately 410,000 independent consultants, who market and sell the Company’s products to their customers. The Company’s largest markets are Mexico and the United States (including the Dominican Republic), which contributed approximately 67% and 24% of its total net sales in 2004, respectively.

      The Company’s business operates in three primary markets: Mexico, the United States and Europe. Of these, Mexico is the largest, with approximately 67% of total net sales. Net sales in the United States (including the Dominican Republic), Europe and South America represented 24%, 8% and 1%, respectively, of total net sales for the year ended December 31, 2004. In 2000, the Company divided the United States into two divisions: the U.S. Division and the Hispanic Division, which is largely comprised of Spanish-speakers, and represents approximately two-thirds of the total U.S. business. Additionally, management combines the results of the Dominican Republic with the results of the Hispanic Division to evaluate the operations of the Hispanic Group. In Europe, the Company operates in Germany, Switzerland, Italy, Austria and the Netherlands, and several other countries through distributors. The Company has renewed its focus on the Mexican, U.S. and European markets and, in 2003, the Company discontinued its operations in Chile, Colombia, Peru and Venezuela. Consequently, the historical financial statements for all periods presented reflect the operations in these markets as discontinued operations. During 2004, the Company ceased its direct selling business in Brazil and entered into a distributorship agreement with a third party who sells the Company’s products to consultants. The Company has the contractual right to terminate this distribution arrangement if it chooses to operate directly in this market. The Company has made a decision to cease its direct selling operations in Argentina during 2005.

Seasonality and Sales Cycles

      The business, measured both in terms of net sales and in terms of numbers of consultants, is subject to certain seasonal trends. Both net sales and the number of consultants typically increase at year end, primarily

due to the winter holiday season both as an occasion for the purchase of gifts and as a time of year when there may be increased interest in joining the consultant network as a way of generating extra income.

      Consultant turnover occurs throughout the year, as is typical in the direct sales industry, and results in variation in the consultant base as measured at the end of intra-year reporting periods. The Company experiences a rate of consultant turnover of over 125% from year to year, which the Company believes is typical of the direct sales industry. In addition, the consultant base and net sales also fluctuate within quarterly reporting periods because the Company has six two-month sales cycles in each fiscal year. The second and fifth sales cycle straddle the first and second, and third and fourth quarters, respectively.

      The Company typically schedules sales promotions to coincide with the beginning of a new sales cycle, but product launches may come at various times throughout the year based on the product development cycle. A successful product launch in a particular reporting period may cause that period to exhibit relatively stronger results because of the higher level of interest in the new product or line. Some fiscal quarters may appear to have generated stronger or weaker net sales or consultant interest as expressed in the number of consultants than the preceding period because of the number of sales cycles closing within that quarter. In addition, because the types of promotions and the timing of certain key new product launches may vary from year to year, quarter over quarter comparisons are generally not be representative of the Company’s growth potential.

      The following table illustrates the Company’s net sales among the four quarters of each of the last three fiscal years (dollars in millions):

Measures of Consultant Performance

      In evaluating the results of operations, management utilizes several key measures relating to the performance of the Company’s independent consultants.

      Consultants at End of Period or Consultant Base. The Company defines the consultants or consultant base at the end of a period as the number of consultants that have placed an order within the past four months as of the end of the period. The Company uses period-to-period comparisons of its consultant base as an indicator of the growth of the business. As a result of this four-month convention, the number of consultants from one month to the next may vary significantly due to the timing of certain key events, promotions and product launches.

      Average Number of Consultants. The average number of consultants is calculated based on the number of consultants at the end of each month during the period, divided by the number of months in the period. The Company uses period-to-period comparisons of the average number of consultants as an indicator of the growth of the business, and this number is more directly correlated with net sales than the ending consultant number for a given period.

      Consultant Productivity. Management also regards consultant productivity as an important measure of the Company’s ability to generate net sales on a cost-efficient basis. Consultant productivity refers to the amount purchased by each consultant during the period and is calculated by dividing net sales during the period by the average number of consultants during that period. U.S. dollar productivity is impacted by fluctuations in exchange rates. Management believes that productivity in local currency is a better indicator of the business’s performance. In a period of rapid growth of the consultant base, productivity can be impacted by the number of new consultants whose average order size is typically lower than that of established consultants. A component of productivity is the percentage of consultants who place orders on a regular basis.

      The Company intends to seek to continue to grow its consultant base by continuing to provide a variety of incentives and overrides, which encourage existing consultants and managers to sponsor new consultants. In the past, the Company’s net sales have typically grown in line with the growth in the Company’s consultant base. Conversely, consultant productivity is somewhat adversely affected by an increase in the relative percentage of newer consultants, as new consultants typically have lower productivity than experienced ones. Consequently, normal growth in the consultant base tends to increase net sales, while reducing average consultant productivity. From time to time, consultant liquidity is affected by the overall economic condition of a country in which the Company operates. In weaker economies, the collection cycle of payments from the ultimate consumer to the consultants to the Company sometimes increases slightly. However, even during these periods, the Company has historically had sufficient cash flow to satisfy its debt obligations.

Compensation of the Company’s Direct Selling Network

      Consultants earn income by purchasing products from the Company at wholesale prices and selling to consumers at suggested retail prices. In addition, consultants who sponsor a certain number of recruits and meet certain minimum sales levels can become managers or lineage leaders. The compensation of a manager or lineage leader includes overrides, which are equal to a percentage of the paid sales generated by consultants recruited directly or indirectly by them. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Additionally, managers are also motivated to perform collection efforts on the Company’s behalf, as overrides paid on a consultant’s downline productivity are paid only upon the collection of receivables. The overrides represent a significant portion of the Company’s selling, general and administrative expense.

Research and Development

      Research and development is a key part of new product introductions that motivate the consultant base and increase net sales. The Company has its own in-house development department staffed with approximately 10 trained professionals. The Company has chosen a strategy that allows it to focus most of its efforts on the development side. The Company utilizes research and industry developments as well as proven market concepts and products as a base for its development of new products. As a result, research and development expenses are less than 1% of net sales.

Foreign Currency Translation

      The Company generates the majority of its net sales through peso-denominated sales to consultants in Mexico, which is its largest market. The Company also has operations in other overseas markets, each of which generates net sales in its respective local currency. Because the Company reports its financial results in, and all of its debt is denominated in, U.S. dollars, the Company is exposed to significant foreign currency related risks in connection with the translation of its activities outside the United States from local currencies into U.S. dollars and the translation of currency for the repayment of debt, payment of interest expense and other dollar-denominated obligations into U.S. dollars. See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.”

Results of Operations

      Net Sales. The Company records net sales based on the wholesale price of product sold to its consultants. The Company’s net sales represents net revenue plus the shipping, handling and other fees paid to it by consultants, less any commissions paid by the Company to consultants on their personal sales. Approximately 89% to 90% of these net sales are product-related and are commissionable, while 10% to 11% are consultant kits and other sales aids, training materials and certain other products which are non-commissionable. Sales are recorded upon shipment by third-party carrier to the consultants. The retail price of the Company’s products is at the high end of the range for comparable direct selling merchants. The wholesale price is determined by the commission earned by the consultant based on the size of the order.

      Cost of Sales. The Company’s cost of sales primarily represents the cost to the Company of the products it sells to its consultants and costs associated with free product on certain promotional arrangements. Cost of sales also includes manufacturing and other production-related expenses and charges related to obsolete and slow-moving inventory. The Company’s gross margins may not be comparable to those of other entities because the Company includes certain costs related to distribution in selling, general and administrative expenses rather than in cost of sales.

      Selling, General and Administrative Expense. Selling, general and administrative expenses (“SG&A”) include sales promotional expenses, including the cost of various sales incentives, distribution expenses, and shipping and handling costs, as well as selling, marketing and administrative expenses, including general management, finance, human resources, and information technology. SG&A expenses also include override payments to lineage leaders who earn a percentage of the sales of the consultants in their downline and bad debt expense related to uncollectible accounts receivable.

      Loss on Discontinued Operations. During the year ended December 31, 2003, the Company discontinued its operations in Venezuela, Colombia, Chile and Peru. Accordingly, the results of these markets have been classified as discontinued operations in all periods disclosed in the statements 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 following tables represent selected components of the consolidated results of operations by market. Management evaluates market performance based on segment operating income, excluding reorganization and restructuring charges, unusual gains and losses, and amortization of goodwill and other intangible assets. Results for South America and Thailand are combined and included in the following tables under the caption “All Others.” Results for the Dominican Republic are included in the U.S. segment as the operations of the Dominican Republic are under the same management as the operations of the U.S. Hispanic Division. Corporate expenses, reorganization and restructuring charges and unusual gains and losses are included under the caption “Corporate, Unallocated and Other.”

See Note 14 to the Company’s consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      Net Sales. Net sales for 2004 increased to $416.2 million from $383.9 million for 2003, an increase of $32.3 million, or 8.4%. In local currencies, net sales increased 10.8% in 2004 compared to 2003. The average ending number of consultants worldwide increased 6.6% to approximately 434,000 consultants in 2004, an increase of 27,000 consultants over the 2003 average ending number of consultants. The increase in the average number of consultants was primarily the result of consultant increases in Mexico. Measured in local currencies, consultant productivity increased 3.9%, but because of weaker average exchange rates, consultant productivity measured in U.S. dollars increased 1.6% in 2004 compared to 2003.

      In Mexico, net sales for 2004 increased 20.6% compared to net sales for 2003 measured in local currency. However, due to weaker average exchange rates, net sales measured in U.S. dollars for 2004 increased 15.2% to $278.4 million compared to net sales of $241.7 million for 2003. The increase in net sales in 2004 compared to 2003 was due primarily to an increase in the average number of consultants. The average number of

consultants in Mexico increased to approximately 321,000 consultants in 2004 compared to 265,000 in 2003, a 21.1% increase. The increase in the consultant base was primarily the result of an increase in the number of new consultants resulting from promotions aimed at increasing the sponsorship of new consultants. In particular, third quarter 2004 promotional cases and other sponsoring promotions were very well accepted by the consultant base. Consultant productivity measured in local currency was relatively constant.

      In the United States and the Dominican Republic, net sales for 2004 decreased to $98.0 million compared to $102.1 million for 2003, a decrease of $4.1 million, or 4.0%. The United States is comprised of two distinct divisions, the Hispanic Division including the Dominican Republic (referred to collectively as the Hispanic Group) and the U.S. Division. The Hispanic Group’s net sales decreased 0.6% to $69.4 million in 2004 from $69.8 million in 2003 as a result of a decrease in the average number of consultants partially offset by an increase in consultant productivity. The U.S. Division’s net sales decreased 11.5% to $28.6 million in 2004, from $32.3 million in 2003, as a result of a decrease in the number of consultants.

