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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from ___to ___
 Commission File Number 333-106666
 JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L.
  Luxembourg
(State or other jurisdiction of 
Incorporation or organization)
    
    98-0399297
(I.R.S. Employer
Identification Number)
 370, Route de Longwy
L-1940 Luxembourg
Luxembourg
 (352) 226027
  þ o
  o o þ
  o þ




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##### 



JAFRA WORLDWIDE HOLDINGS (Lux) S.àR.L. AND SUBSIDIARIES
     
 Page No.PART I  FINANCIAL INFORMATIONItem 1. (*)
    
    Financial Statements (Unaudited):Consolidated Financial Statements  Jafra Worldwide Holdings (Lux) S.àR.L.Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Consolidated Financial Statements  Jafra Cosmetics International, Inc. and SubsidiariesConsolidated Balance Sheets
    
    
    16Consolidated Statements of Operations
    
    
    17Consolidated Statements of Cash Flows
    
    
    18Notes to Consolidated Financial Statements
    
    
    19Financial Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    
    27Statements of Operations
    
    
    28Statements of Cash Flows
    
    
    29Notes to Financial Statements
    
    
    30Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and SubsidiariesConsolidated Balance Sheets
    
    
    36Consolidated Statements of Income
    
    
    37Consolidated Statements of Cash Flows
    
    
    38Notes to Consolidated Financial Statements
    
    
    39Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    44Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    58Item 4.
    
    Controls and Procedures
    
    
    60PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    61Item 1A.
    
    Risk Factors
    
    
    61Item 6.
    
    Exhibits
    
    
    61Signature
    
    
    62EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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3 4 3 4 3 4 3 4 3 4 3 4
 3




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 (Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,783
    
    
    $
    24,819Receivables, net
    
    
    50,210
    
    
    
    43,398Inventories, net
    
    
    56,856
    
    
    
    38,930Prepaid income taxes
    
    
    1,616
    
    
    
    2,590Prepaid expenses and other current assets
    
    
    8,031
    
    
    
    8,931Deferred income taxes
    
    
    25,092
    
    
    
    15,278Assets from discontinued operations
    
    
    
    
    
    
    27Total current assets
    
    
    171,588
    
    
    
    133,973Property and equipment, net
    
    
    50,398
    
    
    
    54,412Other assets:Goodwill
    
    
    63,584
    
    
    
    64,794Trademarks
    
    
    42,070
    
    
    
    43,437Deferred financing fees, employee supplemental savings plan and other assets
    
    
    9,514
    
    
    
    11,451Noncurrent assets from discontinued operations
    
    
    
    
    
    
    33Total assets
    
    $
    337,154
    
    
    $
    308,100LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,732
    
    
    $
    18,839Accrued liabilities
    
    
    54,250
    
    
    
    58,432Income taxes payable
    
    
    17,137
    
    
    
    4,269Deferred income taxes
    
    
    968
    
    
    
    Liabilites from discontinued operations
    
    
    
    
    
    
    40Total current liabilities
    
    
    95,087
    
    
    
    81,580Long-term debt
    
    
    114,557
    
    
    
    130,000Deferred income taxes
    
    
    18,859
    
    
    
    21,072Employee supplemental savings plan and other long-term liabilities
    
    
    5,617
    
    
    
    5,917Total liabilities
    
    
    234,120
    
    
    
    238,569Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, par value $100; 316,420 shares
authorized, issued and outstanding in 2006 and 2005
    
    
    31,642
    
    
    
    31,642Additional paid-in capital
    
    
    51,769
    
    
    
    51,769Retained earnings (deficit)
    
    
    27,608
    
    
    
    (8,390
    )Accumulated other comprehensive loss
    
    
    (7,985
    )
    
    
    (5,490
    )Total stockholders equity
    
    
    103,034
    
    
    
    69,531Total liabilities and stockholders equity
    
    $
    337,154
    
    
    $
    308,100
  4




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    115,615
    
    
    $
    105,827
    
    
    $
    351,481
    
    
    $
    304,936Cost of sales
    
    
    27,994
    
    
    
    24,880
    
    
    
    79,422
    
    
    
    68,400Gross profit
    
    
    87,621
    
    
    
    80,947
    
    
    
    272,059
    
    
    
    236,536Selling, general and administrative expenses
    
    
    67,012
    
    
    
    63,645
    
    
    
    203,296
    
    
    
    184,612Income from operations
    
    
    20,609
    
    
    
    17,302
    
    
    
    68,763
    
    
    
    51,924Other income (expense):Exchange gain (loss), net
    
    
    1,587
    
    
    
    (371
    )
    
    
    (783
    )
    
    
    1,708Interest expense
    
    
    (3,925
    )
    
    
    (4,142
    )
    
    
    (11,813
    )
    
    
    (13,963
    )Interest income
    
    
    433
    
    
    
    96
    
    
    
    1,129
    
    
    
    260Loss on extinguishment of debt
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    (9,753
    )Other expense
    
    
    (107
    )
    
    
    (102
    )
    
    
    (1,588
    )
    
    
    (315
    )Other income
    
    
    277
    
    
    
    52
    
    
    
    143
    
    
    
    136Income before income taxes
    
    
    17,282
    
    
    
    12,835
    
    
    
    54,259
    
    
    
    29,997Income tax expense
    
    
    6,323
    
    
    
    3,888
    
    
    
    18,261
    
    
    
    10,709Income from continuing operations
    
    
    10,959
    
    
    
    8,947
    
    
    
    35,998
    
    
    
    19,288Loss on discontinued operations, net of income tax
expense of $0.0 million in 2005
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (19
    )Net income
    
    $
    10,959
    
    
    $
    8,945
    
    
    $
    35,998
    
    
    $
    19,269
  5




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    35,998
    
    
    $
    19,269Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    4,041
    
    
    
    10,021Amortization and write off of deferred financing fees
    
    
    1,225
    
    
    
    3,028Provision for uncollectible accounts receivable
    
    
    7,881
    
    
    
    6,439Unrealized foreign exchange and derivative losses (gains)
    
    
    425
    
    
    
    (3,395
    )Deferred income taxes
    
    
    (11,112
    )
    
    
    (4,625
    )Changes in operating assets and liabilities:Receivables
    
    
    (15,893
    )
    
    
    (1,205
    )Inventories
    
    
    (18,838
    )
    
    
    (1,214
    )Prepaid expenses and other current assets
    
    
    (300
    )
    
    
    92Other assets
    
    
    313
    
    
    
    221Accounts payable and accrued liabilities
    
    
    4,592
    
    
    
