##### Table of Contents



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 June 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
    
    15Consolidated Statements of Operations
    
    16Consolidated Statements of Cash Flows
    
    17Notes to Consolidated Financial Statements
    
    18Financial Statements  Distribuidora Comercial Jafra, S.A. de C.V.Balance Sheets
    
    25Statements of Operations
    
    26Statements of Cash Flows
    
    27Notes to Financial Statements
    
    28Consolidated Financial Statements  Jafra Cosmetics International, S.A. de C.V. and SubsidiariesConsolidated Balance Sheets
    
    33Consolidated Statements of Income
    
    34Consolidated Statements of Cash Flows
    
    35Notes to Consolidated Financial Statements
    
    36Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    40Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    53Item 4.
    
    Controls and Procedures
    
    54PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    55Item 1A.
    
    Risk Factors
    
    55Item 6.
    
    Exhibits
    
    55Signature
    
    56EXHIBIT 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)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    39,018
    
    
    $
    24,819Receivables, net
    
    
    48,203
    
    
    
    43,398Inventories, net
    
    
    48,772
    
    
    
    38,930Prepaid income taxes
    
    
    4,301
    
    
    
    2,590Prepaid expenses and other current assets
    
    
    8,397
    
    
    
    8,931Deferred income taxes
    
    
    22,896
    
    
    
    15,278Assets from discontinued operations
    
    
    
    
    
    
    27Total current assets
    
    
    171,587
    
    
    
    133,973Property and equipment, net
    
    
    50,107
    
    
    
    54,412Other assets:Goodwill
    
    
    62,690
    
    
    
    64,794Trademarks
    
    
    40,759
    
    
    
    43,437Deferred financing fees, employee supplemental savings plan and other assets
    
    
    9,830
    
    
    
    11,451Noncurrent assets from discontinued operations
    
    
    
    
    
    
    33Total assets
    
    $
    334,973
    
    
    $
    308,100LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    20,106
    
    
    $
    18,839Accrued liabilities
    
    
    55,000
    
    
    
    58,432Income taxes payable
    
    
    14,689
    
    
    
    4,269Deferred income taxes
    
    
    952
    
    
    
    Liabilites from discontinued operations
    
    
    
    
    
    
    40Total current liabilities
    
    
    90,747
    
    
    
    81,580Long-term debt
    
    
    130,000
    
    
    
    130,000Deferred income taxes
    
    
    19,151
    
    
    
    21,072Employee supplemental savings plan and other long-term liabilities
    
    
    5,431
    
    
    
    5,917Total liabilities
    
    
    245,329
    
    
    
    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)
    
    
    16,651
    
    
    
    (8,390
    )Accumulated other comprehensive loss
    
    
    (10,418
    )
    
    
    (5,490
    )Total stockholders equity
    
    
    89,644
    
    
    
    69,531Total liabilities and stockholders equity
    
    $
    334,973
    
    
    $
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    114,669
    
    
    $
    102,291
    
    
    $
    235,866
    
    
    $
    199,109Cost of sales
    
    
    23,572
    
    
    
    21,955
    
    
    
    51,428
    
    
    
    43,520Gross profit
    
    
    91,097
    
    
    
    80,336
    
    
    
    184,438
    
    
    
    155,589Selling, general and administrative expenses
    
    
    67,701
    
    
    
    60,771
    
    
    
    136,282
    
    
    
    120,968Income from operations
    
    
    23,396
    
    
    
    19,565
    
    
    
    48,156
    
    
    
    34,621Other income (expense):Exchange (loss) gain, net
    
    
    (2,260
    )
    
    
    2,571
    
    
    
    (2,370
    )
    
    
    2,078Interest expense
    
    
    (4,003
    )
    
    
    (4,619
    )
    
    
    (7,888
    )
    
    
    (9,821
    )Interest income
    
    
    381
    
    
    
    53
    
    
    
    696
    
    
    
    164Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,753
    )Other expense
    
    
    (299
    )
    
    
    (97
    )
    
    
    (1,670
    )
    
    
    (214
    )Other income
    
    
    
    
    
    
    55
    
    
    
    55
    
    
    
    84Income before income taxes
    
    
    17,215
    
    
    
    17,528
    
    
    
    36,979
    
    
    
    17,159Income tax expense
    
    
    5,846
    
    
    
    4,820
    
    
    
    11,938
    
    
    
    6,821Income from continuing operations
    
    
    11,369
    
    
    
    12,708
    
    
    
    25,041
    
    
    
    10,338Loss on discontinued operations, net of income tax
expense of $0.0 million in 2005
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (17
    )Net income
    
    $
    11,369
    
    
    $
    12,701
    
    
    $
    25,041
    
    
    $
    10,321
  5




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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    25,041
    
    
    $
    10,321Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    2,403
    
    
    
    6,705Amortization and write off of deferred
financing fees
    
    
    555
    
    
    
    2,737Provision for uncollectible accounts receivable
    
    
    6,204
    
    
    
    4,043Unrealized foreign exchange and derivative
losses (gains)
    
    
    2,491
    
    
    
    (2,456
    )Deferred income taxes
    
    
    (8,637
    )
    
    
    (1,589
    )Changes in operating assets and liabilities:Receivables
    
    
    (13,582
    )
    
    
    (424
    )Inventories
    
    
    (11,901
    )
    
    
    (2,019
    )Prepaid expenses and other current assets
    
    
    (807
    )
    
    
    (303
    )Other assets
    
    
    327
    
    
    
    304Accounts payable and accrued liabilities
    
    
    4,312
    
    
    
    (6,682
    )Income taxes payable/prepaid
    
    
    8,961
    
    
    
    (1,621
    )Other long-term liabilities
    
    
    (609
    )
    
    
    177Net operating activities of discontinued
operations
    
    
    20
    
    
    
    18Net cash provided by operating activities
    
    
    14,778
    
    
    
    9,211Cash flows from investing activities:Purchases of property and equipment
    
    
    (572
    )
    
