Jafra Worldwide Holdings Lux Sarl 10K 2005 Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2005
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to .

Commission filenumber 333-106666

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

(Exact name of Registrant as specified in its charter)


Luxembourg		98-0399297
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification Number)

382-386 Route de Longwy

L-2212 Luxembourg

Luxembourg

(352) 226027

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

registrant’s principal executive offices)

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

None

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Act”). Yes þ No o

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

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

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” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined inRule 12-b2 of the Act). Yes o No þ

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

As of March 15, 2006 the registrant had outstanding 316,420 shares of common stock, par value $100.00 per share.

Documents Incorporated by Reference

None

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

TABLE OF CONTENTS


Item	Description	Page

PART I
1.	Business		3
1A.	Risk Factors		10
1B.	Unresolved Staff Comments		19
2.	Properties		19
3.	Legal Proceedings		19
4.	Submission of Matters to a Vote of Security Holders		19

PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters		19
6.	Selected Financial Data		20
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
7A.	Quantitative and Qualitative Disclosures About Market Risk		40
8.	Financial Statements and Supplementary Data		44
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		138
9A.	Controls and Procedures		138
9B.	Other Information

PART III
10.	Directors, Executive Officers and Significant Employees of the Company		138
11.	Executive Compensation		141
12.	Security Ownership of Certain Beneficial Owners and Management		142
13.	Certain Relationships and Related Transactions		143
14.	Principal Accounting Fees and Services		143

PART IV
15.	Exhibits, Financial Statement Schedules		144
Signatures			152
EX-21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I


Item 1.	*Business*

General

Jafra Worldwide Holdings (Lux) S.àr.l., a Luxembourgsociété à responsabilité limitée(the “Parent”) is an intermediate holding company that conducts all of its operations through its U.S. andnon-U.S. subsidiaries. Prior to the Parent’s recapitalization of its operations (the “Recapitalization”) on May 20, 2003, the historical operations of CDRJ Investments (Lux) S.A. (“CDRJ”) were equivalent to the operations of the Parent. CDRJ was liquidated in April 2004. CDRJ and its subsidiaries and the Parent and its subsidiaries are referred to collectively as the “Company” or “Jafra.”

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

The Parent agreed to file periodic reports with the Securities and Exchange Commission (“SEC”) in connection with the issuance in May 2003 of an aggregate $200 million of 103/4% Senior Subordinated Notes due 2011 (the “103/4% Notes”) by its subsidiaries Jafra Cosmetics International, Inc. (“JCI”) and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution” and together with JCI, the “issuers”), so long as the 103/4% Notes are outstanding. The 103/4% Notes, of which approximately $130 million is outstanding as of December 31, 2005, are guaranteed by the Parent. JCI and Jafra Distribution are also borrowers (and the Parent is the Guarantor) under a $60 million amended and restated revolving credit facility entered into in August 2004, which can be increased by the Company up to $90 million subject to the agreement by the lenders to participate in the amount of such increase. The Company currently has no borrowings outstanding under the revolving credit facility.

The Company is a direct seller of skin and body care products, color cosmetics, fragrances and other personal care products. The Company sells its Jafra brand products through a network of approximately 451,000 independent consultants, who market and sell the Company’s products to their customers. The Company generated approximately 71% of its total net sales in 2005 in Mexico and approximately 22% of its total net sales in the United States and the Dominican Republic.

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

Strategy

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

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

Capitalize on Leading Market Position and Brand Equity in Mexico. The Company believes its leading market position and the strength of the Jafra brand in Mexico position it to benefit from favorable demographic

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

Increase Presence in the United States. In late 2000, the Company strengthened its focus on the growing Hispanic population in the United States. This allowed the Company to customize its marketing efforts. The Company has focused on separate portions of the population and will continue to provide its U.S. Spanish and non-Spanish speaking consultants with tailored recruiting programs, training materials, seminars and product presentations. In addition, the Company will continue to focus on the particular needs of the non-Spanish speaking consultants.

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

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

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

Research and Development

The Company continuously introduces new and revitalized products based on changes in consumer demand and technological advances in order to enhance the quality, image and price positioning of its products. Research and development is conducted at the Jafra Skin, Body and Color Laboratory, located in the Westlake Village, California facility. Amounts incurred on research activities relating to the development of new products and improvement of existing products were $1.6 million in the year ended December 31, 2005, $1.4 million in the year ended December 31, 2004 and $1.3 million in the year ended December 31, 2003.

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

Products

The following table sets forth the net sales of the Company’s principal product lines for the years ended December 31, 2005, 2004 and 2003:


	2005					2004					2003
			Percentage					Percentage					Percentage
	Sales by		of Total			Sales by		of Total			Sales by		of Total
	Product Line		Sales			Product Line		Sales			Product Line		Sales
	($ In millions)					($ In millions)					($ In millions)

Skin care	$	72.2		17.3	%	$	78.6		19.5	%	$	73.8		19.9	%
Body care and personal care		49.4		11.9			48.3		12.0			47.2		12.7
Color cosmetics		85.5		20.5			83.5		20.7			84.9		22.8
Fragrances		165.0		39.6			146.4		36.3			127.3		34.3
Other products(1)		44.4		10.7			46.6		11.5			38.3		10.3

Subtotal before shipping and other fees, less commissions		416.5		100.0	%		403.4		100.0	%		371.5		100.0	%

Shipping and other fees, less commissions		13.6					12.8					12.4

Total	$	430.1				$	416.2				$	383.9


(1)		Includes sales aids (e.g., party hostess gifts, demonstration products, etc.) and promotional materials purchased by consultants, which typically do not qualify for commissions or overrides.

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

Body Care and Personal Care. The Company markets a broad selection of body, bath, sun and personal care products, including deodorants and shampoos. The Company’s signature body care product,Royal Jelly Body Complex, contains “royal jelly” (a substance produced by queen bees) in an oil-free deep moisturizing formula with natural botanical extracts and vitamins. Other offerings in the body care line include sunscreens, hand care lotions, revitalizing sprays, and bath products. While the Company varies its product offerings and continues to develop new products,Royal AlmondandPrecious Proteinproducts have been top sellers for many years. Also, the Company offers theDefine Your Bodyline of four products, a complete line of body treatment products. The Company has continued to build on the success of theJafra Spaline with the launches of the Spa fragrances and theScalp Massage and Hair Treatment. TheTender Momentsbaby line was enhanced with the launch of pediatrician-testedBaby Bottom Balm, formulated with soothing ingredients.

Color Cosmetics. The Company sells a range of color cosmetics for the face, eyes, lips, cheeks and nails. The Company internally develops lipstick formulas, foundations and mascaras. The Company continues to enhance its color palette strategy by introducing seasonal color products through innovative fashion color statements in the spring and fall shade product offerings. This has been a consistent strategy and has continued to drive the sales of color products. In 2005, the Company continued to introduce new products in theB-Twinline to target the teenage color cosmetics market.

Fragrance. Direct selling is a significant distribution channel for fragrances, and the Company’s new scents have enabled the Company to participate on an increasingly larger scale in this channel. The Company introduces new fragrances into its product line regularly and has introduced at least one new fragrance a year since 1996.

During 2005, the Company introducedVessenandVasluiinto its regular line. The Company also introduced several limited life products.

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

Marketing

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

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

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

Independent Consultants

The Company had approximately 451,000 independent consultants worldwide as of December 31, 2005. Approximately 374,000 of these consultants were in Mexico, 58,000 were in the United States, 16,000 were in Europe and 3,000 were in the Dominican Republic. These consultants, including managers, district managers and district directors, are not agents or employees of Jafra; they are independent contractors or dealers. They purchase products directly from the Company and sell them directly to their customers.

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

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

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

Recruiting. The Company believes that it presents an attractive proposition for prospective consultants due to its lowstart-up costs and policy of providing retail discounts. Other major attractions to prospective recruits include flexible hours, increased disposable income, an attractive incentive program (including international travel,

national and regional meetings, awards and free products), personal and professional recognition, social interaction, product discounts and career development opportunities.

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

Consultant Management and Training. At December 31, 2005, the Company had approximately 17,000 managers, 2,000 district managers and 1,000 district directors. To become a manager, a consultant must sponsor a specified number of recruits who meet certain minimum sales levels. Once a consultant becomes a manager, she is eligible to earn commissions on personal sales plus overrides on the sales of her downline consultants. A manager continues to gain seniority in the Jafra sales force by meeting the prescribed recruitment and sales requirements at each level of management. At more senior levels, managers may have several junior managers who in turn sponsor and manage other managers and consultants. The most successful managers have many such downline managers and consultants, and earn commissions on their personal sales plus overrides on their downline group’s sales. During 2005, the Company recorded $69.7 million as override expense within selling, general and administrative expenses and $4.7 million of commissions on personal sales paid to consultants as a reduction of net sales.

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

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

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

Geographic Operations

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

Due to the challenging macroeconomic environment that has affected the Company’s results in selected markets in which the Company operated, the Company adopted a strategic plan to focus on the strengths of the Mexican, U.S. and European markets. The Company terminated its direct selling operations in Argentina in 2005, Brazil in 2004 and in certain markets in South America and Thailand in 2003. The Company plans to expand into other international markets in the future.

The Company’s most important markets are Mexico, the United States (including the Dominican Republic) and Europe, which represented approximately 71%, 22% and 7%, respectively, of total 2005 consolidated net sales. The Company has entered into foreign currency exchange contracts to help mitigate the risk that a potential

currency devaluation in Mexico would have on operations and liquidity. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”

In certain European markets, including Czech Republic, Denmark/Norway, Greece, Hungary, Ireland, Poland, Slovenia and Sweden the Company operates through distributors. The Company also has distributor agreements with third parties in Brazil, Argentina and other South American countries who buy the product from the Company’s Mexico or United States subsidiaries and sell or have the right to sell the Company’s products. The Company has the contractual right to terminate these arrangements if it chooses to operate directly in a given market.

Manufacturing

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

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

Distribution Centers

As of December 31, 2005, the Company used four primary distribution centers in the United States, Mexico and Europe. The U.S. warehouses in Bridgeport, New Jersey and Westlake Village, California currently stock the entire Jafra product line. In 2002, the Company opened a distribution center in Lerma, Mexico that services all consultants in Mexico. In addition, the Company has a distribution center in Kaufbeuren, Germany that services all of the European markets. Management believes that its facilities are adequate to meet demand in its existing markets for the foreseeable future.

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

Competition

The Company sells all of its products in highly competitive markets. The principal bases of competition in the cosmetics direct selling industry are price, quality and range of product offerings. On the basis of information available to it from industry sources, management believes that there are a significant number of companies (including both direct sales and cosmetic manufacturing companies) that compete with the Company’s products. Several direct sales companies compete with Jafra in sales of cosmetic products, and at least two such competitors, Mary Kay and Avon, are substantially larger than the Company in terms of total independent salespersons, sales volume and resources. In addition, the Company’s products compete with cosmetics and toiletry items manufactured by cosmetic companies that sell their products in retail or department stores. Several of such competitors are substantially larger than the Company in terms of sales and have substantially more resources. The Company also faces competition in recruiting independent salespersons from other direct selling organizations whose product lines may or may not compete with the Company’s products.