    (5,967
    )Income taxes payable/prepaid
    
    
    13,920
    
    
    
    652Other long-term liabilities
    
    
    (407
    )
    
    
    415Net operating activities of discontinued operations
    
    
    20
    
    
    
    52Net cash provided by operating activities
    
    
    21,865
    
    
    
    23,783Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,296
    )
    
    
    (2,975
    )Other and investments related to employee supplemental savings plan
    
    
    400
    
    
    
    (543
    )Net cash used in investing activities
    
    
    (896
    )
    
    
    (3,518
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    (15,443
    )
    
    
    (69,500
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    46,000Repayments under revolving credit facility
    
    
    
    
    
    
    (56,375
    )Repayment of Vorwerk note
    
    
    
    
    
    
    (20,000
    )Equity contribution from shareholder
    
    
    
    
    
    
    79,100Net cash used in financing activities
    
    
    (15,443
    )
    
    
    (20,775
    )Effect of exchange rate changes on cash
    
    
    (562
    )
    
    
    (770
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,964
    
    
    
    (1,280
    )Cash and cash equivalents at beginning of period
    
    
    24,819
    
    
    
    10,586Cash and cash equivalents at end of period
    
    $
    29,783
    
    
    $
    9,306
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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation
 société à responsabilité limitée société anonyme
    New Accounting Pronouncements.
   7




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
       8




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   (2) Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    14,286
    
    
    $
    11,165Finished goods
    
    
    42,570
    
    
    
    27,765Total inventories
    
    $
    56,856
    
    
    $
    38,930
 (3) Property and Equipment
  September 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    15,875
    
    
    $
    16,193Buildings
    
    
    18,294
    
    
    
    17,255Machinery, equipment and other
    
    
    44,772
    
    
    
    56,98278,941
    
    
    
    90,430Less accumulated depreciation.
    
    
    28,543
    
    
    
    36,018Property and equipment, net
    
    $
    50,398
    
    
    $
    54,412
 (4) Goodwill and Other Intangible Assets.
  United
    
    
    
    
    
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    
    Mexico
    
    
    Europe
    
    
    TotalBalance as of December 31, 2005.
    
    $
    32,188
    
    
    $
    27,837
    
    
    $
    4,769
    
    
    $
    64,794Translation effect
    
    
    
    
    
    
    (884
    )
    
    
    (326
    )
    
    
    (1,210
    )Balance as of September 30, 2006
    
    $
    32,188
    
    
    $
    26,953
    
    
    $
    4,443
    
    
    $
    63,584
 (5) Income Taxes
  9




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  (6) Debt
 3 4 3 4 3 4 3 4 3 4
  3 4 3 4 3 4 3 4 3 4 3 4
 3 4 3 4
 3 4
  10




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 3 4
  3 4 3 4
 3 4
  3 4
 11




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  (7) Restructuring Charges
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Opening balance
    
    $
    169
    
    
    $
    1,697
    
    
    $
    459
    
    
    $
    2,391Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Charges against reserves
    
    
    (117
    )
    
    
    (900
    )
    
    
    (407
    )
    
    
    (1,594
    )Ending balance
    
    $
    52
    
    
    $
    797
    
    
    $
    52
    
    
    $
    797
 (8) Comprehensive Income
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    10,959
    
    
    $
    8,945
    
    
    $
    35,998
    
    
    $
    19,269Unrealized and deferred realized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )Reclassification of deferred realized loss to
exchange gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Foreign currency translation adjustments
    
    
    2,433
    
    
    
    (816
    )
    
    
    (2,495
    )
    
    
    (438
    )Comprehensive income
    
    $
    13,392
    
    
    $
    8,129
    
    
    $
    33,503
    
    
    $
    18,896
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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (9) Financial Reporting for Business Segments
    United Statesand the
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedMexico
    
    Republic
    
    Europe
    
    Others
    
    and Other
    
    Total(in thousands)As of and for the three months ended September
30, 2006Net sales
    
    $
    85,018
    
    
    $
    24,230
    
    
    $
    6,345
    
    
    $
    22
    
    
    $
    
    
    
    $
    115,615Income (loss) from operations
    
    
    21,338
    
    
    
    3,946
    
    
    
    61
    
    
    
    (866
    )
    
    
    (3,870
    )
    
    
    20,609Depreciation
    
    
    1,220
    
    
    
    336
    
    
    
    53
    
    
    
    27
    
    
    
    
    
    
    
    1,636Segment assets
    
    
    230,036
    
    
    
    89,287
    
    
    
    16,710
    
    
    
    2,085
    
    
    
    (964
    )
    
    
    337,154Goodwill
    
    
    26,953
    
    
    
    32,188
    
    
    
    4,443
    
    
    
    
    
    
    
    
    
    
    
    63,584For the three months ended September 30, 2005Net sales
    
    $
    76,914
    
    
    $
    22,167
    
    
    $
    6,661
    
    
    $
    85
    
    
    $
    
    
    
    $
    105,827Income (loss) from operations
    
    
    19,696
    
    
    
    2,367
    
    
    
    109
    
    
    
    (204
    )
    
    
    (4,666
    )
    
    
    17,302Depreciation
    
    
    970
    
    
    
    2,280
    
    
    
    59
    
    
    
    7
    
    
    
    
    
    
    
    3,316As of December 31, 2005Segment assets
    
    $
    210,868
    
    
    $
    82,448
    
    
    $
    15,009
    
    
    $
    716
    
    
    $
    (1,001
    )
    
    $
    308,040Assets from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    60Goodwill
    
    
    27,837
    
    
    
    32,188
    
    
    
    4,769
    
    
    
    
    
    
    
    
    
    
    
    64,794For the nine months ended September 30, 2006Net sales
    
    $
    257,819
    
    
    $
    71,701
    
    
    $
    21,847
    
    
    $
    114
    
    
    $
    
    
    
    $
    351,481Income (loss) from operations
    
    
    71,034
    
    
    
    10,891
    
    
    
    686
    
    
    
    (1,930
    )
    
    
    (11,918
    )
    
    
    68,763Depreciation
    
    
    2,790
    
    
    
    1,040
    
    
    
    160
    
    
    
    51
    
    
    
    
    
    
    
    4,041Capital expenditures
    
    
    749
    
    
    
    183
    
    
    
    62
    
    
    
    302
    
    
    
    
    
    
    
    1,296For the nine months ended September 30, 2005Net sales
    
    $
    214,590
    
    
    $
    66,980
    
    
    $
    22,937
    
    
    $
    429
    
    
    $
    
    
    
    $
    304,936Income (loss) from operations
    
    
    57,790
    
    
    