      The Hispanic Group had an average of 54,000 consultants during 2004 compared to 58,000 consultants in 2003, a decrease of 6.9%. The decrease is the consultant base in the Hispanic Division was primarily the result of consultant losses during the end of 2003 and the beginning of 2004 associated with issues surrounding the implementation of a new commercial system. However, in the Hispanic Division, consultant productivity increased as a result of changes in the program including an increase in the minimum order necessary to obtain the maximum commission. During 2004, program changes were implemented in the Dominican Republic to focus the consultant base on the income opportunity of selling Jafra products. One result of these program changes was a smaller more productive consultant base which is evident by the decrease in the number of consultants offset by greater productivity in the Dominican Republic.

      The U.S. Division had an 11.7% decrease in net sales during 2004 compared to 2003 primarily as a result in the decrease in the number of consultants. During 2004, the U.S. Division had approximately 26,000 consultants compared to 30,000 consultants in 2003. This decrease in the number of consultants was the result of consultant losses associated with issues surrounding the implementation of a new commercial system at the end of 2003 and beginning of 2004 and also a shift in the direction of the business to a focus on “party sales.” Consultant productivity in the U.S. Division was relatively constant in 2004 compared to 2003.

      In Europe, net sales for 2004 were $35.0 million, compared to $32.9 million for 2003, an increase of $2.1 million, or 6.4%, in part due to stronger average exchange rates. Measured in local currencies, net sales decreased 2.8% in 2004 compared to 2003. In 2004, consultant productivity measured in local currencies decreased compared to 2003 consultant productivity as a result of increased economic difficulties in the countries in which the Company operates. The average number of consultants was approximately 18,000 in 2004 and was relatively constant to the average number of consultants during 2003.

      Other markets consist of Brazil, Argentina and Thailand. Net sales in the other markets for 2004 were $4.8 million, a decrease of $2.4 million, or 33.3% compared to $7.2 million for 2003. During 2004, the Company ceased direct selling operation in Brazil and therefore, net sales in Brazil were significantly less in 2004 compared to 2003. Net sales in Argentina were relatively constant in 2004 compared to 2003. The Company did not have any sales in Thailand in 2004 compared to approximately $0.4 million in 2003 as a result of the Company’s exit of the Thailand market at the end of 2003.

      Gross Profit. Gross profit in 2004 increased to $321.3 million from $294.2 million in 2003, an increase of $27.1 million, or 9.2%. Gross profit as a percentage of net sales or gross margin, increased to 77.2% from 76.6% as a result of increased gross margins in the United States and Europe.

      In Mexico, gross margin remained constant at 75.7% in 2004 and 2003.

      In the United States, gross margin increased to 78.2% in 2004 compared to 76.8% in 2003 as a result of increased margins on regular line sales and promotional sales and reduced expenses related to the reserve for slow moving inventory.

      In Europe, gross margin increased to approximately 81.1% in 2004 compared to 78.4% principally as the result of impact of the favorable exchange rates of the euro to the U.S. dollar on cost of sales, as a significant amount of inventory in Europe is purchased in U.S. dollars.

      In the other markets, gross margin in 2004 decreased to 56.2% in 2004 compared to 56.9% in 2003 primarily as a result of inventory liquidation efforts in Brazil.

      Selling, General and Administrative Expenses. SG&A expenses in 2004 increased to $245.3 million from $232.8 million in 2003, an increase of $12.5 million, or 5.4%. SG&A expenses, as a percentage of net sales, decreased to 58.9% in 2004 compared to 60.6% in 2003 primarily as a result of percentage decreases in Mexico and absolute dollar decreases in the United States.

      In Mexico, SG&A expenses increased to $133.7 million in 2004 from $116.8 million in 2003, an increase of $16.9 million, or 14.5%. As a percentage of net sales, SG&A expenses decreased to 48.0% in 2004 compared to 48.3% in 2003. The decrease in SG&A expenses as a percentage of net sales was primarily the result of a decrease in selling and administrative expenses as percentage of net sales, partially offset by an increase in sales promotional expense. Selling and administrative expenses decreased as a percentage of net sales due to the favorable impact of increased net sales on fixed costs. Sales promotional expenses increased in 2004 compared to 2003 as a result of additional event winners, additional literature and a new activity promotion implemented at the beginning of 2004.

      In the United States, SG&A expenses decreased to $59.9 million in 2004 from $62.1 million in 2003, a decrease of $2.2 million, or 3.5% as a result of reduced variable expenses as a result of reduced net sales. As a percentage of net sales, SG&A expenses increased to 61.1% in 2004 compared to 60.8% in 2003 as a result of the unfavorable impact of reduced sales on fixed expenses, partially offset by decreased sales promotional expense. Sales promotional expense decreased in total and as a percentage of total net sales as a result of reduced sales promotional activity, including fewer meetings and trips, in an effort to refocus the U.S. Division on party sales and an effort to contain costs.

      In Europe, SG&A expenses increased to $25.5 million in 2004 from $23.9 million in 2003, an increase of $1.6 million, or 6.7%. As a percentage of net sales, SG&A expenses increased to 72.9% in 2004 from 72.6% in 2003, primarily as a result of increased override expenses due to better collections and changes in the program implemented in the middle of 2003. Selling and administrative expenses also increased as percentage of net sales as a result of incremental information technology expenses. The increased override, selling and administrative expenses were partially offset by decreased sales promotional expenses.

      SG&A expenses in other markets, Brazil, Argentina and Thailand, decreased to $4.9 million in 2004 compared to $8.9 million in 2003, a $4.0 million decrease. As a percentage of net sales, SG&A expenses also decreased. The decrease is primarily the result of ceasing direct selling operations in Thailand at the end of 2003 and ceasing of direct selling operations in Brazil in late 2004. As a result, the Company has significantly reduced all costs in these markets and subsequent to ceasing direct selling operations, the Company is only incurring those costs necessary to wind down and liquidate the operations in Brazil.

      SG&A expenses in Corporate, Unallocated and Other increased nominally to $21.3 million in 2004 compared to $21.1 million in 2003, an increase of $0.2 million.

      Transaction Related Expenses. During 2004, the Company incurred $29.8 million of transaction fees related to the Acquisition and to certain other transactions contemplated but subsequently terminated. Included in these amounts was $20.3 million of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4.9 million of special bonus payments paid directly by the former controlling shareholder. During 2003, the Company incurred $16.8 million of transaction expenses related to the Recapitalization and to other transactions contemplated but subsequently terminated. Included in this amount was compensation expense of $10.4 million to current options holders for any diminished value of the outstanding options due to a repricing of all options. Also included in this amount was $2.7 million of special bonus payments to certain former and current members of management and to non-employee directors for contributions to completing the Recapitalization.

      Restructuring and Impairment Charges. During 2004, the Company recorded $5.0 million of restructuring and impairment charges. Of these charges, $2.4 million was termination benefits and $0.4 million of asset impairment charges related to the transfer of substantially all of the Company’s skin and body care manufacturing operations to its facilities in Mexico from the United States. Additionally, during 2004, the Company recorded $2.2 million of severance related charges related to the resignation of four members of management subsequent to the Acquisition.

      Exchange Gain (Loss), Net. The Company’s net foreign exchange gain in 2004 was $0.2 million compared to an $11.0 million loss in 2003, a favorable change of $11.2 million. The Company’s foreign exchange gains and losses primarily result from its operations in Mexico, Europe and South America. The net exchange gain (loss) has three primary elements: gains or losses on forward currency and option contracts, unrealized and realized gains or losses on the remeasurement of U.S. dollar-denominated debt, and gains or losses on transactions denominated in foreign currencies.

      In 2003 and 2004, the Company used option contracts to hedge foreign currency exposure to the Mexican peso. The Company purchases exchange rate put options which gives it the right, but not the obligation, to sell Mexican pesos at a specified U.S. dollar exchange rate, which the Company refers to as strike rate. The option contracts provide protection in the event the Mexican peso weakens beyond the option strike rate. In conjunction with the put options, and as part of a zero-cost option collar structure, the Company sold Mexican peso call options, which give the counterparty the right, but not the obligation, to buy Mexican pesos from the Company at a specified strike rate. The premiums earned from selling the call options exactly offset the premiums paid from purchasing the put options, creating a net zero-cost hedge structure. The effect of these contracts would be to limit the benefit the Company would otherwise derive from the strengthening of the Mexican peso beyond the strike rate. In mid-2002, the Company modified its policy to include use of option contracts. Prior to amendment of the policy, the Company used foreign currency forward contracts (“forward contracts” or “forwards”) to hedge foreign currency exposure to the Mexican peso. In mid-2002, in order to execute the option contracts and to offset the current outstanding forward contracts to sell Mexican pesos, the Company entered into forward contracts to buy Mexican pesos.

      During 2004, the Company recognized $1.5 million of exchange losses related to the option contracts. As the Company can utilize hedge accounting pursuant to SFAS No. 133 for forward and option contracts to hedge certain forecasted transactions, certain losses can be deferred as a separate component of other comprehensive loss and are then recognized in income at the same time that the underlying hedged exposure is recognized in income. As of December 31, 2003, the Company had deferred gains of $0.3 million as a component of other comprehensive loss. During 2004, the Company deferred as a component of other comprehensive loss $0.4 million of losses on option contracts. During 2004, the Company reclassified a nominal amount of deferred losses to exchange gains or cost of sales in the consolidated statements of operations.

      As of December 31, 2002, the Company had deferred losses of $0.3 million as a component of other comprehensive loss. During 2003, the Company deferred an additional $0.4 million of gains on option contracts as a component of other comprehensive loss. During the year ended December 31, 2003, the Company reclassified $0.5 million of exchange gains on option contracts from other comprehensive loss into exchange loss on the consolidated statement of operations. Additionally, during the year ended December 31, 2003, the Company reclassified $0.7 million of losses on forward contracts and a nominal amount of exchange gains on option contracts from other comprehensive loss into cost of sales in the consolidated statements of operations.

      During 2004, the Mexican peso strengthened in relation to the U.S. dollar and as a result the Company recognized approximately $0.5 million of gains on the remeasurement of U.S. dollar-denominated debt. Additionally, the Company recognized $1.2 million of gains in 2004 on other foreign currency transactions, including intercompany transactions.

      During 2003, as a result of devaluation of the Mexico peso, the Company recognized approximately $12.3 million of losses on the remeasurement of the U.S. dollar-denominated debt, most of which was

unrealized. Additionally, the Company recognized $0.5 million of gains in 2003 on other foreign currency transactions, including intercompany transactions.