    
    (956
    )Other and investments related to employee
supplemental savings plan
    
    
    606
    
    
    
    (421
    )Net cash provided by (used in) investing
activities
    
    
    34
    
    
    
    (1,377
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    
    
    
    
    (69,500
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    46,000Repayments under revolving credit facility
    
    
    
    
    
    
    (44,000
    )Repayment of Vorwerk note
    
    
    
    
    
    
    (20,000
    )Equity contribution from shareholder
    
    
    
    
    
    
    79,100Net cash used in financing activities
    
    
    
    
    
    
    (8,400
    )Effect of exchange rate changes on cash
    
    
    (613
    )
    
    
    (1,011
    )Net increase (decrease) in cash and cash equivalents
    
    
    14,199
    
    
    
    (1,577
    )Cash and cash equivalents at beginning of period
    
    
    24,819
    
    
    
    10,586Cash and cash equivalents at end of period
    
    $
    39,018
    
    
    $
    9,009
  6




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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)
    (2) Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    12,872
    
    
    $
    11,165Finished goods
    
    
    35,900
    
    
    
    27,765Total inventories
    
    $
    48,772
    
    
    $
    38,930
 (3) Property and Equipment
  June 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    15,571
    
    
    $
    16,193Buildings
    
    
    17,961
    
    
    
    17,255Machinery, equipment and other
    
    
    43,172
    
    
    
    56,98276,704
    
    
    
    90,430Less accumulated depreciation
    
    
    26,597
    
    
    
    36,018Property and equipment, net
    
    $
    50,107
    
    
    $
    54,412
 8




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##### Table of Contents



JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (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
    
    
    
    
    
    
    (1,731
    )
    
    
    (373
    )
    
    
    (2,104
    )Balance as of June 30, 2006
    
    $
    32,188
    
    
    $
    26,106
    
    
    $
    4,396
    
    
    $
    62,690
 (5) Income Taxes
  (6) Debt
 3 4 3 4 3 4 3 4 3 4
  9




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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 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)
  (7) Restructuring Charges
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Opening balance
    
    $
    268
    
    
    $
    1,937
    
    
    $
    459
    
    
    $
    2,391Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Charges against reserves
    
    
    (99
    )
    
    
    (240
    )
    
    
    (290
    )
    
    
    (694
    )Ending balance
    
    $
    169
    
    
    $
    1,697
    
    
    $
    169
    
    
    $
    1,697
 (8) Comprehensive Income
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    11,369
    
    
    $
    12,701
    
    
    $
    25,041
    
    
    $
    10,321Unrealized and deferred realized loss on derivatives
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    (74
    )Reclassification of deferred realized loss to
exchange (loss) gain
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    131Reclassification of deferred realized (gain) loss
to cost of sales
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    8Foreign currency translation adjustments
    
    
    (3,253
    )
    
    
    (163
    )
    
    
    (4,928
    )
    
    
    378Comprehensive income
    
    $
    8,116
    
    
    $
    12,580
    
    
    $
    20,113
    
    
    $
    10,764
 11




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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
    
    Corporate,Mexico
    
    Republic
    
    Europe
    
    Others
    
    and Other
    
    Total(in thousands)As of and for the three months ended June 30,
2006Net sales
    
    $
    81,933
    
    
    $
    24,668
    
    
    $
    8,068
    
    
    $
    
    
    
    $
    
    
    
    $
    114,669Income (loss) from operations
    
    
    24,825
    
    
    
    3,775
    
    
    
    179
    
    
    
    (621
    )
    
    
    (4,762
    )
    
    
    23,396Depreciation
    
    
    782
    
    
    
    344
    
    
    
    56
    
    
    
    15
    
    
    
    
    
    
    
    1,197Segment assets
    
    
    228,284
    
    
    
    89,704
    
    
    
    16,605
    
    
    
    1,482
    
    
    
    (1,102
    )
    
    
    334,973Goodwill
    
    
    26,106
    
    
    
    32,188
    
    
    
    4,396
    
    
    
    
    
    
    
    
    
    
    
    62,690For the three months ended June 30, 2005Net sales
    
    $
    71,108
    
    
    $
    22,480
    
    
    $
    8,549
    
    
    $
    154
    
    
    $
    
    
    
    $
    102,291Income (loss) from operations
    
    
    20,679
    
    
    
    1,539
    
    
    
    898
    
    
    
    (221
    )
    
    
    (3,330
    )
    
    
    19,565Depreciation
    
    
    889
    
    
    
    2,292
    
    
    
    77
    
    
    
    7
    
    
    
    
    
    
    
    3,265As 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 six months ended June 30, 2006Net sales
    
    $
    172,801
    
    
    $
    47,470
    
    
    $
    15,503
    
    
    $
    92
    
    
    $
    
    
    
    $
    235,866Income (loss) from operations
    
    
    49,696
    
    
    
    6,945
    
    
    
    625
    
    
    
    (1,028
    )
    
    
    (8,082
    )
    
    
    48,156Depreciation
    
    
    1,569
    
    
    
    704
    
    
    
    106
    
    
    
    24
    
    
    
    
    
    
    
    2,403Capital expenditures
    
    
    159
    
    
    
    131
    
    
    
    38
    
    
    
    244
    
    
    
    
    
    
    
    572For the six months ended June 30, 2005Net sales
    
    $
    137,676
    
    
    $
    44,811
    
    
    $
    16,277
    
    
    $
    345
    
    
    $
    
    
    
    $
    199,109Income (loss) from operations
    
    
    38,094
    
    
    
    2,740
    
    
    
    1,374
    
    
    
    (311
    )
    
    
    (7,276
    )
    
    
    34,621Depreciation
    
    
    1,898
    
    
    
    4,605
    
    
    
    188
    
    
    
    14
    
    
    
    
    
    
    
    6,705Capital expenditures
    
    
    407
    
    
    
