Jafra Worldwide Holdings Lux Sarl 10Q 2006 Q2 Quarterly report

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


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.

(Exact name of Registrant as specified in its charter)


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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YESþ NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero Accelerated Filero Non-Accelerated Filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

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

At August 10, 2006, there were 316,420 shares of Common stock, par value $100 per share, outstanding.

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

Index to Financial Statements and Exhibits

Filed with the Quarterly Report of the Company on Form 10-Q

For the Three and Six Months Ended June 30, 2006


		Page No.
	PART I — FINANCIAL INFORMATION
Item 1. (*)	Financial Statements (Unaudited):
	Consolidated Financial Statements — Jafra Worldwide Holdings (Lux) S.àR.L.
	Consolidated Balance Sheets	4
	Consolidated Statements of Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
	Consolidated Financial Statements — Jafra Cosmetics International, Inc. and Subsidiaries
	Consolidated Balance Sheets	15
	Consolidated Statements of Operations	16
	Consolidated Statements of Cash Flows	17
	Notes to Consolidated Financial Statements	18
	Financial Statements — Distribuidora Comercial Jafra, S.A. de C.V.
	Balance Sheets	25
	Statements of Operations	26
	Statements of Cash Flows	27
	Notes to Financial Statements	28
	Consolidated Financial Statements — Jafra Cosmetics International, S.A. de C.V. and Subsidiaries
	Consolidated Balance Sheets	33
	Consolidated Statements of Income	34
	Consolidated Statements of Cash Flows	35
	Notes to Consolidated Financial Statements	36

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	54

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 6.	Exhibits	55

	Signature	56
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

* Jafra Worldwide Holdings (Lux) S.àr.l. (the “Parent”) is the parent company of Distribuidora Comercial Jafra, S.A. de C.V. (“Jafra Distribution”) and Jafra Cosmetics International, Inc. (“JCI”), which severally issued an original amount of $120 million and $80 million, respectively, of 10³/4% Subordinated Notes of which $78 million and $52 million, respectively, are currently outstanding, (the “10³/4% Notes”). The Parent has fully and unconditionally guaranteed the 10³/4% Notes on a senior subordinated basis and is a “voluntary filer” of reports under the Securities Exchange Act of 1934 pursuant to a covenant under the indenture relating to the 10³/4% Notes. Jafra Distribution and JCI have fully and unconditionally guaranteed the obligations of the other under the 10³/4% Notes on a senior subordinated basis, subject to a 30-day standstill period prior to enforcement of such guarantees. Jafra Cosmetics International, S.A. de C.V. and its subsidiaries (“Jafra Cosmetics S.A.”), indirect subsidiaries of the Parent, have fully and unconditionally guaranteed the obligations of Jafra Distribution under the 10³/4% Notes. As such, the Parent is filing separate financial statements of JCI, Jafra Distribution and Jafra Cosmetics S.A. in addition to its own financial statements, in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006.

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			2005
ASSETS

Current assets:
Cash and cash equivalents	$	39,018		$	24,819
Receivables, net		48,203			43,398
Inventories, net		48,772			38,930
Prepaid income taxes		4,301			2,590
Prepaid expenses and other current assets		8,397			8,931
Deferred income taxes		22,896			15,278
Assets from discontinued operations		—			27

Total current assets		171,587			133,973

Property and equipment, net		50,107			54,412

Other assets:
Goodwill		62,690			64,794
Trademarks		40,759			43,437
Deferred financing fees, employee supplemental savings plan and other assets		9,830			11,451
Noncurrent assets from discontinued operations		—			33

Total assets	$	334,973		$	308,100


LIABILITIES AND STOCKHOLDER’S EQUITY

Current liabilities:
Accounts payable		20,106		$	18,839
Accrued liabilities		55,000			58,432
Income taxes payable		14,689			4,269
Deferred income taxes		952			—
Liabilites from discontinued operations		—			40

Total current liabilities		90,747			81,580

Long-term debt		130,000			130,000
Deferred income taxes		19,151			21,072
Employee supplemental savings plan and other long-term liabilities		5,431			5,917

Total liabilities		245,329			238,569


Commitments and contingencies		—			—

Stockholder’s equity:
Common stock, par value $100; 316,420 shares authorized, issued and outstanding in 2006 and 2005		31,642			31,642
Additional paid-in capital		51,769			51,769
Retained earnings (deficit)		16,651			(8,390	)
Accumulated other comprehensive loss		(10,418	)		(5,490	)

Total stockholder’s equity		89,644			69,531

Total liabilities and stockholder’s equity	$	334,973		$	308,100

See accompanying notes to consolidated financial statements

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

CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales	$	114,669		$	102,291		$	235,866		$	199,109
Cost of sales		23,572			21,955			51,428			43,520

Gross profit		91,097			80,336			184,438			155,589
Selling, general and administrative expenses		67,701			60,771			136,282			120,968

Income from operations		23,396			19,565			48,156			34,621
Other income (expense):
Exchange (loss) gain, net		(2,260	)		2,571			(2,370	)		2,078
Interest expense		(4,003	)		(4,619	)		(7,888	)		(9,821	)
Interest income		381			53			696			164
Loss on extinguishment of debt		—			—			—			(9,753	)
Other expense		(299	)		(97	)		(1,670	)		(214	)
Other income		—			55			55			84

Income before income taxes		17,215			17,528			36,979			17,159
Income tax expense		5,846			4,820			11,938			6,821

Income from continuing operations		11,369			12,708			25,041			10,338
Loss 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

See accompanying notes to consolidated financial statements

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	25,041		$	10,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,403			6,705
Amortization and write off of deferred financing fees		555			2,737
Provision for uncollectible accounts receivable		6,204			4,043
Unrealized 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			304
Accounts payable and accrued liabilities		4,312			(6,682	)
Income taxes payable/prepaid		8,961			(1,621	)
Other long-term liabilities		(609	)		177
Net operating activities of discontinued operations		20			18

Net cash provided by operating activities		14,778			9,211


Cash 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		—			46,000
Repayments under revolving credit facility		—			(44,000	)
Repayment of Vorwerk note		—			(20,000	)
Equity contribution from shareholder		—			79,100

Net 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			10,586

Cash and cash equivalents at end of period	$	39,018		$	9,009

See accompanying notes to consolidated financial statements

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

Jafra Worldwide Holdings (Lux) S.àr.l, a Luxembourgsociété à responsabilité limitée(the “Parent”) is a wholly-owned subsidiary of Jafra S.A., a Luxembourgsociété anonyme(“Jafra S.A.”). Vorwerk & Co. eins GmbH (“Vorwerk”) owns substantially all of the issued and outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany.

The accompanying unaudited interim consolidated financial statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 and the accompanying unaudited consolidated balance sheet as of December 31, 2005 reflect the operations of the Parent and its subsidiaries and are referred to collectively as “the Company.” Jafra Cosmetics International, S.A. de C.V. (“Jafra Cosmetics S.A.”) and Distribuidora Comercial Jafra, S.A. de C.V. (“Jafra Distribution”) are collectively referred to as “Jafra Mexico.”

The unaudited interim consolidated financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, including normal recurring adjustments, necessary to fairly state the Company’s consolidated financial statements as of June 30, 2006 and for the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The functional currency of certain of the Company’s foreign subsidiaries generally consists of currencies other than the U.S. dollar. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive income.

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

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments. The standard was effective for the Company beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) did not impact the Company at this time as there are currently no outstanding options and no share-based payments have been made in the current fiscal year.

In September 2004, the consensus of Emerging Issues Task Force (“EITF”) Issue No. 04-10, “Applying Paragraph 19 of Financial Accounting Standards Board (“FASB”) FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,” was published. EITF Issue No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The consensus in EITF 04-10 was applied for fiscal years ending after September 15, 2005. Adoption of this consensus did not have an impact on the Company’s disclosures.

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

In December 2004, the FASB issued SFAS No. 153, “Exchanges of nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nomonetary assets that do not have commercial substance. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. SFAS No. 154 is effective for accounting changes and correction of errors made on or after January 1, 2006 with early adoption permitted. The adoption of SFAS No. 154 did not have a material effect on the consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likely than not recognition threshold to determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this Interpretation.

(2) Inventories

Inventories consist of the following (in thousands):


	June 30,		December 31,
	2006		2005
Raw materials and supplies	$	12,872	$	11,165
Finished goods		35,900		27,765

Total inventories	$	48,772	$	38,930

(3) Property and Equipment

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


	June 30,		December 31,
	2006		2005
Land	$	15,571	$	16,193
Buildings		17,961		17,255
Machinery, equipment and other		43,172		56,982

		76,704		90,430
Less accumulated depreciation		26,597		36,018

Property and equipment, net	$	50,107	$	54,412

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

(4) Goodwill and Other Intangible Assets.

The Company’s intangible assets consist of trademarks and goodwill. The Company has determined trademarks, principally the Jafra name resulting from the acquisition of the Jafra business from Gillette, to have an indefinite life. The carrying value of trademarks decreased $2,678,000 to $40,759,000 at June 30, 2006 from $43,437,000 at December 31, 2005 as a result of foreign currency translation. The changes in the carrying amount of goodwill for the six months ended June 30, 2006 are as follows (in thousands):


	United								Consolidated
Goodwill	States		Mexico			Europe			Total
Balance as of December 31, 2005	$	32,188	$	27,837		$	4,769		$	64,794
Translation effect		—		(1,731	)		(373	)		(2,104	)

Balance as of June 30, 2006	$	32,188	$	26,106		$	4,396		$	62,690

(5) Income Taxes

The actual income tax rate of the Company differs from the “expected” tax rate, computed by applying the federal corporate rates to income before taxes for the three and six months ended June 30, 2006 primarily due to (i) state income taxes and other permanent differences in the Company’s U.S. subsidiary and (ii) permanent differences in the Company’s Mexican subsidiaries. The actual income tax rate of the Company differs from the “expected” tax rate, computed by applying the federal corporate rate to income before income taxes for the three and six months ended June 30, 2005 primarily due to (i) state income taxes and other permanent differences including the write off of foreign tax and research and development credits in the Company’s U.S. subsidiary in the first quarter of 2005 and (ii) permanent differences in the Company’s Mexican subsidiaries.

(6) Debt

On May 20, 2003, Jafra Cosmetics International, Inc. (“JCI”) and Jafra Distribution (collectively, the “Issuers”) issued $200 million aggregate principal amount of 10³/4% Subordinated Notes (the “10³/4% Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”). The 10³/4% Notes represent the several obligations of JCI and Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10³/4% Notes mature in 2011 and bear interest at a fixed rate of 10³/4% payable semi-annually.

On August 16, 2004, the Company entered into a Restated Senior Credit Agreement (the “Restated Credit Agreement”) which provides for a revolving credit facility of up to an aggregate of $60 million at any one time outstanding, which can be increased by the Company to $90 million under certain circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Agreement. Borrowings under the Restated Credit Agreement currently bear interest at an annual rate of Libor plus 2.5% and are subject to periodic adjustment based on certain levels of financial performance. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution. At June 30, 2006, there were no borrowings under the Restated Credit Agreement.

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

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

The 10³/4% Notes are unsecured and are generally not redeemable until May 15, 2007. Thereafter, the 10³/4% Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, the Issuers redeemed $69,500,000 of the original $200 million of 10³/4% Notes at a redemption price of 110.75 with the cash proceeds from a private equity contribution from Vorwerk of $79,100,000. As a result of this redemption and the redemption of $500,000 of the 10³/4% Notes during 2004, $130.0 million principal amount of the 10³/4% Notes was outstanding at June 30, 2006 and December 31, 2005.