      Interest Expense, Net of Interest Income. Net interest expense increased to $27.2 million in 2004 compared to $20.9 million in 2003, an increase of $6.3 million, or 30.2%. The increase in interest expense was primarily the result of the Recapitalization of the Company, which resulted in a higher average debt balance outstanding during 2004 compared to 2003. The Recapitalization was complete and new debt was issued in May 2003.

      Loss on Extinguishment of Debt. On August 16, 2004, the Company entered into the Restated Credit Agreement and paid in full all existing amounts under the Senior Credit Agreement. In addition, in connection with the Acquisition, holders of $0.5 million principal amount of the 10³/4% Notes redeemed such notes. In connection with the refinancing of the Senior Credit Agreement and the purchase of $0.5 million of the outstanding 10³/4% Notes, the Company wrote off approximately $4.5 million of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the consolidated statements of operations during 2004.

      On February 17, 2005, the Company redeemed approximately $69.5 million of the outstanding 10³/4% Notes at a premium of $7.4 million. In connection with the redemption of the 10³/4% Notes, the Company wrote off $2.4 million of previously capitalized deferred financing fees. As a result, the Company expects to report $9.8 million as loss on extinguishment of debt in 2005. The redemption of the outstanding 10³/4% Notes was funded through a series of equity offerings which resulted in Jafra S.A. subscribing to 316,270 new shares of the Company.

      On May 23, 2003, the Company repurchased its outstanding 11³/4% Subordinated Notes due April 30, 2008 in the aggregate principal amount of $75.2 million at a premium of approximately $4.4 million. Additionally, the Company repaid $7.4 million under its then existing credit agreement. In connection with the redemption of these notes and the termination of this credit agreement, the Company wrote off approximately $2.2 million of capitalized deferred financing fees. The total expense related to the extinguishment of the previous debt was $6.6 million in 2003.

      Other (Expense) Income, Net. The Company recorded $0.6 million of other expense during 2004 compared to $0.4 million during 2003. Other expense primarily relates to the reclassification of $0.3 million of accumulated other comprehensive loss to other expense in 2004, certain interest tax charges and in 2003 formation expenses.

      Income Tax (Benefit) Expense. The Company recorded an income tax benefit of $2.3 million during 2004 compared to income tax expense of $8.3 million during 2003. The income tax benefit in 2004 was the result of pretax losses in the Company’s United States subsidiary with a corresponding tax benefit and the reversal of $2.3 million of tax accruals in the United States. Additionally, during 2004, the Company reduced certain valuation allowances in one of its Mexican subsidiaries related to net operating losses which resulted in a low effective tax rate for the Company’s Mexican subsidiaries. In 2003, the Company’s effective income tax rate from continuing operations increased to 145.6% and was primarily the result of valuation allowances against net operating losses on the Company’s Mexican subsidiaries and valuation allowances against certain operating losses generated by the Company’s Brazilian entity.

      Loss on Discontinued Operations. Loss on discontinued operations was $0.2 million in 2004 compared to $5.4 million in 2003, a decrease of loss of $5.2 million. In 2004, the losses on discontinued operations were primarily related to costs necessary to liquidate certain markets. In 2003, the additional losses were primarily due to the write-off of certain assets in connection with the Company’s exit from Venezuela, Colombia, Chile and Peru and the reclassification of $2.5 million accumulated other comprehensive loss to loss on discontinued operations.

      Net Income (Loss). Net income was $11.2 million in 2004 compared to a net loss of $8.0 million in 2003, a favorable change of $19.2 million. The increase in net income was the result of a $27.1 million increase in gross margin, an $11.2 million favorable change in exchange gain (loss), a $2.1 million decrease in loss on extinguishment of debt, a $10.6 million favorable change in income tax (benefit) expense and a $5.2 million

decrease in loss on discontinued operations, partially offset by a $12.5 million increase in SG&A expenses, a $13.0 million increase in transaction related expenses, $5.0 million of restructuring and impairment charges, a $0.2 million increase in other expense and a $6.3 million increase in interest expense.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      Net Sales. Net sales for 2003 increased to $383.9 million from $382.6 million for 2002, an increase of $1.3 million, or 0.3%. In local currencies, net sales increased 7.2% in 2003 compared to 2002. The average ending number of consultants worldwide increased 8.2% to approximately 407,000 consultants in 2003, an increase of 31,000 consultants over the 2002 average ending number of consultants. The increase in the average number of consultants was primarily the result of consultant increases in Mexico, the Hispanic Division of the United States and Europe. Measured in local currencies, consultant productivity decreased 1.0%, but because of weaker average exchange rates, consultant productivity measured in U.S. dollars decreased 7.4% in 2003 compared to 2002.

      In Mexico, net sales for 2003 increased 7.2% compared to net sales for 2002 as measured in local currency. However, due to weaker average exchange rates, net sales measured in U.S. dollars decreased 3.9% in 2003 to $241.7 million compared to $251.6 million for 2002. The Mexican peso devalued approximately 8% from December 2002 to December 2003, which resulted in an approximately 11.1% unfavorable impact on Mexico net sales. The increase in net sales measured in local currency in 2003 compared to 2002 was due primarily to an increase in the average number of consultants and an increase in consultant productivity. The average number of consultants in Mexico increased to approximately 265,000 consultants in 2003 compared to 252,000 in 2002, a 5.2% increase. The increase in the consultant base was primarily the result of an increase in the number of new consultants resulting from promotions aimed at increasing the sponsorship of new consultants, and a favorable response to discounted new consultant cases. Consultant productivity for 2003 increased 1.9% measured in local currency due to sales volume promotions and hostess promotions.

      In the United States, net sales for 2003, increased to $102.1 million from $97.4 million for 2002, an increase of $4.7 million, or 4.8%. The Hispanic Division’s net sales increased 9.5%, to $67.0 million in 2003 from $61.2 million in 2002, as a result of an increase in the average number of consultants. The impact of this increase in the average number of consultants was partially offset by a decrease in consultant productivity. The U.S. Division’s net sales increased 4.2% to $32.3 million in 2003, from $31.0 million in 2002, as a result of an increase in consultant productivity and in the average number of consultants. The Dominican Republic’s net sales decreased to $2.8 million in 2003 from $5.2 million in 2002 as a result of devaluation of the Dominican Republic peso and reduced consultant productivity.

      The Hispanic Division had an average of 49,000 consultants in 2003, a 26% increase compared to the average number of consultants in 2002. The increase in the consultant base was primarily the result of attractive consultant case promotions and temporary changes in the commission structure to encourage consultant retention in 2003 compared to 2002. The Hispanic Division’s consultant productivity decreased 12.5% due to the rapid new consultant growth in 2003 as new consultants entering the business are generally less productive than the established consultants.

      The U.S. Division had a 3.4% increase in consultant productivity in 2003 compared to 2002 due largely to the increase in internet orders. During 2002 the Company implemented program changes in its U.S. business to increase the minimum order size in order for consultants to achieve the maximum commission rate. The result of the program change was for the consultant base to consist of more consultants purchasing products for resale rather than personal use, which increased the consultant productivity. The average consultant base in the U.S. Division increased 1.0% to approximately 30,000 consultants.

      In Europe, net sales for 2003 were $32.9 million, compared to $26.9 million for 2002, an increase of $6.0 million, or 22.3%, in part due to stronger average exchange rates. Measured in local currencies, net sales increased 7.1% in 2003 compared to 2002. The increase in net sales was primarily the result of an increase in the average number of consultants during 2003 compared to 2002, offset by a decrease in consultant

productivity measured in local currencies. The average number of consultants in Europe increased to approximately 18,000 in 2003, an increase of 12.1% compared to the average number of consultants 2002. The increase in the consultant base was the result of a continued promotional focus during the year on recruitment of new consultants. In Europe, consultant productivity measured in local currencies decreased 4.5% in 2003 compared to 2002 as a result of smaller average orders.

      Net sales in the other markets for 2003 were $7.2 million, an increase of $0.5 million or 7.5% compared to $6.7 million for 2002. In Brazil, net sales in 2003 were $5.9 million, compared to $5.2 million in 2002, an increase of 13.5% primarily as the result of an increase in the average number of consultants, offset by reduced consultant productivity. Net sales in Argentina increased by approximately $0.1 million.

      Gross Profit. Gross profit in 2003 increased to $294.2 million from $292.4 million in 2002, an increase of $1.8 million, or 0.6%. Gross profit as a percentage of net sales or gross margin, increased to 76.6% from 76.4% as a result of lower than anticipated manufacturing costs within “Corporate, Unallocated and Other” and an increase in gross margin in Europe, partially offset by decreases in gross margin in Mexico, the United States and All Others.

      In Mexico, gross margin decreased nominally to 75.7% in 2003 compared to 75.9% in 2002 due primarily to a decreased margin contribution from new products. The percentage of commissionable sales compared to total sales remained relatively constant at approximately 91.0% in 2002 and 2003.

      In the United States, gross margin remained constant at 76.8% in 2003 and 2002.

      In Europe, gross margin increased to approximately 78.4% in 2003 compared to 76.6% in 2002 principally as the result of impact of the favorable exchange rates of the euro to the U.S. dollar on cost of sales, as a significant amount of inventory in Europe is purchased in U.S. dollars.

      In the other markets, gross margin in 2003 decreased to 56.9% compared to 61.2% in 2002. Gross margin in Brazil increased to 58.4% in 2003 compared to 56.4% in 2002 due to positive trends in gross margin during the last three months of the year as a result of the Company’s restructuring activities in that market. However, the increase in gross margin in Brazil were offset by a significant decrease in Thailand’s gross margin in 2003 compared to 2002, as a result of the process of liquidating the assets in Thailand in 2003, as well as a decrease in Argentina’s gross margin, the impact of average weaker exchange rates on the cost of purchasing inventory adversely affected Argentina’s margin.

      Selling, General and Administrative Expenses. SG&A expenses in 2003 increased to $232.8 million from $232.3 million in 2002, an increase of $0.5 million, or 0.2%. SG&A expenses, as a percentage of net sales, decreased to 60.6% in 2003 from 60.7% in 2002.

      In Mexico, SG&A expenses decreased to $116.8 million in 2003, from $124.7 million in 2002, a decrease of $7.9 million, or 6.3% primarily due to average weaker exchange rates. As a percentage of net sales, SG&A expenses decreased to 48.3% in 2003 compared to 49.6% in 2002. A decrease in administrative and variable freight expenses, partially offset by an increase in sales promotional expenses reduced SG&A expenses in Mexico. Administrative expenses decreased primarily as a result of $3.4 million of lower bad debt expense in 2003 compared to 2002. Variable freight out expenses decreased in 2003 compared to 2002 because of reduced costs as a result of consolidation of orders in 2003. Sales promotional expenses increased in 2003 compared to 2002 as a result of additional attendees, in part due to better collections, qualifying for and attending the annual consultant convention and the annual leadership seminar.