Patents and Trademarks

The Company’s operations do not depend to any significant extent upon any single trademark other than theJafratrademark. Some of the trademarks Jafra uses, however, are identified with and important to the sale of its

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

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

Information andE-Commerce Systems

During 2004, the Company appointed a Chief Information Officer to evaluate global management information systems. The Company utilizedE-Commerce systems for order taking and in some instances, consultant activation in the United States and Mexico. The Company plans to implement a new commercial information system in the United States during 2006 to replace the commercial information portion of the JD Edwards system.

Seasonality

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

Environmental Matters

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

Employees

As of December 31, 2005, the Company had 968 full-time employees, of which 244 were employed in the United States, 653 were employed in Mexico and 71 were employed in other countries. The Company also had 406 outside contract employees. In Mexico, some of the Company’s employees are unionized. The Company has in the past experienced union-related work stoppages in Mexico. Within the past five years, none of these stoppages have had any material impact on operations. The Company believes its relations with its employees are generally good. The Company’s employees are not unionized in any market outside of Mexico.


Item 1A.	*Risk Factors*

Risk Factors

The following important factors, and those important factors described elsewhere in this report or in other Securities and Exchange Commission filings, could affect (and in some cases have affected) our actual results and could cause our results to differ materially from estimates or expectations. Additional risks and uncertainties may also materially and adversely affect our business operations. Any of the following risks could materially and adversely affect our business, financial condition or results of operations.

If we are unable to retain our existing independent consultants and recruit additional consultants, net sales may decrease.

We distribute almost all of our products through independent consultants. The consultants may terminate their services at any time, and, like most direct selling companies, we experience high turnover among consultants from year to year. As a result, we need to continue to retain existing and recruit additional independent consultants. Our operations would be harmed if we fail to attract new consultants or maintain and increase productivity by our consultants.

The number and productivity of our consultants could be affected by several additional factors, including:


	•	adverse publicity regarding the Company, its products, its distribution channel or its competitors;

	•	any failure to motivate consultants with new products;

	•	changes in the public’s perception of the Company’s products and their ingredients;

	•	competition for consultants from other direct selling cosmetics companies;

	•	changes in the public’s perception of the Company’s consultants and direct selling businesses in general; and

	•	general economic and business conditions.

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

Any adverse changes in our business operations in Mexico would adversely affect net sales and profitability.

Approximately 71% of our net sales for the year ended December 31, 2005 were generated in Mexico. Various factors could harm our business in Mexico. These factors include, among others:


	•	worsening economic conditions, including a prolonged recession in Mexico;

	•	greater difficulty in staffing and managing foreign operations;

	•	fluctuations in currency exchange rates and inflation;

	•	longer collection cycles and increases in bad debt expenses;

	•	burdens and costs of compliance with local laws; and

	•	greater difficulty in protecting intellectual property.

Mexico is an emerging market economy, with attendant risks.

Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities including our operations. The next presidential national elections will be held in July 2006. Our financial condition, results of operations and prospects may be affected by currency fluctuations, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico.

The Mexican economy in the past has suffered balance of payment deficits and shortages in foreign exchange reserves. There are currently no exchange controls in Mexico. However, Mexico has imposed foreign exchange controls in the past. Under the North American Free Trade Agreement, if Mexico experiences serious balance of payment difficulties or the threat thereof in the future, Mexico would have the right to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors. Any restrictive exchange control policy could adversely affect our ability to obtain U.S. dollars or to convert pesos into U.S. dollars for purposes of paying dollar-denominated expenses, such as interest on indebtedness, to the extent that we may have to effect those conversions.

International operations may be adversely affected by local conditions.

Approximately 79% of our net sales in 2005 were generated outside the United States. Our ability to conduct business outside the United States and our revenues from foreign markets are subject to the risks inherent in international operations. Our international operations may be adversely affected by import duties or other legal restrictions on imports, currency exchange control regulations, transfer pricing regulations, the possibility of hyperinflationary conditions and potentially adverse tax consequences, among other things. The governments of nations in which we operate may take actions that materially adversely affect our ability to conduct business in these markets.

Currency exchange rate fluctuations in Mexico could lower our net sales and net income.

During 2005, we recognized approximately 79% of our net sales innon-U.S. markets in each market’s respective local currency, including approximately 71% in Mexican pesos. In preparing our financial statements, we translate net sales and expenses in foreign countries from their local currencies into U.S. dollars using weighted average exchange rates. If the U.S. dollar strengthens relative to local currencies, primarily the Mexican peso, our reported net sales, gross profits and net income will likely be reduced.

Despite the current stability of the Mexican peso, the value of the Mexican peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. Historically, our Mexican subsidiaries have been able to raise their prices generally in line with local inflation, thereby helping to mitigate the effects of devaluations of the Mexican peso. However, our Mexican operating companies may not be able to maintain this pricing policy in the future.

We may not be able to enter into hedging or to protect us from fluctuations in currency exchange rates.

Because we cannot predict the degree of future exchange rate fluctuations, we cannot estimate the effect these fluctuations may have upon future reported results, product pricing or our overall financial condition. Although we attempt to reduce our exposure to short-term exchange rate fluctuations by using foreign currency puts and calls, these instruments or any other hedging activity may not effectively reduce exchange rate exposure. In particular, we currently employ a hedging strategy comprised of zero-cost collars that are designed to protect us against sudden and extreme devaluations in the Mexican peso. Our current hedging policy may not fully protect us against more gradual changes in exchange rates. Declines of the Mexico peso that are not offset by hedging have the effect of reducing our net sales measured in U.S. dollars.

We may be affected by high levels of inflation in Mexico.

Mexico has a history of high levels of inflation, and may experience inflation in the future. During most of the 1980s and during the mid-andlate-1990s, Mexico experienced periods of high levels of inflation. The annual rates

of inflation for the last five years as measured by changes in the National Consumer Price Index, as provided by Banco de Mexico, were:


2001	4.40	%
2002	5.70	%
2003	3.98	%
2004	5.20	%
2005	3.33	%

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

The final liquidation and dissolution of subsidiaries in our non-core markets may result in additional costs and diversion of management resources.

Our shift in strategic focus involving the recent exit of the direct selling markets in Argentina and Brazil and the exit in 2003 from Colombia, Peru and Thailand may prove to be unsuccessful for a number of reasons:


	•	The completion of the liquidation of these non-core operations may take longer than we anticipate, may prove to be more expensive and more time consuming than we project, and may divert management’s attention from our core business.

	•	We may need to obtain regulatory and other governmental approvals and third-party consents, and may encounter other factors typical in a closure that could significantly increase the costand/or delay the completion of this process. To the extent the completion of this process is delayed, the costs of liquidating and dissolving these subsidiaries and the negative impact on our income statement will continue, and the exit-related transaction costs could be greater than planned;

	•	The shift in strategy may reduce the morale of our consultant base in our remaining markets; and

	•	Tax authorities in the jurisdictions in which we are liquidating operations may conclude that additional taxes are payable as part of the liquidation process.

	•	We may incur liabilities or increased costs relative to third party distribution agreements.

Failure to develop and introduce new products could adversely impact our consultants’ productivity and revenues, and therefore harm net sales.

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

Failure of new products to gain consultant and market acceptance could negatively affect levels of consultant productivity.

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

Fluctuations in consultant liquidity could negatively impact our revenues and collection cycle and increase our bad debt expense.

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

The loss of key high-level consultants could negatively impact consultant growth and net sales.

At December 31, 2005, we had approximately 17,000 managers, 2,000 district managers and 1,000 district directors. These district directors, together with their extensive networks of downline consultants, account for substantially all of our net sales. As a result, the loss of a high-level consultant or a group of leading consultants, whether by their own choice or through disciplinary actions for violations of policies and procedures, could negatively impact our consultant growth and net sales.

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

Although we review applicable local laws in developing plans, compliance efforts may be harmed by an evolving regulatory climate and subjective interpretations of laws by the authorities. Any determination that our operations or activities are not in compliance with applicable regulations could negatively impact our business and reputation with regulators in the markets in which it operates.

Government regulation of our products and services may restrict or inhibit introduction of these products in some markets and could harm our ability to generate sales.

Our products and our related marketing and advertising efforts are subject to extensive government regulation by numerous domestic and foreign governmental agencies and authorities. In the United States, these include the Federal Trade Commission, the Consumer Product Safety Commission, the Food and Drug Administration, the State Attorneys General and other federal and state regulatory agencies; and, in Mexico, the Ministry of Health along with similar government agencies in other foreign markets where we may operate. Our markets have varied regulations concerning product formulation, labeling, packaging and importation. These laws and regulations often require it to, among other things:


	•	conform product labeling to the regulations in each country; and

	•	register or qualify products with the applicable government authority or obtain necessary approvals or file necessary notifications for the marketing of our products.

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

Laws and regulations may prohibit or severely restrict our direct sales efforts and cause our net sales and profitability to decline.

Various government agencies throughout the world, including in the United States, Mexico and Germany regulate direct sales practices. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, that compensate participants for recruiting additional participants

irrespective of product salesand/or do not involve legitimate products. The laws and regulations in our current markets often:


	•	impose order cancellations, product returns, inventory buy-backs and cooling-off rights for consumers and consultants;

	•	require us or our consultants to register with governmental agencies;

	•	impose reporting requirements to regulatory agencies; and/or

	•	require us to ensure that consultants are not being compensated solely based upon the recruitment of new consultants.

Complying with these sometimes inconsistent rules and regulations can be difficult and requires the devotion of significant resources. If we are unable to continue business in existing markets or commence operations in new markets because of these or similar laws or regulations, our net sales and profitability will decline.

In addition, countries where we operate could change their laws or regulations to negatively affect or prohibit completely network or direct sales efforts. Government agencies and courts in these countries may also use their powers and discretion in interpreting and applying laws in a manner that limits our ability to operate or otherwise harms our business. If any governmental authority were to bring a regulatory enforcement action — either of their own accord or due to a challenge by a private party — our net sales and earnings would likely suffer.

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

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

Improper consultant actions could harm our reputation or increase costs.

Consultant activities in our existing markets that violate governmental laws or regulations or that are otherwise improper could result in governmental actions. Given the size of our consultant force, we experience problems with consultants from time to time. In particular, some of consultants may make unauthorized claims regarding products or the earning potential related to becoming a Jafra consultant. These claims could harm our reputation or result in the payment of fines or penalties, if regulatory authorities were to determine that we should have prevented or are otherwise responsible for such behavior.