    386
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    956
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JAFRA WORLDWIDE HOLDINGS (LUX) S.àR.L. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Corporate expenses
    
    $
    (4,665
    )
    
    $
    (3,128
    )
    
    $
    (7,956
    )
    
    $
    (6,368
    )Unusual charges(1)
    
    
    (97
    )
    
    
    (202
    )
    
    
    (126
    )
    
    
    (908
    )Total corporate, unallocated and other
    
    $
    (4,762
    )
    
    $
    (3,330
    )
    
    $
    (8,082
    )
    
    $
    (7,276
    )
 
 (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
      13




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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
   14




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,272
    
    
    $
    9,479Receivables, net
    
    
    4,373
    
    
    
    3,852Inventories, net
    
    
    11,674
    
    
    
    9,398Receivables from affiliates
    
    
    15,493
    
    
    
    8,251Prepaid expenses and other current assets
    
    
    3,244
    
    
    
    2,344Deferred income taxes
    
    
    10,615
    
    
    
    10,511Total current assets
    
    
    61,671
    
    
    
    43,835Property and equipment, net
    
    
    16,554
    
    
    
    17,118Other assets:Goodwill
    
    
    36,584
    
    
    
    36,957Notes receivable from affiliates
    
    
    14,530
    
    
    
    13,338Deferred financing fees, net
    
    
    1,667
    
    
    
    1,869Employee supplemental savings plan and other assets
    
    
    5,332
    
    
    
    5,938Total assets
    
    $
    136,338
    
    
    $
    119,055LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,127
    
    
    $
    2,728Accrued liabilities
    
    
    23,533
    
    
    
    22,124Income taxes payable
    
    
    4,210
    
    
    
    2,472Payables to affiliates
    
    
    15,581
    
    
    
    6,406Total current liabilities
    
    
    45,451
    
    
    
    33,730Long-term debt
    
    
    52,000
    
    
    
    52,000Deferred income taxes
    
    
    5,852
    
    
    
    5,852Employee supplemental savings plan and other long-term
liabilities
    
    
    5,431
    
    
    
    5,917Total liabilities
    
    
    108,734
    
    
    
    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
    
    
    (5,956
    )
    
    
    (12,173
    )Accumulated other comprehensive loss
    
    
    (2,398
    )
    
    
    (2,229
    )Total stockholders equity
    
    
    27,604
    
    
    
    21,556Total liabilities and stockholders equity
    
    $
    136,338
    
    
    $
    119,055
  15




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JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales to third parties
    
    $
    32,736
    
    
    $
    31,029
    
    
    $
    62,973
    
    
    $
    61,088Sales to affiliates
    
    
    748
    
    
    
    171
    
    
    
    1,286
    
    
    
    391Net sales
    
    
    33,484
    
    
    
    31,200
    
    
    
    64,259
    
    
    
    61,479Cost of sales
    
    
    8,679
    
    
    
    7,216
    
    
    
    16,676
    
    
    
    13,848Gross profit
    
    
    24,805
    
    
    
    23,984
    
    
    
    47,583
    
    
    
    47,631Selling, general and administrative
expenses
    
    
    27,210
    
    
    
    26,392
    
    
    
    50,784
    
    
    
    52,134Management fee income from affiliates
    
    
    (1,071
    )
    
    
    (470
    )
    
    
    (2,844
    )
    
    
    (2,066
    )Royalty income from affiliates, net
    
    
    (6,329
    )
    
    
    (5,618
    )
    
    
    (13,524
    )
    
    
    (11,204
    )Income from operations
    
    
    4,995
    
    
    
    3,680
    
    
    
    13,167
    
    
    
    8,767Other income (expense):Exchange gain (loss), net
    
    
    244
    
    
    
    (266
    )
    
    
    372
    
    
    
    (375
    )Interest expense
    
    
    (1,543
    )
    
    
    (2,109
    )
    
    
    (3,042
    )
    
    
    (4,167
    )Interest income
    
    
    279
    
    
    
    127
    
    
    
    447
    
    
    
    278Loss on extinquishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,963
    )Other expense
    
    
    (229
    )
    
    
    (17
    )
    
    
    (335
    )
    
    
    (18
    )Other income
    
    
    
    
    
    
    43
    
    
    
    47
    
    
    
    70Income before income taxes
    
    
    3,746
    
    
    
    1,458
    
    
    
    10,656
    
    
    
    592Income tax expense
    
    
    1,520
    
    
    
    505
    
    
    
    4,439
    
    
    
    1,994Net income (loss)
    
    $
    2,226
    
    
    $
    953
    
    
    $
    6,217
    
    
    $
    (1,402
    )
  16




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##### Table of Contents



JAFRA
COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune, 302006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    6,217
    
    
    $
    (1,402
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    810
    
    
    
    4,793Provision for uncollectible accounts receivable
    
    
    205
    
    
    
    250Write off and amortization of deferred financing fees
    
    
    202
    
    
    
    1,195Unrealized foreign exchange (gain) loss
    
    
    (152
    )
    
    
    328Deferred income taxes
    
    
    (104
    )
    
    
    1,832Changes in operating assets and liabilities:Receivables
    
    
    (555
    )
    
    
    270Inventories
    
    
    (2,043
    )
    
    
    1,362Prepaid expenses and other current assets
    
    
    (798
    )
    
    
    316Intercompany receivables and payables
    
    
    1,857
    
    
    
    4,353Other assets
    
    
    131
    
    
    
    321Accounts payable and accrued liabilities
    
    
    545
    
    
    
    (1,248
    )Income taxes payable
    
    
    1,712
    
    
    
    (2,058
    )Other long-term liabilities
    
    
    (609
    )
    
    
    177Net cash provided by operating activities
    
    
    7,418
    
    
    
    10,489Cash flows from investing activities:Purchases of property and equipment
    
    
    (169
    )
    
    
    (549
    )Other and investments related to employee supplemental savings plan
    
    
    606
    
    
    