      In the United States, SG&A expenses increased to $62.1 million in 2003 from $58.9 million in 2002, an increase of $3.2 million, or 5.4% as a result of increased net sales. As a percentage of net sales, SG&A expenses increased nominally to 60.8% in 2003 compared to 60.5% in 2002.

      In Europe, SG&A expenses increased to $23.9 million in 2003 from $19.4 million in 2002, an increase of $4.5 million, or 23.2%. As a percentage of net sales, SG&A expenses increased to 72.6% in 2003 from 72.1% in 2002, primarily as a result of increased sales promotional expenses and override expenses in 2003. Sales promotional expenses in Europe increased as a result of increased promotional activity in an effort to stimulate

consultant base growth. Override expenses increased as a result of better collections in Italy, Holland, Austria and Switzerland, as overrides are based on collected receivables.

      SG&A expenses in South America and Thailand decreased to $8.9 million in 2003, compared to $10.0 million in 2002, a $1.1 million decrease, or 11.1%. As a percentage of net sales, SG&A expenses increased by 63.0 percentage points in Thailand as a result of the process of liquidating of assets in that market, and decreased by 28.2 percentage points in Brazil as a result of restructuring activities.

      SG&A expenses in Corporate, Unallocated and Other increased to $21.1 million in 2003 compared to $19.3 million in 2002.

      Transaction Related Expenses. During 2003, the Company incurred $16.8 million of costs in connection with the May 2003 Recapitalization of the Company and other transactions that were contemplated, but were subsequently terminated. The most significant portion of this increase was $13.2 million of compensation expense attributable to bonuses paid to certain members of management and non-employee board of director members as a result of the May 2003 recapitalization. In 2002, the Company incurred approximately $1.5 million of costs related to certain transactions contemplated but not completed.

      Exchange Loss. The Company’s net foreign exchange loss in 2003 was $11.0 million compared to $10.6 million in 2002, an increase in exchange losses of $0.4 million, or 3.8%.

      During 2003, the Company recognized $0.8 million of exchange gains related to option contracts. As of December 31, 2002, the Company had deferred losses of $0.3 million as a component of other comprehensive loss. During 2003, the Company deferred an additional $0.4 million of gains on option contracts as a component of other comprehensive loss. During the year ended December 31, 2003, the Company reclassified $0.5 million of exchange gains on option contracts from other comprehensive loss into exchange loss on the consolidated statement of operations. Additionally, during the year ended December 31, 2003, the Company reclassified $0.7 million of losses on forward contracts and a nominal amount of exchange gains on option contracts from other comprehensive loss into cost of sales in the consolidated statements of operations.

      During 2002, the Company recognized $2.6 million of exchange losses related to forward contracts and $0.9 million of exchange gains related to option contracts (including the reclassification of other comprehensive loss into exchange loss). As of December 31, 2001, the Company had deferred losses of $3.7 million as a component of other comprehensive loss. During 2002, the Company deferred an additional $1.8 million of losses on forward exchange contracts and $1.3 million of exchange gains on option contracts as a component of other comprehensive loss. During the year ended December 31, 2002, the Company reclassified $1.6 million of losses on forward contracts and $0.5 million of exchange gains on option contracts from other comprehensive loss into exchange loss on the consolidated statement of income. Additionally, during the year ended December 31, 2002, the Company reclassified $3.1 million of losses on forward contracts and $0.4 million of exchange gains on option contracts from other comprehensive loss into cost of sales in the consolidated statements of operations.

      During 2003, the Mexican peso devalued approximately 8%. As a result of the devaluation, the Company recognized approximately $12.3 million of losses on the remeasurement of the U.S. dollar-denominated debt. Additionally, the Company recognized $0.5 million of gains in 2003 on other foreign currency transactions, including intercompany transactions.

      During 2002, the Mexican peso devalued 13.5%, which resulted in a $5.2 million loss on the remeasurement of U.S. dollar-denominated debt. The Company recognized $4.3 million of other exchange losses on other foreign currency transactions, most of which was unrealized, primarily due to the weakening of the South American currencies.

      Interest Expense, Net of Interest Income. Interest expense increased to $20.9 million in 2003 compared to $11.4 million in 2002, an increase of $9.5 million, or 83.3%. The increase in interest expense was primarily the result of the May 2003 recapitalization of the Company, which resulted in a higher average debt balance during 2003 compared to 2002. The average debt balance during 2003 was $194.7 million compared to $90.8 million during 2002.

      Loss on Extinguishment of Debt. On May 23, 2003, the Company repurchased its outstanding 11³/4% Subordinated Notes due April 30, 2008 in the aggregate principal amount of $75.2 million at a premium of approximately $4.4 million. Additionally, the Company repaid $7.4 million under its then existing credit agreement. In connection with the redemption of these notes and the termination of this credit agreement, the Company wrote off approximately $2.2 million of capitalized deferred financing fees. The total expense related to the extinguishment of the previous debt was $6.6 million.

      Other Income (Expense), Net. Other income (expense) was an expense of $0.4 million in 2003, compared to income of $0.1 million in 2002, a change of $0.5 million. Other income (expense) in 2003 related primarily to certain entity formation expenses.

      Income Tax Expense. Income tax expense decreased to $8.3 million in 2003 from $16.2 million in 2002, a decrease of $7.9 million, or 48.8%. The Company’s effective income tax rate from continuing operations increased to 145.6% in 2003, compared to 44.1% in 2002. The effective tax rate in 2003 was primarily the result of valuation allowances against net operating losses on the Company’s Mexican subsidiaries and valuation allowances against certain operating losses generated by the Company’s Brazilian entity. In 2002, the Company released $2.3 million of valuation allowances against certain deferred tax assets in the United States and had a $1.2 million favorable change on net deferred tax liabilities in Mexico due to the impact of the enactment of changes in Mexico’s future corporate statutory rates. These were partially offset by valuation allowances against certain pretax expenses in the United States.

      Loss on Discontinued Operations. Loss on discontinued operations was $5.4 million in 2003, compared to $1.5 million in 2002, an increase in loss of $3.9 million, or 93.3%. The additional losses in 2003 were primarily due to the write-off of certain assets in connection with the Company’s exit from Venezuela, Colombia, Chile and Peru and the reclassification of $2.5 million accumulated other comprehensive loss to loss on discontinued operations.

      Net (Loss) Income. Net loss was $8.0 million in 2003 compared to net income of $18.8 million in 2002, an unfavorable change of $26.8 million. The decrease in net income was due to a $0.5 million increase in SG&A expenses, $15.3 million of incremental transaction related expenses, a $0.4 million increase in exchange loss, a $9.5 million increase in interest expense, $6.6 million of loss on extinguishment of debt in 2003, a $0.5 million unfavorable change in other income (expense), and a $3.9 million increase in loss on discontinued operations in 2003, partially offset by a $1.8 million increase in gross margin, a $7.9 million decrease in income tax expense and the absence in 2003 of the $0.2 million of expense related to the cumulative effect of accounting change.

New Accounting Pronouncements

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

      In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, An Amendment of ARB No. 43, Chapter 4.” This Statement clarifies that abnormal amounts of idle facility expense, freight, handling cost and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of SFAS No. 151 is not expected to have a material impact on the operations of the Company.

      In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”. SFAS No. 123 (R) requires that companies recognized compensation expense equal to the fair value of stock options or other share based payments. The standard is effective for the Company beginning in the 2005 third quarter. The adoption of SFAS No. 123 (R) will not impact the Company at this time as all options were cancelled (See Note 16 to the consolidated financials statements.)

Critical Accounting Policies and Estimates

      Management’s Discussion and Analysis of Financial Condition and Results of Operations are based on the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. These principles require the appropriate application of certain accounting policies, many of which require management to make estimates and assumptions about future events and their impact on amounts reported in the Company’s consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results may differ from management’s estimates. Such differences could be material to the consolidated financial statements.

      These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, the application of accounting policies has been appropriate, and actual results have not differed materially from those determined using necessary estimates.

      The Company’s accounting policies are more fully described in Note 2 to the audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”. Certain critical accounting policies are described below.

      Accounts Receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of consultants to make payments. An allowance is calculated based on historical experience and the age of the outstanding receivables. If the financial condition of consultants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

      Inventory Obsolescence. The Company writes down its inventory to provide for estimated obsolete or unsalable inventory based on assumptions about future demand for its products. If future demand is less favorable than management’s assumptions, additional inventory write-downs may be required. Likewise, favorable future demand and market conditions could positively impact future operating results if inventory that has been written-down is sold.

      Foreign Currency Contracts. The Company enters into foreign currency contracts to reduce the effect of adverse exchange rate fluctuations in the exchange rate of the Mexican peso to the U.S. dollar. The Company places foreign currency contracts based on its forecasted U.S. dollar cash outflows from its Mexican subsidiaries over a rolling period and does not hedge transactions that are not included in the forecast on the date the forward or option contract is initiated. As a matter of policy, the Company does not hold or issue contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features or involving leveraged derivatives. If the Mexican peso were to significantly strengthen during the year compared to the U.S. dollar, the Company may incur additional losses on option contracts open as of the balance sheet date. See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”.

      Contingencies. The Company accounts for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies”. SFAS No. 5 requires that the Company record an estimated loss from a loss contingency when information available prior to issuance of the Company’s financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and income tax matters requires management to use judgment. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the

likelihood of changes to the estimate of the ultimate outcome increases. Management believes that the accruals for these matters are adequate.

      Income Taxes. Deferred income tax assets have been established for net operating loss carryforwards of certain foreign subsidiaries and foreign tax credits originating in the United States, which are reduced by a valuation allowance. The net operating loss carryforwards expire in varying amounts over a future period of time. Realization of the income tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying value of the income tax carryforwards will be realized. The amount of the income tax carryforwards that is considered realizable, however, could change if estimates of future taxable income during the carryforward period are adjusted.

      Impairment of Long-Lived Assets and Intangibles. Long-lived assets are reviewed for impairment, based on undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, the Company will recognize an impairment loss, measured by the future discounted cash flow method. Indefinite lived intangibles are evaluated for impairment based on SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that indefinite lived intangibles not be amortized, but be tested for impairment annually.

Liquidity and Capital Resources

Overview

      The Company has historically funded expenditures for operations, administrative expenses, capital expenditures and debt service obligations with internally generated funds from operations, with working capital needs being satisfied from time to time with borrowings. The Company believes that it will be able to meet its debt service obligations and fund its operating requirements in the future with cash flow from operations and borrowings under the senior credit facilities, although no assurance can be given in this regard. The Company continues to focus on working capital management, including the collection of accounts receivable, decreasing inventory levels and management of accounts payable.