We rely on one manufacturing facility to provide products accounting for substantially all of our net sales.

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

If we are unable to protect our intellectual property rights, our ability to compete could be negatively impacted.

The market for our products depends to a significant extent upon the goodwill associated with our trademark and trade names. We own the trademark rights to our most important trademark,Jafra, in every country where it conducts business. Most, but not all, of our other material trademarks are registered in the United States, Mexico and Germany. We do not actively protect our intellectual property in any other market in which we operate. We may not be successful in asserting trademark protection for every trademark in each country where we conduct business. One of our most significant lines of products,Royal Jelly, is not protected by any registered trademark because it is a generic term. In addition, while unregistered United States trademarks may receive use-based protection under applicable United States law, foreign law does not provide the same protection in other countries. Many of our unregistered trademarks, both in the United States and in other countries, have been used for several years without challenge. There can be no assurance that these trademarks will not be challenged in the future. The costs required to protect our trademarks and trade names may be substantial.

Other parties may infringe on our owned or licensed intellectual property rights, and may thereby dilute our brand in the marketplace. Any such infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise.

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

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

As a group doing more than 79% of our business innon-U.S. markets during 2005, we are subject to foreign tax and intercompany pricing laws, including those relating to the flow of funds among our companies pursuant to, for example, purchase agreements, licensing agreements, intercompany loans or other arrangements. Regulators (including tax authorities) in the United States, Mexico and in other foreign markets may closely monitor our corporate structure and how it effects intercompany fund transfers. If such regulators successfully challenge our structure or these mechanisms, we may be subject to additional taxes, interest and penalties, which could have a material adverse impact on cash flow, net income and our effective tax rate.

We depend on key personnel and the loss of the services provided by any of our executive officers or other key employees could harm our business and results of operations.

Our success depends to a significant degree upon the continued contributions of our senior management. While we have employment agreements with some key management, these employees may voluntarily terminate their employment at any time. We may not be able to successfully retain existing personnel or identify, hire and integrate new personnel; and we do not have key person insurance policies in place for these employees. We have announced the future termination of the employment contracts with our current Chief Executive Officer Ronald Clark and President, Gonzalo R. Rubio effective June 30 and April 15, 2006, respectively. We have also announced the reassignment of our Chief Financial Officer. Our failure to manage the transition of these key personnel and adequately replace the services and expertise they provide could adversely affect our business.

Competitive market conditions and the strengths of competitors may harm our ability to sell products or recruit and retain consultants.

The markets for our products are intensely competitive. Many of our competitors have greater name recognition and financial resources, which may give them a competitive advantage. Jafra products compete directly with branded, premium retail products. We currently do not have significant patent or other proprietary protection, and competitors may introduce products with the same ingredients that we use in our products. At least two of such competitors, Mary Kay and Avon, utilize direct sales marketing and have substantially larger numbers of salespersons, sales volume and resources.

We also compete with other direct marketing companies for consultants. Some of these competitors have a longer operating history and greater visibility, name recognition and financial resources than Jafra. Some of our competitors have also adopted and could continue to adopt some of Jafra’s successful business strategies, including our compensation strategy for our consultants. Consequently, to successfully compete in this market and attract and retain consultants, we must ensure that our business opportunities and compensation plans are financially rewarding. There can be no assurance that we will be able to successfully compete in this market for consultants.

Product liability claims or recalls could harm our net sales and profitability.

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

System failures could harm our ability to manufacture our products or fulfill our consultants’ orders.

Because of our diverse geographic operations and our complex consultant compensation plan, our business is highly dependent on efficiently functioning information technology systems. These systems and operations are vulnerable to damage or interruption from fires, earthquakes, telecommunications failures and other events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in services and reduce our net sales and profits.

Our net sales depend on consumer confidence and spending, which may fluctuate from period to period for reasons beyond our control.

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

Our substantial indebtedness could have a material adverse effect on our financial health, ability to obtain financing in the future, and ability to react to changes in our business.

We have a significant amount of debt, which could:


	•	make it more difficult for us to satisfy our obligations to the holders of the 103/4% Notes and to the lenders under our senior credit facilities, resulting in possible defaults on and acceleration of such indebtedness;


	•	increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a significant portion of our borrowings is and will continue to be at variable rates of interest;

	•	increase our vulnerability to fluctuations in the exchange rate of the principal currency in which we sell products, the Mexican peso, to the U.S. dollar, the currency in which interest obligations are payable;

	•	require us to dedicate a substantial portion of our cash flow from operations to payments on debt, which would reduce the availability of cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;

	•	limit our flexibility in planning for, or reacting to, changes in our business and industry;

	•	limit our ability to borrow additional funds in the future.

Any of the foregoing factors could also have a material adverse effect on our business, financial condition and results of operations.

We may not be able to generate sufficient cash to service our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control.

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

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

Restrictive covenants in our debt instruments may adversely affect financial flexibility.

Our senior credit facilities and the indenture governing the 103/4% Notes contain various covenants that limit specified types of transactions. These covenants limit our ability to, among other things:


	•	incur indebtedness or issue preferred shares;

	•	pay dividends or make distributions or other restricted payments to Jafra S.A.;

	•	make investments;

	•	sell assets;

	•	create liens without securing the 103/4% Notes;

	•	consolidate, merge, sell or otherwise dispose of assets; and

	•	enter into certain transactions with affiliates.

In addition, the senior credit facilities contain covenants that require our restricted subsidiaries to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and there can be no assurance that we will meet those tests. A breach of any of these covenants could result in a default under the senior credit facilities. Upon the occurrence of an

event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding thereunder senior credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were to be unable to repay those amounts, the lenders under the senior credit facilities could proceed against the collateral granted to them to secure that indebtedness. The Parent, JCI, Jafra Distribution and Jafra Cosmetics S.A. have pledged substantially all of their assets as collateral under the senior credit facilities. If the lenders under the senior credit facilities accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay the senior credit facilities or the 103/4% Notes, and, in such circumstances, we could be forced into liquidation or reorganization.

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

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

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

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

Because we are not a U.S. company, it may be difficult to effect service of process on us or on ournon-U.S. resident directors and officers or to enforce any judgment received against us from a U.S. court.

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

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

While we periodically reassesses material trends and uncertainties affecting results of operations and financial condition in connection with the preparation of management’s discussion and analysis of results of operations and financial condition contained in our 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.


Item 1B.	*Unresolved Staff Comments*

Not applicable.


Item 2.	*Properties*

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


Item 3.	*Legal Proceedings*

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


Item 4.	*Submission of Matters to a Vote of Security Holders*

At a duly convened annual general meeting of shareholders held on November 16, 2005 in Luxembourg, Luxembourg, the sole shareholder of the Company accepted the resignation of Dr Jörg Mittelsten Scheid from the Board of Managers. The terms of the other existing Managers — Ronald Clark, Gonzalo Rubio, Achim Schwanitz, Eberhard Pothmann, Ronald Weber, Jochen Sarazin and Wolfgang Bahlmann — were confirmed and their mandates were renewed until the approval of annual accounts by the shareholder for the year ended December 31, 2005. At the same meeting, the sole shareholder also appointed Markus von Blomberg to the Board of Managers and approved the annual accounts for the year ended May 20, 2004 and for the period ended December 31, 2004. No other matters were put to a vote of the shareholder.

PART II


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*

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


Item 6.	*Selected Financial Data*

The following is a summary of selected consolidated financial data of the Company (amounts in millions except for consultant and consultant productivity data). The selected consolidated financial data, other than consultant data, as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 are derived from the audited consolidated financial statements of Jafra Worldwide Holdings (Lux) S.àr.l. which appear in Item 8. “Financial Statements and Supplementary Data.” The selected consolidated financial data as of December 31, 2003 are derived from the audited financial statements of the Company which are not included herein. The selected consolidated financial data as of December 31, 2002 and 2001 and for the years ended December 31, 2002 and 2001 are derived from the audited financial statements of CDRJ which are not included herein. The related selected financial data should be read in conjunction with such financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Years Ended December 31,
	2005			2004			2003			2002			2001

Statement of Operations Data:
Net sales(a)	$	430.1		$	416.2		$	383.9		$	382.6		$	365.4
Cost of sales		99.7			94.9			89.7			90.2			84.2

Gross profit		330.4			321.3			294.2			292.4			281.2
Selling, general and administrative expenses(a)		253.3			245.3			232.8			232.3			225.0
Transaction related expenses(b)		—			29.8			16.8			1.5			—
Restructuring and impairment charges(c)		—			5.0			—			—			—

Income from operations		77.1			41.2			44.6			58.6			56.2
Other income (expense):
Exchange gain (loss), net		—			0.2			(11.0	)		(10.6	)		(9.5	)
Interest expense		(18.1	)		(27.3	)		(21.2	)		(11.7	)		(13.7	)
Interest income		0.4			0.1			0.3			0.3			0.3
Loss on extinguishment of debt		(9.8	)		(4.5	)		(6.6	)		—			—
Other expense		(3.7	)		(0.7	)		(0.6	)		(0.2	)		(0.3	)
Other income		0.3			0.1			0.2			0.3			0.2

Income from continuing operations before income taxes and cumulative effect of accounting change		46.2			9.1			5.7			36.7			33.2
Income tax expense (benefit)		19.6			(2.3	)		8.3			16.2			17.3

Income (loss) from continuing operations before cumulative effect of accounting change		26.6			11.4			(2.6	)		20.5			15.9
Loss on discontinued operations, net of income tax expense of $0 in 2005, 2004 and 2003, $0.1 in 2002 and 2001		—			(0.2	)		(5.4	)		(1.5	)		(0.2	)

Income (loss) before cumulative effect of accounting change		26.6			11.2			(8.0	)		19.0			15.7
Cumulative effect of accounting change, net of income tax expense of $0 in 2002 and $0.1 in 2001(f)		—			—			—			(0.2	)		0.1

Net income (loss)	$	26.6		$	11.2		$	(8.0	)	$	18.8		$	15.8

Balance Sheet Data (at end of Period):
Cash and cash equivalents	$	24.8		$	10.6		$	16.1		$	26.8		$	5.7
Working capital(d)		27.6			32.9			11.7			12.1			14.7
Property and equipment, net		54.4			61.8			63.4			60.4			59.0
Total assets		308.1			298.4			293.7			290.0			291.1
Total debt(e)		130.0			240.3			247.5			84.4			93.1
Stockholder’s equity (deficit)	$	69.5		$	(40.2	)	$	(55.4	)	$	108.5		$	96.0
Other Financial Data:
Net cash provided by operating activities	$	51.0		$	7.6		$	13.0		$	43.4		$	30.6
Net cash used in investing activities		(5.0	)		(6.0	)		(11.5	)		(11.3	)		(11.7	)
Net cash used in financing activities		(30.8	)		(8.7	)		(10.6	)		(8.7	)		(16.6	)
Depreciation and amortization		12.9			6.7			5.7			5.5			7.6
Amortization and write off of deferred financing fees		3.3			6.3			4.0			1.4			1.4
Capital expenditures	$	4.3		$	5.7		$	10.7		$	11.0		$	11.2
Total ending consultants		451,000			410,000			412,000			401,000			351,000
Average ending consultants(g)		435,000			434,000			407,000			376,000			344,000
Consultant productivity(g)	$	989		$	958		$	943		$	1,018		$	1,062


(a)		During the second quarter of 2005, the Company corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Prior to the second quarter of 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by the Company at the point of shipment. (See Item 7.) In connection with the adoption of Emerging Issues Task Force IssueNo. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” on January 1, 2002, reclassifications have been made to all periods ending prior to that date to reflect commissions on personal sales paid to consultants, previously reported as selling, general and administrative expenses, as a reduction of net sales and selling, general and administrative expenses. The amounts that have been reclassified as a reduction to net sales and selling, general and administrative expenses is $3.8 million for the years ended December 31, 2001.