    (421
    )Net cash provided by (used in) investing activities
    
    
    437
    
    
    
    (970
    )Cash flows from financing activities:Repayments of subordinated debt
    
    
    
    
    
    
    (27,800
    )Repayment of Vorwerk note
    
    
    
    
    
    
    (20,000
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    43,000Repayments under revolving credit facility
    
    
    
    
    
    
    (35,000
    )Advances to affiliates
    
    
    (1,214
    )
    
    
    (604
    )Equity contribution from Parent
    
    
    
    
    
    
    31,662Net cash used in financing activities
    
    
    (1,214
    )
    
    
    (8,742
    )Effect of exchange rate changes on cash
    
    
    152
    
    
    
    (306
    )Net increase in cash and cash equivalents
    
    
    6,793
    
    
    
    471Cash and cash equivalents at beginning of period
    
    
    9,479
    
    
    
    5,748Cash and cash equivalents at end of period
    
    $
    16,272
    
    
    $
    6,219
  17




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation
 société à responsabilité limitée société
anonyme .
    New Accounting Pronouncements.
   18




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
    (2) Property and Equipment
  June 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    6,188
    
    
    $
    6,188Buildings
    
    
    8,482
    
    
    
    7,200Machinery, equipment and other
    
    
    13,345
    
    
    
    25,17428,015
    
    
    
    38,562Less accumulated depreciation
    
    
    11,461
    
    
    
    21,444Property and equipment, net
    
    $
    16,554
    
    
    $
    17,118
 19




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (3) Goodwill and Other Intangible Assets
  United
    
    
    
    
    
    
    ConsolidatedGoodwill
    
    States
    
    
    Europe
    
    
    TotalBalance as of December 31, 2005
    
    $
    32,188
    
    
    $
    4,769
    
    
    $
    36,957Translation effect
    
    
    
    
    
    
    (373
    )
    
    
    (373
    )Balance as of June 30, 2006
    
    $
    32,188
    
    
    $
    4,396
    
    
    $
    36,584
 (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
 20




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##### Table of Contents



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
 21




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  (6) Restructuring Charges
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Opening balance
    
    $
    268
    
    
    $
    1,937
    
    
    $
    459
    
    
    $
    2,391Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Charges against reserves
    
    
    (99
    )
    
    
    (240
    )
    
    
    (290
    )
    
    
    (694
    )Ending balance
    
    $
    169
    
    
    $
    1,697
    
    
    $
    169
    
    
    $
    1,697
 (7) Comprehensive Income (Loss)
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    2,226
    
    
    $
    953
    
    
    $
    6,217
    
    
    $
    (1,402
    )Foreign currency translation adjustments
    
    
    (98
    )
    
    
    48
    
    
    
    (169
    )
    
    
    214Comprehensive income (loss)
    
    $
    2,128
    
    
    $
    1,001
    
    
    $
    6,048
    
    
    $
    (1,188
    )
 22




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 (8) Related Party Transactions
      (9) Financial Reporting for Business Segments
   23




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  United Statesand the
    
    
    
    
    
    
    
    
    
    Corporate,Dominican
    
    
    
    
    
    All
    
    Unallocated
    
    ConsolidatedRepublic
    
    Europe (1)
    
    Others
    
    and Other
    
    TotalAs of and for the three
months ended June 30, 2006Net sales
    
    $
    24,668
    
    
    $
    8,068
    
    
    $
    
    
    
    $
    748
    
    
    $
    33,484Income (loss) from operations
    
    
    3,775
    
    
    
    179
    
    
    
    (9
    )
    
    
    1,050
    
    
    
    4,995Depreciation
    
    
    344
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    400Segment assets
    
    
    89,704
    
    
    
    16,605
    
    
    
    6
    
    
    
    30,023
    
    
    
    136,338Goodwill
    
    
    32,188
    
    
    
    4,396
    
    
    
    
    
    
    
    
    
    
    
    36,584For the three months ended
June 30, 2005Net sales
    
    $
    22,480
    
    
    $
    8,549
    
    
    $
    
    
    
    $
    171
    
    
    $
    31,200Income from operations
    
    
    1,539
    
    
    
    898
    
    
    
    
    
    
    
    1,243
    
    
    
    3,680Depreciation
    
    
    2,292
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    2,369As of December 31, 2005Segment assets
    
    $
    82,448
    
    
    $
    15,009
    
    
    $
    9
    
    
    $
    21,589
    
    
    $
    119,055Goodwill
    
    
    32,188
    
    
    
    4,769
    
    
    
    
    
    
    
    
    
    
    
    36,957For the six months ended June
30, 2006Net sales
    
    $
    47,470
    
    
    $
    15,503
    
    
    $
    
    
    
    $
    1,286
    
    
    $
    64,259Income (loss) from operations
    
    
    6,945
    
    
    
    625
    
    
    
    (9
    )
    
    
    5,606
    
    
    
    13,167Depreciation
    
    
    704
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    810Capital expenditures
    
    
    131
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    169For the six months ended June
30, 2005Net sales
    
    $
    44,811
    
    
    $
    16,277
    
    
    $
    
    
    
    $
    391
    
    
    $
    61,479Income from operations
    
    
    2,740
    
    
    
    1,374
    
    
    
    
    
    
    
    4,653
    
    
    
    8,767Depreciation
    
    
    4,605
    
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    4,793Capital expenditures
    
    
    386
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    549
 
 (1)
    
    excludes Jafra Poland sp.zo.o, an indirect wholly-owned subsidiary of the Parent and
affiliate of JCI  Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Corporate expenses
    
    $
    (6,063
    )
    
    $
    (4,622
    )
    
    $
    (10,260
    )
    
    $
    (8,166
    )Transaction with affiliates
    
    
    7,400
    
    
    
    6,088
    
    
    
    16,368
    
    
    
    13,267Unusual charges(1)
    
    
    (287
    )
    
    
    (223
    )
    