      As of December 31, 2004, the Company had outstanding $240.3 million of debt, consisting of $199.5 million of 10³/4% Notes, $20.8 million under the Restated Credit Agreement and $20.0 million due to Vorwerk.

      The following schedule details the payment schedule for debt and lease obligations as of December 31, 2004:

Schedule of Debt and Operating Lease Obligations

Payments Due by Period

As of December 31, 2004

Liquidity

      On May 20, 2003, the Issuers issued $200 million aggregate principal amount of 10³/4% Subordinated Notes (the 10³/4% Notes) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”) and

entered into a senior credit agreement (the “Senior Credit Agreement”). The 10³/4% Notes represent the several obligations of JCI and Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10³/4% Notes mature in 2011 and bear a fixed interest rate of 10³/4% payable semi-annually.

      JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the obligations under the 10³/4% Notes on a senior subordinated basis on the terms provided in the Indenture governing the 10³/4% Notes. Each Issuer has fully and unconditionally guaranteed the obligations of the other under the 10³/4% Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. Each existing and subsequently acquired or organized U.S. subsidiary of JCI is required to fully and unconditionally guarantee the U.S. portion of 10³/4% Notes jointly and severally, on a senior subordinated basis. Each acquired or organized Mexican subsidiary of Jafra Distribution is also required to fully and unconditionally guarantee the Mexican portion of the 10³/4% Notes jointly and severally, on a senior subordinated basis. Jafra Cosmetics S.A. has also fully and unconditionally guaranteed the obligations of Jafra Distribution under the 10³/4% Notes. Each existing and subsequently acquired or organized subsidiary of Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee the Mexican portion of the 10³/4% Notes jointly and severally, on a senior subordinated basis.

      The 10³/4% Notes are unsecured and are generally not redeemable for four years from their issue date. Thereafter, the 10³/4% Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. In connection with the Acquisition, holders of $0.5 million principal amount of the 10³/4% Notes redeemed such notes and as a result, $199.5 million principal amount of the 10³/4% Notes was outstanding at December 31, 2004. Subsequently, on February 17, 2005, the Company redeemed approximately $69.5 million of the outstanding 10³/4% Notes at a premium of $7.4 million. In connection with the redemption of the 10³/4% Notes, the Company wrote off $2.4 million of previously capitalized deferred financing fees. As a result, the Company expects to report $9.8 million as loss on extinguishment of debt in 2005. The redemption of the outstanding 10³/4% Notes was funded through a series of equity offerings which resulted in Jafra S.A. subscribing to 316,270 new shares of the Company.

      Following the closing of the Acquisition, the Company and the Issuers entered into the Restated Credit Agreement which provides for a revolving credit facility of up to an aggregate of $60 million, which can be increased by the Company to $90 million under certain circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Agreement. On August 16, 2004, the Company borrowed $43.5 million of the loans. Borrowings under the Restated Credit Agreement bear interest at an annual rate of Libor plus 2.50%. As of December 31, 2004, the applicable interest rate was 4.5%, subject to periodic adjustment based on certain levels of financial performance. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

      The Company also entered into a Loan Contract (the “Loan Contract”) in August 2004 to borrow up to $20.0 million from Vorwerk at an annual interest rate of Libor plus 2.625%. The Loan Contract was allocated 100% to JCI and will expire in January 2005. On August 12, 2004, the Company borrowed the full amount under the Loan Contract and as of December 31, 2004, the full amount was outstanding. Such amount was repaid in January 2005.

      With the borrowings from the Restated Credit Agreement and the Loan Contract, the Company paid in full all existing amounts under the Senior Credit Agreement.

      Both the Indenture and the Restated Credit Agreement contain certain covenants that limit the Company’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Company to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Company and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of December 31, 2004, the Company and its subsidiaries were in compliance with all covenants.

      The Restated Credit Agreement contains provisions whereby (i) the default by the Company, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in any payment under debt obligations in an aggregate principal amount of $5.0 million or more beyond any applicable grace period, or (ii) any default by the Company, or any default by JCI, Jafra Distribution or any of their respective subsidiaries, in the observance or performance of any other agreement or condition under such other debt obligations that allows the holder(s) of such debt obligations to accelerate the maturity of such obligations after the expiration of any grace period or the provision of notice, and such grace period has expired or notice has been given, will allow the lenders under the Restated Credit Agreement to terminate their commitments to lend thereunder and/or declare any amounts outstanding thereunder to be immediately due and payable. The Indenture contains similar provisions that apply upon the failure by the Company, or the failure by JCI, Jafra Distribution or any of their significant subsidiaries (as defined in the Indenture), to pay any indebtedness for borrowed money when due, or on the acceleration of any other debt obligations exceeding $10.0 million. The Indenture also contains provisions that, under certain circumstances, permit the holders of certain senior indebtedness (including the loans made under the Restated Credit Agreement) to block payments on the 10³/4% Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

      The terms of the Indenture significantly restrict the Company and its other subsidiaries from paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Company to make such restricted payments or transfers is generally limited to an amount determined by a formula based on 50% of its consolidated net income (which, as defined in the Indenture, excludes goodwill impairment charges and any after-tax extraordinary, unusual or nonrecurring gains and losses) accruing from October 1, 2002, plus specified other amounts. In addition, as a condition to making such payments to Jafra S.A. based on such formula, the Company must have a consolidated coverage ratio (as defined in the Indenture) of at least 2.25 to 1 after giving effect to any such payments. Notwithstanding such restrictions, the Indenture permits an (i) aggregate of $5.0 million of such payments and (ii) payments for certain specific uses, such as the payment of consolidated taxes or holding company expenses, to be made whether or not there is availability under the formula or the conditions to its use are met. The terms of the Restated Credit Agreement contain similar restrictions. The Restated Credit Agreement generally limits dividends by the Company to dividends necessary to fund specified costs and expenses, but permits the Company to pay dividends of up to 50% of consolidated net income (as defined in the Restated Credit Agreement), accruing from July 1, 2004, plus up to $5.0 million so long as the consolidated leverage ratio (as defined in the Restated Credit Agreement) does not exceed 3 to 1 after giving effect to such payment and the sum of unused borrowing availability under the Restated Credit Agreement plus cash is not less than $5 million.

      The Company believes that its existing cash, cash flow from operations and availability under the Restated Credit Agreement will provide sufficient liquidity to meet the Company’s cash requirements and working capital needs over the next year. In certain foreign markets, the Company has experienced reduced consultant liquidity in certain foreign subsidiaries. Reduced consultant liquidity could result in future reduced cash flows from operations, which may require the Company to use available funds under the Restated Credit Agreement.

Cash Flows

      Net cash provided by operating activities was $7.6 million in 2004, consisting of $27.2 million provided by net income adjusted for depreciation and other non-cash items included in net income, less $19.6 million used in changes in operating assets and liabilities. Net income for 2004 included $29.8 million of transaction related fees ($4.9 of which were a non-cash expense) and $5.0 million of restructuring charges. The significant elements of net cash used by operating activities were a $12.3 million increase in receivables, a $3.6 million increase in accounts payable and a $3.1 million increase in income taxes payable. Net cash provided by operating activities was $13.0 million in 2003, consisting of $21.3 million provided by net loss adjusted for depreciation and other non-cash items included in net (loss) income, less $8.3 million used in changes in operating assets and liabilities. Net (loss) income in 2003 included $6.6 million related to the extinguishment of debt, of which $4.4 million was cash paid on premiums, and $16.8 million of costs related to the May 2003

recapitalization of the Company. The significant elements of the net cash used in operating assets and liabilities were an $11.0 million increase in receivables, an $8.1 million increase in inventories, offset by a $9.5 million increase in accounts payable and accrued liabilities.

      Net cash used in investing activities was $6.0 million in 2004 compared to $11.5 million in 2003. In 2004 and 2003, investing activities primarily consisted of capital expenditures.

      Net cash used in financing activities was $8.7 million in 2004 compared to $10.6 million in 2003. During 2004, the Company entered into the Restated Credit Agreement and paid in full all amounts outstanding under the Senior Credit Agreement. Also, during 2004, the Company entered into a loan agreement with Vorwerk and borrowing $20.0 million under the Loan Agreement. During 2004, the Company repurchased $0.5 million of the outstanding 10³/4% Notes. During 2003, the Company completed a recapitalization of its operations by entering into new senior credit facilities and issuing $200 million of 10³/4% Notes. The proceeds were used to redeem the 11³/4% Senior Subordinated Notes due 2008 at a face value of $75.2 million and to repay $8.4 million outstanding under the existing credit facilities. Thereafter, an initial liquidating distribution of $83.6 million from additional paid-in capital and $75.4 million from retained earnings was made to stockholders of CDRJ. In addition, the Company deferred $14.7 million of costs associated with the issuance of the debt. The Company has made $2.5 million of scheduled payments under its new term loan during 2003.

      The effect of exchange rate changes on cash was a gain of $1.5 million in 2004 compared to a $1.6 million loss in 2003 related to fluctuations in the exchange rate of the Mexican peso, South American currencies and European currencies.

Foreign Operations

      As a group doing more than 77% of its business in international markets in 2004, the Company is subject to foreign taxes and intercompany pricing laws, including those relating to the flow of funds between its subsidiaries pursuant to, for example, purchase agreements, licensing agreements or other arrangements. Regulators in the United States, Mexico and in other foreign markets may closely monitor the Company’s corporate structure and how it effects intercompany fund transfers.

      Net sales outside of the United States aggregated 77%, 74% and 76% of the Company’s total net sales for the fiscal years 2004, 2003 and 2002, respectively. In addition, as of December 31, 2004, international subsidiaries comprised approximately 69% of the Company’s consolidated total assets. Accordingly, the Company has experienced and continues to be exposed to foreign exchange risk. The Company has implemented a hedging program to protect against potential devaluation of the Mexican peso. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

      The Company’s subsidiaries in Mexico generated approximately 67% of the Company’s net sales for 2004 compared to 63% for 2003, substantially all of which was denominated in Mexican pesos. During 2004, the peso was relatively stable, but during 2003 and 2002, the peso weakened against the U.S. dollar.

      Mexico has experienced periods of high inflation in the past and has been considered a hyperinflationary economy. Because the functional currency in Mexico is the Mexican peso, gains and losses of remeasuring debt to the U.S. dollar from the peso are included as a component of net income (loss). Jafra Mexico had $128.5 million of U.S. dollar-denominated third-party debt as of December 31, 2004.

      The Company is also exposed to foreign exchange risks due to its operations in South America. The Company’s largest South American operation was Brazil. The Company also operates in Argentina and the Dominican Republic.

      During the year ended December 31, 2003, the Company discontinued its operations in Venezuela, Colombia, Chile and Peru. The Company has terminated sales and has liquidated a majority of its assets in those jurisdictions.