    5,109
    
    
    
    1,481
    
    
    
    (517
    )
    
    
    (11,939
    )
    
    
    51,924Depreciation
    
    
    2,868
    
    
    
    6,885
    
    
    
    247
    
    
    
    21
    
    
    
    
    
    
    
    10,021Capital expenditures
    
    
    2,041
    
    
    
    697
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    2,975
 13




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Corporate expenses
    
    $
    (3,806
    )
    
    $
    (3,618
    )
    
    $
    (11,762
    )
    
    $
    (9,986
    )Unusual charges(1)
    
    
    (64
    )
    
    
    (648
    )
    
    
    (156
    )
    
    
    (1,553
    )Total corporate, unallocated and other
    
    $
    (3,870
    )
    
    $
    (4,266
    )
    
    $
    (11,918
    )
    
    $
    (11,539
    )
 
 (1)
    
    Unusual charges include severance, loss or gain on sale of assets, holding company expenses and
other charges not related to the normal operations of the business. (10) Foreign Currency Option Contracts
      14




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (11) Discontinued Operations and Ceased Operations
   15




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 (Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,547
    
    
    $
    9,479Receivables, net
    
    
    3,918
    
    
    
    3,852Inventories
    
    
    13,115
    
    
    
    9,398Receivables from affiliates
    
    
    22,165
    
    
    
    8,251Prepaid expenses and other current assets
    
    
    3,129
    
    
    
    2,344Deferred income taxes
    
    
    10,615
    
    
    
    10,511Total current assets
    
    
    68,489
    
    
    
    43,835Property and equipment, net
    
    
    16,234
    
    
    
    17,118Other assets:Goodwill
    
    
    36,631
    
    
    
    36,957Notes receivable from affiliates
    
    
    8,792
    
    
    
    13,338Deferred financing fees, net
    
    
    1,399
    
    
    
    1,869Employee supplemental savings plan and other assets
    
    
    5,415
    
    
    
    5,938Total assets
    
    $
    136,960
    
    
    $
    119,055LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,756
    
    
    $
    2,728Accrued liabilities
    
    
    16,793
    
    
    
    22,124Income taxes payable
    
    
    6,318
    
    
    
    2,472Payables to affiliates
    
    
    17,218
    
    
    
    6,406Total current liabilities
    
    
    43,085
    
    
    
    33,730Long-term debt
    
    
    45,823
    
    
    
    52,000Deferred income taxes
    
    
    5,852
    
    
    
    5,852Note payable to affiliates
    
    
    5,204
    
    
    
    Employee supplemental savings plan and other long-term liabilities
    
    
    5,618
    
    
    
    5,917Total liabilities
    
    
    105,582
    
    
    
    97,499Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, par value $.01: 1,000 shares authorized, issued
and outstanding in 2006 and 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    35,958
    
    
    
    35,958Retained deficit
    
    
    (2,185
    )
    
    
    (12,173
    )Accumulated other comprehensive loss
    
    
    (2,395
    )
    
    
    (2,229
    )Total stockholders equity
    
    
    31,378
    
    
    
    21,556Total liabilities and stockholders equity
    
    $
    136,960
    
    
    $
    119,055
  16




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales to third parties
    
    $
    30,575
    
    
    $
    28,828
    
    
    $
    93,548
    
    
    $
    89,917Sales to affiliates
    
    
    897
    
    
    
    249
    
    
    
    2,183
    
    
    
    640Net sales
    
    
    31,472
    
    
    
    29,077
    
    
    
    95,731
    
    
    
    90,557Cost of sales
    
    
    8,756
    
    
    
    6,660
    
    
    
    25,432
    
    
    
    20,508Gross profit
    
    
    22,716
    
    
    
    22,417
    
    
    
    70,299
    
    
    
    70,049Selling, general and administrative expenses
    
    
    21,728
    
    
    
    24,407
    
    
    
    72,508
    
    
    
    76,539Management fee income from affiliates
    
    
    (2,093
    )
    
    
    (1,031
    )
    
    
    (4,937
    )
    
    
    (3,097
    )Royalty income from affiliates, net
    
    
    (5,556
    )
    
    
    (5,373
    )
    
    
    (19,083
    )
    
    
    (16,577
    )Income from operations
    
    
    8,637
    
    
    
    4,414
    
    
    
    21,811
    
    
    
    13,184Other income (expense):Exchange gain (loss), net
    
    
    44
    
    
    
    1
    
    
    
    417
    
    
    
    (374
    )Interest expense
    
    
    (1,545
    )
    
    
    (1,745
    )
    
    
    (4,587
    )
    
    
    (5,912
    )Interest income
    
    
    149
    
    
    
    83
    
    
    
    596
    
    
    
    361Loss on extinquishment of debt
    
    
    (645
    )
    
    
    
    
    
    
    (645
    )
    
    
    (3,963
    )Other expense
    
    
    (27
    )
    
    
    (7
    )
    
    
    (173
    )
    
    
    (24
    )Other income
    
    
    277
    
    
    
    100
    
    
    
    133
    
    
    
    170Income before income taxes
    
    
    6,890
    
    
    
    2,846
    
    
    
    17,552
    
    
    
    3,442Income tax expense
    
    
    3,125
    
    
    
    1,356
    
    
    
    7,564
    
    
    
    3,350Net income
    
    $
    3,765
    
    
    $
    1,490
    
    
    $
    9,988
    
    
    $
    92
  17




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    9,988
    
    
    $
    92Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    1,200
    
    
    
    7,132Provision for uncollectible accounts receivable
    
    
    336
    
    
    
    335Write off and amortization of deferred financing fees
    
    
    470
    
    
    
    1,296Unrealized foreign exchange (gain) loss
    
    
    (184
    )
    
    
    326Deferred income taxes
    
    
    (104
    )
    
    
    1,832Changes in operating assets and liabilities:Receivables
    
    
    (270
    )
    
    
    760Inventories
    
    
    (3,516
    )
    
    
    1,244Prepaid expenses and other current assets
    
    
    (677
    )
    
    
    369Intercompany receivables and payables
    
    
    (3,241
    )
    
    
    9,486Other assets
    
    
    236
    
    
    
    234Accounts payable and accrued liabilities
    
    
    (5,515
    )
    
    
    (1,224
    )Income taxes payable
    
    
    3,806
    
    
    
    (1,796
    )Other long-term liabilities
    
    
    (407
    )
    
    
    415Net cash provided by operating activities
    
    
    2,122
    
    
    
    20,501Cash flows from investing activities:Purchases of property and equipment
    
    
    (245
    )
    