In connection with the February 17, 2005 redemption, the Company paid $7,472,000 of premiums and wrote off approximately $2,281,000 of previously capitalized deferred financing fees. As a result, the Company recorded $9,753,000 as loss on extinguishment of debt in the accompanying consolidated statements of income during the six months ended June 30, 2005.

As of June 30, 2006 and December 31, 2005, approximately $3,572,000 and $4,262,000, respectively of unamortized deferred financing fees were reported as a noncurrent asset in the accompanying consolidated balance sheets. These deferred financing fees are being amortized on a basis that approximates the interest method over the term of the 10³/4% Notes and the Restated Credit Agreement.

Both the Indenture and the Restated Credit Agreement contain certain covenants that limit the Company’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Company to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Company and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of June 30, 2006, the Company and its subsidiaries were in compliance with all covenants.

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

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

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

(7) Restructuring Charges

During the year ended December 31, 2004, the Company recorded a total of $5,017,000 of restructuring and impairment charges. Of these charges, $2,838,000 related primarily to the transfer in 2004 of substantially all of its skin and body care manufacturing operations to its facilities in Mexico from the United States. Additionally, during the year ended December 31, 2004, the Company recorded $2,179,000 of severance related charges related to the resignation of four members of management. The ending balance at June 30, 2006 represents severance related charges and is expected to be paid by the end of 2006. A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Opening balance	$	268		$	1,937		$	459		$	2,391
Additions		—			—			—			—
Charges against reserves		(99	)		(240	)		(290	)		(694	)

Ending balance	$	169		$	1,697		$	169		$	1,697

(8) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Net income	$	11,369		$	12,701		$	25,041		$	10,321
Unrealized and deferred realized loss on derivatives		—			(77	)		—			(74	)
Reclassification of deferred realized loss to exchange (loss) gain		—			123			—			131
Reclassification of deferred realized (gain) loss to cost of sales		—			(4	)		—			8
Foreign currency translation adjustments		(3,253	)		(163	)		(4,928	)		378

Comprehensive income	$	8,116		$	12,580		$	20,113		$	10,764

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

(9) Financial Reporting for Business Segments

Segment information has been prepared in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”. SFAS No. 131 requires disclosure of certain information regarding operating segments, products and services, geographic areas of operations and major customers.

The Company’s business is comprised of one industry segment, direct selling, with worldwide operations. The Company is organized into geographical business units that each sell the full line of Jafra cosmetics, skin care, body care, fragrances, and other products. The Company has three reportable business segments: Mexico, the United States, including the Dominican Republic, and Europe. Business results for subsidiaries in South America, Thailand and exploration of new markets are combined and included in the following table under the caption “All Others.”

The accounting policies used to prepare the information reviewed by the Company’s chief operating decision makers are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment operating income, excluding reorganization and restructuring charges, unusual gains and losses such as certain severance charges and liquidation costs, and impairment. Consistent with the information reviewed by the Company’s chief operating decision makers, corporate costs, foreign exchange gains and losses, interest expense, other nonoperating income or expense, and income taxes are not allocated to operating segments. The effects of intersegment sales (net sales and related gross profit) are excluded from the computation of segment net sales and operating profit (loss). The elimination of intercompany profit from inventory within segment assets is included in “Corporate, Unallocated and Other.”


			United States
			and 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, 2006
Net sales	$	81,933	$	24,668	$	8,068	$	—		$	—		$	114,669
Income (loss) from operations		24,825		3,775		179		(621	)		(4,762	)		23,396
Depreciation		782		344		56		15			—			1,197
Segment assets		228,284		89,704		16,605		1,482			(1,102	)		334,973
Goodwill		26,106		32,188		4,396		—			—			62,690

For the three months ended June 30, 2005
Net sales	$	71,108	$	22,480	$	8,549	$	154		$	—		$	102,291
Income (loss) from operations		20,679		1,539		898		(221	)		(3,330	)		19,565
Depreciation		889		2,292		77		7			—			3,265

As of December 31, 2005
Segment assets	$	210,868	$	82,448	$	15,009	$	716		$	(1,001	)	$	308,040
Assets from discontinued operations		—		—		—		60			—			60
Goodwill		27,837		32,188		4,769		—			—			64,794

For the six months ended June 30, 2006
Net sales	$	172,801	$	47,470	$	15,503	$	92		$	—		$	235,866
Income (loss) from operations		49,696		6,945		625		(1,028	)		(8,082	)		48,156
Depreciation		1,569		704		106		24			—			2,403
Capital expenditures		159		131		38		244			—			572

For the six months ended June 30, 2005
Net sales	$	137,676	$	44,811	$	16,277	$	345		$	—		$	199,109
Income (loss) from operations		38,094		2,740		1,374		(311	)		(7,276	)		34,621
Depreciation		1,898		4,605		188		14			—			6,705
Capital expenditures		407		386		163		—			—			956

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

Corporate, unallocated and other includes (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
Corporate 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

The Company is exposed to currency risk relating to its forecasted U.S. dollar-denominated expenditures at Jafra Mexico. As part of its overall strategy to reduce the risk of adverse potential exchange rate fluctuations in Mexico, the Company enters into foreign currency option contracts (“option contracts”). The exchange rate at which the option contracts may be exercised is based upon the market rate at the time the contracts are placed. The Company purchased exchange rate put options, which gives the Company the right, but not the obligation, to sell Mexican pesos at a specified U.S. dollar exchange rate (“strike rate”). These contracts provide protection in the event the Mexican peso weakens beyond the option strike rate. In conjunction with the put options, and as part of a zero-cost option collar structure, the Company sold Mexican peso call options, which gives the counterparty the right, but not the obligation, to buy Mexican pesos from the Company at a specified strike rate. The effect of these call options would be to limit the benefit the Company would otherwise derive from the strengthening of the Mexican peso beyond the strike rate

The Company ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on option contracts put into place subsequent to that date were recorded directly as a component of exchange loss. Therefore, at June 30, 2006 and December 31, 2005, the Company did not have any gains or losses deferred as a component of other comprehensive income.

During the three and six months ended June 30, 2006, the Company recognized gains of approximately $754,000 and $1,048,000, respectively, on option contracts as a component of exchange (loss) gain on the accompanying consolidated statements of income. During the three and six months ended June, 30, 2005, the Company recognized losses of approximately $1,546,000 and $1,588,000, respectively, on option contracts as a component of exchange (loss) gain on the accompanying consolidated statements of income.

The fair value of the option contracts was $425,000 and $2,944,000 at June 30, 2006 and December 31, 2005, respectively, and has been recorded in accrued liabilities in the consolidated balance sheets.

The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 682,000,000 and 828,000,000 in put and call positions at June 30, 2006 and December 31, 2005, respectively, and mature at various dates through September 28, 2007. Notional amounts do not quantify the Company’s market or credit exposure or represent the Company’s assets or liabilities, but are used in the calculation of cash settlements under the contracts.

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

(11) Discontinued Operations and Ceased Operations

During 2003, the Company discontinued its operations in Venezuela, Colombia, Chile and Peru. The Company has terminated sales in these markets and has liquidated a majority of the assets in 2003. As of June 30, 2006, the liquidation of all of these markets was complete. The results of the operations of these markets have been classified as discontinued operations in all periods presented in the statements of income prior to liquidation. The assets and liabilities from the discontinued operations prior to final liquidation have been segregated in the accompanying consolidated balance sheets.

During the year ended December 31, 2005, the Company ceased direct selling operations in Argentina and during the year ended December 31, 2004, the Company ceased direct selling operations in Brazil. The Company continues to serve these markets through third party distributors.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)


	June 30,			December 31,
	2006			2005
ASSETS

Current assets:
Cash and cash equivalents	$	16,272		$	9,479
Receivables, net		4,373			3,852
Inventories, net		11,674			9,398
Receivables from affiliates		15,493			8,251
Prepaid expenses and other current assets		3,244			2,344
Deferred income taxes		10,615			10,511

Total current assets		61,671			43,835

Property and equipment, net		16,554			17,118

Other assets:
Goodwill		36,584			36,957
Notes receivable from affiliates		14,530			13,338
Deferred financing fees, net		1,667			1,869
Employee supplemental savings plan and other assets		5,332			5,938

Total assets	$	136,338		$	119,055


LIABILITIES AND STOCKHOLDER’S EQUITY

Current liabilities:
Accounts payable	$	2,127		$	2,728
Accrued liabilities		23,533			22,124
Income taxes payable		4,210			2,472
Payables to affiliates		15,581			6,406

Total current liabilities		45,451			33,730

Long-term debt		52,000			52,000
Deferred income taxes		5,852			5,852
Employee supplemental savings plan and other long-term liabilities		5,431			5,917

Total liabilities		108,734			97,499


Commitments 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			35,958
Retained deficit		(5,956	)		(12,173	)
Accumulated other comprehensive loss		(2,398	)		(2,229	)

Total stockholder’s equity		27,604			21,556

Total liabilities and stockholder’s equity	$	136,338		$	119,055

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales to third parties	$	32,736		$	31,029		$	62,973		$	61,088
Sales to affiliates		748			171			1,286			391

Net sales		33,484			31,200			64,259			61,479
Cost of sales		8,679			7,216			16,676			13,848

Gross profit		24,805			23,984			47,583			47,631
Selling, general and administrative expenses		27,210			26,392			50,784			52,134
Management 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			8,767
Other 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			278
Loss on extinquishment of debt		—			—			—			(3,963	)
Other expense		(229	)		(17	)		(335	)		(18	)
Other income		—			43			47			70


Income before income taxes		3,746			1,458			10,656			592

Income tax expense		1,520			505			4,439			1,994


Net income (loss)	$	2,226		$	953		$	6,217		$	(1,402	)

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Six Months Ended
	June, 30
	2006			2005
Cash 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			4,793
Provision for uncollectible accounts receivable		205			250
Write off and amortization of deferred financing fees		202			1,195
Unrealized foreign exchange (gain) loss		(152	)		328
Deferred income taxes		(104	)		1,832
Changes in operating assets and liabilities:
Receivables		(555	)		270
Inventories		(2,043	)		1,362
Prepaid expenses and other current assets		(798	)		316
Intercompany receivables and payables		1,857			4,353
Other assets		131			321
Accounts payable and accrued liabilities		545			(1,248	)
Income taxes payable		1,712			(2,058	)
Other long-term liabilities		(609	)		177

Net cash provided by operating activities		7,418			10,489


Cash 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		—			43,000
Repayments under revolving credit facility		—			(35,000	)
Advances to affiliates		(1,214	)		(604	)
Equity contribution from Parent		—			31,662

Net 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			471
Cash and cash equivalents at beginning of period		9,479			5,748

Cash and cash equivalents at end of period	$	16,272		$	6,219

See accompanying notes to consolidated financial statements

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

(1) Basis of Presentation

Jafra Cosmetics International, Inc. a Delaware corporation, is a direct wholly-owned subsidiary of Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourgsociété à responsabilité limitée (the “Parent”), which is a wholly-owned direct subsidiary of Jafra S.A., a Luxembourgsociété anonyme(“Jafra S.A.”).Vorwerk & Co. eins GmbH (“Vorwerk”) owns substantially all of the issued and outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany.

The unaudited interim consolidated financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to fairly state JCI’s consolidated financial statements as of June 30, 2006 and for the interim periods presented. All significant intercompany accounts and transactions between entities comprising JCI have been eliminated in consolidation.

The functional currency of certain of JCI’s subsidiaries consists of currencies other than the U.S. dollar. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive income (loss).

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments. The standard was effective for JCI beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) did not impact JCI as there are currently no outstanding options and no share-based payments have been made in the current fiscal year.