Off-Balance Sheet Arrangements

      The Company has no off-balance sheet arrangements.

Inflation

      The Company’s business is exposed to risks arising from Mexico’s history of high levels of inflation, and may continue to be exposed to such risks in the future. The Company adjusts the wholesale pricing of its products in local currency to mitigate these risks. See “Risk Factors — Mexico may experience high levels of inflation in the future which could adversely affect the Company’s profit margins.”

Information Concerning Forward-Looking Statements

      This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements are based upon management’s current expectations and beliefs concerning future developments and their potential effects upon the Company. If the risks or uncertainties materialize or the assumptions prove incorrect, the results of the Company may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any statements relating to future results of operations, plans, outlook or strategies; any projections of earnings, revenue, expenses, or other financial items; any statements concerning developments, performance or market share relating to products; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include macroeconomic and geopolitical trends and events and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report, and that are otherwise described from time to time in the Company’s Securities and Exchange Commission reports filed after this report. The Company assumes no obligation and does not intend to update these forward-looking statements.

Risk Factors

      The following important factors, and those important factors described elsewhere in this report 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. The risks described below are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may also materially and adversely affect the Company’s business operations. Any of the following risks could materially and adversely affect the Company’s business, financial condition or results of operations.

      The Company distributes almost all of its products through independent consultants and depends on them directly for nearly all of its net sales. The consultants may terminate their services at any time, and, like most direct selling companies, the Company experiences high turnover among consultants from year to year. The Company’s turnover rate for consultants is over 125% from year to year. As a result, the Company needs to continue to retain existing and recruit additional independent consultants. To increase its net sales, the Company must increase the number and/or the productivity of its consultants. The Company’s operations would be harmed if it failed to generate continued interest and enthusiasm among consultants and failed to attract new consultants.

      Although in the recent past the Company experienced an increase in active consultants in certain territories, it could experience declines in active consultants, including senior consultants at the manager and

district director levels. The Company cannot accurately predict how the number and productivity of consultants may fluctuate because it relies upon existing consultants to recruit, train and motivate new consultants. The Company’s operating results could be harmed if its existing and new business opportunities and products do not generate sufficient interest to retain existing consultants and attract new consultants. The number and productivity of the Company’s consultants also depends on several additional factors, including:

      In addition, the Company may face saturation or maturity levels in a given country or market. The maturity of several of the Company’s markets could also affect its ability to attract and retain consultants in those markets.

      Approximately 67% of the Company’s net sales for the year ended December 31, 2004 were generated in Mexico. Various factors could harm the Company’s business in Mexico. These factors include, among others:

      The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general and on the Company in particular, as well as on market conditions. The national elections held on July 2, 2000 ended 71 years of rule by the Institutional Revolutionary Party (or “PRI”) with the election of President Vicente Fox Quesada, a member of the National Action Party (or “PAN”) and resulted in the increased representation of opposition parties in the Mexican Congress and in mayoral and gubernatorial positions. Multiparty rule is still relatively new in Mexico and could result in economic or political conditions that could materially and adversely affect the Company’s operations. The next national elections will be held in 2006, and campaigning activities have begun as of the date of this filing. The Company cannot predict the impact that this new political landscape will have on the Mexican economy. Furthermore, the Company’s financial condition, results of operations and prospects may be affected by currency fluctuations, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico.

      The Mexican economy in the past has suffered balance of payment deficits and shortages in foreign exchange reserves. There are currently no exchange controls in Mexico. However, Mexico has imposed foreign exchange controls in the past. Pursuant to the provisions of the North American Free Trade Agreement, if Mexico experiences serious balance of payment difficulties or the threat thereof in the future, Mexico would

have the right to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors. Any restrictive exchange control policy could adversely affect the Company’s ability to obtain U.S. dollars or to convert pesos into U.S. dollars for purposes of paying dollar-denominated expenses, such as interest on its indebtedness, to the extent that it may have to effect those conversions.

      Approximately 77% of the Company’s net sales in the year ended December 31, 2004 were generated outside the United States. The Company’s ability to conduct business outside the United States and its revenues derived from foreign markets are subject to the risks inherent in international operations. The Company’s international operations may be adversely affected by import duties or other legal restrictions on imports, currency exchange control regulations, transfer pricing regulations, the possibility of hyperinflationary conditions and potentially adverse tax consequences, among other things. In addition, the governments of many developing nations have exercised and continue to exercise significant influence over many aspects of their domestic economies. There can be no assurance that the governments of nations in which the Company operate or may expand will not take actions that materially adversely affect the Company’s ability to conduct business in these markets.

      During 2004, the Company recognized approximately 77% of its net sales in non-U.S. markets in each market’s respective local currency, including approximately 67% in Mexican pesos. In preparing its financial statements, the Company translates net sales and expenses in foreign countries from their local currencies into U.S. dollars using weighted average exchange rates. If the U.S. dollar strengthens relative to local currencies, primarily the Mexican peso, the Company’s reported net sales, gross profits and net income will likely be reduced.

      The Company’s historical exchange gains and losses primarily result from its operations in Mexico, Europe and South America. The value of the Mexican peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. Historically, the Company’s Mexican subsidiaries have been able to raise their prices generally in line with local inflation, thereby helping to mitigate the effects of devaluations of the Mexican peso. However, there can be no assurance that the Company’s Mexican operating companies will be able to maintain this pricing policy in the future, or that future exchange rate fluctuations will not have a material adverse effect on the Company’s ability to pay when due the principal and interest on its indebtedness, which is primarily denominated in U.S. dollars.

      Because the Company cannot predict the degree of future exchange rate fluctuations, it cannot estimate the effect these fluctuations may have upon future reported results, product pricing or its overall financial condition. Although the Company attempts to reduce its exposure to short-term exchange rate fluctuations by using foreign currency puts and calls, it cannot be certain these instruments or any other hedging activity will effectively reduce exchange rate exposure. In particular, the Company currently employs a hedging strategy comprised of zero-cost collars that are designed to protect it against sudden and extreme devaluations in the Mexican peso. The Company’s current hedging policy may not fully protect it against more gradual changes in exchange rates. There can be no assurance that instruments protecting the Company to the same or a similar extent will be available in the future on reasonable terms, if at all. Unprotected declines in the value of the Mexican peso against the U.S. dollar will adversely affect the Company’s ability to pay its dollar-denominated expenses, including its obligations under its outstanding indebtedness, and will reduce its reported net sales.

      Mexico has a history of high levels of inflation, and may experience inflation in the future. During most of the 1980s and during the mid-and late-1990s, Mexico experienced periods of high levels of inflation. The annual rates of inflation for the last five years as measured by changes in the National Consumer Price Index, as provided by Banco de Mexico, were:

      A substantial increase in the Mexican inflation rate would have the effect of increasing some of the Company’s costs, which could adversely affect its results of operations and financial condition, as well as the value of its securities. High levels of inflation may also affect the balance of trade between Mexico and the United States, and other countries, which could adversely affect the Company’s results of operations.

      The Company’s shift in strategic focus involving the recent exit of the direct selling market of Brazil and the exit in 2003 from Venezuela, Chile, Colombia, Peru and Thailand and the planned exit of Argentina in 2005 may prove to be unsuccessful for a number of reasons:

      If the Company fails to develop, introduce, and offer new products planned for the future, its consultant productivity and net sales could be harmed. Factors that could affect the Company’s ability to continue to develop and introduce new products include, among others, government regulations, proprietary protections of competitors that may affect its ability to offer comparable products (including patent law protections, trademark laws, and common law protections of trade secrets and proprietary know-how that could prevent the Company or delay it from developing innovative products similar to its competitors’), and any failure to anticipate changes in consumer tastes and buying preferences.

      A critical component of the Company’s business is its ability to develop new products that create enthusiasm among its consultant force and appeal to consumers. If the Company fails to introduce and effectively market new products generating such enthusiasm and appeal, consultant productivity could be harmed. Factors that could cause any new products to fail to gain market acceptance among the Company’s consultants and its customers include quality problems with the products themselves, failure to identify consumer tastes and buying preferences, failure to develop marketing strategies, packaging, and product brochures and other information materials to generate sufficient enthusiasm and demand, and pricing new products above the level that consumers are willing to pay.

      The Company’s independent consultants earn income by purchasing products from the Company at wholesale prices and selling to their customers at suggested retail prices. Consultants’ ability to collect payments from their customers can be affected by the overall economic condition of the countries in which they operate. If the Company’s independent consultants experience difficulties in collecting payments from their customers, the consultants might be unable to make payments to the Company for the purchase of Jafra products, which could have an adverse impact on the Company’s revenues and could increase its bad debt expense.

      At December 31, 2004, the Company had approximately 16,000 managers, 2,000 district managers and 1,000 district directors. These district directors, together with their extensive networks of downline consultants, account for substantially all of the Company’s net sales. As a result, the loss of a high-level consultant or a group of leading consultants in the consultant’s network of downline consultants, whether by their own choice or through disciplinary actions by the Company for violations of its policies and procedures, could negatively impact the Company’s consultant growth and net sales.

The regulatory environment in which the Company operates is evolving, and its ability to sell products through its consultant network may be harmed by regulatory changes, subjective interpretations of laws or an inability to work effectively with national and local government agencies.

      Although the Company reviews applicable local laws in developing its plans, its efforts to comply with them may be harmed by an evolving regulatory climate and subjective interpretation of laws by the authorities. Any determination that the Company’s operations or activities are not in compliance with applicable regulations could negatively impact its business and reputation with regulators in the markets in which it operates.

Government regulation of the Company’s products and services may restrict or inhibit introduction of these products in some markets and could harm its ability to generate sales.

      The Company’s products and its related marketing and advertising efforts are subject to extensive government regulation by numerous domestic and foreign governmental agencies and authorities. These include, in the United States, the Federal Trade Commission, the Consumer Product Safety Commission, the Food and Drug Administration, the State Attorneys General and other federal and state regulatory agencies, and, in Mexico, the Ministry of Health along with similar government agencies in other foreign markets where

the Company may operate. The Company’s markets have varied regulations concerning product formulation, labeling, packaging and importation. These laws and regulations often require it to, among other things:

      Failure to introduce products or delays in introducing products could reduce the Company’s net sales and decrease its profitability. Regulators may also prohibit the Company from making therapeutic claims about products despite research and independent studies supporting these claims. These product claim restrictions could prevent the Company from realizing the potential revenue from some of its products.

Laws and regulations may prohibit or severely restrict the Company’s direct sales efforts and cause its net sales and profitability to decline.