    
    (502
    )
    
    
    (448
    )Total corporate, unallocated and other
    
    $
    1,050
    
    
    $
    1,243
    
    
    $
    5,606
    
    
    $
    4,653
 
 (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. 24




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 BALANCE SHEETS
 (In thousands, except share amounts)
 (Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    273
    
    
    $
    505Receivables
    
    
    471
    
    
    
    366Inventories
    
    
    37,925
    
    
    
    30,697Receivables from affiliates
    
    
    19,772
    
    
    
    18,143Prepaid income taxes
    
    
    3,546
    
    
    
    2,465Prepaid expenses and other current assets
    
    
    4,202
    
    
    
    5,232Deferred income taxes
    
    
    
    
    
    
    1,109Total current assets
    
    
    66,189
    
    
    
    58,517Machinery and equipment, net
    
    
    2,418
    
    
    
    2,667Other assets:Trademarks
    
    
    1,142
    
    
    
    1,311Deferred financing fees, net
    
    
    1,905
    
    
    
    2,393Investment in preferred shares of affiliated company
    
    
    124,508
    
    
    
    132,763Guarantee fee and other
    
    
    2,021
    
    
    
    2,368Total assets
    
    $
    198,183
    
    
    $
    200,019LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,706
    
    
    $
    12,623Accrued liabilities
    
    
    1,356
    
    
    
    1,794Income taxes payable
    
    
    249
    
    
    
    Payables to affiliates
    
    
    275
    
    
    
    3,143Deferred income taxes
    
    
    952
    
    
    
    Total current liabilities
    
    
    16,538
    
    
    
    17,560Long-term debt
    
    
    78,000
    
    
    
    78,000Deferred income taxes
    
    
    3,711
    
    
    
    5,412Total liabilities
    
    
    98,249
    
    
    
    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
    
    
    60,009
    
    
    
    52,495Accumulated other comprehensive loss
    
    
    (7,570
    )
    
    
    (943
    )Total stockholders equity
    
    
    99,934
    
    
    
    99,047Total liabilities and stockholders equity
    
    $
    198,183
    
    
    $
    200,019
  25




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Third party net sales
    
    $
    44
    
    
    $
    12
    
    
    $
    77
    
    
    $
    12Sales to affiliates
    
    
    41,677
    
    
    
    38,946
    
    
    
    92,008
    
    
    
    75,752Net sales
    
    
    41,721
    
    
    
    38,958
    
    
    
    92,085
    
    
    
    75,764Cost of sales
    
    
    25,410
    
    
    
    23,119
    
    
    
    56,097
    
    
    
    45,409Gross profit
    
    
    16,311
    
    
    
    15,839
    
    
    
    35,988
    
    
    
    30,355Selling, general and administrative expenses
    
    
    682
    
    
    
    (6
    )
    
    
    1,148
    
    
    
    691Management fee expense to affiliate
    
    
    344
    
    
    
    145
    
    
    
    828
    
    
    
    543Service fee expense to affiliate
    
    
    7,790
    
    
    
    10,022
    
    
    
    14,810
    
    
    
    16,725Income from operations
    
    
    7,495
    
    
    
    5,678
    
    
    
    19,202
    
    
    
    12,396Other expense:Exchange (loss) gain, net
    
    
    (2,994
    )
    
    
    3,193
    
    
    
    (4,430
    )
    
    
    2,675Interest expense
    
    
    (2,448
    )
    
    
    (2,446
    )
    
    
    (4,825
    )
    
    
    (5,534
    )Interest income
    
    
    29
    
    
    
    
    
    
    
    83
    
    
    
    21Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,790
    )Other expense
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Income before income taxes
    
    
    2,082
    
    
    
    6,422
    
    
    
    10,030
    
    
    
    3,768Income tax expense
    
    
    447
    
    
    
    1,607
    
    
    
    2,516
    
    
    
    1,592Net income
    
    $
    1,635
    
    
    $
    4,815
    
    
    $
    7,514
    
    
    $
    2,176
  26




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
 
 STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    7,514
    
    
    $
    2,176Adjustments to reconcile net income to net cash
used in operating activities:Depreciation and amortization
    
    
    476
    
    
    
    379Write off and amortization of deferred financing fees
    
    
    353
    
    
    
    1,542Unrealized foreign exchange and derivative loss (gain)
    
    
    5,171
    
    
    
    (2,683
    )Deferred income taxes
    
    
    360
    
    
    
    1,833Changes in operating assets and liabilities:Receivables
    
    
    (132
    )
    
    
    (46
    )Inventories
    
    
    (9,521
    )
    
    
    (3,304
    )Prepaid expenses and other current assets
    
    
    693
    
    
    
    (305
    )Intercompany receivables and payables
    
    
    (5,656
    )
    
    
    5,952Other assets
    
    
    (30
    )
    
    
    (31
    )Accounts payable and accrued liabilities
    
    
    1,647
    
    
    
    (2,800
    )Income taxes payable
    
    
    (1,027
    )
    
    
    (2,869
    )Net cash used in operating activities
    
    
    (152
    )
    
    
    (156
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (60
    )
    
    
    (10
    )Net cash used in investing activities
    
    
    (60
    )
    
    
    (10
    )Cash flows from financing activities:Repurchase of subordinated debt
    
    
    
    
    
    
    (41,700
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    3,000Repayments under revolving credit facility
    
    
    
    
    
    
    (9,000
    )Contribution from shareholders
    
    
    
    
    
    
    47,490Net cash used in financing activities
    
    
    
    
    
    
    (210
    )Effect of exchange rate changes on cash
    
    
    (20
    )
    
    
    298Net decrease in cash
    
    
    (232
    )
    
    
    (78
    )Cash at beginning of period
    
    
    505
    
    
    
    83Cash at end of period
    
    $
    273
    
    
    $
    5
  27




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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.
    28




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS   (continued)
(Unaudited)
  (2) Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    12,840
    
    
    $
    11,061Finished goods
    
    
    25,085
    
    
    
    19,636Total inventories
    
    $
    37,925
    
    
    $
    30,697
 (3) Machinery and Equipment
  June 30,
    
    
    December 31,2006
    
    
    2005Machinery, equipment and other
    
    $
    3,297
    
    
    $
    3,454Less accumulated depreciation.
    