In September 2004, the consensus of Emerging Issues Task Force (“EITF”) Issue No. 04-10, “Applying Paragraph 19 of Financial Accounting Standards Board (“FASB”) FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,” was published. EITF Issue No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The consensus in EITF 04-10 was applied for fiscal years ending after September 15, 2005. The adoption of this consenus did not have a material impact on the disclosure of JCI’s segments.

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

In December 2004, the FASB issued SFAS No. 153, “Exchanges of nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nomonetary assets that do not have commercial substance. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. JCI has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likely than not recognition threshold to determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. JCI is currently evaluating the impact of this Interpretation.

(2) Property and Equipment

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


	June 30,		December 31,
	2006		2005
Land	$	6,188	$	6,188
Buildings		8,482		7,200
Machinery, equipment and other		13,345		25,174

		28,015		38,562
Less accumulated depreciation		11,461		21,444

Property and equipment, net	$	16,554	$	17,118

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

(3) Goodwill and Other Intangible Assets

JCI’s intangible assets consist of trademarks and goodwill. JCI has determined trademarks, principally the Jafra name resulting from the acquisition of the Jafra business from Gillette, to have an indefinite life. The carrying value of trademarks increased $14,000 to $298,000 at June 30, 2006 from $284,000 at December 31, 2005 as a result of foreign currency translation. The changes in the carrying amount of goodwill for the six months ended June 30, 2006 are as follows (in thousands):


	United					Consolidated
Goodwill	States		Europe			Total
Balance as of December 31, 2005	$	32,188	$	4,769		$	36,957
Translation effect		—		(373	)		(373	)

Balance as of June 30, 2006	$	32,188	$	4,396		$	36,584

(4) Income Taxes

The actual income tax rate of JCI differs from the “expected” tax rate, computed by applying the U.S. federal corporate rate of 35% to income before income taxes for the three and six months ended June 30, 2006 and 2005, principally as the result of state income tax and in the six months ended June 30, 2005, also certain permanent differences, including research and development credits and certain non-deductible expenses.

(5) Debt

On May 20, 2003, JCI and Distribuidora Comercial Jafra, S.A. de C.V. (“Jafra Distribution” and collectively with JCI, the “Issuers”) issued $200 million aggregate principal amount of 10³/4% Subordinated Notes (the “10³/4% Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”). The 10³/4% Notes represent the several obligations of JCI and Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10³/4% Notes mature in 2011 and bear a fixed interest rate of 10³/4% payable semi-annually.

On August 16, 2004, the Issuers entered into a Restated Senior Credit Agreement (the “Restated Credit Agreement”) which provides for a revolving credit facility of up to an aggregate of $60 million at any one time, which can be increased by the Parent to $90 million under certain circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Borrowings under the Restated Credit Agreement currently bear interest at an annual rate of Libor plus 2.5% and are subject to periodic adjustment based on certain levels of financial performance. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution. At June 30, 2006, there were no borrowings under the Restated Credit Agreement.

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

The 10³/4% Notes are unsecured and are generally not redeemable until May 15, 2007. Thereafter, the 10³/4% Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, the Issuers redeemed $27,800,000 of the original $80 million of 10³/4% Notes at a redemption price of 110.75 with the cash proceeds from an equity contribution from the Parent of $31,662,000. As a result of this redemption and the redemption of $200,000 of the 10³/4% Notes during 2004, $52.0 million principal amount of the 10³/4% Notes was outstanding at June 30, 2006 and December 31, 2005.

In connection with the February 17, 2005 redemption, JCI paid $2,989,000 of premiums and wrote off approximately $974,000 of previously capitalized deferred financing fees. As a result, JCI recorded $3,963,000 as loss on extinguishment of debt in the accompanying consolidated statements of operations during the six months ended June 30, 2005.

As of June 30, 2006 and December 31, 2005, approximately $1,667,000 and $1,869,000, respectively, of unamortized deferred financing fees were reported as a noncurrent asset in the accompanying consolidated balance sheets. These deferred financing fees are being amortized on a basis that approximates the interest method over the term of the 10³/4% Notes and the Restated Credit Agreement.

Both the Indenture and the Restated Credit Agreement contain certain covenants that limit the Parent’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Parent to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Parent and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of June 30, 2006, the Parent and its subsidiaries were in compliance with all covenants.

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

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

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

(6) Restructuring Charges

During the year ended December 31, 2004, JCI recorded a total of $4,790,000 of restructuring and impairment charges. Of these charges, $2,611,000 related primarily to the transfer in 2004 of substantially all of its skin and body care manufacturing operations to the Parent’s facilities in Mexico from the United States. Additionally, during the year ended December 31, 2004, JCI recorded $2,179,000 of severance related charges related to the resignation of four members of management. The ending balance at June 30, 2006 represents severance related charges and is expected to be paid by the end of 2006. A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Opening balance	$	268		$	1,937		$	459		$	2,391
Additions		—			—			—			—
Charges against reserves		(99	)		(240	)		(290	)		(694	)

Ending balance	$	169		$	1,697		$	169		$	1,697

(7) Comprehensive Income (Loss)

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


	Three months ended					Six months ended
	June 30,					June 30,
	2006			2005		2006			2005
Net income (loss)	$	2,226		$	953	$	6,217		$	(1,402	)
Foreign currency translation adjustments		(98	)		48		(169	)		214

Comprehensive income (loss)	$	2,128		$	1,001	$	6,048		$	(1,188	)

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

(8) Related Party Transactions

JCI distributes certain skin and body products to other affiliates of the Parent (“affiliates”). Sales to affiliates were made at cost plus a markup ranging from 0 to 11%. JCI purchased color and fragrance products, and starting in late 2004, most skin and body care products from Jafra Mexico totaling $6,559,000 and $11,624,000 for the three and six months ended June 30, 2006, respectively, and $3,946,000 and $6,964,000 for the three and six months ended June 30, 2005, respectively.

In addition, JCI provides certain management services, such as research and development, legal, accounting and treasury, management oversight and other administrative functions to affiliates. The cost of these services is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. JCI charges out a portion of these management expenses to its affiliates based upon charges identified to specific affiliates and upon a formula using the percentage of revenues of each affiliate to the total consolidated revenues of the Parent. JCI believes the amounts and methods of allocations are reasonable and approximate the cost of the actual services provided.

JCI is charged a royalty by Jafra Cosmetics S.A. for the right to use the Jafra trademark in the United States and Europe. The total royalty expense charged by Jafra Cosmetics S.A. to JCI was $793,000 and $1,528,000 for the three and six months ended June 30, 2006, respectively, and $710,000 and $1,492,000 for the three and six months ended June 30, 2005, respectively, and was offset against royalty income from affiliates in the accompanying consolidated statements of operations.

JCI owns the worldwide rights to its multi-level sales know-how (referred to as the “Jafra Way”). The Jafra Way was initially developed in the United States for lineage, training, and compensation of consultants. The royalty fees charged by JCI to Jafra Cosmetics S.A. for the use of the Jafra Way were $7,122,000 and $15,052,000 for the three and six months ended June 30, 2006, respectively, and $6,328,000 and $12,696,000 for the three and six months ended June 30, 2005, respectively, and were based upon a percentage of Jafra Cosmetics S.A.’s sales to third parties.

JCI has granted loans to certain affiliates at annual interest rates ranging from 3% to 5%. Such loans are due to be repaid five years from the date of grant, with no prepayment penalty. Notes receivable from affiliates at December 31, 2005 and June 30, 2006 consist primarily of loans JCI has made to indirect subsidiaries of the Parent to fund certain of their operations in South America. Net interest income from affiliates was $111,000 and $206,000 for the three and six months ended June 30, 2006, respectively, and $120,000 and $244,000 for the three and six months ended June 30, 2005, respectively, and was included in interest income on the accompanying consolidated statements of operations.

(9) Financial Reporting for Business Segments

JCI’s business is comprised of one industry segment, direct selling, with worldwide operations, principally in the United States and Europe. JCI is organized into geographical business units that each sell the full line of Jafra cosmetics, skin care, body care, fragrances, and other products. JCI has two reportable business segments: the United States, including the Dominican Republic, and Europe. Business results for the Thailand subsidiary are included in the following table under the caption “All Others.”

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

The accounting policies used to prepare the information reviewed by the JCI’s chief operating decision makers are the same as those described in the summary of significant accounting policies. JCI evaluates performance based on segment operating income, excluding reorganization and restructuring charges, unusual gains and losses such as certain severance charges and liquidation costs, and impairment. Consistent with the information reviewed by the JCI’s chief operating decision makers, corporate costs, foreign exchange gains and losses, interest expense, other nonoperating income or expense, and income taxes are not allocated to operating segments. The effects of intersegment sales (net sales and related gross profit) are excluded from the computation of segment net sales and operating profit (loss). The elimination of intercompany profit from inventory within segment assets and net receivables from affiliates are included in “Corporate, Unallocated and Other.” Gross profit from affiliates, management fee income from affiliates, royalty income from affiliates and market subsidy expense to affiliates and are included in the following table under the caption “Corporate, Unallocated and Other.”


	United States
	and the							Corporate,
	Dominican				All			Unallocated		Consolidated
	Republic		Europe (1)		Others			and Other		Total
As of and for the three months ended June 30, 2006
Net sales	$	24,668	$	8,068	$	—		$	748	$	33,484
Income (loss) from operations		3,775		179		(9	)		1,050		4,995
Depreciation		344		56		—			—		400
Segment assets		89,704		16,605		6			30,023		136,338
Goodwill		32,188		4,396		—			—		36,584

For the three months ended June 30, 2005
Net sales	$	22,480	$	8,549	$	—		$	171	$	31,200
Income from operations		1,539		898		—			1,243		3,680
Depreciation		2,292		77		—			—		2,369

As of December 31, 2005
Segment assets	$	82,448	$	15,009	$	9		$	21,589	$	119,055
Goodwill		32,188		4,769		—			—		36,957

For the six months ended June 30, 2006
Net sales	$	47,470	$	15,503	$	—		$	1,286	$	64,259
Income (loss) from operations		6,945		625		(9	)		5,606		13,167
Depreciation		704		106		—			—		810
Capital expenditures		131		38		—			—		169

For the six months ended June 30, 2005
Net sales	$	44,811	$	16,277	$	—		$	391	$	61,479
Income from operations		2,740		1,374		—			4,653		8,767
Depreciation		4,605		188		—			—		4,793
Capital expenditures		386		163		—			—		549


(1)		excludes Jafra Poland sp.zo.o, an indirect wholly-owned subsidiary of the Parent and affiliate of JCI

Corporate, unallocated and other includes (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
Corporate expenses	$	(6,063	)	$	(4,622	)	$	(10,260	)	$	(8,166	)
Transaction with affiliates		7,400			6,088			16,368			13,267
Unusual 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.

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.

BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)


	June 30,			December 31,
	2006			2005
ASSETS

Current assets:
Cash and cash equivalents	$	273		$	505
Receivables		471			366
Inventories		37,925			30,697
Receivables from affiliates		19,772			18,143
Prepaid income taxes		3,546			2,465
Prepaid expenses and other current assets		4,202			5,232
Deferred income taxes		—			1,109

Total current assets		66,189			58,517

Machinery and equipment, net		2,418			2,667

Other assets:
Trademarks		1,142			1,311
Deferred financing fees, net		1,905			2,393
Investment in preferred shares of affiliated company		124,508			132,763
Guarantee fee and other		2,021			2,368

Total assets	$	198,183		$	200,019


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	13,706		$	12,623
Accrued liabilities		1,356			1,794
Income taxes payable		249			—
Payables to affiliates		275			3,143
Deferred income taxes		952			—

Total current liabilities		16,538			17,560

Long-term debt		78,000			78,000
Deferred income taxes		3,711			5,412

Total liabilities		98,249			100,972

Commitments and contingencies		—			—

Stockholders’ equity:
Series B common stock, no par value: 151 shares authorized, issued and outstanding in 2006 and 2005		5			5
Additional paid-in capital		47,490			47,490
Retained earnings		60,009			52,495
Accumulated other comprehensive loss		(7,570	)		(943	)

Total stockholders’ equity		99,934			99,047

Total liabilities and stockholders’ equity	$	198,183		$	200,019

See accompanying notes to financial statements

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.

STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Third party net sales	$	44		$	12		$	77		$	12
Sales to affiliates		41,677			38,946			92,008			75,752

Net sales		41,721			38,958			92,085			75,764
Cost of sales		25,410			23,119			56,097			45,409

Gross profit		16,311			15,839			35,988			30,355
Selling, general and administrative expenses		682			(6	)		1,148			691
Management fee expense to affiliate		344			145			828			543
Service fee expense to affiliate		7,790			10,022			14,810			16,725

Income from operations		7,495			5,678			19,202			12,396
Other expense:
Exchange (loss) gain, net		(2,994	)		3,193			(4,430	)		2,675
Interest expense		(2,448	)		(2,446	)		(4,825	)		(5,534	)
Interest income		29			—			83			21
Loss on extinguishment of debt		—			—			—			(5,790	)
Other expense		—			(3	)		—			—

Income before income taxes		2,082			6,422			10,030			3,768
Income tax expense		447			1,607			2,516			1,592

Net income	$	1,635		$	4,815		$	7,514		$	2,176

See accompanying notes to financial statements

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	7,514		$	2,176
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		476			379
Write off and amortization of deferred financing fees		353			1,542
Unrealized foreign exchange and derivative loss (gain)		5,171			(2,683	)
Deferred income taxes		360			1,833
Changes 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	)		5,952
Other 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		—			3,000
Repayments under revolving credit facility		—			(9,000	)
Contribution from shareholders		—			47,490

Net cash used in financing activities		—			(210	)
Effect of exchange rate changes on cash		(20	)		298

Net decrease in cash		(232	)		(78	)
Cash at beginning of period		505			83

Cash at end of period	$	273		$	5

See accompanying notes to financial statements

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

Distribuidora Comercial Jafra, S.A. de C.V., asociedad anonima de capital variable(“Jafra Distribution”), organized under the laws of the United Mexican States in February 2003, is owned by five indirect wholly-owned subsidiaries of Jafra Worldwide Holdings (Lux), S.àr.l., a Luxembourgsociété à responsabilité limitée(the “Parent”). The Parent is the wholly-owned subsidiary of Jafra S.A., a Luxembourgsociété anonyme(“Jafra S.A.”). Vorwerk & Co. eins GmbH (“Vorwerk”) owns substantially all of the issued and outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany.

The accompanying unaudited interim financial statements as of June 30, 2006 and for the three months and six ended June 30, 2006 and 2005 and the accompanying unaudited balance sheet as of December 31, 2005 reflect the operations of Jafra Distribution. The unaudited interim financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to fairly state Jafra Distribution’s financial statements as of June 30, 2006 and for the interim periods presented.

The functional currency for Jafra Distribution is the Mexican peso. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive loss.

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

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments. The standard was effective for Jafra Distribution beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) did not impact Jafra Distribution at this time as there are currently no outstanding options and no share-based payments have been made in the current fiscal year.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nomonetary assets that do not have commercial substance. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Jafra Distribution has concluded that SFAS No. 153 will not have a material impact on its financial statements.

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS — (continued)
(Unaudited)

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likely than not recognition threshold to determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. Jafra Distribution is currently evaluating the impact of this Interpretation.

(2) Inventories

Inventories consist of the following (in thousands):


	June 30,		December 31,
	2006		2005
Raw materials and supplies	$	12,840	$	11,061
Finished goods		25,085		19,636

Total inventories	$	37,925	$	30,697

(3) Machinery and Equipment

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


	June 30,		December 31,
	2006		2005
Machinery, equipment and other	$	3,297	$	3,454
Less accumulated depreciation.		879		787

Machinery and equipment, net	$	2,418	$	2,667

(4) Investment in Affiliated Company

On May 20, 2003, Jafra Distribution subscribed for and purchased a total of 13,642 shares of Series C preferred stock of Jafra Cosmetics S.A. de C.V. (“Jafra Cosmetics S.A.”) for $10,000 per share, for a total purchase price of $136,420,000. Jafra Distribution has recorded the total investment, less the effects of foreign currency translation, as an investment in affiliated company on the accompanying balance sheets. Except for the effect of translation, which reduced the investment by approximately $11,912,000 as of June 30, 2006, Jafra Distribution carries the investment on its balance sheet at cost.

(5) Income Taxes

During the three and six months ended June 30, 2006, the income tax rate differed from the statutory income tax rate as a result of certain permanent differences. During the three and six months ended June 30, 2005, the income tax rate differed from the statutory income tax rate as a result of certain permanent differences.

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS — (continued)
(Unaudited)

(6) Debt

On May 20, 2003, Jafra Distribution and Jafra Cosmetics International, Inc. (“JCI”) (collectively, the “Issuers”) issued $200 million aggregate principal amount of 10³/4% Subordinated Notes (the “10³/4% Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”). The 10³/4% Notes represent the several obligations of JCI and Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10³/4% Notes mature in 2011 and bear a fixed interest rate of 10³/4% payable semi-annually

On August 16, 2004, the Issuers entered into the Restated Senior Credit Agreement (the “Restated Credit Agreement”) which provides for a revolving credit facility of up to an aggregate of $60 million at any one time outstanding, which can be increased by the Parent to $90 million under certain circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Agreement. Borrowings under the Restated Credit Agreement currently bear interest at an annual rate of Libor plus 2.5% and are subject to periodic adjustment based on certain levels of financial performance. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution. At June 30, 2006, there were no borrowings under the Restated Credit Agreement.

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

The 10³/4% Notes are unsecured and are generally not redeemable until May 15, 2007. Thereafter, the 10³/4% Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, Jafra Distribution redeemed $41,700,000 of the 10³/4% Notes at a redemption price of 110.75 with the cash proceeds from an equity contribution from the Parent. As a result of this redemption and the redemption of $300,000 of the 10³/4% Notes during 2004, $78.0 million principal amount of the 10³/4% Notes was outstanding at June 30, 2006.

In connection with the February 17, 2005 redemption, Jafra Distribution paid $4,483,000 of premiums and wrote off approximately $1,307,000 of previously capitalized deferred financing fees. As a result, Jafra Distribution recorded a $5,790,000 loss on extinguishment of debt in the accompanying statements of operations during the six months ended June 30, 2005.

As of June 30, 2006 and December 31, 2005, approximately $1,905,000 and $2,393,000 of unamortized deferred financing fees (excluding translation effects) were reported as a noncurrent asset in the accompanying balance sheets. These deferred financing fees are being amortized on a basis that approximates the interest method over the term of the 10³/4% Notes and the Restated Credit Agreement.

Both the Indenture and the Restated Credit Agreement contain certain covenants that limit Jafra Distribution’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Parent to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Parent and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of June 30, 2006, the Parent and its subsidiaries were in compliance with all covenants.

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS — (continued)
(Unaudited)

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

On May 20, 2003, Jafra Distribution paid Jafra Cosmetics S.A. $4,000,000 for Jafra Cosmetics S.A. to fully and unconditionally guarantee the obligations of Jafra Distribution under the 10³/4% Notes on a senior subordinated basis. Each existing and subsequently acquired or organized subsidiary of Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee the Mexican portion of the 10³/4% Notes, jointly and severally, on a senior subordinated basis. The guarantee fee is being amortized into income over an eight year period, the term of the 10³/4% Notes. At June 30, 2006 and December 31, 2005, approximately $2,021,000 and $2,368,000, respectively, were classified as non-current assets and the remaining unamortized amount was classified as current assets on the accompanying balance sheets.

(7) Comprehensive (Loss) Income

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005
Net income	$	1,635		$	4,815	$	7,514		$	2,176
Foreign currency translation adjustments		(4,252	)		3,462		(6,627	)		3,561

Comprehensive (loss) income	$	(2,617	)	$	8,277	$	887		$	5,737

DISTRIBUIDORA COMERCIAL JAFRA, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS — (continued)
(Unaudited)

(8) Related Party Transactions

Jafra Distribution sells skin, body care products, color cosmetics and fragrance products to other affiliates of the Parent (“affiliates”). Sales to affiliates, primarily in the United States and Germany, were $6,962,000 and $12,026,000 for the three and six months ended June 30, 2006, respectively, and $4,723,000 and $8,367,000 for the three and six months ended June 30, 2005, respectively. These sales were made at cost plus a markup ranging from 0 to 11%. Jafra Distribution purchases certain skin and body care products from an affiliate. Purchases were $727,000 and $1,265,000 for the three and six months ended June 30, 2006, respectively, and $171,000 and $391,000 for the three and six months ended June 30, 2005, respectively. Jafra Distribution sells products purchased from an affiliate and other purchased inventory to its Mexico affiliate, Jafra Cosmetics S.A., at a markup. Sales to Jafra Cosmetics S.A. were $34,715,000 and $79,982,000 for the three and six months ended June 30, 2006, respectively, and $34,223,000 and $67,385,000 for the three and six months ended June 30, 2005, respectively.

Jafra Distribution receives certain administrative and other services from Jafra Cosmetics S.A. The cost of these services is included in service fee expense to affiliate in the accompanying statements of operations. Jafra Distribution believes the amounts are reasonable and approximate the cost of the actual services received.

In addition, Jafra Distribution is provided with certain management services, such as legal, accounting and treasury, management oversight, and other administrative functions from JCI. The cost of these services is included in management fee expense to affiliate in the accompanying statements of operations. JCI charges out a portion of management expenses to its affiliates based principally upon a formula using the percentage of revenues of each affiliate to the total consolidated revenues of the Parent. Jafra Distribution believes the amounts and methods of allocations are reasonable and approximate the cost of the actual services received.

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)


	June 30,			December 31,
	2006			2005
ASSETS

Current assets:
Cash and cash equivalents	$	22,048		$	14,400
Receivables, net		43,300			39,035
Receivables from affiliates		2,207			4,579
Current deferred income taxes		12,281			3,658
Prepaid expenses and other current assets		1,445			1,475

Total current assets		81,281			63,147

Property and equipment, net		30,844			34,564

Other assets:
Goodwill		26,106			27,837
Trademarks		40,611			43,303
Other		1,191			1,535

Total assets	$	180,033		$	170,386


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	4,431		$	3,595
Accrued liabilities		28,798			33,342
Income taxes payable		10,231			1,797
Payables to affiliates		19,337			19,839
Other current liabilities		279			328

Total current liabilities		63,076			58,901

Deferred income taxes		9,931			10,201
Other long-term liabilities		2,021			2,368

Total liabilities		75,028			71,470

Commitments 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			54,334
Retained earnings		62,775			50,087
Accumulated other comprehensive loss		(12,104	)		(5,505	)

Total stockholders’ equity		105,005			98,916

Total liabilities and stockholders’ equity	$	180,033		$	170,386

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net sales	$	81,889		$	71,096		$	172,724		$	137,664
Cost of sales		29,682			29,861			67,802			58,353

Gross profit		52,207			41,235			104,922			79,311
Selling, general and administrative expenses		41,523			35,457			87,672			69,553
Management fee expense to affiliates		536			325			1,825			1,523
Service fee income from affiliate		(7,790	)		(10,022	)		(14,810	)		(16,725	)
Royalty expense to affiliates, net		6,329			5,618			13,524			11,204

Income from operations		11,609			9,857			16,711			13,756
Other income (expense):
Exchange gain (loss), net		495			(1,610	)		726			(1,768	)
Interest expense		—			(85	)		—			(115	)
Interest income		196			46			388			102
Other expense		(91	)		(77	)		(196	)		(189	)