    
    (934
    )Other and investments related to employee supplemental savings plan
    
    
    400
    
    
    
    (543
    )Net cash provided by (used in) investing activities
    
    
    155
    
    
    
    (1,477
    )Cash flows from financing activities:Repayments of subordinated debt
    
    
    (6,177
    )
    
    
    (27,800
    )Repayment of Vorwerk note
    
    
    
    
    
    
    (20,000
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    43,000Repayments under revolving credit facility
    
    
    
    
    
    
    (45,000
    )Advances from (to) affiliates
    
    
    9,836
    
    
    
    (1,120
    )Equity contribution from Parent
    
    
    
    
    
    
    31,662Net cash provided by (used in) financing activities
    
    
    3,659
    
    
    
    (19,258
    )Effect of exchange rate changes on cash
    
    
    132
    
    
    
    (288
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,068
    
    
    
    (522
    )Cash and cash equivalents at beginning of period
    
    
    9,479
    
    
    
    5,748Cash and cash equivalents at end of period
    
    $
    15,547
    
    
    $
    5,226
  18




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 (1) Basis of Presentation
 société à responsabilité limitée société
anonyme .
    New Accounting Pronouncements.
   19




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
       20




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  (2) Property and Equipment
  September30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    8,473
    
    
    
    7,200Machinery, equipment and other
    
    
    13,379
    
    
    
    25,17428,040
    
    
    
    38,562Less accumulated depreciation
    
    
    11,806
    
    
    
    21,444Property and equipment, net
    
    $
    16,234
    
    
    $
    17,118
 (3) Goodwill and Other Intangible Assets
  United
    
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    
    Europe
    
    
    TotalBalance as of December 31, 2005
    
    $
    32,188
    
    
    $
    4,769
    
    
    $
    36,957Translation effect
    
    
    
    
    
    
    (326
    )
    
    
    (326
    )Balance as of September 30, 2006
    
    $
    32,188
    
    
    $
    4,443
    
    
    $
    36,631
 (4) Income Taxes
  (5) Debt
 3 4 3 4 3 4 3 4 3 4
  21




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 3 4 3 4 3 4 3 4 3 4 3 4
 3 4 3 4
 3 4
  3 4
  3 4 3 4
 3 4
  22




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  3 4
  (6) Restructuring Charges
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Opening balance
    
    $
    169
    
    
    $
    1,697
    
    
    $
    459
    
    
    $
    2,391Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Charges against reserves
    
    
    (117
    )
    
    
    (900
    )
    
    
    (407
    )
    
    
    (1,594
    )Ending balance
    
    $
    52
    
    
    $
    797
    
    
    $
    52
    
    
    $
    797
 23




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (7) Comprehensive Income
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    3,765
    
    
    $
    1,490
    
    
    $
    9,988
    
    
    $
    92Foreign currency translation adjustments
    
    
    3
    
    
    
    (138
    )
    
    
    (166
    )
    
    
    76Comprehensive income
    
    $
    3,768
    
    
    $
    1,352
    
    
    $
    9,822
    
    
    $
    168
 (8) Related Party Transactions
       24




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (9) Financial Reporting for Business Segments
    United Statesand the
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    UnallocatedRepublic
    
    Europe (1)
    
    Others
    
    and Other
    
    TotalAs of and for the three
months ended September 30,
2006Net sales
    
    $
    24,230
    
    
    $
    6,345
    
    
    $
    
    
    
    $
    897
    
    
    $
    31,472Income (loss) from operations
    
    
    3,946
    
    
    
    61
    
    
    
    (1
    )
    
    
    4,631
    
    
    
    8,637Depreciation
    
    
    336
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    389Segment assets
    
    
    89,287
    
    
    
    16,710
    
    
    
    6
    
    
    
    30,957
    
    
    
    136,960Goodwill
    
    
    32,188
    
    
    
    4,443
    
    
    
    
    
    
    
    
    
    
    
    36,631For the three months ended
September 30, 2005Net sales
    
    $
    22,167
    
    
    $
    6,661
    
    
    $
    
    
    
    $
    249
    
    
    $
    29,077Income from operations
    
    
    2,367
    
    
    
    109
    
    
    
    
    
    
    
    1,938
    
    
    
    4,414Depreciation
    
    
    2,280
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    2,339As of December 31, 2005Segment assets
    
    $
    82,448
    
    
    $
    15,009
    
    
    $
    9
    
    
    $
    21,589
    
    
    $
    119,055Goodwill
    
    
    32,188
    
    
    
    4,769
    
    
    
    
    
    
    
    
    
    
    
    36,957For the nine months ended
September 30, 2006Net sales
    
    $
    71,701
    
    
    $
    21,847
    
    
    $
    
    
    
    $
    2,183
    
    
    $
    95,731Income (loss) from operations
    
    
    10,891
    
    
    
    686
    
    
    
    (10
    )
    
    
    10,244
    
    
    
    21,811Depreciation
    
    
    1,040
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    1,200Capital expenditures
    
    
    183
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    245For the nine months ended
September 30, 2005Net sales
    
    $
    66,980
    
    
    $
    22,937
    
    
    $
    
    
    
    $
    640
    
    
    $
    90,557Income from operations
    
    
    5,109
    
    
    
    1,481
    
    
    
    
    
    
    
    6,594
    
    
    
    13,184Depreciation
    
    
    6,885
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    7,132Capital expenditures
    
    
    697
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    935
 
 (1)
    
    excludes Jafra Poland sp.zo.o, a former indirect wholly-owned subsidiary of the Parent and
affiliate of JCI  25




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Corporate expenses
    
    $
    (4,378
    )
    
    $
    (4,093
    )
    
    $
    (14,638
    )
    
    $
    (12,259
    )Transaction with affiliates
    
    
    7,657
    
    
    
    6,404
    
    
    
    24,028
    
    
    
    19,674Unusual charges(1)
    
    
    1,352
    
    
    
    (373
    )
    
    
    854
    
    
    
    (821
    )Total corporate, unallocated and other
    
    $
    4,631
    
    
    $
    1,938
    
    
    $
    10,244
    
    
    $
    6,594
 
 (1)
    
    Unusual charges include severance, loss or gain on sale of assets, holding company expenses,
expenses included in corporate expenses for management purposes but absorbed by entities
outside of JCI and other charges not related to the normal operations of the business. 26




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    69
    
    
    $
    505Receivables
    
    
    563
    
    
    
    366Inventories
    
    
    44,488
    
    
    
    30,697Receivables from affiliates
    
    
    17,539
    
    
    