    
    879
    
    
    
    787Machinery and equipment, net
    
    $
    2,418
    
    
    $
    2,667
 (4) Investment in Affiliated Company
  (5) Income Taxes
  29




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##### Table of Contents



DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO 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 3 4 3 4
  3 4
  30




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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 (Loss) Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,635
    
    
    $
    4,815
    
    
    $
    7,514
    
    
    $
    2,176Foreign currency translation adjustments
    
    
    (4,252
    )
    
    
    3,462
    
    
    
    (6,627
    )
    
    
    3,561Comprehensive (loss) income
    
    $
    (2,617
    )
    
    $
    8,277
    
    
    $
    887
    
    
    $
    5,737
 31




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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
    32




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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)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,048
    
    
    $
    14,400Receivables, net
    
    
    43,300
    
    
    
    39,035Receivables from affiliates
    
    
    2,207
    
    
    
    4,579Current deferred income taxes
    
    
    12,281
    
    
    
    3,658Prepaid expenses and other current assets
    
    
    1,445
    
    
    
    1,475Total current assets
    
    
    81,281
    
    
    
    63,147Property and equipment, net
    
    
    30,844
    
    
    
    34,564Other assets:Goodwill
    
    
    26,106
    
    
    
    27,837Trademarks
    
    
    40,611
    
    
    
    43,303Other
    
    
    1,191
    
    
    
    1,535Total assets
    
    $
    180,033
    
    
    $
    170,386LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,431
    
    
    $
    3,595Accrued liabilities
    
    
    28,798
    
    
    
    33,342Income taxes payable
    
    
    10,231
    
    
    
    1,797Payables to affiliates
    
    
    19,337
    
    
    
    19,839Other current liabilities
    
    
    279
    
    
    
    328Total current liabilities
    
    
    63,076
    
    
    
    58,901Deferred income taxes
    
    
    9,931
    
    
    
    10,201Other long-term liabilities
    
    
    2,021
    
    
    
    2,368Total liabilities
    
    
    75,028
    
    
    
    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
    
    
    62,775
    
    
    
    50,087Accumulated other comprehensive loss
    
    
    (12,104
    )
    
    
    (5,505
    )Total stockholders equity
    
    
    105,005
    
    
    
    98,916Total liabilities and stockholders equity
    
    $
    180,033
    
    
    $
    170,386
  33




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    81,889
    
    
    $
    71,096
    
    
    $
    172,724
    
    
    $
    137,664Cost of sales
    
    
    29,682
    
    
    
    29,861
    
    
    
    67,802
    
    
    
    58,353Gross profit
    
    
    52,207
    
    
    
    41,235
    
    
    
    104,922
    
    
    
    79,311Selling, general and administrative expenses
    
    
    41,523
    
    
    
    35,457
    
    
    
    87,672
    
    
    
    69,553Management fee expense to affiliates
    
    
    536
    
    
    
    325
    
    
    
    1,825
    
    
    
    1,523Service fee income from affiliate
    
    
    (7,790
    )
    
    
    (10,022
    )
    
    
    (14,810
    )
    
    
    (16,725
    )Royalty expense to affiliates, net
    
    
    6,329
    
    
    
    5,618
    
    
    
    13,524
    
    
    
    11,204Income from operations
    
    
    11,609
    
    
    
    9,857
    
    
    
    16,711
    
    
    
    13,756Other income (expense):Exchange gain (loss), net
    
    
    495
    
    
    
    (1,610
    )
    
    
    726
    
    
    
    (1,768
    )Interest expense
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (115
    )Interest income
    
    
    196
    
    
    
    46
    
    
    
    388
    
    
    
    102Other expense
    
    
    (91
    )
    
    
    (77
    )
    
    
    (196
    )
    
    
    (189
    )Income before income taxes
    
    
    12,209
    
    
    
    8,131
    
    
    
    17,629
    
    
    
    11,786Income tax expense
    
    
    3,865
    
    
    
    2,701
    
    
    
    4,941
    
    
    
    3,227Net income
    
    $
    8,344
    
    
    $
    5,430
    
    
    $
    12,688
    
    
    $
    8,559
  34




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    12,688
    
    
    $
    8,559Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,184
    
    
    
    1,519Provision for uncollectible accounts receivable
    
    
    5,999
    
    
    
    3,793Unrealized foreign exchange and derivative (gain) loss
    
    
    (2,588
    )
    
    
    1,441Deferred income taxes
    
    
    (8,893
    )
    
    
    (5,254
    )Changes in operating assets and liabilities:Receivables
    
    
    (12,980
    )
    
    
    (853
    )Inventories
    
    
    
    
    
    
    702Prepaid expenses and other current assets
    
    
    (341
    )
    
    
    (203
    )Intercompany receivables and payables
    
    
    2,914
    
    
    
    (11,838
    )Other assets
    
    
    259
    
    
    
    14Accounts payable and accrued liabilities and value added taxes
    
    
    2,070
    
    
    
    (2,481
    )Income taxes payable
    
    
    8,262
    
    
    
    3,304Net cash provided by (used in) operating activities
    
    
    8,574
    
    
    
    (1,297
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (99
    )
    
    
    (397
    )Net cash used in investing activities
    
    
    (99
    )
    
    
    (397
    )Effect of exchange rate changes on cash
    
    
    (827
    )
    
    
    50Net increase (decrease) in cash and cash equivalents
    
    
    7,648
    
    
    
    (1,644
    )Cash and cash equivalents at beginning of period
    
    
    14,400
    
    
    