      Various government agencies throughout the world, including in the United States and Mexico, regulate direct sales practices. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that compensate participants for recruiting additional participants irrespective of product sales and/or do not involve legitimate products. The laws and regulations in the Company’s current markets often:

      Complying with these sometimes inconsistent rules and regulations can be difficult and requires the devotion of significant resources on the Company’s part. If the Company is unable to continue business in existing markets or commence operations in new markets because of these or similar laws or regulations, its net sales and profitability will decline.

      In addition, countries where the Company operates could change their laws or regulations to negatively affect or prohibit completely network or direct sales efforts. Government agencies and courts in these countries may also use their powers and discretion in interpreting and applying laws in a manner that limits the Company’s ability to operate or otherwise harms its business. If any governmental authority were to bring a regulatory enforcement action against the Company that interrupts its business, its net sales and earnings would likely suffer.

Challenges by private parties to the form of the Company’s direct marketing system could harm its ability to sell products through its consultant network.

      The Company may be subject to challenges by private parties, including its consultants, to the form of its direct marketing system or elements of its business. In the United States, the direct marketing industry and regulatory authorities have generally relied on the implementation of rules and policies designed to protect consumers, to prevent inappropriate activities and to distinguish between legitimate direct marketing distribution plans and unlawful pyramid schemes. The Company has adopted rules and policies based on case law, rulings of the FTC, pronouncements of regulatory authorities in several states and domestic and global industry standards. Legal and regulatory requirements concerning direct marketing systems, however, involve a high level of subjectivity, are inherently fact-based and are subject to judicial and administrative interpretation. Because of the foregoing, the Company can provide no assurance that it would not be harmed by the application or interpretation of statutes or regulations governing direct marketing, particularly in any civil challenge by a current or former consultant.

The Company’s consultants are independent contractors and not employees. If regulatory authorities were to determine, however, on a facts and circumstances basis, that the consultants are legally the Company’s employees, the Company could have significant liability under social benefit laws.

      The Company’s consultants are self-employed and are not its employees. The possibility exists that a governmental authority or judicial proceeding could question the legal status of the Company’s consultants, in regard to possible coverage under social benefit laws. If such a governmental authority or court reached a decision contrary to the Company’s view and interpretation of the current laws and regulations or if the law or regulations were expressly changed, such a result could require the Company, and in some instances its consultants, to make regular contributions to social benefit funds. To the Company’s knowledge this issue may not have been fully resolved at the national industry level in Mexico, the United States and some European countries. If there should be a final determination adverse to the Company, the cost for future, and possibly past, contributions could be substantial and could materially adversely affect the Company’s business and financial condition.

Improper consultant actions could harm the Company’s reputation or increase its costs.

      Consultant activities in the Company’s existing markets that violate governmental laws or regulations or that are otherwise improper could result in governmental actions against the Company in markets where it operates. Given the size of the Company’s consultant force, it experiences problems with consultants from time to time. In particular, some of its consultants may make unauthorized claims about either the Company’s products or the earnings potential related to becoming a Jafra consultant. These claims could harm the Company’s reputation or otherwise adversely impact it, including by requiring it to pay fines or penalties, if regulatory authorities were to determine that the Company should have prevented or is otherwise responsible for such behavior.

The Company relies on one manufacturing facility to provide products accounting for substantially all of its net sales.

      The Company manufactures products accounting for approximately 90% of its net sales at its manufacturing facility in Mexico City. Workers at this facility are unionized pursuant to a collective bargaining agreement. The Company has in the past experienced union-related work stoppages in Mexico. If manufacturing operations were to be interrupted for a material period of time because of an employment dispute, strike or any other labor-related cause, it could have a material adverse effect on the Company’s ability to fulfill orders, which would have an adverse effect on net sales as well as on the Company’s consultants’ and their customers’ impressions of the Company’s customer service standards. Additionally, if manufacturing operations at this facility were interrupted due to equipment failures, natural disasters, power failures, lack of suitable water supply or any other reason, the Company could experience similar adverse effects.

Failure of the Company’s Internet and other technology initiatives to create sustained consultant enthusiasm and incremental cost savings could negatively impact its business.

      The Company has been developing and implementing a strategy to use the Internet to sign-up consultants and take orders from consultants for its products. There can be no assurance, however, that any cost savings from the Internet strategy in Mexico and the United States will prove to be significant or that the Company will be successful in adapting and implementing its strategy to other markets in which it operates. This could result in an inability to service consultants in the manner they expect, which could adversely impact the Company’s profitability and growth.

If the Company is unable to protect its intellectual property rights, its ability to compete could be negatively impacted.

      The market for the Company’s products depends to a significant extent upon the goodwill associated with its trademark and trade names. The Company owns the trademark rights to its most important trademark, Jafra, in every country where it conducts business. Most, but not all, of the Company’s other material

trademarks are registered in the United States and in many foreign countries, but the Company may not be successful in asserting trademark or protection for every trademark in each country where it conducts business. One of the Company’s most significant lines of products, Royal Jelly, is not protected by any registered trademark because it is a generic term. In addition, though the Company’s unregistered United States trademarks may receive use-based protection under United States law, foreign law may not provide the same protection in other countries. Many of the Company’s unregistered trademarks, both in the United States and in other countries, have been used for several years without challenge. There can be no assurance that these trademarks will not be challenged in the future. The costs required to protect the Company’s trademarks and trade names may be substantial.

      Other parties may infringe on the Company’s intellectual property rights or intellectual property rights which it is licensed to use, and may thereby dilute its brand in the marketplace. Any such infringement of the Company’s intellectual property rights would also likely result in a commitment of its time and resources to protect these rights through litigation or otherwise.

Governmental authorities may question the Company’s intercompany transfer pricing or other payment policies or change their laws in a manner that could increase its effective tax rate or otherwise harm its business.

      As a group doing more than 77% of its business in non-U.S. markets during 2004, the Company is subject to foreign tax and intercompany pricing laws, including those relating to the flow of funds among its companies pursuant to, for example, purchase agreements, licensing agreements, intercompany loans or other arrangements. Regulators (including tax authorities) in the United States, Mexico and in other foreign markets may closely monitor the Company’s corporate structure and how it effects intercompany fund transfers. If such regulators successfully challenge the Company’s structure or these mechanisms, the Company may be subject to additional taxes, interest and penalties, which could have a material adverse impact on its cash flow, net income and effective tax rate. Furthermore, proposed changes in United States tax laws may adversely affect the ability of JCI to deduct interest on its indebtedness. If such changes are enacted, the Company’s effective tax rate may increase.

The Company depends on its key personnel and the loss of the services provided by any of its executive officers or other key employees could harm its business and results of operations.

      The Company’s success depends to a significant degree upon the continued contributions of its senior management, many of whom would be difficult to replace. While the Company has employment agreements with Ronald B. Clark, Gonzalo Rubio, Eugenio Lopez, Gary Eshleman and Beatriz Gutai, these employees may voluntarily terminate their employment with the Company at any time. The Company may not be able to successfully retain existing personnel or identify, hire and integrate new personnel. The Company does not have key person insurance policies in place for these employees.

The Company’s markets are intensely competitive, and market conditions and the strengths of competitors may harm its ability to sell its products or recruit and retain consultants.

      The markets for the Company’s products are intensely competitive. The Company’s results of operations may be harmed by market conditions and competition in the future. Many of the Company’s competitors have much greater name recognition and financial resources than Jafra, which may give them a competitive advantage. For example, Jafra products compete directly with branded, premium retail products. The Company currently does not have significant patent or other proprietary protection, and competitors may introduce products with the same ingredients that the Company uses in its products. At least two of such competitors, Mary Kay and Avon, utilize direct sales marketing and have substantially larger numbers of salespersons, sales volume and resources.

      The Company also competes with other marketing companies for consultants. Some of these competitors have a longer operating history and greater visibility, name recognition and financial resources than Jafra. Some of the Company’s competitors have also adopted and could continue to adopt some of Jafra’s successful

business strategies, including its compensation strategy for its consultants. Consequently, to successfully compete in this market and attract and retain consultants, the Company must ensure that its business opportunities and compensation plans are financially rewarding. There can be no assurance that the Company will be able to successfully compete in this market for consultants.

Product liability claims or recalls could harm the Company’s net sales and profitability.

      The Company may be required to pay for losses or injuries purportedly caused by its products. To date, the Company has not been subject to any material product liability lawsuits. It could, however, become subject to such suits in the future. Claims could be based on allegations that, among other things, the Company’s products contain contaminants, include inadequate instructions regarding their use or inadequate warnings concerning side effects and interactions with other substances. In addition, any such claim, whether or not true, may result in negative publicity that may adversely affect the Company’s net sales. Also, if one of the Company’s products is found to be defective the Company may be required to recall it, which may result in substantial expense and adverse publicity and adversely affect its net sales. Although the Company maintains, and require its material suppliers and manufacturers to maintain, product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or potential product liability claims may be excluded under the terms of the policy, which could hurt the Company’s financial condition if it were required to pay fines, penalties or damages.

System failures could harm the Company’s ability to manufacture its products or fulfill its consultants’ orders.

      Because of the Company’s diverse geographic operations and its complex consultant compensation plan, the Company’s business is highly dependent on efficiently functioning information technology systems. These systems and operations are vulnerable to damage or interruption from fires, earthquakes, telecommunications failures and other events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in services and reduce the Company’s net sales and profits. The Company has licensed and implemented a highly customized JD Edwards commercial software system currently for use by its U.S. operations. As anticipated, the Company is in the process of addressing necessary system corrections. If the Company is unable to complete these or subsequently required corrections in a timely manner, its service levels, net sales and profits could be negatively impacted.

The Company’s net sales depend on consumer confidence and spending, which may fluctuate from period to period for reasons beyond its control.

      The sale of cosmetics and other personal care products correlates strongly to the level of consumer spending generally, and thus is significantly affected by the general state of the economy and the ability and willingness of consumers to spend on discretionary items. Reduced consumer confidence and spending generally may result in reduced demand for the Company’s products and limitations on its ability to maintain or increase prices. A decline in economic conditions or general consumer spending in any of the Company’s major markets could have a material adverse effect on its net sales and ability to generate profits.

The Company’s substantial indebtedness could have a material adverse effect on its financial health, its ability to obtain financing in the future and its ability to react to changes in its business.

      The Company has a significant amount of debt, which could:

      Any of the foregoing impacts of the Company’s substantial indebtedness could have a material adverse effect on its business, financial condition and results of operations.

The Company may be able to incur substantial additional indebtedness.

      The Company may be able to incur substantial additional indebtedness in the future. Although the terms of the indenture governing the 10³/4% Notes include restrictions on the incurrence of additional indebtedness, the restrictions are subject to a number of significant qualifications and exceptions, including an exception for indebtedness incurred under the senior credit facilities. Under certain circumstances, the indebtedness incurred in compliance with these restrictions could be substantial. Such restrictions apply only to the Company and its subsidiaries and do not limit Jafra S.A.’s ability to incur debt. In addition, the restrictions contained in the indenture governing the 10³/4% Notes do not prevent the Company from incurring obligations not included within the definition of Indebtedness in that indenture. If new debt is added to the Company’s current debt levels, the related risks that it now faces would intensify.