    18,143Prepaid income taxes
    
    
    703
    
    
    
    2,465Prepaid expenses and other current assets
    
    
    4,128
    
    
    
    5,232Deferred income taxes
    
    
    
    
    
    
    1,109Total current assets
    
    
    67,490
    
    
    
    58,517Machinery and equipment, net
    
    
    2,498
    
    
    
    2,667Other assets:Trademarks
    
    
    1,133
    
    
    
    1,311Deferred financing fees, net
    
    
    1,579
    
    
    
    2,393Investment in preferred shares of affiliated company
    
    
    128,547
    
    
    
    132,763Guarantee fee
    
    
    1,984
    
    
    
    2,368Total assets
    
    $
    203,231
    
    
    $
    200,019LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,644
    
    
    $
    12,623Accrued liabilities
    
    
    3,240
    
    
    
    1,794Income taxes payable
    
    
    793
    
    
    
    Payables to affiliates
    
    
    799
    
    
    
    3,143Deferred income taxes
    
    
    968
    
    
    
    Total current liabilities
    
    
    22,444
    
    
    
    17,560Long-term debt
    
    
    68,734
    
    
    
    78,000Deferred income taxes
    
    
    3,683
    
    
    
    5,412Total liabilities
    
    
    94,861
    
    
    
    100,972Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 151 shares authorized,
issued and outstanding in 2006 and 2005
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    47,490
    
    
    
    47,490Retained earnings
    
    
    65,191
    
    
    
    52,495Accumulated other comprehensive loss
    
    
    (4,316
    )
    
    
    (943
    )Total stockholders equity
    
    
    108,370
    
    
    
    99,047Total liabilities and stockholders equity
    
    $
    203,231
    
    
    $
    200,019
  27




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Third party net sales
    
    $
    25
    
    
    $
    4
    
    
    $
    102
    
    
    $
    17Sales to affiliates
    
    
    48,208
    
    
    
    42,898
    
    
    
    140,216
    
    
    
    118,650Net sales
    
    
    48,233
    
    
    
    42,902
    
    
    
    140,318
    
    
    
    118,667Cost of sales
    
    
    30,377
    
    
    
    27,493
    
    
    
    86,474
    
    
    
    72,902Gross profit
    
    
    17,856
    
    
    
    15,409
    
    
    
    53,844
    
    
    
    45,765Selling, general and administrative expenses
    
    
    578
    
    
    
    326
    
    
    
    1,724
    
    
    
    1,017Management fee expense to affiliate
    
    
    465
    
    
    
    272
    
    
    
    1,293
    
    
    
    816Service fee expense to affiliate
    
    
    7,396
    
    
    
    7,390
    
    
    
    22,206
    
    
    
    24,115Income from operations
    
    
    9,417
    
    
    
    7,421
    
    
    
    28,621
    
    
    
    19,817Other expense:Exchange gain (loss), net
    
    
    2,184
    
    
    
    (61
    )
    
    
    (2,246
    )
    
    
    2,614Interest expense
    
    
    (2,317
    )
    
    
    (2,358
    )
    
    
    (7,144
    )
    
    
    (7,892
    )Interest income
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    21Loss on extinguishment of debt
    
    
    (947
    )
    
    
    
    
    
    
    (947
    )
    
    
    (5,790
    )Other expense
    
    
    (96
    )
    
    
    (3
    )
    
    
    (97
    )
    
    
    (3
    )Other income
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    Income before income taxes
    
    
    8,255
    
    
    
    4,999
    
    
    
    18,284
    
    
    
    8,767Income tax expense
    
    
    3,072
    
    
    
    545
    
    
    
    5,588
    
    
    
    2,137Net income
    
    $
    5,183
    
    
    $
    4,454
    
    
    $
    12,696
    
    
    $
    6,630
  28




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    12,696
    
    
    $
    6,630Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    716
    
    
    
    538Write off and amortization of deferred financing fees
    
    
    755
    
    
    
    1,732Unrealized foreign exchange and derivative loss (gain)
    
    
    2,256
    
    
    
    (2,901
    )Deferred income taxes
    
    
    348
    
    
    
    1,163Changes in operating assets and liabilities:Receivables
    
    
    (210
    )
    
    
    37Inventories
    
    
    (14,905
    )
    
    
    (2,220
    )Prepaid expenses and other current assets
    
    
    886
    
    
    
    (72
    )Intercompany receivables and payables
    
    
    (2,237
    )
    
    
    2,084Other assets
    
    
    (30
    )
    
    
    Accounts payable and accrued liabilities
    
    
    6,043
    
    
    
    (1,324
    )Income taxes payable
    
    
    2,499
    
    
    
    (2,809
    )Net cash provided by operating activities
    
    
    8,817
    
    
    
    2,858Cash flows from investing activities:Purchases of property and equipment
    
    
    (137
    )
    
    
    (10
    )Net cash used in investing activities
    
    
    (137
    )
    
    
    (10
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    (9,266
    )
    
    
    (41,700
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    3,000Repayments under revolving credit facility
    
    
    
    
    
    
    (11,375
    )Contribution from shareholders
    
    
    
    
    
    
    47,490Net cash used in financing activities
    
    
    (9,266
    )
    
    
    (2,585
    )Effect of exchange rate changes on cash
    
    
    150
    
    
    
    (294
    )Net decrease in cash
    
    
    (436
    )
    
    
    (31
    )Cash at beginning of period
    
    
    505
    
    
    
    83Cash at end of period
    
    $
    69
    
    
    $
    52
  29




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
 sociedad anonima de capital variable société à responsabilité limitée société anonyme
   New Accounting Standards.
    30




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
      (2) Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    14,181
    
    
    $
    11,061Finished goods
    
    
    30,307
    
    
    
    19,636Total inventories
    
    $
    44,488
    
    
    $
    30,697
 31




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
 (3) Machinery and Equipment
  September 30,
    
    
    December 31,2006
    
    
    2005Machinery, equipment and other
    
    $
    3,480
    
    
    $
    3,454Less accumulated depreciation.
    