    4,153Cash and cash equivalents at end of period
    
    $
    22,048
    
    
    $
    2,509
  35




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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.
   36




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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
  June 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    9,383
    
    
    $
    10,004Buildings
    
    
    9,429
    
    
    
    10,056Machinery, equipment and other
    
    
    26,162
    
    
    
    28,12044,974
    
    
    
    48,180Less accumulated depreciation
    
    
    14,130
    
    
    
    13,616Property and equipment, net
    
    $
    30,844
    
    
    $
    34,564
 (3) Goodwill and Other Intangible Assets.
  (4) Income Taxes
  (5) Debt
 3 4 3 4 3 4 3 4 3 4
 37




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JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. 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
 (6) Comprehensive Income
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    8,344
    
    
    $
    5,430
    
    
    $
    12,688
    
    
    $
    8,559Unrealized and deferred realized loss on derivatives
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    (74
    )Reclassification of deferred realized loss to
exchange gain (loss)
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    131Reclassification of deferred realized (gain) loss
to cost of sales
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    8Foreign currency translation adjustments
    
    
    (4,291
    )
    
    
    2,861
    
    
    
    (6,599
    )
    
    
    3,012Comprehensive income
    
    $
    4,053
    
    
    $
    8,333
    
    
    $
    6,089
    
    
    $
    11,636
 (7) Related Party Transactions
    38




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##### Table of Contents



JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   (8) Foreign Currency Option Contracts
      39




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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
  40




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    114.7
    
    
    
    100.0
    %
    
    $
    102.3
    
    
    
    100.0
    %
    
    $
    235.9
    
    
    
    100.0
    %
    
    $
    199.1
    
    
    
    100.0
    %Cost of sales
    
    
    23.6
    
    
    
    20.6
    
    
    
    22.0
    
    
    
    21.5
    
    
    
    51.4
    
    
    
    21.8
    
    
    
    43.5
    
    
    
    21.8Gross profit
    
    
    91.1
    
    
    
    79.4
    
    
    
    80.3
    
    
    
    78.5
    
    
    
    184.5
    
    
    
    78.2
    
    
    
    155.6
    
    
    
    78.2Selling, general and administrative expenses
    
    
    67.7
    
    
    
    59.0
    
    
    
    60.7
    
    
    
    59.3
    
    
    
    136.3
    
    
    
    57.8
    
    
    
    121.0
    
    
    
    60.8Income rom operations
    
    
    23.4
    
    
    
    20.4
    
    
    
    19.6
    
    
    
    19.2
    
    
    
    48.2
    
    
    
    20.4
    
    
    
    34.6
    
    
    
    17.4Exchange (loss) gain, net
    
    
    (2.3
    )
    
    
    (2.0
    )
    
    
    2.6
    
    
    
    2.5
    
    
    
    (2.4
    )
    
    
    (1.0
    )
    
    
    2.1
    
    
    
    1.1Interest expense
    
    
    (4.0
    )
    
    
    (3.5
    )
    
    
    (4.6
    )
    
    
    (4.5
    )
    
    
    (7.9
    )
    
    
    (3.4
    )
    
    
    (9.8
    )
    
    
    (4.9
    )Interest income
    
    
    0.4
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.8
    )
    
    
    (4.9
    )Other expense
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.7
    )
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Income before income taxes
    
    
    17.2
    
    
    
    15.0
    
    
    
    17.5
    
    
    
    17.1
    
    
    
    36.9
    
    
    
    15.6
    
    
    
    17.1
    
    
    
    8.6Income tax expense
    
    
    5.8
    
    
    
    5.1
    
    
    
    4.8
    
    
    
    4.7
    
    
    
    11.9
    
    
    
    5.0
    
    
    
    6.8
    
    
    
    3.4Income from continuing operations
    
    
    11.4
    
    
    
    9.9
    
    
    
    12.7
    
    
    
    12.4
    
    
    
    25.0
    
    
    
    10.6
    
    
    
    10.3
    
    
    
    5.2Loss on discontinued operations,
net of income tax expense
of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    11.4
    
    
    
    9.9
    %
    
    $
    12.7
    
    
    
    12.4
    %
    
    $
    25.0
    
    
    
    10.6
    %
    
    $
    10.3
    
    
    
    5.2
    %
 Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 Corporate,United
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    ConsolidatedDollars in millions
    
    Mexico
    
    
    States
    
    
    Europe
    
    
    All Others
    
    
    and Other
    
    
    TotalThree Months Ended June 30, 2006Net sales
    
    $
    81.9
    
    
    $
    24.7
    
    
    $
    8.1
    
    
    $
    
    
    
    $
    
    
    
    $
    114.7Cost of sales
    
    
    17.6
    
    
    
    5.9
    
    
    
    1.5
    
    
    
    
    
    
    
    (1.4
    )
    
    
    23.6Gross profit
    
    
    64.3
    
    
    
    18.8
    
    
    
    6.6
    
    
    
    
    
    
    
    1.4
    
    
    
    91.1Selling, general and
administrative expenses
    
    
    39.5
    
    
    
    15.0
    
    
    
    6.4
    
    
    
    0.6
    
    
    
    6.2
    
    
    
    67.7Income (loss) from operations
    
    $
    24.8
    
    
    $
    3.8
    
    
    $
    0.2
    
    
    $
    (0.6
    )
    
    $
    (4.8
    )
    
    $
    23.4Three Months Ended June 30, 2005Net sales
    
    $
    71.1
    
    
    $
    22.5
    
    
    $
    8.5
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    102.3Cost of sales
    
    
    16.8
    
    
    
    5.1
    
    
    
    1.5
    
    
    
    0.1
    
    
    
    (1.5
    )
    
    
    22.0Gross profit
    
    
    54.3
    
    
    
    17.4
    
    
    
    7.0
    
    
    
    0.1
    
    
    
    1.5
    
    
    
    80.3Selling, general and
administrative expenses
    
    
    33.6
    
    
    
    15.9
    
    
    