(b)		In connection with the acquisition and to certain other non-recurring transactions subsequently terminated, the Company incurred $29.8 million of transaction related expenses during the year ended December 31, 2004. In connection with the recapitalization and certain other non-recurring transactions subsequently terminated, the Company incurred $16.8 million of transaction related expenses during the year ended December 31, 2003. In connection with non-recurring transactions subsequently terminated, the Company incurred $1.5 million of transaction related expenses during the year ended December 31, 2002.

(c)		Restructuring and impairment charges include the following: for 2004, approximately $4.6 million of restructuring charges and approximately $0.4 million of asset impairment charges.

(d)		Working capital is calculated as total current assets excluding cash less current liabilities excluding current portion of long term debt and in 2004, indebtedness due to Vorwerk.

(e)		Total debt consists of borrowings under the subordinated notes, term loan, revolving loan, Vorwerk note and unsecured foreign bank loan.

(f)		In connection with the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and other Intangible Assets,” on January 1, 2002, the Company recorded a net loss of $0.2 million (net of a tax effect of $0) as a cumulative transition adjustment to earnings. In connection with the adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001, the Company recorded a net gain of $0.1 million (net of a tax effect of $0.1 million) as a cumulative effect adjustment to earnings.

(g)		The average consultant base is calculated by averaging the total ending consultant base as of the last day of each of the prior twelve months. A consultant is included in the total ending consultant base if she places an order within the prior four months. Consultant productivity is defined as net sales in U.S. dollars divided by the annual average number of consultants.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

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

Overview

The Company is a direct seller of skin and body care products, color cosmetics, fragrances and other personal care products. The Company sells its Jafra brand products through a direct selling network of approximately 451,000 independent consultants, who market and sell the Company’s products to their customers. The Company’s largest markets are Mexico and the United States (including the Dominican Republic), which contributed approximately 71% and 22% of its total net sales in 2005, respectively.

Markets

The Company’s business operates in three primary markets: Mexico, the United States and Europe. Of these, Mexico is the largest, with approximately 71% of total net sales. Net sales in the United States (including the Dominican Republic) and Europe represented 22% and 7%, respectively, of total net sales for the year ended December 31, 2005. Net sales in South America during 2005 were nominal due to the Company’s decision to cease operations in South America. In 2000, the Company divided the United States into two divisions: the U.S. Division and the Hispanic Division, which is largely comprised of Spanish-speakers, and represents approximately two-thirds of the total U.S. business. Additionally, management combines the results of the Dominican Republic with the results of the Hispanic Division to evaluate the operations of the Hispanic Group. In Europe, the Company operates in Germany, Switzerland, Italy, Austria and the Netherlands, and in several other countries through distributors. The Company has renewed its focus on the Mexican, U.S. and European markets and is exploring the possibility of expanding into new markets in 2006 and future years. In 2003, the Company discontinued its operations in Chile, Colombia, Peru and Venezuela. Consequently, the historical financial statements for all periods presented reflect the operations in these markets as discontinued operations. During 2005, the Company ceased its direct selling business in Argentina and during 2004, the Company ceased its direct selling business in Brazil and entered into distributorship agreements with third parties who sell the Company’s products to consultants. The Company has the contractual right to terminate these distribution arrangements if it chooses to operate directly in these markets. Because of the distribution agreements in these markets, the Company has not classified these operations as discontinued operations.

Seasonality and Sales Cycles

The business, measured both in terms of net sales and in terms of numbers of consultants, is subject to certain seasonal trends. Both net sales and the number of consultants typically increase at year end, primarily due to the winter holiday season both as an occasion for the purchase of gifts and as a time of year when there may be increased interest in joining the consultant network as a way of generating extra income.

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

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

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


	For the Year Ended												For the Year Ended												For the Year Ended
	December 31, 2005												December 31, 2004												December 31, 2003
	Q1			Q2 (1)			Q3			Q4			Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4

Net sales	$	96.8		$	102.3		$	105.9		$	125.1		$	103.1		$	103.7		$	94.8		$	114.6		$	90.2		$	100.0		$	86.6		$	107.1
% of full fiscal year		22	%		24	%		25	%		29	%		25	%		25	%		23	%		27	%		23	%		26	%		23	%		28	%


(1)		See “Results of Operations.”

Measures of Consultant Performance

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

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

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

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

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

Compensation of the Company’s Direct Selling Network

Consultants earn income by purchasing products from the Company at wholesale prices and selling to consumers at suggested retail prices. In addition, consultants who sponsor a certain number of recruits and meet certain minimum sales levels can become managers or lineage leaders. The compensation of a manager or lineage leader includes overrides, which are equal to a percentage of the paid sales generated by consultants recruited directly or indirectly by them. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Additionally, managers are also motivated to perform collection efforts on the Company’s behalf, as overrides paid on a consultant’s downline productivity are paid only upon the collection of receivables. The overrides of $69.7 million, $68.1 million, and $61.7 million for the years ended December 31, 2005, 2004 and 2003, respectively, represent a significant portion of the Company’s selling, general and administrative expense.

Research and Development

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

products as a base for its development of new products. As a result, research and development expenses are less than 1% of net sales.

Foreign Currency Translation

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

Results of Operations

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

During the second quarter of 2005, the Company corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements”, net sales, cost of sales and related direct and incremental selling expenses are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. The Company currently insures shipments and assists consultants by replacing lost or damaged shipments impacting the risk of loss. Prior to the second quarter of 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by the Company at the point of shipment. As a result, commencing with the second quarter of 2005, the Company’s results have been reported based upon recognizing sales at the point of delivery. The Company has determined that this correction did not have a material impact on the prior period financial statements which have therefore not been restated. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, the Company’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $5,111,000, cost of sales of $1,171,000, gross profit of $3,940,000, selling, general and administrative expenses of $1,659,000, income from operations of $2,281,000 and net income of $1,515,000. The Company has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.

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

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

Loss on Discontinued Operations. During the year ended December 31, 2003, the Company discontinued its operations in Venezuela, Colombia, Chile and Peru. Accordingly, the results of these markets have been classified as discontinued operations in all periods disclosed in the statements of operations.

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


	Years Ended December 31,
	2005					2004					2003
	($ In millions)

Net sales	$	430.1		100.0	%	$	416.2		100.0	%	$	383.9		100.0	%
Cost of sales		99.7		23.2			94.9		22.8			89.7		23.4

Gross profit		330.4		76.8			321.3		77.2			294.2		76.6
Selling, general and administrative expenses		253.3		58.9			245.3		58.9			232.8		60.6
Transaction related expenses		—		—			29.8		7.2			16.8		4.4
Restructuring and impairment charges		—		—			5.0		1.2			—		—

Income from operations		77.1		17.9			41.2		9.9			44.6		11.6
Exchange gain (loss), net		—		—			0.2		—			(11.0	)	(2.9	)
Interest expense		(18.1	)	(4.2	)		(27.3	)	(6.6	)		(21.2	)	(5.5	)
Interest income		0.4		0.1			0.1		—			0.3		0.1
Loss on extinguishment of debt		(9.8	)	(2.3	)		(4.5	)	(1.0	)		(6.6	)	(1.7	)
Other expense		(3.7	)	(0.8	)		(0.7	)	(0.1	)		(0.6	)	(0.2	)
Other income		0.3		0.1			0.1		—			0.2		0.1

Income from continuing operations before income taxes		46.2		10.8			9.1		2.2			5.7		1.5
Income tax expense (benefit)		19.6		4.6			(2.3	)	(0.5	)		8.3		2.2

Income (loss) from continuing operations		26.6		6.2			11.4		2.7			(2.6	)	(0.7	)
Loss on discontinued operations, net of income tax expense		—		—			(0.2	)	—			(5.4	)	(1.4	)

Net income (loss)	$	26.6		6.2	%	$	11.2		2.7	%	$	(8.0	)	(2.1	)%

The following tables represent selected components of the consolidated results of operations by market. Management evaluates market performance based on segment operating income, excluding reorganization and restructuring charges, unusual gains and losses, and amortization of goodwill and other intangible assets. Results for South America, Thailand and new markets are combined and included in the following tables under the caption “All Others.” Results for the Dominican Republic are included in the U.S. segment as the operations of the Dominican Republic are under the same management as the operations of the U.S. Corporate expenses, reorganization and restructuring charges and unusual gains and losses are included under the caption “Corporate, Unallocated and Other.”


			United
			States and the							Corporate,
			Dominican							Unallocated			Consolidated
	Mexico		Republic		Europe		All Others			and Other			Total
	(Dollars in millions)

Year Ended December 31, 2005
Net sales	$	306.4	$	91.6	$	31.6	$	0.5		$	—		$	430.1
Cost of sales		74.9		20.3		5.5		0.3			(1.3	)		99.7

Gross profit		231.5		71.3		26.1		0.2			1.3			330.4
Selling, general and administrative expenses		145.8		61.2		23.1		1.9			21.3			253.3

Income (loss) from operations	$	85.7	$	10.1	$	3.0	$	(1.7	)	$	(20.0	)	$	77.1

Year Ended December 31, 2004
Net sales	$	278.4	$	98.0	$	35.0	$	4.8		$	—		$	416.2
Cost of sales		67.6		21.4		6.6		2.1			(2.8	)		94.9

Gross profit		210.8		76.6		28.4		2.7			2.8			321.3
Selling, general and administrative expenses		133.7		59.9		25.5		4.9			21.3			245.3
Transaction related expenses		—		—		—		—			29.8			29.8
Restructuring and impairment charges		—		—		—		—			5.0			5.0

Income (loss) from operations	$	77.1	$	16.7	$	2.9	$	(2.2	)	$	(53.3	)	$	41.2

Year Ended December 31, 2003
Net sales	$	241.7	$	102.1	$	32.9	$	7.2		$	—		$	383.9
Cost of sales		58.8		23.7		7.1		3.1			(3.0	)		89.7

Gross profit		182.9		78.4		25.8		4.1			3.0			294.2
Selling, general and administrative expenses		116.8		62.1		23.9		8.9			21.1			232.8
Transaction related expenses		—		—		—		—			16.8			16.8

Income (loss) from operations	$	66.1	$	16.3	$	1.9	$	(4.8	)	$	(34.9	)	$	44.6

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

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net Sales. Net sales for 2005 increased to $430.1 million from $416.2 million for 2004, an increase of $13.9 million, or 3.3%. In local currencies, net sales increased 0.3% in 2005 compared to 2004 as a result of an

increase in Mexico net sales, partially offset by decreases in the United States and European net sales and the Company’s decision to cease direct selling operations in South America. The average ending number of consultants worldwide increased 0.2% to approximately 435,000 consultants in 2005, an increase of 1,000 consultants over the 2004 average ending number of consultants. Mexico had an increase of approximately 31,000 average consultants in 2005 compared to 2004. This was offset by decreases in the number of consultants in South America due to the Company’s strategic decision in South America and consultant decreases in the United States and Europe. Measured in local currencies, consultant productivity was relatively constant between 2005 and 2004.