    
    982
    
    
    
    787Machinery and equipment, net
    
    $
    2,498
    
    
    $
    2,667
 (4) Investment in Affiliated Company
  (5) Income Taxes
  (6) Debt
 3 4 3 4 3 4 3 4 3 4
  3 4 3 4 3 4 3 4 3 4 3 4
 32




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
 3 4 3 4
 3 4
  3 4
  3 4 3 4
 3 4
   33




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
   3 4 3 4 3 4
 (7) Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    5,183
    
    
    $
    4,454
    
    
    $
    12,696
    
    
    $
    6,630Foreign currency translation adjustments
    
    
    3,254
    
    
    
    (121
    )
    
    
    (3,373
    )
    
    
    3,440Comprehensive income
    
    $
    8,437
    
    
    $
    4,333
    
    
    $
    9,323
    
    
    $
    10,070
 34




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
 (8) Related Party Transactions
    35




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,388
    
    
    $
    14,400Receivables, net
    
    
    45,552
    
    
    
    39,035Receivables from affiliates
    
    
    2,753
    
    
    
    4,579Current deferred income taxes
    
    
    14,477
    
    
    
    3,658Prepaid expenses and other current assets
    
    
    1,257
    
    
    
    1,475Total current assets
    
    
    77,427
    
    
    
    63,147Property and equipment, net
    
    
    31,344
    
    
    
    34,564Other assets:Goodwill
    
    
    26,953
    
    
    
    27,837Trademarks
    
    
    41,928
    
    
    
    43,303Other
    
    
    1,382
    
    
    
    1,535Total assets
    
    $
    179,034
    
    
    $
    170,386LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,485
    
    
    $
    3,595Accrued liabilities
    
    
    32,886
    
    
    
    33,342Income taxes payable
    
    
    10,026
    
    
    
    1,797Payables to affiliates
    
    
    21,748
    
    
    
    19,839Other current liabilities
    
    
    273
    
    
    
    328Total current liabilities
    
    
    68,418
    
    
    
    58,901Deferred income taxes
    
    
    9,664
    
    
    
    10,201Guarantee fee
    
    
    1,984
    
    
    
    2,368Total liabilities
    
    
    80,066
    
    
    
    71,470Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Series B common stock, no par value: 139,373 shares authorized,
issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    Series C preferred stock, no par value: 13,642 shares authorized,
issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    54,334
    
    
    
    54,334Retained earnings
    
    
    53,500
    
    
    
    50,087Accumulated other comprehensive loss
    
    
    (8,866
    )
    
    
    (5,505
    )Total stockholders equity
    
    
    98,968
    
    
    
    98,916Total liabilities and stockholders equity
    
    $
    179,034
    
    
    $
    170,386
  36




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    84,993
    
    
    $
    76,910
    
    
    $
    257,717
    
    
    $
    214,573Cost of sales
    
    
    36,322
    
    
    
    32,400
    
    
    
    104,123
    
    
    
    90,753Gross profit
    
    
    48,671
    
    
    
    44,510
    
    
    
    153,594
    
    
    
    123,820Selling, general and administrative
expenses
    
    
    45,624
    
    
    
    40,181
    
    
    
    133,295
    
    
    
    109,733Management fee expense to affiliates
    
    
    1,659
    
    
    
    761
    
    
    
    3,484
    
    
    
    2,284Service fee income from affiliate
    
    
    (7,396
    )
    
    
    (7,390
    )
    
    
    (22,206
    )
    
    
    (24,115
    )Royalty expense to affiliates, net
    
    
    5,556
    
    
    
    5,374
    
    
    
    19,083
    
    
    
    16,577Income from operations
    
    
    3,228
    
    
    
    5,584
    
    
    
    19,938
    
    
    
    19,341Other income (expense):Exchange (loss) gain,
net
    
    
    (617
    )
    
    
    (882
    )
    
    
    109
    
    
    
    (2,650
    )Interest expense
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (132
    )Interest income
    
    
    322
    
    
    
    88
    
    
    
    711
    
    
    
    190Other expense
    
    
    (95
    )
    
    
    (88
    )
    
    
    (291
    )
    
    
    (277
    )Income before income taxes
    
    
    2,838
    
    
    
    4,686
    
    
    
    20,467
    
    
    
    16,472Income tax expense
    
    
    112
    
    
    
    1,982
    
    
    
    5,054
    
    
    
    5,208Net income
    
    $
    2,726
    
    
    $
    2,704
    
    
    $
    15,413
    
    
    $
    11,264
  37




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    15,413
    
    
    $
    11,264Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,211
    
    
    
    2,330Provision for uncollectible accounts receivable
    
    
    7,545
    
    
    
    6,104Unrealized foreign exchange and derivative (gain) loss
    
    
    (1,832
    )
    
    
    1,295Deferred income taxes
    
    
    (11,356
    )
    
    
    (7,620
    )Changes in operating assets and liabilities:Receivables
    
    
    (15,381
    )
    
    
    (2,244
    )Inventories
    
    
    
    
    
    
    706Prepaid expenses and other current assets
    
    
    24
    
    
    
    (68
    )Intercompany receivables and payables
    
    
    3,641
    
    
    
    (12,359
    )Other assets
    
    
    106
    
    
    
    (13
    )Accounts payable and accrued liabilities and value added taxes
    
    
    3,994
    
    
    
    (3,366
    )Income taxes payable
    
    
    7,589
    
    
    
    5,269Net cash provided by operating activities
    
    
    11,954
    
    
    
    1,298Cash flows from investing activities:Purchases of property and equipment
    
    
    (22
    )
    
    
    (2,031
    )Net cash used in investing activities
    
    
    (22
    )
    
    
    (2,031
    )Cash flows from financing activities:Dividend payment
    
    
    (12,000
    )
    
    
    Net cash used in financing activities
    
    
    (12,000
    )
    
    
    Effect of exchange rate changes on cash
    
    
    (944
    )
    
    
    91Net decrease in cash and cash equivalents
    
    
    (1,012
    )
    
    
    (642
    )Cash and cash equivalents at beginning of period
    
    
    14,400
    
    
    
    4,153Cash and cash equivalents at end of period
    
    $
    13,388
    
    
    $
    3,511
  38




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
 sociedad anonima de capital variable société à responsabilité limitée société ananyme
   New Accounting Standards.
   39




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
      (2) Property and Equipment
  September 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    9,687
    
    
    $
    10,004Buildings
    
    
    9,735
    
    
    
    10,056Machinery, equipment and other
    
    
    27,523
    
    
    
    28,12046,945
    
    
    
    48,180Less accumulated depreciation
    
    
    15,601
    
    
    
    13,616Property and equipment, net
    
    $
    31,344
    
    
    $
    34,564
 40




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (3) Goodwill and Other Intangible Assets.
  (4) Income Taxes
  (5) Debt
 3 4 3 4 3 4 3 4 3 4
 3 4 3 4 3 4 3 4 3 4
 3 4 3 4 3 4
 (6) Dividend
  41




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (7) Comprehensive Income
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    2,726
    