Income before income taxes		12,209			8,131			17,629			11,786
Income tax expense		3,865			2,701			4,941			3,227

Net income	$	8,344		$	5,430		$	12,688		$	8,559

See accompanying notes to consolidated financial statements

JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	12,688		$	8,559
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,184			1,519
Provision for uncollectible accounts receivable		5,999			3,793
Unrealized foreign exchange and derivative (gain) loss		(2,588	)		1,441
Deferred income taxes		(8,893	)		(5,254	)
Changes in operating assets and liabilities:
Receivables		(12,980	)		(853	)
Inventories		—			702
Prepaid expenses and other current assets		(341	)		(203	)
Intercompany receivables and payables		2,914			(11,838	)
Other assets		259			14
Accounts payable and accrued liabilities and value added taxes		2,070			(2,481	)
Income taxes payable		8,262			3,304

Net 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	)		50

Net increase (decrease) in cash and cash equivalents		7,648			(1,644	)
Cash and cash equivalents at beginning of period		14,400			4,153

Cash and cash equivalents at end of period	$	22,048		$	2,509

See accompanying notes to consolidated financial statements

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

(1) Basis of Presentation

Jafra Cosmetics International, S.A. de C.V., asociedad anonima de capital variable, organized under the laws of the United Mexican States, is owned by five indirect wholly-owned subsidiaries of Jafra Worldwide Holdings (Lux), S.àr.l., a Luxembourgsociété à responsabilité limitée(the “Parent”). The Parent is the wholly-owned subsidiary of Jafra S.A., a Luxembourgsociété ananyme (“Jafra S.A.”). Vorwerk & Co. eins GmbH (“Vorwerk”) owns substantially all of the issued and outstanding capital stock of Jafra S.A. Vorwerk is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany.

The accompanying unaudited interim consolidated financial statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 and the accompanying unaudited balance sheet as of December 31, 2005 reflect the operations of Jafra Cosmetics International S.A. de C.V. and its subsidiaries (“Jafra Cosmetics S.A.”) The unaudited interim consolidated financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission’s Regulation S-X. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to fairly state Jafra Cosmetics S.A.’s consolidated financial statements as of June 30, 2006 and for the interim periods presented. All significant intercompany accounts and transactions between entities comprising Jafra Cosmetics S.A. have been eliminated in consolidation.

The functional currency for Jafra Cosmetics S.A. is the Mexican peso. For presentation purposes, assets and liabilities are translated into U.S. dollars at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of other comprehensive loss.

New Accounting Standards.In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments. The standard was effective for the Jafra Cosmetics S.A. beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) did not impact Jafra Cosmetics S.A. at this time as there are currently no outstanding options and no share-based payments have been made in the current fiscal year.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nomonetary assets that do not have commercial substance. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Jafra Cosmetics S.A. has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

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

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likely than not recognition threshold to determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. Jafra Cosmetics S.A. is currently evaluating the impact of this Interpretation.

(2) Property and Equipment

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


	June 30,		December 31,
	2006		2005
Land	$	9,383	$	10,004
Buildings		9,429		10,056
Machinery, equipment and other		26,162		28,120

		44,974		48,180
Less accumulated depreciation		14,130		13,616

Property and equipment, net	$	30,844	$	34,564

(3) Goodwill and Other Intangible Assets.

Jafra Cosmetics S.A.’s intangible assets consist of trademarks and goodwill. Jafra Cosmetics S.A. has determined trademarks, principally the Jafra name resulting from the acquisition of the Jafra business from Gillette, to have an indefinite life. Except for translation adjustments, there were no changes in the carrying amount of trademarks and goodwill during the six months ended June 30, 2006 and the year ended December 31, 2005. The carrying value of trademarks was $40,611,000 and $43,303,000 as of June 30, 2006 and December 31, 2005, respectively. Goodwill was $26,106,000 and $27,837,000 at June 30, 2006 and December 31, 2005, respectively.

(4) Income Taxes

The actual income tax rate of Jafra Cosmetics S.A. for the three and six months ended June 30, 2006 and 2005 differs from the “expected” tax rate, computed by applying the Mexico federal corporate rate to income before income taxes due to certain permanent differences, including inflation.

(5) Debt

On May 20, 2003, Distribuidora Comercial Jafra, S.A. de C.V. (“Jafra Distribution”) and Jafra Cosmetics International, Inc. (“JCI”) (collectively, the “Issuers”) issued $200 million aggregate principal amount of 10³/4% Subordinated Notes (the “10³/4% Notes”) due 2011 pursuant to an Indenture dated May 20, 2003 (the “Indenture”). The 10³/4% Notes represent the several obligations of JCI and Jafra Distribution in the original amount of $80 million and $120 million, respectively. The 10³/4% Notes mature in 2011 and bear a fixed interest rate of 10³/4% payable semi-annually.

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

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

On May 20, 2003, Jafra Cosmetics S.A. received $4,000,000 from Jafra Distribution to fully and unconditionally guarantee the obligations of Jafra Distribution under the 10³/4% Notes on a senior subordinated basis. Each existing and subsequently acquired or organized subsidiary of Jafra Cosmetics S.A. is also required to fully and unconditionally guarantee the Mexican portion of the 10³/4% Notes jointly and severally, on a senior subordinated basis. The guarantee fee is being amortized into income over an eight year period, the term of the 10³/4% Notes. At June 30, 2006 and December 31, 2005, approximately $2,021,000 and $2,368,000, respectively, was classified as a non-current liability and the remaining unamortized amount was classified as a current liability on the accompanying consolidated balance sheets.

(6) Comprehensive Income

Comprehensive income is summarized as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Net income	$	8,344		$	5,430		$	12,688		$	8,559
Unrealized and deferred realized loss on derivatives		—			(77	)		—			(74	)
Reclassification of deferred realized loss to exchange gain (loss)		—			123			—			131
Reclassification of deferred realized (gain) loss to cost of sales		—			(4	)		—			8
Foreign currency translation adjustments		(4,291	)		2,861			(6,599	)		3,012

Comprehensive income	$	4,053		$	8,333		$	6,089		$	11,636

(7) Related Party Transactions

Jafra Cosmetics S.A. purchases products from its Mexican affiliate, Jafra Distribution at a markup. The cost of these purchases was $34,715,000 and $79,982,000 for the three and six months ended June 30, 2006, respectively, and $34,223,000 and $67,385,000 for the three and six months ended June 30, 2005, respectively.

Jafra Cosmetics S.A. provides certain administrative and other services to Jafra Distribution. The income from these services was included in service fee income from affiliate on the accompanying consolidated statements of income. Jafra Cosmetics S.A. believes the amounts are reasonable and approximate the value of the actual services rendered.

In addition, Jafra Cosmetics S.A. is provided with certain management services, such as legal, accounting and treasury, management oversight, and other administrative functions from JCI. The cost of these services is included in management fee expense to affiliate in the accompanying consolidated statements of income. JCI charges out a portion of these management expenses to its affiliates based principally upon a formula using the percentage of revenues of each affiliate to the total consolidated revenues of the Parent. Jafra Cosmetics S.A. believes the amounts and methods of allocations are reasonable and approximate the cost of the actual services received.

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

Jafra Cosmetics S.A. charges JCI a royalty for the right to use the Jafra trademark in the United States and Europe. The total royalty income earned by Jafra Cosmetics S.A. from JCI was $793,000 and $1,528,000 for the three and six months ended June 30, 2006, respectively, and $710,000 and $1,492,000 for the three and six months ended June 30, 2005, respectively, and was offset against royalty expense to affiliates in the accompanying consolidated statements of income.

(8) Foreign Currency Option Contracts

Jafra Cosmetics S.A. is exposed to currency risk relating to its forecasted U.S. dollar-denominated expenditures. As part of its overall strategy to reduce the risk of adverse potential exchange rate fluctuations, Jafra Cosmetics S.A. enters into foreign currency option contracts (“option contracts”). The exchange rate at which the option contracts may be exercised is based upon the market rate at the time the contracts are placed. Jafra Cosmetics S.A. purchased exchange rate put options, which gives Jafra Cosmetics S.A. the right, but not the obligation, to sell Mexican pesos at a specified U.S. dollar exchange rate (“strike rate”). These contracts provide protection in the event the Mexican peso weakens beyond the option strike rate. In conjunction with the put options, and as part of a zero-cost option collar structure, Jafra Cosmetics S.A. sold Mexican peso call options, which gives the counterparty the right, but not the obligation, to buy Mexican pesos from Jafra Cosmetics S.A. at a specified strike rate. The effect of these call options would be to limit the benefit Jafra Cosmetics S.A. would otherwise derive from the strengthening of the Mexican peso beyond the strike rate

Jafra Cosmetics S.A. ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on option contracts put into place subsequent to that date were recorded directly as a component of exchange gain (loss). Therefore, at June 30, 2006 and December 31, 2005, Jafra Cosmetics S.A. did not have any gains or losses deferred as a component of other comprehensive income.

During the three and six months ended June, 30, 2006, Jafra Cosmetics S.A. recognized gains of approximately $754,000 and $1,048,000, respectively, on option contracts as a component of exchange gain (loss) on the accompanying consolidated statements of income. During the three and six months ended June, 30, 2005, Jafra Cosmetics S.A. recognized losses of approximately $1,546,000 and $1,588,000, respectively, on option contracts as a component of exchange gain (loss) on the accompanying consolidated statements of income.

The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 682,000,000 and 828,000,000 in put and call positions at June 30, 2006 and December 31, 2005, respectively, and mature at various dates through September 28, 2007. Notional amounts do not quantify Jafra Cosmetics S.A.’s market or credit exposure or represent Jafra Cosmetics S.A.’s assets or liabilities, but are used in the calculation of cash settlements under the contracts.

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

General

The following discussion of the consolidated results of operations, financial condition and liquidity of Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourgsociété à responsabilité limitée (the “Parent” or the “Company”), and its subsidiaries should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto and with the audited consolidated financial statements as of and for the year ended December 31, 2005 included in the Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of results that may be expected for future periods.

Foreign Operations

Net sales outside of the United States constituted approximately 80% and 78% of the Company’s total net sales for the six months ended June 30, 2006 and 2005, respectively. In addition, as of June 30, 2006 non-U.S. subsidiaries comprised approximately 75% of the Company’s consolidated total assets. Accordingly, the Company has experienced and continues to be exposed to foreign exchange risk. The Company has implemented a hedging program to reduce the risk of a devaluation of the Mexican peso; however, a devaluation of the Mexican peso could have a negative impact on the Company’s results.

The Company’s subsidiaries in Mexico generated approximately 73% of the Company’s net sales compared to 69% for the six month period ending June 30, 2005, substantially all of which were denominated in Mexican pesos. During the first six months of 2006, the Mexico peso devalued compared to the U.S. dollar which resulted in exchange losses on the remeasurement of U.S. dollar-denominated debt. Jafra Distribution had $78.0 million of outstanding U.S. dollar denominated debt at June 30, 2006.

The Company is exposed to foreign exchange risk due to its operations in Europe. The Company also has exposure related to the outstanding intercompany notes and payables in Brazil which are denominated in U.S. dollars. The Company does not currently have a hedging program to protect against any devaluation of the real or the euro. A devaluation of either currency could have a negative impact on the Company’s results.

As a group doing approximately 80% of its business in international markets during the first six months of 2006, the Company is subject to foreign taxes and intercompany pricing laws, including those relating to the flow of funds between its subsidiaries pursuant to purchase agreements, licensing agreements or other arrangements. Regulations in the United States, Mexico and in other foreign markets may result in monitoring of the Company’s corporate structure and how it affects intercompany fund transfers.