The Company may not be able to generate sufficient cash to service all of its indebtedness, and may be forced to take other actions to satisfy its obligations under such indebtedness, which may not be successful.

      The Company’s ability to make scheduled payments on or to refinance its debt obligations depends on its financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond the Company’s control.

      There can be no assurance that the Company will maintain a level of cash flows from operating activities sufficient to permit it to pay the principal, premium, if any, and interest on its indebtedness.

      If the Company’s cash flows and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance indebtedness. These alternative measures may not be successful and may not permit the Company to meet its scheduled debt service obligations and, even if successful, may not be favorable to investors. In the absence of such operating results and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. The senior credit facilities and the indenture governing the 10³/4% Notes restrict the Company’s ability to dispose of assets and use the proceeds from the disposition. The Company may not be able to consummate those dispositions or to obtain the proceeds which could be realized from them and, even if consummated, such proceeds may not be adequate to meet any debt service obligations then due.

Restrictive covenants in the Company’s debt instruments may adversely affect its financial flexibility.

      The Company’s senior credit facilities and the indenture governing the 10³/4% Notes contain various covenants that limit its ability to engage in specified types of transactions. These covenants limit the Company’s ability to, among other things:

      In addition, the senior credit facilities contain covenants that require the company’s restricted subsidiaries to maintain specified financial ratios and satisfy other financial condition tests. The Company’s ability to meet those financial ratios and tests can be affected by events beyond its control, and there can be no assurance that it will meet those tests. A breach of any of these covenants could result in a default under the senior credit facilities. Upon the occurrence of an event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding thereunder senior credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If the Company were to be unable to repay those amounts, the lenders under the senior credit facilities could proceed against the collateral granted to them to secure that indebtedness. The Parent, JCI, Jafra Distribution and Jafra Cosmetics S.A. have pledged substantially all of their assets as collateral under the senior credit facilities. If the lenders under the senior credit facilities accelerate the repayment of borrowings, there can be no assurance that the Company will have sufficient assets to repay the senior credit facilities or the 10³/4% Notes, and, in such circumstances, the Company could be forced into liquidation or reorganization.

The instruments governing the Company’s debt contain cross default provisions that may cause all of the debt issued under such instruments to become immediately due and payable as a result of a default under an unrelated debt instrument.

      The indenture governing the 10³/4% Notes and the agreements governing the senior credit facilities contain numerous operating covenants and require the Company to meet certain financial ratios and tests. The Company’s failure to comply with the obligations contained in the indenture governing the 10³/4% Notes, the senior credit facilities or other instruments governing its indebtedness could result in an event of default under the applicable instrument, which could result in the related debt and the debt issued under other instruments becoming immediately due and payable. In such event, the Company would need to raise funds from alternative sources, which funds may not be available to it on favorable terms, on a timely basis or at all. Alternatively, such a default could require the Company to sell assets and otherwise curtail its operations in order to pay its creditors. Such alternative measures could have a material adverse effect on the Company’s ability to manufacture products for sale by its consultants or its ability to recruit and retain consultants.

One stockholder controls the direction of the Company’s business. The interests of the Company’s controlling stockholder may conflict with the interests of other investors.

      Vorwerk & Co. eins GmbH (“Vorwerk”) owns substantially all of the outstanding shares of the common stock of the Company’s ultimate parent company. The Company is a wholly-owned subsidiary of Jafra S.A. As a result, Vorwerk exercises control over the composition of the Company’s board of directors and other matters requiring stockholder approval, and control over the Company’s policy and affairs.

Because the Company is not a U.S. company, it may be difficult to effect service of process on it or on its non-U.S. residents directors and officers or to enforce any judgment received against it from a U.S. court.

      Jafra Worldwide Holdings S.àr.l. is a Luxembourg company. Certain of its officers and directors are residents of various jurisdictions outside the United States, including Mexico, where laws regarding service of process differ from the laws of the United States. A substantial portion of its assets is located outside the United States, primarily in Mexico. As a result, it may be difficult to effect service of process within the United States upon such persons or to enforce in Luxembourg courts judgments obtained against such persons

or such property in United States courts and predicated upon the civil liability provisions of the United States federal securities laws.

      The Company has been advised by Bonn Schmitt Steichen, its Luxembourg counsel, that there is doubt as to (i) whether a Luxembourg court has jurisdiction to entertain original cases or actions predicated solely upon the United States federal securities laws, (ii) the enforceability, in original actions in Luxembourg courts, of liabilities predicated solely upon the United States federal securities laws and (iii) the enforceability in Luxembourg courts of judgments of United States courts obtained in actions predicated upon the civil liability provisions of the United States federal securities laws.

      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.

      The Company is exposed to certain market risks arising from transactions in the normal course of its business, and from debt incurred in the Recapitalization of the Company. Such risk is principally associated with interest rate and foreign exchange fluctuations, as well as changes in the Company’s credit standing.

Interest Rate Risk

      The Company has U.S. dollar-denominated debt obligations in both the United States and Mexico that have fixed and variable interest rates and mature on various dates. The table below presents principal cash flows and related interest rates by fiscal year of maturity:

Debt Obligation Information at December 31, 2004

(Amounts in U.S. dollars in 000’s)

      As of December 31, 2004, the Company had $40.8 million of variable interest rate debt outstanding. If variable interest rates had increased by 10%, the Company would have incurred $0.3 million of additional interest expense during 2004.

Foreign Currency Risk

      The Company operates globally, with manufacturing facilities in Mexico and distribution facilities in various locations around the world. With the exception of most intercompany product sales between European subsidiaries, and intercompany sales between Mexican entities, all intercompany product sales are denominated in U.S. dollars, as are some expenses, including interest payments with respect to all of its outstanding indebtedness. In addition, 77% of the Company’s 2004 revenue was generated in countries with a functional

currency other than the U.S. dollar. As a result, the Company’s earnings and cash flows are exposed to fluctuations in foreign currency exchange rates.

      As part of its overall strategy to reduce the risk of adverse potential exchange rate fluctuations in Mexico, the Company enters into foreign currency exchange contracts. Prior to March 2002, the Company purchased forward exchange contracts (“forward contracts” or “forwards”) to hedge its foreign currency exposures to the Mexican peso. In mid-2002, in accordance with previously approved policies, the Company modified its hedging program to include the use of foreign currency option contracts (“option contracts” or “options”). In order to offset its current outstanding forward contracts to sell Mexican pesos, the Company entered into forward contracts to buy Mexican pesos. Also, on that date, the Company entered into a series of U.S. dollar option contracts. The exchange rate at which the option contracts may be exercised is based upon the market rate at the time the contracts are placed. The Company purchased exchange rate put options, which gives the Company the right, but not the obligation, to sell Mexican pesos at a specified U.S. dollar exchange rate (“strike rate”). These contracts provide protection in the event the Mexican peso weakens beyond the option strike rate. In conjunction with the put options, and as part of a zero-cost option collar structure, the Company sold Mexican peso call options, which gives the counterparty the right, but not the obligation, to buy Mexican pesos from the Company at a specified strike rate. The effect of these call options would be to limit the benefit the Company would otherwise derive from the strengthening of the Mexican peso beyond the strike rate.

      The existing zero-cost collars will not protect the Company (i) against fluctuations in exchange rates within the collar range or (ii) against a prolonged, gradual decline in the value of the Mexican peso against the U.S. dollar.

      The Company places contracts based on its forecasted U.S. dollar cash outflows from Jafra Mexico and does not hedge transactions that are not included in the forecast on the date the contract is initiated. As a matter of policy, the Company does not hold or issue contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features nor is the Company a party to leveraged derivatives. The Company regularly monitors its foreign currency exposures and ensures that contract amounts do not exceed the amounts of the underlying exposures. In addition, as the Company generally purchases hedging instruments on a rolling forecast, there can be no assurance that instruments protecting it to the same or a similar extent will be available in the future on reasonable terms, if at all. Unprotected declines in the value of the Mexican peso against the U.S. dollar will adversely affect the Company’s ability to pay its dollar-denominated expenses.

      Pursuant to SFAS No. 133, the Company’s use of contracts to hedge certain forecasted transactions qualifies for hedge accounting. Gains and losses from such derivative instruments can be deferred as a separate component of other comprehensive loss, and are then 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 and option contracts with the corresponding gains and losses generated by the underlying hedged transactions. Under SFAS No. 133, certain of the Company’s forward and option contracts do not qualify for hedge accounting and, therefore, are remeasured based on fair value, with gains and losses included as a component of net (loss) income. As of December 31, 2004, the fair value of the option contracts was included in current liabilities in the accompanying consolidated balance sheets.

      The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 545,000,000 and 831,000,000 in put and call positions at December 31, 2004 and 2003, respectively. The foreign currency option contracts outstanding at December 31, 2004 mature at various dates through March 31, 2006 and the foreign currency option contracts outstanding at December 31, 2003 mature at various dates through June 30, 2005. Notional amounts do not quantify the Company’s market or credit exposure or represent its assets or liabilities, but are used in the calculation of cash settlements under the contracts.

      The following tables provide information about the details of the Company’s option contracts as of December 31, 2004 and 2003 (in thousands, except for average strike price):

      Prior to entering into foreign currency hedging contracts, the Company evaluates the counterparties’ credit ratings. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company does not currently anticipate non-performance by such counterparties.

      The Company’s Mexican subsidiaries, Jafra Distribution and Jafra Cosmetics S.A. had U.S. dollar-denominated debt of $128.5 million and $148.5 million at December 31, 2004 and 2003, respectively. During 2004, the peso was relatively stable. However, during 2003, the value of the peso to the U.S. dollar decreased by 8%, and Jafra Mexico incurred a $12.3 million foreign currency transaction loss related to the remeasurement and repayment of U.S. dollar-denominated debt.

      Based upon the $128.5 million of Jafra Distribution’s outstanding debt at December 31, 2004, a 10% decline in the peso to U.S. dollar exchange rate would result in a $12.8 million foreign currency exchange loss.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES*

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

Jafra Worldwide Holdings (Lux) S.àr.l.

Luxembourg

      We have audited the accompanying consolidated balance sheets of Jafra Worldwide Holdings (Lux) S.àr.l. (successor Parent to CDRJ Investments (Lux) S.A.) and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholder’s (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over the financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jafra Worldwide Holdings (Lux) S.àr.l. and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Los Angeles, California

March 4, 2004

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

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

ASSETS

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)