    
    $
    2,704
    
    
    $
    15,413
    
    
    $
    11,264Unrealized and deferred realized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )Reclassification of deferred realized loss to
exchange (loss) gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Reclassification of deferred realized loss to cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Foreign currency translation adjustments
    
    
    3,238
    
    
    
    (78
    )
    
    
    (3,361
    )
    
    
    2,783Comprehensive income
    
    $
    5,964
    
    
    $
    2,626
    
    
    $
    12,052
    
    
    $
    14,112
 (8) Related Party Transactions
      42




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (9) Foreign Currency Option Contracts
      
 43




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
 société à responsabilité limitée
 Foreign Operations
     Information Concerning Forward-Looking Statements
  44




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    
    
    
    
    2005Net sales
    
    $
    115.6
    
    
    
    100.0
    %
    
    $
    105.8
    
    
    
    100.0
    %
    
    $
    351.5
    
    
    
    100.0
    %
    
    $
    304.9
    
    
    
    100.0
    %Cost of sales
    
    
    28.0
    
    
    
    24.2
    
    
    
    24.9
    
    
    
    23.5
    
    
    
    79.4
    
    
    
    22.6
    
    
    
    68.4
    
    
    
    22.4Gross profit
    
    
    87.6
    
    
    
    75.8
    
    
    
    80.9
    
    
    
    76.5
    
    
    
    272.1
    
    
    
    77.4
    
    
    
    236.5
    
    
    
    77.6Selling, general and administrative expenses
    
    
    67.0
    
    
    
    58.0
    
    
    
    63.6
    
    
    
    60.1
    
    
    
    203.3
    
    
    
    57.8
    
    
    
    184.6
    
    
    
    60.6Income from operations
    
    
    20.6
    
    
    
    17.8
    
    
    
    17.3
    
    
    
    16.4
    
    
    
    68.8
    
    
    
    19.6
    
    
    
    51.9
    
    
    
    17.0Exchange gain (loss), net
    
    
    1.6
    
    
    
    1.4
    
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    1.7
    
    
    
    0.6Interest expense
    
    
    (3.9
    )
    
    
    (3.3
    )
    
    
    (4.1
    )
    
    
    (3.8
    )
    
    
    (11.8
    )
    
    
    (3.3
    )
    
    
    (14.0
    )
    
    
    (4.7
    )Interest income
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.1
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.1Loss on extinguishment of debt
    
    
    (1.6
    )
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    (0.5
    )
    
    
    (9.8
    )
    
    
    (3.2
    )Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.6
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.1
    )Other income
    
    
    0.3
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1Income before income taxes
    
    
    17.3
    
    
    
    15.0
    
    
    
    12.8
    
    
    
    12.1
    
    
    
    54.3
    
    
    
    15.5
    
    
    
    30.0
    
    
    
    9.8Income tax expense
    
    
    6.3
    
    
    
    5.5
    
    
    
    3.9
    
    
    
    3.7
    
    
    
    18.3
    
    
    
    5.3
    
    
    
    10.7
    
    
    
    3.5Income from continuing operations
    
    
    11.0
    
    
    
    9.5
    
    
    
    8.9
    
    
    
    8.4
    
    
    
    36.0
    
    
    
    10.2
    
    
    
    19.3
    
    
    
    6.3Loss on discontinued operations,
net of income tax expense
of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    11.0
    
    
    
    9.5
    %
    
    $
    8.9
    
    
    
    8.4
    %
    
    $
    36.0
    
    
    
    10.2
    %
    
    $
    19.3
    
    
    
    6.3
    %
 Three months ended September 30, 2006 compared to the three months ended September 30, 2005
 Corporate,United
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    ConsolidatedDollars in millions
    
    Mexico
    
    
    States
    
    
    Europe
    
    
    All Others
    
    
    and Other
    
    
    TotalThree Months Ended September 30, 2006Net sales
    
    $
    85.0
    
    
    $
    24.2
    
    
    $
    6.4
    
    
    $
    
    
    
    $
    
    
    
    $
    115.6Cost of sales
    
    
    21.1
    
    
    
    6.0
    
    
    
    1.4
    
    
    
    
    
    
    
    (0.5
    )
    
    
    28.0Gross profit
    
    
    63.9
    
    
    
    18.2
    
    
    
    5.0
    
    
    
    
    
    
    
    0.5
    
    
    
    87.6Selling, general and
administrative expenses
    
    
    42.6
    
    
    
    14.3
    
    
    
    4.9
    
    
    
    0.8
    
    
    
    4.4
    
    
    
    67.0Income (loss) from operations
    
    $
    21.3
    
    
    $
    3.9
    
    
    $
    0.1
    
    
    $
    (0.8
    )
    
    $
    (3.9
    )
    
    $
    20.6Three Months Ended September 30, 2005Net sales
    
    $
    76.9
    
    
    $
    22.2
    
    
    $
    6.6
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    105.8Cost of sales
    
    
    18.9
    
    
    
    4.7
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    
    
    
    
    24.9Gross profit
    
    
    58.0
    
    
    
    17.5
    
    
    
    5.4
    
    
    
    0.1
    
    
    
    
    
    
    
    80.9Selling, general and
administrative expenses
    
    
    38.3
    
    
    
    15.1
    
    
    
    5.3
    
    
    
    0.2
    
    
    
    4.7
    
    
    
    63.6Income (loss) from operations
    
    $
    19.7
    
    
    $
    2.4
    
    
    $
    0.1
    
    
    $
    (0.2
    )
    
    $
    (4.7
    )
    
    $
    17.3
 45




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##### Table of Contents



Net sales
     46




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##### Table of Contents



Gross profit.
    Selling, general and administrative expenses.
    47




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##### Table of Contents



Exchange gain (loss).
 Interest expense, net of interest income. 3 4
 Loss on extinguishment of debt. 3 4 3 4
 Other Expense, net.
 Income tax expense.
 48




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##### Table of Contents



Net income (loss).
 Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
 Corporate,United
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    ConsolidatedDollars in millions
    
    Mexico
    
    
    States
    
    
    Europe
    
    
    All Others
    
    
    and Other
    
    
    TotalNine Months Ended September 30, 2006Net sales
    
    $
    257.8
    
    
    $
    71.7
    
    
    $
    21.9
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    351.5Cost of sales
    
    
    60.4
    
    
    
    17.2
    
    
    
    4.5
    
    
    
    0.1
    
    
    
    (2.8
    )
    
    
    79.4Gross profit
    
    
    197.4
    
    
    
    54.5
    
    
    
    17.4
    
    
    
    0.0
    
    
    
    2.8
    
    
    