In Mexico, net sales for 2005 increased 5.9% compared to net sales for 2004 measured in local currency. However, due to stronger average exchange rates, net sales measured in U.S. dollars for 2005 increased 10.1% to $306.4 million compared to net sales of $278.4 million for 2004. The increase in net sales in 2005 compared to 2004 in local currency was due primarily to an increase in the average number of consultants. The average number of consultants in Mexico increased to approximately 352,000 consultants in 2005 compared to 321,000 in 2004, a 9.7% increase. The increase in the consultant base was primarily the result of an increase in the number of new consultants resulting from promotions aimed at increasing the sponsorship of new consultants and successful promotions in the second half of 2005 aimed at retaining new consultants.

In the United States and the Dominican Republic, net sales for 2005 decreased to $91.6 million compared to $98.0 million for 2004, a decrease of $6.4 million, or 6.5%. The United States is comprised of two divisions, the Hispanic Division including the Dominican Republic (referred to collectively as the Hispanic Group) and the U.S. Division. The Hispanic Group’s net sales decreased 2.2% to $67.9 million in 2005 from $69.4 million in 2004 as a result of a decrease in the average number of consultants partially offset by an increase in consultant productivity. The U.S. Division’s net sales decreased 17.1% to $23.7 million in 2005, from $28.6 million in 2004, as a result of a decrease in the number of consultants.

The Hispanic Group net sales decreased 2.2% in 2005 compared to 2004 as a result of a decrease in the average number of consultants, partially offset by an increase in consultant productivity. The Hispanic Group had an average of 45,000 consultants during 2005 compared to 54,000 consultants in 2004, a decrease of 16.7%. The decrease in the consultant base in the Hispanic Division was primarily the result of fewer consultants at the beginning of 2005 compared to 2004 and reduced sponsoring of new consultants in 2005 compared to 2004. However, in the Hispanic Division, consultant productivity continued to increase as a result of changes in the program including an increase in the minimum order necessary to obtain the maximum commission. Productivity in the Dominican Republic increased as a result of favorable exchange rates and changes in the program.

The U.S. Division had a 17.1% decrease in net sales during 2005 compared to 2004 primarily as a result of the decrease in the number of consultants. During 2005, the U.S. Division had approximately 20,000 consultants compared to 26,000 consultants in 2004. This decrease in the number of consultants was the result of reduced sponsoring of new consultants in the U.S. Division in 2005 compared to 2004 and 2,000 fewer consultants at the beginning of 2005 compared to 2004. U.S. Division productivity increased in 2005 compared to 2004 because of continued benefits related to the program changes to the minimum order and also the minimum order to receive the maximum commission percentage.

In Europe, net sales for 2005 were $31.6 million, compared to $35.0 million for 2004, a decrease of $3.4 million, or 9.7%. Measured in local currencies, net sales decreased 9.4% in 2005 compared to 2004. The decrease in net sales was primarily due to a decrease in consultant productivity. The average number of consultants was approximately 18,000 in 2005 and was relatively constant to the average number of consultants during 2004. In May 2005, the Company modified its programs in Germany, Austria and the Netherlands to introduce a new “Career Plan” to focus on building a productive consultant base. However, this change in the plan is meant to stimulate long term growth in the number of consultants. In the short-term, the number of consultants may be negatively impacted as the consultants learn how to recruit under this new plan.

Other markets consist primarily of Brazil, Argentina and Thailand. Net sales in the other markets for 2005 were $0.5 million, a decrease of $4.3 million, or 90.0% compared to $4.8 million for 2004. During 2005, the Company ceased direct selling operations in Argentina and during 2004, the Company ceased direct selling operations in Brazil. These two markets contributed $4.8 million of net sales in 2004 compared to $0.5 million in 2005.

Gross Profit. Gross profit in 2005 increased to $330.4 million from $321.3 million in 2004, an increase of $9.1 million, or 2.8%. Gross profit as a percentage of net sales or gross margin decreased to 76.8% in 2005 compared to 77.2% in 2004. The increase of gross margin in Europe was offset by a decrease in gross profit in the United States.

In Mexico, gross margin decreased slightly to 75.6% in 2005 compared to 75.7% in 2004.

In the United States, gross margin decreased to 77.8% in 2005 compared to 78.2% in 2004 as a result of decreased margins on non-commissionable sales, such as promotional consultant cases, which were introduced more frequently in the United States during 2005.

In Europe, gross margin increased to approximately 82.6% in 2005 compared to 81.1% principally as the result of impact of the favorable exchange rates of the euro to the U.S. dollar on cost of sales, as a significant amount of inventory in Europe is purchased by the Company in U.S. dollars.

In the other markets, gross margin in 2005 decreased to 40.0% in 2004 compared to 56.2% in 2004 primarily as a result of inventory liquidation efforts in Brazil in 2004 and sales to a third party distributor at cost in 2005.

Selling, General and Administrative Expenses. SG&A expenses in 2005 increased to $253.3 million from $245.3 million in 2004, an increase of $8.0 million, or 3.3%. SG&A expenses, as a percentage of net sales was constant at 58.9% in 2005 and 2004.

In Mexico, SG&A expenses increased to $145.8 million in 2005 from $133.7 million in 2004, an increase of $12.1 million, or 9.1% primarily due to increased variable expenses associated with increased net sales. As a percentage of net sales, SG&A expenses decreased to 47.6% in 2005 compared to 48.0% in 2004. The decrease in SG&A expenses as a percentage of net sales was primarily the result of the favorable impact of increased sales on fixed costs. As a percentage of net sales, sales promotional expenses and override expenses were relatively constant.

In the United States, SG&A expenses increased to $61.2 million in 2005 from $59.9 million in 2004, an increase of $1.3 million, or 2.2% as a result of additional depreciation expense related to the accelerated depreciation of approximately $5.3 million of the commercial portion of the JD Edwards software due to a change in the estimate of the software’s useful life. This was partially offset by reduced information technology expenses and savings associated with cost containment efforts, including headcount vacancies and other reduced spending. As a percentage of net sales, SG&A expenses increased to 66.8% in 2005 compared to 61.1% in 2004 as a result of the unfavorable impact of reduced sales on fixed expenses and increased depreciation expense.

In Europe, SG&A expenses decreased to $23.1 million in 2005 from $25.5 million in 2004, a decrease of $2.4 million, or 9.4%. As a percentage of net sales, SG&A expenses increased to 73.1% in 2005 from 72.9% in 2004, primarily as a result of the negative impact of reduced net sales on the fixed costs. This was partially offset by reduced override expenses, in total and as a percentage of net sales. In mid-2005, Germany, Austria and the Netherlands launched the new career plan, which encourages long term growth. However, as the consultants were learning how to operate their business under the new career plan, the overrides earned by the consultants were less in 2005 compared to 2004.

SG&A expenses in other markets, Brazil, Argentina and Thailand, decreased to $1.9 million in 2005 compared to $4.9 million in 2004, a $3.0 million decrease as a result of the Company’s decision to cease direct selling operations in Brazil and Argentina. Most costs in 2005 were related to the Company’s efforts to liquidate these markets and costs related to investigating new markets.

SG&A expenses in Corporate, Unallocated and Other was constant at $21.3 million in 2005 and 2004.

Transaction Related Expenses. During 2005, the Company did not incur transaction related expenses. During 2004, the Company incurred $29.8 million of transaction fees related to the acquisition and to certain other strategic transactions which were terminated. Included in these amounts was $20.3 million of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4.9 million of special bonus payments paid directly by the former controlling shareholder.

impairment charges related to the transfer of substantially all of the Company’s skin and body care manufacturing operations to its facilities in Mexico from the United States. Additionally, during 2004, the Company recorded $2.2 million of severance related charges related to the resignation of four members of management subsequent to the acquisition. As of December 31, 2005, $0.5 million of the restructuring and impairment charges were unpaid and were included as an accrued liability on the consolidated balance sheet.

Exchange Gain (Loss), Net. The Company’s net foreign exchange loss was nominal in 2005 compared to a $0.2 million gain in 2004, an unfavorable change of $0.2 million. The Company’s foreign exchange gains and losses primarily result from its operations in Mexico, Europe and South America. The net exchange gain (loss) has three primary elements: gains or losses on forward currency and option contracts, unrealized and realized gains or losses on the remeasurement of U.S. dollar-denominated debt, and gains or losses on transactions denominated in foreign currencies.

The Company uses option contracts to hedge foreign currency exposure to the Mexican peso. The Company purchases exchange rate put options which gives it the right, but not the obligation, to sell Mexican pesos at a specified U.S. dollar exchange rate, which the Company refers to as strike rate. The option contracts provide protection in the event the Mexican peso weakens beyond the option strike rate. In conjunction with the put options, and as part of a zero-cost option collar structure, the Company sold Mexican peso call options, which give the counterparty the right, but not the obligation, to buy Mexican pesos from the Company at a specified strike rate. The premiums earned from selling the call options exactly offset the premiums paid from purchasing the put options, creating a net zero-cost hedge structure. The effect of these contracts would be to limit the benefit the Company would otherwise derive from the strengthening of the Mexican peso beyond the strike rate.

During 2005, the Company recognized $5.0 million of exchange losses related to the option contracts. The Company ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date were recorded directly as a component of exchange gain (loss). As of December 31, 2004, the Company had deferred losses of $0.1 million as a component of other comprehensive income which was recognized as a component of exchange gain (loss) during 2005.

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

During 2005 and 2004, the Mexican peso strengthened in relation to the U.S. dollar and as a result the Company recognized approximately $3.8 million and $0.5 million of gains, respectively on the remeasurement of U.S. dollar-denominated debt. Additionally, the Company recognized $1.2 million of gains in 2005 and 2004, on other foreign currency transactions, including intercompany transactions.