Information Concerning Forward-Looking Statements

Certain of the statements contained in this report are forward-looking statements made based on our expectations or beliefs concerning future developments and their potential effects. There can be no assurance that future developments will be in accordance with our expectations or that the effect of future developments on us will be those we anticipated. The factors described in our Annual Report on Form 10-K for the year ended December 31, 2005 or in other Securities and Exchange Commission filings, could affect (and in some cases have affected) our actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements.

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

Results of Operations

The following table represents selected components of the Company’s results of operations, in millions of dollars and as percentages of net sales.


	Three Months Ended June 30,										Six Months Ended June 30,
	2006					2005					2006					2005
Net 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		21.8

Gross profit		91.1		79.4			80.3		78.5			184.5		78.2			155.6		78.2
Selling, general and administrative expenses		67.7		59.0			60.7		59.3			136.3		57.8			121.0		60.8

Income rom operations		23.4		20.4			19.6		19.2			48.2		20.4			34.6		17.4
Exchange (loss) gain, net		(2.3	)	(2.0	)		2.6		2.5			(2.4	)	(1.0	)		2.1		1.1
Interest 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		8.6
Income tax expense		5.8		5.1			4.8		4.7			11.9		5.0			6.8		3.4

Income from continuing operations		11.4		9.9			12.7		12.4			25.0		10.6			10.3		5.2
Loss 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			Consolidated
Dollars in millions	Mexico		States		Europe		All Others			and Other			Total
Three Months Ended June 30, 2006
Net sales	$	81.9	$	24.7	$	8.1	$	—		$	—		$	114.7
Cost of sales		17.6		5.9		1.5		—			(1.4	)		23.6

Gross profit		64.3		18.8		6.6		—			1.4			91.1
Selling, general and administrative expenses		39.5		15.0		6.4		0.6			6.2			67.7

Income (loss) from operations	$	24.8	$	3.8	$	0.2	$	(0.6	)	$	(4.8	)	$	23.4


Three Months Ended June 30, 2005
Net sales	$	71.1	$	22.5	$	8.5	$	0.2		$	—		$	102.3
Cost of sales		16.8		5.1		1.5		0.1			(1.5	)		22.0

Gross profit		54.3		17.4		7.0		0.1			1.5			80.3
Selling, general and administrative expenses		33.6		15.9		6.1		0.3			4.8			60.7

Income (loss) from operations	$	20.7	$	1.5	$	0.9	$	(0.2	)	$	(3.3	)	$	19.6

Net sales. Net sales in the second quarter of 2006 increased to $114.7 million from $102.3 million in the second quarter of 2005, an increase of $12.4 million, or 12.1%. The increase in net sales was primarily caused by an increase in the average number of consultants and an increase in consultant productivity. The Company’s average number of consultants in the second quarter of 2006 increased to approximately 471,000 or 9.7% over the average number of consultants in the second quarter of 2005 due to an increase in the number of consultants in the Company’s Mexico and U.S. subsidiaries. A consultant is included in the total ending consultant base if she places an order within the past four months as of the end of the period. The average number of consultants is calculated based on the number of consultants at the end of each month during the period, divided by the number of months in the period. Total Company consultant productivity in the second quarter of 2006 increased 2.2% compared to the second quarter of 2005. Consultant productivity refers to the average amount purchased by each consultant during the period and is calculated by dividing net sales during the period by the average number of consultants during that period.

In Mexico, net sales in the second quarter of 2006 increased to $81.9 million from $71.1 million in the second quarter of 2005, an increase of $10.8 million, or 15.2%. Net sales in Mexico measured in local currency increased 17.1% in the second quarter of 2006 over the comparable 2005 period. The period-over-period net sales increase was due primarily to an increase in the average number of consultants in combination with an increase in consultant productivity. The increase in consultant productivity was primarily related to positive acceptance of productivity promotions and a more favorable product mix with more regular line products. The average number of consultants during the second quarter of 2006 was 384,000 compared to 345,000 during the second quarter of 2005, an increase of 11.3%. The increase in the number of consultants was primarily due to more consultants at the beginning of 2006 over the comparable prior year.

In the United States, including the Dominican Republic, net sales in the second quarter of 2006 increased to $24.7 million compared to $22.5 million in the second quarter of 2005, an increase of $2.2 million, or 9.8%. Operations in the United States (inclusive of the Dominican Republic) are bifurcated into two separate units: the Hispanic Group, which includes the Hispanic Division and the Dominican Republic and represents approximately two-thirds of the United States segment and the U.S. Division. In the United States, the increase in net sales was the result of an increase in Hispanic Group net sales.

Net sales in the Hispanic Group (including the Dominican Republic) increased to $19.3 million in the second quarter of 2006 compared to $17.0 million in the second quarter of 2005, an increase of $2.3 million, or 13.5%. The net sales increase in the second quarter of 2006 compared to the second quarter of 2005 was primarily due to an increase in the average number of consultants and an increase in consultant productivity. The average number of consultants in the Hispanic Group increased to 50,000, an increase of 9.5% compared to the average number of consultants in the second quarter of 2005. The increase in the average number of consultants was primarily the result of better sponsoring in the second quarter of 2006 compared to the second quarter of 2005 and also better retention by having successful promotions focused on retaining consultants. Consultant productivity increase 3.5% during the second quarter of 2006 compared to the second quarter of 2005. During the second quarter of 2006, changes to the current program were implemented to remove certain requirements to obtain the maximum commission percentage and to remove certain minimum ordering requirements in an effort to increase the number of consultants. These changes have not had a significant impact on the quarter to quarter comparison.

Net sales in the U.S. Division decreased 1.8% to approximately $5.4 million in the second quarter of 2006 compared to $5.5 million in the second quarter of 2005 as a result of a decrease of 4.9% in consultant productivity, partially offset by an increase in the average number of consultants. During the second quarter of 2006, the average number of consultants in the U.S. Division increased 3.7% compared to the second quarter of 2005 to 20,000 consultants. During the second quarter of 2006, changes to the current program were implemented to remove certain requirements to obtain the maximum commission percentage and to remove certain minimum ordering requirements in an effort to increase the number of consultants. This change of strategy in the U.S. Division was an important change to focus on sponsoring and retaining consultants. The change in the minimum order size requirement had a negative impact on consultant productivity.

In Europe, net sales decreased to $8.1 million in the second quarter of 2006 compared to $8.5 million in the second quarter of 2005, a decrease of $0.4 million, or 4.7%. The decrease in net sales was primarily driven by a decrease in the average number of consultants partially offset by an increase in consultant productivity. The average number of consultants was approximately 17,000 in the second quarter of 2006, a decrease of approximately 7.3% compared to the second quarter of 2005. The Company’s subsidiaries in Germany, Austria and Holland had a decrease in the average number of consultants while the subsidiaries in Italy and Switzerland had an increase in the average number of consultants during the second quarter of 2006 compared to the second quarter of 2005. Consultant productivity in Europe increased 1.8% primarily as a result of better productivity in the German subsidiary during the second quarter of 2006 compared to the second quarter of 2005.

Gross profit.Consolidated gross profit in the second quarter of 2006 increased to $91.1 million from $80.3 million in the comparable prior year period, an increase of $10.8 million, or 13.5%. Gross profit as a percentage of net sales (gross margin) increased to 79.4% in the second quarter of 2006 from 78.5% in the second quarter of 2005. The increase in gross margin in the second quarter of 2006 was primarily a result of increased margins in Mexico.

In Mexico, gross margin in the second quarter of 2006 increased to 78.5% from 76.4% in the second quarter of 2005 as a result of a favorable product mix with more regular line products.

In the United States, gross margin in the second quarter of 2006 decreased to 76.1% compared to 77.3% in the second quarter of 2005 as result of lower margins on regular line sales.

In Europe, gross margin in the second quarter of 2006 decreased to 81.5% compared to 82.4% in the second quarter of 2005 primarily as a result of additional reserves for slow moving inventory.

Selling, general and administrative expenses.SG&A expenses in the second quarter of 2006 increased to $67.7 million compared to $60.7 million in the second quarter of 2005, an increase of $7.0 million or 11.5%. SG&A expenses as a percentage of net sales decreased to 59.0% in the second quarter of 2006 compared to 59.3% in the second quarter of 2005, due to decreased SG&A expenses, as a percentage of net sales, at the Company’s Mexican and U.S. subsidiaries.

In Mexico, SG&A expenses in the second quarter of 2006 increased by $5.9 million, or 17.6%, to $39.5 million compared to $33.6 million in the second quarter of 2005 as a result of increased variable expenses in line with the increase in net sales. SG&A expenses increased as a percentage of net sales to 48.2% in the second quarter of 2006 compared to 47.3% in the second quarter of 2005. The increase in SG&A expenses as a percentage of net sales was primarily due to increased bad debt expense, increased promotional expenses related to additional promotions to motivate the consultants and legal expenses.

In the United States, SG&A expenses in the second quarter of 2006 decreased by $0.9 million, or 5.7%, to $15.0 million from $15.9 million in the second quarter of 2005. SG&A expenses as a percentage of net sales were 60.7% in the second quarter of 2006 compared to 70.7% in the second quarter of 2005. The decrease in SG&A expenses as a percentage of net sales and in total was primarily attributable to decreased depreciation expense. In 2005, the Company changed its estimate of the useful life of the Company’s United States commercial software and therefore the software was fully depreciated by the end of 2005. Also, the Company had savings related to unfilled employment positions in information technology.

In Europe, SG&A expenses in the second quarter of 2006 increased by $0.3 million, or 4.9% to $6.4 million from $6.1 million in the second quarter of 2005. SG&A expenses as a percentage of net sales in Europe increased to 79.0% in the second quarter of 2006 from 71.8% in the second quarter of 2005 as a result of the unfavorable impact of reduced net sales on fixed expenses, incrementally higher personnel expenses in Switzerland related to the change in field personnel and additional expenses in Italy, including marketing and call center expenses.

SG&A expenses in the Company’s other markets in the second quarter of 2006 increased by $0.3 million, to $0.6 million compared to $0.3 million during the second quarter of 2005 as a result of additional expenses in developing markets, including expenses to begin operations in Russia.

SG&A expenses in “Corporate, Unallocated and Other” increased to $6.2 million during the second quarter of 2006 compared to $4.8 million in the second quarter of 2005, as a result of additional bonus related accruals related to the change in senior management.

Exchange (loss) gain.The Company’s foreign exchange loss was $2.3 million during the second quarter of 2006 compared to an exchange gain of $2.6 million during the second quarter of 2005, an unfavorable change of $4.9 million. Foreign exchange losses and gains result from three primary sources: gains and losses on option contracts, gains and losses due to the remeasurement of U.S. dollar-denominated debt at Jafra Distribution and gains and losses arising from other foreign currency-denominated transactions, including remeasurement of U.S. dollar-denominated intercompany accounts. During the second quarter of 2006, the Company recognized $3.4 million of losses related to the remeasurement of U.S. dollar-denominated debt at Jafra Mexico as the peso has devalued during the second quarter of 2006 compared to the U.S. dollar and Jafra Mexico’s functional currency is the Mexican peso, $0.8 million of gains on option contracts and $0.3 million of gains on other foreign currency transactions. During the second quarter of 2005, the Company recognized $3.2 million of exchange gains related to the remeasurement of U.S. dollar-denominated debt, $1.6 million of losses on option contracts and $1.0 million of gains on other foreign currency transactions.

Interest expense, net of interest income.Net interest expense (including interest income) in the second quarter of 2006 decreased to $3.6 million from $4.6 million in the second quarter of 2005, a decrease of $1.0 million. The decrease in net interest expense was primarily due to the repayment of all borrowings under the Restated Credit Agreement.