    6.1
    
    
    
    0.3
    
    
    
    4.8
    
    
    
    60.7Income (loss) from operations
    
    $
    20.7
    
    
    $
    1.5
    
    
    $
    0.9
    
    
    $
    (0.2
    )
    
    $
    (3.3
    )
    
    $
    19.6
 41




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##### Table of Contents



Net sales
     42




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##### Table of Contents



Gross profit.
    Selling, general and administrative expenses.
     43




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##### Table of Contents



Exchange (loss) gain.
 Interest expense, net of interest income.
 Other Expense, net.
 Income tax expense.
 Net income (loss).
 44




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##### Table of Contents



Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 Corporate,United
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    ConsolidatedDollars in millions
    
    Mexico
    
    
    States
    
    
    Europe
    
    
    All Others
    
    
    and Other
    
    
    TotalSix Months Ended June 30, 2006Net sales
    
    $
    172.8
    
    
    $
    47.5
    
    
    $
    15.5
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    235.9Cost of sales
    
    
    39.3
    
    
    
    11.2
    
    
    
    3.1
    
    
    
    0.1
    
    
    
    (2.3
    )
    
    
    51.4Gross profit
    
    
    133.5
    
    
    
    36.3
    
    
    
    12.4
    
    
    
    0.0
    
    
    
    2.3
    
    
    
    184.5Selling, general and
administrative expenses
    
    
    83.8
    
    
    
    29.4
    
    
    
    11.7
    
    
    
    1.0
    
    
    
    10.4
    
    
    
    136.3Income (loss) from operations
    
    $
    49.7
    
    
    $
    6.9
    
    
    $
    0.7
    
    
    $
    (1.0
    )
    
    $
    (8.1
    )
    
    $
    48.2Six Months Ended June 30, 2005Net sales
    
    $
    137.7
    
    
    $
    44.8
    
    
    $
    16.3
    
    
    $
    0.3
    
    
    $
    
    
    
    $
    199.1Cost of sales
    
    
    32.6
    
    
    
    9.8
    
    
    
    2.6
    
    
    
    0.1
    
    
    
    (1.6
    )
    
    
    43.5Gross profit
    
    
    105.1
    
    
    
    35.0
    
    
    
    13.7
    
    
    
    0.2
    
    
    
    1.6
    
    
    
    155.6Selling, general and
administrative expenses
    
    
    67.0
    
    
    
    32.3
    
    
    
    12.3
    
    
    
    0.5
    
    
    
    8.9
    
    
    
    121.0Income (loss) from operations
    
    $
    38.1
    
    
    $
    2.7
    
    
    $
    1.4
    
    
    $
    (0.3
    )
    
    $
    (7.3
    )
    
    $
    34.6
 Net sales
   th
 45




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Gross profit.
    Selling, general and administrative expenses.
   46




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Exchange (loss) gain.
 Interest expense, net of interest income. 3 4
 Loss on extinguishment of debt. 3 4
 Other Expense, net.
 Income tax expense.
 47




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Net income.
 Liquidity and Capital Resources
 Overview
  Liquidity
 3 4 3 4 3 4 3 4 3 4
  3 4 3 4 3 4 3 4 3 4 3 4
 48




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3 4 3 4 3 4 3 4 3 4
  3 4
  3 4
 49




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Cash Flows
     50




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Recent Accounting Pronouncements
      51




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Business Trends and Initiatives
     52




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Risk
    53




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##### Table of Contents



Coverage inMexican
    
    
    Average Strike
    
    
    Fair Value inForeign Currency
    
    Pesos
    
    
    Price
    
    
    U.S. Dollars(1)
    
    
    Maturity DateAt June 30, 2006:Purchased puts (Company may sell
peso/buy USD)Mexican peso
    
    
    162,000
    
    
    
    11.55-12.73
    
    
    $
    (192
    )
    
    July-Sept. 2006Mexican peso
    
    
    217,000
    
    
    
    11.66-12.28
    
    
    
    (133
    )
    
    Oct.-Dec. 2006Mexican peso
    
    
    110,000
    
    
    
    12.03-12.34
    
    
    
    (74
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    113,000
    
    
    
    11.86-12.10
    
    
    
    22
    
    
    Apr.-June 2007Mexican peso
    
    
    80,000
    
    
    
    12.14-12.17
    
    
    
    26
    
    
    July.-Sept. 2007682,000
    
    
    
    
    
    
    $
    (351
    )Written calls (Counterparty may
buy peso/sell USD)Mexican peso
    
    
    162,000
    
    
    
    10.47-11.48
    
    
    $
    (65
    )
    
    July-Sept. 2006Mexican peso
    
    
    217,000
    
    
    
    10.56-11.12
    
    
    
    28
    
    
    Oct.-Dec. 2006Mexican peso
    
    
    110,000
    
    
    
    10.90-11.24
    
    
    
    (35
    )
    
    Jan.-Mar. 2007Mexican peso
    
    
    113,000
    
    
    
    10.75-11.00
    
    
    
    12
    
    
    Apr.-June 2007Mexican peso
    
    
    80,000
    
    
    
    11.04-11.07
    
    
    
    (14
    )
    
    July.-Sept. 2007682,000
    
    
    
    
    
    
    $
    (74
    )
  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 $425,000 and
$2,944,000 at June 30, 2006 and December 31, 2005, respectively, represents the carrying value
and was recorded in accrued liabilities in the consolidated balance sheets. 54




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ITEM 4. CONTROLS AND PROCEDURES
   55




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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 2002.32.1
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 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.
 56




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SIGNATURE
  Jafra Worldwide Holdings (Lux) S.àr.l./s/ EUGENIO LOPEZ

          Eugenio LopezChief Executive Officer/s/ ENRIQUE MARCOEnrique MarcoChief Financial Officer (Principal Financial Accounting Officer)/s/ STACY WOLFStacy WolfCorporate Controller (Principal Accounting Officer)
  57