Interest Expense, Net of Interest Income. Net interest expense decreased to $17.7 million in 2005 compared to $27.2 million in 2004, a favorable change of $9.5 million, or 34.9%. The decrease in interest expense was primarily the result of the February 2005 bond redemption which resulted in a lower average debt balance outstanding during 2005 compared to 2004.

Loss on Extinguishment of Debt. On February 17, 2005, the Company redeemed approximately $69.5 million of the outstanding 103/4% Notes at a premium of $7.5��million. In connection with the redemption of the 103/4% Notes, the Company 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 operations. The redemption of the outstanding 103/4% Notes was funded through a series of private equity offerings which resulted in Jafra S.A. subscribing to 316,270 new shares of the Company.

On August 16, 2004, the Company entered into the Restated Credit Agreement and paid in full all existing amounts under the Senior Credit Agreement. In addition, in connection with the Acquisition, holders of $0.5 million

principal amount of the 103/4% Notes redeemed such notes. In connection with the refinancing of the Senior Credit Agreement and the purchase of $0.5 million of the outstanding 103/4% Notes, the Company wrote off approximately $4.5 million of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the consolidated statements of operations during 2004.

Other (Expense) Income, Net. The Company recorded $3.4 million of other expense during 2005 compared to $0.6 million during 2004. Other expense primarily relates to the reclassification of $3.1 million of accumulated other comprehensive loss to other expense in 2005 compared to $0.3 million in 2004 related to the liquidation of markets in which the Company no longer conducts direct selling operations.

Income Tax Expense (Benefit). The Company recorded an income tax expense of $19.6 million during 2005 compared to an income tax benefit of $2.3 million during 2004. In 2005, the Company recognized an income tax expense on pretax income in the United States and Mexico. In the United States, the rate was higher than the overall effective tax rate because of additional expense in 2005 as a result of the finalization of a United States tax examination and changes in the prior year estimates of certain tax credits and permanent items. In Mexico, the rate was more than the federal because of certain permanent differences. The rate in 2005 was also negatively impacted by valuation allowances taken against pretax loss carryforwards in South America. The income tax benefit in 2004 was the result of pretax losses in the Company’s United States subsidiary with a corresponding tax benefit and the reversal of $2.3 million of tax accruals in the United States. Additionally, during 2004, the Company reduced certain valuation allowances in one of its Mexican subsidiaries related to net operating losses which resulted in a low effective tax rate for the Company’s Mexican subsidiaries.

Loss on Discontinued Operations. The Company had no significant losses or gains on discontinued operations in 2005 compared to $0.2 million loss in 2004, a decrease of loss of $0.2 million. In 2004, the losses on discontinued operations were primarily related to costs necessary to liquidate certain markets.

Net Income (Loss). Net income was $26.6 million in 2005 compared to $11.2 million in 2004, a favorable change of $15.4 million. The increase in net income was the result of a $9.1 million increase in gross margin, the absence of $29.8 million of transaction related expenses and $5.0 million of restructuring and impairment charges, a $9.5 million decrease in net interest expense, a $0.2 million decrease in loss on discontinued operations, partially offset by a $8.0 million increase in selling, general and administrative expenses, a $0.2 million unfavorable change in exchange loss, a $5.3 million increase in loss on extinguishment of debt, a $2.8 million in increase in net other expense and a $21.9 million unfavorable change in income taxes.

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

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

In Mexico, net sales for 2004 increased 20.6% compared to net sales for 2003 measured in local currency. However, due to weaker average exchange rates, net sales measured in U.S. dollars for 2004 increased 15.2% to $278.4 million compared to net sales of $241.7 million for 2003. The increase in net sales in 2004 compared to 2003 was due primarily to an increase in the average number of consultants. The average number of consultants in Mexico increased to approximately 321,000 consultants in 2004 compared to 265,000 in 2003, a 21.1% increase. The increase in the consultant base was primarily the result of an increase in the number of new consultants resulting from promotions aimed at increasing the sponsorship of new consultants. In particular, third quarter 2004 promotional cases and other sponsoring promotions were very well accepted by the consultant base. Consultant productivity measured in local currency was relatively constant.

In the United States and the Dominican Republic, net sales for 2004 decreased to $98.0 million compared to $102.1 million for 2003, a decrease of $4.1 million, or 4.0%. The United States is comprised of two distinct

divisions, the Hispanic Division including the Dominican Republic (referred to collectively as the Hispanic Group) and the U.S. Division. The Hispanic Group’s net sales decreased 0.6% to $69.4 million in 2004 from $69.8 million in 2003 as a result of a decrease in the average number of consultants partially offset by an increase in consultant productivity. The U.S. Division’s net sales decreased 11.5% to $28.6 million in 2004, from $32.3 million in 2003, as a result of a decrease in the number of consultants.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During 2003, as a result of devaluation of the Mexico peso, the Company recognized approximately $12.3 million of losses on the remeasurement of the U.S. dollar-denominated debt, most of which was unrealized. Additionally, the Company recognized $0.5 million of gains in 2003 on other foreign currency transactions, including intercompany transactions.

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

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

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

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

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

operations increased to 145.6% and was primarily the result of valuation allowances against net operating losses on the Company’s Mexican subsidiaries and valuation allowances against certain operating losses generated by the Company’s Brazilian entity.

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

Net Income (Loss). Net income was $11.2 million in 2004 compared to a net loss of $8.0 million in 2003, a favorable change of $19.2 million. The increase in net income was the result of a $27.1 million increase in gross margin, an $11.2 million favorable change in exchange gain (loss), a $2.1 million decrease in loss on extinguishment of debt, a $10.6 million favorable change in income tax (benefit) expense and a $5.2 million decrease in loss on discontinued operations, partially offset by a $12.5 million increase in SG&A expenses, a $13.0 million increase in transaction related expenses, $5.0 million of restructuring and impairment charges, a $0.2 million increase in other expense and a $6.3 million increase in interest expense.

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. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of SFAS No. 151 is not expected to have a material impact on the operations of the Company.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments. The standard is effective for the Company beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to 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”) IssueNo. 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 IssueNo. 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 inEITF 04-10 should be applied for fiscal years ending after September 15, 2005. The adoption of EITF IssueNo. 04-10 did not have a material impact on the disclosure of the Company’s segments.

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 Company has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

obligation and was effective for the Company’s fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on the Company’s consolidated financial statements.

In September 2005, the EITF amended and ratified previous consensus on EITFNo. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” which addresses the amortization period for leasehold improvement in operating leases that are either placed in service significantly after and not contemplated at or near the beginning of the initial lease term or acquired in a business combination. This consensus applies to leasehold improvements that are purchased or acquired in reporting periods beginning after ratification. Adoption of the provisions of EITFNo. 05-6 did not have an impact on the Company’s 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 Company does not expect the adoption of SFAS No. 154 to have a material effect on the consolidated financial statements.

Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

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

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

Revenue Recognition. The Company recognizes revenue at the point of delivery to the consultant. During the second quarter of 2005, the Company corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements”, net sales, cost of sales and related direct and incremental selling expenses are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. The Company currently insures shipments and assists consultants by replacing lost or damaged shipments impacting the risk of loss. Prior to the second quarter of 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by the Company at the point of shipment. As a result, commencing with the second quarter of 2005, the Company’s results have been reported based upon recognizing sales at the point of delivery. The Company has determined that this correction did not have a material impact on the prior period financial statements which have therefore not been restated. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, the Company’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $5,111,000, cost of sales of $1,171,000, gross profit of $3,940,000, selling, general and administrative expenses of $1,659,000, income from operations of $2,281,000 and net income of $1,515,000. The Company has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.

Liquidity and Capital Resources

Overview

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

working capital management, including the collection of accounts receivable, decreasing inventory levels and management of accounts payable.

As of December 31, 2005, the Company had outstanding $130.0 million of 103/4% Notes.

The following schedule details the payment schedule for debt and lease obligations as of December 31, 2005:

Schedule of Debt and Operating Lease Obligations

Payments Due by Period
As of December 31, 2005


Contractual Obligations	Total		2006		2007 - 2008		2009 - 2010		Thereafter
	(Dollars in thousands)

103/4% senior subordinated notes due 2011	$	130,000	$	—	$	—	$	—	$	130,000
Interest payments	$	75,698	$	13,975	$	27,950	$	27,950	$	5,823
Operating lease obligations	$	11,759	$	4,155	$	5,381	$	2,223	$	—

Liquidity

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

JCI is a direct wholly-owned subsidiary of the Parent and Jafra Distribution is an indirect wholly-owned subsidiary of the Parent. The Parent has fully and unconditionally guaranteed the obligations under the 103/4% Notes on a senior subordinated basis on the terms provided in the Indenture. Each Issuer has fully and unconditionally guaranteed the obligations of the other under the 103/4% Notes on a senior subordinated basis, subject to a30-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 $69.5 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 offering to affiliates of $79.1 million. In 2004, in connection with the Acquisition, holders of $0.5 million principal amount of the 103/4% Notes redeemed such notes. As a result of this and the February 2005 redemption, $130.0 million principal amount of the 103/4% Notes was outstanding at December 31, 2005.

On August 16, 2004, the Company and the Issuers entered into the Restated Credit Agreement which provides for a revolving credit facility of up to an aggregate of $60 million, which can be increased by the Company to $90 million under certain circumstances. The Restated Credit Agreement matures on August 16, 2008. JCI can borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Agreement. On August 16, 2004, the Company borrowed $43,500,000 of the loans. Borrowings under the Restated Credit Agreement bear interest at an annual rate of Libor plus 2.50%. As of December 31, 2005, there were no borrowings under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

The Company also entered into a Loan Contract (the “Loan Contract”) in August 2004 to borrow up to $20.0 million from Vorwerk at an annual interest rate of Libor plus 2.625%. The Loan Contract was allocated 100% to JCI and was repaid in full on January 6, 2005.

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

Both the Indenture and the Restated Credit Agreement contain certain covenants that limit the Company’s ability to incur additional indebtedness, pay cash dividends and make certain other payments. These debt agreements also require the Company to maintain certain financial ratios including a minimum EBITDA to cash interest expense coverage ratio and a maximum debt to EBITDA ratio. These covenants apply to the Company and certain of its subsidiaries, including without limitation, JCI, Jafra Distribution and Jafra Cosmetics S.A. As of December 31, 2005 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 thereunderand/or declare any amounts outstanding thereunder to be immediately due and payable. The Indenture contains similar provisions that apply upon the failure by the Company, or the failure by JCI, Jafra Distribution or any of their significant subsidiaries (as defined in the Indenture), to pay any indebtedness for borrowed money when due, or on the acceleration of any other debt obligations exceeding $10.0 million. The Indenture also contains provisions that, under certain circumstances, permit the holders of certain senior indebtedness (including the loans made under the Restated Credit Agreement) to block payments on the 103/4% Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

The terms of the Indenture significantly restrict the Company and its other subsidiaries from paying dividends and otherwise transferring assets to Jafra S.A. The ability of the Company to make such restricted payments or transfers is generally limited to an amount determined by a formula based on 50% of its consolidated net income (which, as defined in the Indenture, excludes goodwill impairment charges and any after-tax extraordinary, unusual or nonrecurring gains and losses) accruing from October 1, 2002, plus specified other amounts. In addition, as a condition to making such payments to Jafra S.A. based on such formula, the Company must have a consolidated coverage ratio (as defined in the Indenture) of at least 2.25 to 1 after giving effect to any such payments. Notwithstanding such restrictions, the Indenture permits (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.