Other Expense, net.During the second quarter of 2006, the Company recorded $0.3 million of other expense compared to $0.1 million in the second quarter of 2005.

Income tax expense.Income tax expense was $5.8 million during the second quarter of 2006 compared to $4.8 million during the second quarter of 2005. During the second quarter of 2006, the effective tax rate was 33.7% as a result of the lower effective tax rate in the Company’s Mexico subsidiares due to a lower Mexico statutory rate and certain permanent differences. The effective rate in the Company’s U.S. subsidiary was greater than the statutory rate because of state taxes and certain permanent differences. During the second quarter of 2005, the effective income tax rate was 27.4% and was different than the federal income tax rates due to certain permanent differences and pretax income in the Company’s European and South America subsidiaries without any associated income tax expense due to the utilization of net loss carryforwards.

Net income (loss).Net income was $11.4 million in the second quarter of 2006, compared to $12.7 million in the second quarter of 2005, a decrease of $1.3 million. This decrease was the result of a $7.0 million increase in selling, general and administrative expenses, a $4.9 million unfavorable change in exchange (loss) gain, a $0.2 million increase in other expense, and a $1.0 million increase in income tax expenses, partially offset by a $10.8 million increase in gross profit and a $1.0 million decrease in net interest expense.

Six months ended June 30, 2006 compared to the six months ended June 30, 2005


										Corporate,
			United							Unallocated			Consolidated
Dollars in millions	Mexico		States		Europe		All Others			and Other			Total
Six Months Ended June 30, 2006
Net sales	$	172.8	$	47.5	$	15.5	$	0.1		$	—		$	235.9
Cost of sales		39.3		11.2		3.1		0.1			(2.3	)		51.4

Gross profit		133.5		36.3		12.4		0.0			2.3			184.5
Selling, general and administrative expenses		83.8		29.4		11.7		1.0			10.4			136.3

Income (loss) from operations	$	49.7	$	6.9	$	0.7	$	(1.0	)	$	(8.1	)	$	48.2


Six Months Ended June 30, 2005
Net sales	$	137.7	$	44.8	$	16.3	$	0.3		$	—		$	199.1
Cost of sales		32.6		9.8		2.6		0.1			(1.6	)		43.5

Gross profit		105.1		35.0		13.7		0.2			1.6			155.6
Selling, general and administrative expenses		67.0		32.3		12.3		0.5			8.9			121.0

Income (loss) from operations	$	38.1	$	2.7	$	1.4	$	(0.3	)	$	(7.3	)	$	34.6

Net sales. Net sales in the first six months of 2006 increased to $235.9 million from $199.1 million in the first six months of 2005, an increase of $36.8 million, or 18.5%. In local currencies, net sales increased 17.3% in the first six months of 2006 compared to the first six months of 2005. The increase in net sales was primarily driven by an increase in the average number of consultants and an increase in consultant productivity. The Company’s average number of consultants in the six months ended June 30, 2006 increased to approximately 476,000 compared to 428,000 in the comparable prior year period, an increase of 48,000 or 11.2%. Total Company consultant productivity in the first six months of 2006 increased by 6.6% compared to the first six months of 2005.

In Mexico, net sales in the first six months of 2006 increased by $35.1 million or 25.5% to $172.8 million compared to $137.7 million in the first six months of 2005 as a result of an increase in the average number of consultants and an increase in consultant productivity. The average number of consultants in Mexico increased to approximately 391,000 in the first six months of 2006 compared to 340,000 in the first six months of 2005. The increase in the average number of consultants was primarily the result of a larger beginning balance in 2006 compared to 2005 and more successful sponsoring, specifically in the first quarter of 2006. Consultant productivity in Mexico increased 8.9% during the first six months of 2006 compared to the first six months of 2005 primarily as a result of the successful productivity promotions and more favorable product mix with less promotional items.

In the United States, including the Dominican Republic, net sales in the first six months of 2006 increased to $47.5 million compared to $44.8 million in the first six months of 2005, an increase of $2.7 million, or 6.0%. In the United States, the increase in net sales was the result of an increase in net sales in the Hispanic Group.

Net sales in the Hispanic Group (including the Dominican Republic) increased to $35.9 million in the first six months of 2006 compared to $33.0 million in the first six months of 2005, an increase of $2.9 million or 8.8%. The net sales increase in the first six months of 2006 compared to the first six months of 2005 was the result of an increase in the average number of consultants and increase in consultant productivity. The Hispanic Group started off with fewer consultants at the beginning of 2006 compared to the beginning of 2005. However, the Hispanic Group had better sponsoring results with the use of promotional consultant cases and a well accepted special 50^th anniversary consultant case. The Hispanic Group also had less consultant attrition during the first six months of 2006 compared to 2005 because of successful retention programs. The average number of consultants in the Hispanic Group in the first six months of 2006 was approximately 47,000 compared to 46,000 in the first six months of 2005. Consultant productivity increased 7.4% in the first six months of 2006 compared to the first six months of 2005 primarily as a result of attractive marketing promotions which have resulted in an increase in the average overall order size.

Net sales in the U.S. Division decreased 1.7% to approximately $11.6 million in the first six months of 2006 compared to $11.8 million in the first six months of 2005 as a result of a decrease in the average number of consultants partially offset by increased consultant productivity of 6.0%. The average number of consultants in the U.S. Division decreased to approximately 20,000 in the first six months of 2006 compared to approximately 22,000 in the first six months of 2005, a decrease of 2,000 or 9.1%. The decrease in the average number of consultants was primarily the result of fewer consultants at the beginning of 2006 compared to 2005. The U.S. Division has identified growing the consultant base as one of its key objectives. As a result of this focus, the U.S. Division had increased sponsoring and better retention in the first six months of 2006 compared to the first six months of 2005.

In Europe, net sales decreased to $15.5 million in the first six months of 2006 compared to $16.3 million in the first six months of 2005, a decrease of $0.8 million, or 4.9%. The decrease was the result of a decrease in the average number of consultants partially offset by a 4.2% increase in consultant productivity. During 2005, a new career plan was implemented in Germany, Austria and Holland to encourage and reward consultants for sponsoring and retention and to focus on long-term growth. The new career plan has been adopted by the consultants at a much slower pace than originally planned and the Company is working with field leaders to focus the leaders on sponsoring new consultants. As a result of the slow adoption, the average number of consultants in Germany, Austria and Holland has decreased in the first six months of 2006 compared to the first six months of 2005. The average number of consultants has increased in Italy and Switzerland in the first six months of 2006 compared to 2005 due to successful recruiting campaigns and incentives.

Net sales in the other markets decreased to $0.1 million in the first six months of 2006 compared to $0.3 million in the first six months of 2005 and were due to liquidation of final inventory in the Company’s Brazil subsidiary.

Gross profit.Consolidated gross profit in the first six months of 2006 increased to $184.5 million from $155.6 million in the first six months of 2005, an increase of $28.9 million, or 18.6%. Gross profit as a percentage of net sales (gross margin) was constant at 78.2% in each period.

In Mexico, gross margin in the first six months of 2006 increased to 77.3% compared to 76.3% in the first six months of 2005 primarily as a result of better margins on regular line sales and fewer promotional offerings during the first six months of 2006 compared to the first six months of 2005.

In the United States, gross margin decreased to 76.4% in the first six months of 2006 compared to 78.1% in the first six months of 2005. The decreased gross margin the the United States was primarily the result of lower margins on new products and non-commissionable sales and additional reserves for slow moving inventory in the Dominican Republic.

In Europe, gross margin in the first six months of 2006 decreased to 80.0% compared to 84.0% in the first six months of 2005 primarily as a result of additional reserves for slow moving inventory in part related to the new color pallette and packaging to be launched during the third quarter of 2006.

Selling, general and administrative expenses.SG&A expenses in the first six months of 2006 increased to $136.3 million, an increase of $15.3 million, or 12.6%, compared to $121.0 million in the first six months of 2005. SG&A expenses as a percentage of net sales decreased to 57.8% in the first six months of 2006 compared to 60.8% in the first six months of 2005 due primarily to decreased SG&A expenses, as a percentage of net sales, at the Company’s Mexican and United States subsidiaries.

In Mexico, SG&A expenses in the first six months of 2006 increased by $16.8 million, or 25.1% to $83.8 million compared to $67.0 million in the first six months of 2005. SG&A expenses decreased as a percentage of net sales to 48.5% in the first six months of 2006 compared to 48.7% in the first six months of 2005. The decrease in SG&A expenses, as a percentage of sales was the result of the favorable impact of fixed costs on greater sales, partially offset by costs to process relatively more orders, bad debt expenses, an additional promotion and legal fees.

In the United States, SG&A expenses in the first six months of 2006 decreased by $2.9 million, or 9.0% to $29.4 million compared to $32.3 million in the first six months of 2005. SG&A expenses as a percentage of net sales were 61.9% in the first six months of 2006 compared to 72.1% in the first six months of 2005. The decrease

in SG&A expenses as a percentage of net sales was primarily attributable to decreased depreciation expense related to the acceleration of the depreciation as a result of the shortening of the useful life of the Company’s commercial software system in 2005. Additionally, the U.S. had savings in personnel related expenses in information technology.

In Europe, SG&A expenses in the first six months of 2006 decreased by $0.6 million, or 4.9% to $11.7 million compared to $12.3 million in the first six months of 2005, in line with the decrease in net sales. SG&A expenses as a percentage of net sales in Europe were constant at 75.5% in the first six months of 2006 and the first six months of 2005.

SG&A expenses in the Company’s other markets in the first six months of 2006 increased by $0.5 million to $1.0 million compared to $0.5 million in the first six months of 2005. The increase in expenses in other markets was primarily related to expenses necessary to start up operations in Russia.

SG&A expenses in “Corporate, Unallocated and Other” increased to $10.4 million compared to $8.9 million during the first six months of 2005. The increase was the result of additional bonus related expenses for the change in senior management.

Exchange (loss) gain.The Company’s foreign exchange loss was $2.4 million for the first six months of 2006 compared to an exchange gain of $2.1 million in the first six months of 2005. During the first six months of 2006, the Company recognized $5.2 million of exchange losses related to the remeasurement of U.S. dollar-denominated debt at Jafra Mexico as the peso has devalued during the first six months of 2006 compared to the U.S. dollar and Jafra Mexico’s functional currency is the Mexican peso, $1.1 million of exchange gains on option contracts and $1.7 million of exchange gains on other foreign currency transactions. During the first six months of 2005, the Company recognized $3.0 million of exchange gains related to the remeasurement of U.S. dollar-denominated debt, $1.7 million of losses on option contracts and $0.8 million of gains on other foreign currency transactions.

Interest expense, net of interest income.Net interest expense (including interest income) in the first six months of 2006 decreased to $7.2 million compared to $9.7 million in the first six months of 2005. The decrease in net interest expense was primarily due to the decrease in the debt balance and specifically the repurchase of $69.5 million principal of 10³/4% Notes during the first quarter of 2005.

Loss on extinguishment of debt.During the first six months of 2005, the Company repurchased $69.5 million of its outstanding 10³/4% Notes. In connection with the redemption, the Company paid $7.5 million of premiums and wrote off approximately $2.3 million of previously capitalized deferred financing fees. As a result, the Company recorded $9.8 million as loss on extinguishment of debt during the first six months of 2005.

Other Expense, net.During the first six months of 2006, the Company recorded $1.7 million of other expenses compared to $0.1 million in the first six months of 2005. Other expense during the first six months of 2006 primarily related to the reclassification of accumulated other comprehensive loss to other expense.