    272.1Selling, general and
administrative expenses
    
    
    126.4
    
    
    
    43.6
    
    
    
    16.7
    
    
    
    2.0
    
    
    
    14.6
    
    
    
    203.3Income (loss) from operations
    
    $
    71.0
    
    
    $
    10.9
    
    
    $
    0.7
    
    
    $
    (2.0
    )
    
    $
    (11.8
    )
    
    $
    68.8Nine Months Ended September 30, 2005Net sales
    
    $
    214.6
    
    
    $
    67.0
    
    
    $
    22.9
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    304.9Cost of sales
    
    
    51.6
    
    
    
    14.6
    
    
    
    3.8
    
    
    
    0.2
    
    
    
    (1.8
    )
    
    
    68.4Gross profit
    
    
    163.0
    
    
    
    52.4
    
    
    
    19.1
    
    
    
    0.2
    
    
    
    1.8
    
    
    
    236.5Selling, general and
administrative expenses
    
    
    105.2
    
    
    
    47.3
    
    
    
    17.6
    
    
    
    0.8
    
    
    
    13.7
    
    
    
    184.6Income (loss) from operations
    
    $
    57.8
    
    
    $
    5.1
    
    
    $
    1.5
    
    
    $
    (0.6
    )
    
    $
    (11.9
    )
    
    $
    51.9
 Net sales
   49




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th
    Gross profit.
   50




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Selling, general and administrative expenses.
      Exchange gain (loss).
 Interest expense, net of interest income. 3 4
 51




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Loss on extinguishment of debt. 3 4 3 4 3 4
 Other Expense, net.
 Income tax expense.
 Net income.
 Liquidity and Capital Resources
 Overview
  52




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Liquidity
 3 4 3 4 3 4 3 4 3 4
  3 4 3 4 3 4 3 4 3 4 3 4
 3 4 3 4
 3 4
  3 4
 53




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3 4 3 4
 3 4
  3 4
  54




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Cash Flows
   3 4 3 4
  Recent Accounting Pronouncements
   55




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56




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Business Trends and Initiatives
     57




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Risk
    58




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Coverage inMexican
    
    
    Average Strike
    
    
    Fair Value inForeign Currency
    

    Pesos
    
    
    Price
    
    
    U.S. Dollars(1)
    
    
    Maturity DateAt September 30, 2006:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    217,000
    
    
    
    11.66-12.28
    
    
    $
    (286
    )
    
    Oct.-Dec. 2006Mexican peso
    
    
    110,000
    
    
    
    12.03-12.34
    
    
    
    (156
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    153,000
    
    
    
    11.69-12.10
    
    
    
    (112
    )
    
    Apr.-June 2007Mexican peso
    
    
    100,000
    
    
    
    11.79-12.17
    
    
    
    (104
    )
    
    July-Sept. 2007Mexican peso
    
    
    150,000
    
    
    
    11.87-11.93
    
    
    
    (30
    )
    
    Oct.-Dec. 2007Mexican peso
    
    
    50,000
    
    
    
    11.96
    
    
    
    (9
    )
    
    Jan. 2008780,000
    
    
    
    
    
    
    $
    (697
    )Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    217,000
    
    
    
    10.56-11.12
    
    
    $
    139
    
    
    Oct.-Dec. 2006Mexican peso
    
    
    110,000
    
    
    
    10.90-11.24
    
    
    
    (47
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    153,000
    
    
    
    10.59-11.00
    
    
    
    50
    
    
    Apr.-June 2007Mexican peso
    
    
    100,000
    
    
    
    10.69-11.07
    
    
    
    (22
    )
    
    July-Sept. 2007Mexican peso
    
    
    150,000
    
    
    
    10.76-10.81
    
    
    
    70
    
    
    Oct.-Dec. 2007Mexican peso
    
    
    50,000
    
    
    
    10.84
    
    
    
    23
    
    
    Jan. 2008780,000
    
    
    
    
    
    
    $
    213
  Coverage inMexican
    
    
    Average Strike
    
    
    Fair Value inForeign Currency
    
    Pesos
    
    
    Price
    
    
    U.S. Dollars(1)
    
    
    Maturity DateAt December 31, 2005:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    150,000
    
    
    
    12.40-13.19
    
    
    $
    (225
    )
    
    Jan.-Mar. 2006Mexican peso
    
    
    176,000
    
    
    
    11.87-12.87
    
    
    
    (309
    )
    
    Apr.-June 2006Mexican peso
    
    
    162,000
    
    
    
    11.55-12.73
    
    
    
    (190
    )
    
    July-Sept. 2006Mexican peso
    
    
    187,000
    
    
    
    11.66-12.28
    
    
    
    (136
    )
    
    Oct.-Dec. 2006Mexican peso
    
    
    80,000
    
    
    
    12.29-12.34
    
    
    
    (103
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    73,000
    
    
    
    11.86-11.90
    
    
    
    (5
    )
    
    Apr.-June 2007828,000
    
    
    
    
    
    
    $
    (968
    )Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    150,000
    
    
    
    11.23-11.95
    
    
    $
    (805
    )
    
    Jan.-Mar. 2006Mexican peso
    
    
    176,000
    
    
    
    10.78-11.65
    
    
    
    (472
    )
    
    Apr.-June 2006Mexican peso
    
    
    162,000
    
    
    
    10.47-11.54
    
    
    
    (378
    )
    
    July-Sept. 2006Mexican peso
    
    
    187,000
    
    
    
    10.56-11.12
    
    
    
    (151
    )
    
    Oct.-Dec. 2006Mexican peso
    
    
    80,000
    
    
    
    11.19-11.24
    
    
    
    (149
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    73,000
    
    
    
    10.75-10.78
    
    
    
    (21
    )
    
    Apr.-June 2007828,000
    
    
    
    
    
    
    $
    (1,976
    )
 
 (1)
    
    The Fair Value of the option contracts presented above, an unrealized loss of $484,000 and
$2,944,000 at September 30, 2006 and December 31, 2005, respectively, represents the carrying
value and was recorded in
accrued liabilities in the consolidated balance sheets. 59




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ITEM 4. CONTROLS AND PROCEDURES
   60




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
  ExhibitNumber31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.3
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 61




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SIGNATURE
  Jafra Worldwide Holdings (Lux) S.àr.l./s/ EUGENIO LOPEZEugenio LopezChief Executive Officer/s/ ENRIQUE MARCOEnrique MarcoChief Financial Officer (Principal Financial
Accounting Officer)/s/ STACY WOLFStacy WolfCorporate Controller (Principal Accounting Officer)
  62