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

Cash Flows

Net cash provided by operating activities was $51.0 million in 2005, consisting of $26.6 million of net income adjusted for depreciation of $12.9 million, provision for uncollectible accounts of $9.4 million, loss on disposal of fixed assets of $0.1 million, amortization of deferred financing fees of $3.3 million, unrealized exchange gains of $0.2 million and change in deferred income taxes of $3.4 million. This was partially offset by $4.4 million used in changes in operating assets and liabilities. Net cash provided by operating activities was $7.6 million in 2004. The significant elements of net cash used by changes in operating assets and liabilities in 2005 were a $8.4 million increase in accounts receivable associated with the increase in sales in Mexico during the second half of 2005 and a $2.4 million decrease in inventories. Net income for 2004 included $29.8 million of transaction related fees ($4.9 of which were a non-cash expense) and $5.0 million of restructuring charges. The significant elements of net cash used by operating activities in 2004 were a $12.3 million increase in receivables, a $3.6 million decrease in accounts payable and a $3.1 million decrease in income taxes payable.

Net cash used in investing activities was $5.0 million in 2005 compared to $6.0 million in 2004. In 2005 and 2004, investing activities primarily consisted of capital expenditures.

Net cash used in financing activities was $30.8 million compared to $8.7 million in 2004. During 2005, Jafra S.A. subscribed to 316,270 shares of common stock of the Company for $79.1 million. This amount was used to redeem $69.5 million of the 103/4% Notes. Additionally, during 2005, the Company repaid $20.0 million of the Vorwerk note and a net of $20.4 million of the revolving credit facility. During 2004, the Company entered into the Restated Credit Agreement and paid in full all amounts outstanding under the Senior Credit Agreement. Also, during 2004, the Company entered into a loan agreement with Vorwerk and borrowed $20.0 million under the Loan Agreement. During 2004, the Company repurchased $0.5 million of the outstanding 103/4% Notes.

The effect of exchange rate changes on cash was a loss of $0.9 million in 2005 compared to a $1.5 million gain in 2004 related to fluctuations in the exchange rate of the Mexican peso, South American currencies and European currencies.

Foreign Operations

As a group doing more than 79% of its business in international markets in 2005, the Company is subject to foreign taxes and intercompany pricing laws, including those relating to the flow of funds between its subsidiaries pursuant to, for example, purchase agreements, licensing agreements or other arrangements. Regulators in the United States, Mexico and in other foreign markets may closely monitor the Company’s corporate structure and how it effects intercompany fund transfers.

Net sales outside of the United States aggregated 79%, 77% and 74% of the Company’s total net sales for the fiscal years 2005, 2004 and 2003, respectively. In addition, as of December 31, 2005, international subsidiaries comprised approximately 74% of the Company’s consolidated total assets. Accordingly, the Company has experienced and continues to be exposed to foreign exchange risk. The Company has implemented a hedging program to protect against potential devaluation of the Mexican peso. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

The Company’s subsidiaries in Mexico generated approximately 71% of the Company’s net sales for 2005 compared to 67% for 2004, substantially all of which was denominated in Mexican pesos. During 2005 and 2004, the peso was relatively stable, but in prior years, the peso weakened against the U.S. dollar.

Mexico has experienced periods of high inflation in the past and has been considered a hyperinflationary economy. Because the functional currency in Mexico is the Mexican peso, gains and losses of remeasuring debt to the U.S. dollar from the peso are included as a component of net income (loss). Jafra Mexico had $78.0 million of U.S. dollar-denominated third-party debt as of December 31, 2005.

The Company is also exposed to foreign exchange risks due to its operations in South America until final liquidation of all markets. The Company’s largest South American operation was Brazil. The Company also operated in Argentina and currently operates in the Dominican Republic.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Inflation

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

Information Concerning Forward-Looking Statements

This Annual Report onForm 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements are based upon management’s current expectations and beliefs concerning future developments and their potential effects upon the Company. If the risks or uncertainties materialize or the assumptions prove incorrect, the results of the Company may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any statements relating to future results of operations, plans, outlook or strategies; any projections of earnings, revenue, expenses, or other financial items; any statements concerning developments, performance or market share relating to products; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include macroeconomic and geopolitical trends and events and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” set forth in Item 1A of this Report, and that are otherwise described from time to time in the Company’s Securities and Exchange Commission reports filed after this report. The Company assumes no obligation and does not intend to update these forward-looking statements.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

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

Interest Rate Risk

The Company has U.S. dollar-denominated debt obligations in both the United States and Mexico that have fixed and variable interest rates and mature on various dates. At December 31, 2005, the Company did not have any outstanding variable debt obligations under its revolving credit facility. The table below presents principal cash flows and related interest rates by fiscal year of maturity:

Debt Obligation Information at December 31, 2005
(Amounts in U.S. dollars in 000’s)


																Fair Value
	Expected Year of Maturity															December 31,
	2006		2007		2008		2009		2010		Thereafter			Total		2005(1)

Senior subordinated notes and revolving credit facility
Fixed Rate (US$)	$	—	$	—	$	—	$	—	$	—	$	130,000		$	130,000	$	142,220
Average Interest Rate		—		—		—		—		—		10.75	%
Variable Rate (US$)	$	—	$	—	$	—	$	—	$	—	$	—		$	—	$	—
Average Interest Rate		—		—		—		—		—		—


(1)		The Company’s estimate of the fair value of its senior subordinated notes was based on trading prices.

As of December 31, 2005, the Company did not have any variable interest rate debt outstanding.

Foreign Currency Risk

The Company operates globally, with manufacturing facilities in Mexico and distribution facilities in various locations around the world. With the exception of most intercompany product sales between European subsidiaries, and intercompany sales between Mexican entities, all intercompany product sales are denominated in U.S. dollars, as are some expenses, including interest payments with respect to all of its outstanding indebtedness. In addition, 79% of the Company’s 2005 revenue was generated in countries with a functional currency other than the U.S. dollar. As a result, the Company’s earnings and cash flows are exposed to fluctuations in foreign currency exchange rates.

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

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

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

Pursuant to SFAS No. 133, the Company’s use of contracts to hedge certain forecasted transactions may qualify for hedge accounting. The Company ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date were recorded directly as a component of exchange gain (loss). As of December 31, 2005, the fair value of the option contracts was included in accrued liabilities in the accompanying consolidated balance sheets and in exchange loss on the accompanying consolidated statements of operations. No amounts at December 31, 2005 were included in other comprehensive loss as the Company did not apply hedge accounting to any outstanding options at December 31, 2005.

The outstanding foreign currency option contracts had a notional value denominated in Mexican pesos of 828,000,000 and 545,000,000 in put and call positions at December 31, 2005 and 2004, respectively. The foreign currency option contracts outstanding at December 31, 2005 mature at various dates through June 30, 2007 and the foreign currency option contracts outstanding at December 31, 2004 mature at various dates through March, 2006. Notional amounts do not quantify the Company’s market or credit exposure or represent its assets or liabilities, but are used in the calculation of cash settlements under the contracts.

The following tables provide information about the details of the Company’s option contracts as of December 31, 2005 and 2004 (in thousands, except for average strike price):


	Coverage in		Average
	Mexican		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	)


	Coverage in
	Mexican		Average Strike		Fair Value in
Foreign Currency	Pesos		Price		U.S. Dollars(1)			Maturity Date

At December 31, 2004:
Purchased puts (Company may sell peso/buy USD)
Mexican peso		107,000		12.62-12.76	$	(298	)		Jan.-Mar. 2005
Mexican peso		179,000		12.50-12.94		(443	)		Apr.-June 2005
Mexican peso		81,000		12.68-13.07		(87	)		July-Sept. 2005
Mexican peso		108,000		13.21-13.32		(163	)		Oct.-Dec. 2005
Mexican peso		70,000		12.99-13.19		(23	)		Jan.-Mar. 2006

		545,000			$	(1,014	)

Written calls (Counterparty may buy peso/sell USD)
Mexican peso		107,000		11.44-11.56	$	29			Jan.-Mar. 2005
Mexican peso		179,000		11.34-11.73		131			Apr.-June 2005
Mexican peso		81,000		11.48-11.84		(136	)		July-Sept. 2005
Mexican peso		108,000		11.97-12.06		(210	)		Oct.-Dec. 2005
Mexican peso		70,000		11.77-11.95		(233	)		Jan.-Mar. 2006

		545,000			$	(419	)


(1)		The fair value as quoted by the financial institutions of the option contracts presented above, an unrealized loss of $2,944,000 and $1,433,000 at December 31, 2005 and 2004, respectively, represents the carrying value and was recorded in accrued liabilities.

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

The Company’s Mexican subsidiary, Jafra Distribution, had U.S. dollar-denominated debt of $78.0 million and $128.5 million at December 31, 2005 and 2004, respectively.

Based upon the $78.0 million of Jafra Distribution’s outstanding debt at December 31, 2005, a 10% decline in the peso to U.S. dollar exchange rate would result in a $7.8 million foreign currency exchange loss.