Income tax expense.Income tax expense was $11.9 million in the first six months of 2006 compared to $6.8 million in the first six months of 2005. During the first six months of 2006, the effective tax rate was 32.2% and was different than the federal income tax rate due to higher rates in the United States subsidiary related to state income taxes and permanent differences and pretax losses in other markets without any associated tax benefit. This rate was partially offset by a lower effective tax rate in the Company’s Mexico subsidiaries as a result of a lower staturory rate and certain permanent differences. During the first six months of 2005, the effective income tax rate was 39.8% and was different than the federal income tax rates due to certain permanent differences, including the write-off of $1.8 million of certain deferred tax assets in the Company’s United States subsidiary, and pretax income in the Company’s European and South American subsidiaries without any associated income tax expense due to the utilization of net loss carryforwards.

Net income.Net income was $25.0 million in the first six months of 2006 compared to $10.3 million in the first six months of 2005, an increase of $14.7 million. The increase was the result of a $28.9 million increase in gross profit, a $2.5 million decrease in net interest expense, the elimination of $9.8 million loss on extinguishment of debt, partially offset by a $15.3 million increase in selling, general and administrative expenses, a $4.5 million unfavorable change in exchange (loss) gain, net, a $1.6 million increase in other expense and a $5.1 million increase in income tax expense.

Liquidity and Capital Resources

Overview

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

Liquidity

The 10³/4% Notes are unsecured and are generally not redeemable until May 15, 2007. Thereafter, the 10³/4% Notes will be redeemable on a pro rata basis at premiums declining to par in the sixth year. On February 17, 2005, pursuant to the Indenture, the Issuers redeemed $69.5 million of the original $200 million of 10³/4% Notes at a redemption price of 110.75 with the cash proceeds from a private equity contribution from Vorwerk of $79.1 million. As a result of this redemption and the redemption of $0.5 million of the 10³/4% Notes during 2004, $130.0 million principal amount of the 10³/4% Notes was outstanding at June 30, 2006 and December 31, 2005.

In connection with the February 17, 2005 redemption, the Company paid $7.5 million of premiums and wrote off approximately $2.3 million of previously capitalized deferred financing fees. As a result, the Company recorded $9.8 million as loss on extinguishment of debt in the accompanying consolidated statements of income during the six months ended June 30, 2005.

As of June 30, 2006 and December 31, 2005, approximately $3.6 million and $4.3 million respectively of unamortized deferred financing fees were reported as a noncurrent asset in the accompanying consolidated balance sheets. These deferred financing fees are being amortized on a basis that approximates the interest method over the term of the 10³/4% Notes and the Restated Credit Agreement.

The Company believes that its existing cash, cash flow from operations and availability under the Restated Credit Agreement will provide sufficient liquidity to meet the Company’s cash requirements and working capital needs over the next years.

Cash Flows

Net cash provided by operating activities was $14.8 million for the six months ended June 30, 2006 compared to $9.2 million for the six months ended June 30, 2005, an increase of $5.6 million. Net cash provided by operating activities for the six months ended June 30, 2006 consisted of $25.0 million of net income adjusted for depreciation of $2.4 million, provision for uncollectible accounts receivable of $6.2 million, unrealized foreign exchange losses of $2.5 million and $8.6 million use of deferred income taxes. This was partially offset by $13.3 million of uses in changes in operating assets and liabilities. The significant elements of net cash used in changes in operating assets and liabilities were a $13.6 million increase in accounts receivable in part due to the increase in net sales, an $11.9 million increase in inventories in part related to new product launches and in response to certain low stock issues, offset by a $4.3 million increase in accounts payable and accrued liabilities and a $9.0 million increase in income taxes payable. The significant elements of net cash used in changes in operating assets and liabilities during the six months ended June 30, 2005 were a decrease of $6.7 million in accounts payable and accrued liabilities and a $1.6 decrease income taxes payable.

Net cash used in investing activities was nominal for the six months ended June 30, 2006 compared to $1.4 million for the six months ended June 30, 2005 primarily related to the purchase of property and equipment and investments related to the supplemental savings plan in the Company’s U.S. subsidiary.

There were no financing activities during the six months ended June 30, 2006 compared to net cash used in financing activities of $8.4 million for the six months ended June 30, 2005. Net cash used in financing activities for the six months ended June 30, 2005 included a $79.1 million equity contribution from the shareholder, Jafra S.A., and net borrowings under the Restated Credit Agreement of $46.0 million, offset by $69.5 million of repurchase of subordinated debt, $44.0 million repayments under the Restated Credit Agreement and $20.0 million repayment of the Vorwerk note.

The effect of exchange changes on cash was $0.6 million during the six months ended June 30, 2006.

Recent Accounting Pronouncements

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

Business Trends and Initiatives

The Company’s Mexico subsidiary has reported net sales growth during the first six months of 2006 and during the last several years as a result of increases in the consultant base. Additionally, the Mexico subsidiary contributes a significant portion of the Company’s consolidated net sales. The Company’s Mexican subsidiary generated 73% of total net sales for the six months ended June 30, 2006 and 71% of total net sales for the year ended December 31, 2005. The Company’s Mexico subsidiary continues to focus on recruiting new consultants and retaining new consultants.

In the United States, the Company has renewed its focus on recruiting new consultants. Although recruiting has been an important part of the U.S. strategy, the U.S. has changed its focus to recruit and sponsor all potential consultants instead of focusing on potential career consultants. In April, the United States modified its program to eliminate certain requirements to obtain the maximum commission. This was done in an effort to enhance recruiting capabilities of the consultants. Although the net sales increase for the six months ended June 30, 2006 was primarily due to increased productivity, the number of sponsored consultants during the first six months of 2006 was better than the number sponsored during the first six months of 2005 and the Hispanic Division had an increase in the number of consultants which contributed to the increase in net sales.

Net sales in Europe have decreased in the first six months of 2006 compared to the first six months of 2005, primarily as result of fewer consultants. The programs in Germany, Austria and Netherlands were changed during the second quarter of 2005 to focus on recruiting and long term growth. Implementation of this new program has taken longer than expected and the Europe subsidiaries are working with leaders to focus on recruiting.

The Company has established a subsidiary in Russia and anticipates beginning sales during the third quarter of 2006. The Company also continues to evaluate expansion or re-entry into other foreign markets including Indonesia and Brazil. The Company expects to incur S,G&A expenses of at least $2.2 million related to such efforts in these markets in 2006. The Company continues to serve other markets through distributorship agreements with third party distributors, including Brazil.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks arising from transactions in the normal course of its business and from debt discussed in “Liquidity and Capital Resources” under Item 2. Such risks are principally associated with interest rate and foreign exchange fluctuations, as well as changes in the Company’s credit standing. See disclosures under Item 7a, “Quantitative and Qualitative Disclosures About Market Risks” in the Company’s annual report on Form 10-K for the year ended December 31, 2005. No significant changes have occurred during the first six months of 2006 in relation to the interest rate risk or the Company’s credit standing.

Foreign Currency Risk

The Company operates globally, with manufacturing facilities in Mexico and distribution facilities in various locations around the world. With the exception of most intercompany product sales between European subsidiares and intercompany sales between Mexican entities, substantially all intercompany product sales are denominated in U.S. dollars. However, 80% of the Company’s revenue for first six months of 2006 was generated in countries with a functional currency other than the U.S. dollar, and 73% of the Company’s revenue for the first six months of 2006 was denominated in Mexican pesos. As a result, the Company’s earnings and cash flows for the three and six months ended June 30, 2006 were exposed to fluctuations in foreign currency exchange rates.

The Company may reduce its primary market exposures to fluctuations in foreign exchange rates and hedge contractual foreign currency cash flows or obligations (including third party and intercompany foreign currency transactions) by creating offsetting positions through the use of forward exchange contracts or option contracts. The Company regularly monitors its foreign currency exposures to ensure that contract amounts do not exceed the amounts of the underlying exposures. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives.

The Company uses foreign currency option contracts to hedge against exposures to currency risk relating to its forecasted U.S. dollar-denominanted expenditures at Jafra Mexico. The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 682,000,000 and 828,000,000 in put and call positions at June 30, 2006 and December 31, 2005, respectively. The outstanding foreign currency option contracts outstanding at June 30, 2006 mature at various dates through September 28, 2007. Notional amounts do not quantify the Company’s market or credit exposure or represent the Company’s assets or liabilities, but are used in the calculation of cash settlements under the contracts.

The following tables provide information about the details of the Company’s option contracts as of June 30, 2006 (in thousands except for average strike price):


	Coverage in
	Mexican		Average Strike		Fair Value in
Foreign Currency	Pesos		Price		U.S. Dollars(1)			Maturity Date
At June 30, 2006:
Purchased puts (Company may sell peso/buy USD)
Mexican peso		162,000		11.55-12.73	$	(192	)	July-Sept. 2006
Mexican peso		217,000		11.66-12.28		(133	)	Oct.-Dec. 2006
Mexican peso		110,000		12.03-12.34		(74	)	Jan.-Mar. 2007
Mexican peso		113,000		11.86-12.10		22		Apr.-June 2007
Mexican peso		80,000		12.14-12.17		26		July.-Sept. 2007

		682,000			$	(351	)


Written calls (Counterparty may buy peso/sell USD)
Mexican peso		162,000		10.47-11.48	$	(65	)	July-Sept. 2006
Mexican peso		217,000		10.56-11.12		28		Oct.-Dec. 2006
Mexican peso		110,000		10.90-11.24		(35	)	Jan.-Mar. 2007
Mexican peso		113,000		10.75-11.00		12		Apr.-June 2007
Mexican peso		80,000		11.04-11.07		(14	)	July.-Sept. 2007

		682,000			$	(74	)

The following table provides information about the details of the Company’s option contracts as of December 31, 2005 (in thousands):


	Coverage in
	Mexican		Average Strike		Fair Value in
Foreign Currency	Pesos		Price		U.S. Dollars(1)			Maturity Date
At December 31, 2005:
Purchased puts (Company may sell peso/buy USD)
Mexican peso		150,000		12.40-13.19	$	(225	)	Jan.-Mar. 2006
Mexican peso		176,000		11.87-12.87		(309	)	Apr.-June 2006
Mexican peso		162,000		11.55-12.73		(190	)	July-Sept. 2006
Mexican peso		187,000		11.66-12.28		(136	)	Oct.-Dec. 2006
Mexican peso		80,000		12.29-12.34		(103	)	Jan.-Mar. 2007
Mexican peso		73,000		11.86-11.90		(5	)	Apr.-June 2007

		828,000			$	(968	)


Written calls (Counterparty may buy peso/sell USD)
Mexican peso		150,000		11.23-11.95	$	(805	)	Jan.-Mar. 2006
Mexican peso		176,000		10.78-11.65		(472	)	Apr.-June 2006
Mexican peso		162,000		10.47-11.54		(378	)	July-Sept. 2006
Mexican peso		187,000		10.56-11.12		(151	)	Oct.-Dec. 2006
Mexican peso		80,000		11.19-11.24		(149	)	Jan.-Mar. 2007
Mexican peso		73,000		10.75-10.78		(21	)	Apr.-June 2007

		828,000			$	(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.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

There has been no change in the Company’s internal controls or procedures during the fiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See discussion under “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 1A. Risk Factors

There have been no material changes in the risk factors provided in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 31, 2006.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None

Item 6. Exhibits

The following documents are exhibits to this quarterly report on Form 10-Q.


Exhibit
Number

31.1		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.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


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

		/s/ EUGENIO LOPEZ Eugenio Lopez
		Chief Executive Officer

		/s/ ENRIQUE MARCO

		Enrique Marco
		Chief Financial Officer (Principal Financial Accounting Officer)

		/s/ STACY WOLF

		Stacy Wolf
		Corporate Controller (Principal Accounting Officer)

Date August 14, 2006

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Jafra Worldwide Holdings Lux Sarl Inactive 10-Q2006 Q2 Quarterly report

Content analysis