Item 8.	*Financial Statements and Supplementary Data*

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES*


	Page

Consolidated Financial Statements — Jafra Worldwide Holdings (Lux) S.àr.l, and Subsidiaries
Reports of Independent Registered Public Accounting Firms		45
Consolidated Balance Sheets — As of December 31, 2005 and 2004		47
Consolidated Statements of Operations — For the years ended December 31, 2005, 2004 and 2003		48
Consolidated Statements of Stockholder’s Equity (Deficit) — For the years ended December 31, 2005, 2004 and 2003		49
Consolidated Statements of Cash Flows — For the years ended December 31, 2005, 2004 and 2003		50
Notes to Consolidated Financial Statements		51
Consolidated Financial Statements — Jafra Cosmetics International, Inc. and Subsidiaries
Reports of Independent Registered Public Accounting Firms		75
Consolidated Balance Sheets — As of December 31, 2005 and 2004		77
Consolidated Statements of Operations — For the years ended December 31, 2005, 2004 and 2003		78
Consolidated Statements of Stockholder’s Equity (Deficit) — For the years ended December 31, 2005, 2004 and 2003		79
Consolidated Statements of Cash Flows — For the years ended December 31, 2005, 2004 and 2003		80
Notes to Consolidated Financial Statements		81
Financial Statements — Distribuidora Comercial Jafra, S.A. de C.V.
Reports of Independent Registered Public Accounting Firms		99
Balance Sheets — As of December 31, 2005 and 2004		101
Statements of Operations — For the years ended December 31, 2005, 2004 and 2003		102
Statements of Stockholders’ Equity — For the years ended December 31, 2005, 2004 and 2003		103
Statements of Cash Flows — For the years ended December 31, 2005, 2004 and 2003		104
Notes to Financial Statements		105
Consolidated Financial Statements — Jafra Cosmetics International, S.A. de C.V. and Subsidiaries
Reports of Independent Registered public Accounting Firms		115
Consolidated Balance Sheets — As of December 31, 2005 and 2004		117
Consolidated Statements of Income — For the years ended December 31, 2005, 2004 and 2003		118
Consolidated Statements of Stockholders’ Equity — For the years ended December 31, 2005, 2004 and 2003		119
Consolidated Statements of Cash Flows — For the years ended December 31, 2005, 2004 and 2003		120
Notes to Consolidated Financial Statements		121
Schedule I — Condensed Financial Information of Registrant		134
Schedule II — Valuation and Qualifying Accounts		136


*		Schedules other than those listed above have been omitted because they are not applicable.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

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

Luxembourg:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Jafra Worldwide Holdings (Lux) S.àr.l., and its subsidiaries at December 31, 2005, and the results of their operations and their cash flows for year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Los Angeles, California

March 24, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of

Directors and Stockholder of

Jafra Worldwide Holdings (Lux) S.ar.l. Luxembourg

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

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

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

Ernst & Young LLP

Los Angeles, California

March 4, 2005

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

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	December 31,			December 31,
	2005			2004

ASSETS
Current assets:
Cash and cash equivalents	$	24,819		$	10,586
Receivables, less allowances for doubtful accounts of $10,703 in 2005 and $9,394 in 2004		43,398			42,904
Inventories, less allowances of $2,960 in 2005 and $2,811 in 2004		38,930			40,375
Prepaid income taxes		2,590			767
Prepaid expenses and other current assets		8,931			6,847
Deferred income taxes		15,278			16,865
Assets from discontinued operations		27			133

Total current assets		133,973			118,477
Property and equipment, net		54,412			61,763
Other assets:
Goodwill		64,794			62,838
Trademarks		43,437			41,463
Deferred financing fees, employee supplemental savings plan and other assets		11,451			13,877
Noncurrent assets from discontinued operations		33			—

Total assets	$	308,100		$	298,418


LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	18,839		$	17,866
Accrued liabilities		58,432			53,499
Income taxes payable		4,269			2,463
Deferred income taxes		—			1,063
Due to Vorwerk		—			20,000
Current Liabilities from discontinued operations		40			129

Total current liabilities		81,580			95,020
Long-term debt		130,000			220,250
Deferred income taxes		21,072			18,178
Employee supplemental savings plan and other long-term liabilities		5,917			5,131

Total liabilities		238,569			338,579

Commitments and contingencies (Note 15)		—			—
Stockholder’s equity (deficit):
Common stock, par value $100; 316,420 and 150 shares authorized, issued and outstanding in 2005 and 2004, respectively		31,642			15
Additional paid-in capital		51,769			4,296
Retained deficit		(8,390	)		(35,001	)
Accumulated other comprehensive loss		(5,490	)		(9,471	)

Total stockholder’s equity (deficit)		69,531			(40,161	)

Total liabilities and stockholder’s equity (deficit)	$	308,100		$	298,418

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Net sales	$	430,056		$	416,174		$	383,859
Cost of sales		99,701			94,840			89,703

Gross profit		330,355			321,334			294,156
Selling, general and administrative expenses		253,259			245,250			232,772
Transaction related expenses		—			29,848			16,786
Restructuring and impairment charges		—			5,017			—

Income from operations		77,096			41,219			44,598
Other income (expense):
Exchange gain (loss), net		7			230			(10,967	)
Interest expense		(18,068	)		(27,285	)		(21,207	)
Interest income		383			130			290
Loss on extinguishment of debt		(9,753	)		(4,464	)		(6,620	)
Other expense		(3,784	)		(771	)		(567	)
Other income		328			90			147

Income from continuing operations before income taxes		46,209			9,149			5,674
Income tax expense (benefit)		19,623			(2,312	)		8,258

Income (loss) from continuing operations		26,586			11,461			(2,584	)
Income (loss) from discontinued operations, net of income tax expense of $0 in 2005 and 2004 and $36 in 2003		25			(212	)		(5,367	)

Net income (loss)	$	26,611		$	11,249		$	(7,951	)

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)


	Years Ended December 31,
	2005					2004					2003
	Shares		Amount			Shares		Amount			Shares			Amount
	(In thousands, except for shares)

Common Stock:
Balance, beginning of year		150	$	15			150	$	15			831,888		$	1,664
Recapitalization of operations from CDRJ Investments (Lux) S.A. to Jafra Worldwide (Lux) S.àr.l.		—		—			—		—			(831,738	)		(1,649	)
Issuance of 316,270 shares of common stock		316,270		31,627			—		—			—			—

Balance, end of year		316,420		31,642			150		15			150			15

Additional Paid-in Capital:
Balance, beginning of year				4,296					—						81,921
Deemed capital contribution									4,922						—
Issuance of 316,270 shares of common stock				47,473
Cash distribution to Jafra S.A.				—					(626	)					—
Recapitalization of operations from CDRJ Investments (Lux) S.A. to Jafra Worldwide (Lux) S.àr.l.				—					—						1,649
Distribution to stockholders of CDRJ Investments (Lux) S.A.				—					—						(83,570	)

Balance, end of year				51,769					4,296						—

Retained (Deficit) Earnings:
Balance, beginning of year				(35,001	)				(46,250	)					37,145
Net income (loss)				26,611					11,249						(7,951	)
Distribution to stockholders of CDRJ Investments (Lux) S.A.				—					—						(74,039	)
Reserved for liquidation costs and final distribution to stockholders of CDRJ Investments (Lux) S.A.				—					—						(1,405	)

Balance, end of year				(8,390	)				(35,001	)					(46,250	)

Accumulated Other Comprehensive Loss:
Balance, beginning of year				(9,471	)				(9,154	)					(12,268	)
Net unrealized and deferred realized gains (losses) on derivatives				65					(343	)					(15	)
Tax benefit (expense) on unrealized and deferred realized gains (losses) on derivatives				—					134						(235	)
Reclassification of accumulated translation adjustment on ceased or discontinued operations				3,141					269						2,458
Currency translation adjustments				775					(377	)					906

Balance, end of year				(5,490	)				(9,471	)					(9,154	)

Total Stockholder’s Equity (Deficit)		316,420	$	69,531			150	$	(40,161	)		150		$	(55,389	)

Comprehensive Income (Loss):
Net income (loss)			$	26,611				$	11,249					$	(7,951	)
Unrealized and deferred realized losses on derivatives				(60	)				(353	)					(119	)
Reclassified to exchange loss				128					7						(550	)
Reclassified to cost of sales				(3	)				3						654
Tax benefit (expense) on unrealized and deferred realized losses on derivatives				—					134						(235	)
Reclassification of accumulated translation adjustment on ceased or discontinued operations				3,141					269						2,458
Currency translation adjustments				775					(377	)					906

Total Comprehensive Income (Loss)			$	30,592				$	10,932					$	(4,837	)

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Cash flows from operating activities:
Net income (loss)	$	26,611		$	11,249		$	(7,951	)
Adjustments to reconcile net income (loss) net cash provided by operating activities:
Loss on disposal of fixed assets		139			—			—
Depreciation and amortization		12,905			6,659			5,743
Provision for uncollectible accounts receivable		9,363			9,046			8,549
Amortization and write off of deferred financing fees		3,259			6,290			4,035
Non-cash compensation expense		—			4,922			—
Asset impairment charge		—			423			388
Unrealized foreign exchange (gains) losses		(200	)		(297	)		11,653
Deferred realized foreign exchange gains (losses)		—			—			646
Deferred income taxes		3,417			(11,347	)		(7,188	)
Changes in operating assets and liabilities:
Receivables		(8,392	)		(12,273	)		(10,879	)
Inventories		2,361			(353	)		(8,138	)
Prepaid expenses and other current assets		(655	)		(12	)		(47	)
Other assets		(158	)		(618	)		(115	)
Accounts payable and accrued liabilities		165			(3,569	)		9,451
Income taxes payable/prepaid		1,200			(3,056	)		578
Other long-term liabilities		1,001			330			1,014
Net operating activities of discontinued operations		(41	)		222			5,238

Net cash provided by operating activities		50,975			7,616			12,977

Cash flows from investing activities:
Purchases of property and equipment		(4,295	)		(5,679	)		(10,703	)
Other		(741	)		(281	)		(780	)

Net cash used in investing activities		(5,036	)		(5,960	)		(11,483	)

Cash flows from financing activities:
Proceeds from issuance of subordinated debt due 2011		—			—			200,000
Proceeds from issuance of term loan		—			—			50,000
Repurchase of subordinated debt due 2008		—			—			(75,180	)
Repurchase of subordinated debt due 2011		(69,500	)		(500	)		—
(Repayment of) proceeds from issuance of Vorwerk note		(20,000	)		20,000			—
Repayments under term loan facility		—			(47,500	)		(10,875	)
Repayments under revolving credit facility		(66,375	)		(94,250	)		(34,700	)
Borrowings under revolving credit facility		46,000			115,000			34,700
Repayments under bank debt		—			—			(828	)
Issuance of common stock		79,100			—			—
Distribution to Jafra S.A.		—			(626	)		—
Distribution of additional paid-in capital to stockholders		—			—			(83,570	)
Distribution payment to stockholders from retained earnings		—			—			(75,444	)
Deferred financing fees		—			(824	)		(14,688	)

Net cash used in financing activities		(30,775	)		(8,700	)		(10,585	)
Effect of exchange rate changes on cash		(931	)		1,510			(1,610	)

Net increase (decrease) in cash and cash equivalents		14,233			(5,534	)		(10,701	)
Cash and cash equivalents at beginning of year		10,586			16,120			26,821

Cash and cash equivalents at end of year	$	24,819		$	10,586		$	16,120

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	17,649		$	24,820		$	19,298
Income taxes	$	14,202		$	11,674		$	5,746

During the year ended December 31, 2005, the Company reclassified $3,141,000 of accumulated translation adjustment losses from accumulated other comprehensive loss to other expense. During the year ended December 31, 2004, the Company reclassified $269,000 of accumulated translation adjustment losses from accumulated other comprehensive loss to other expense. During the year ended December 31, 2003, the Company reclassified $2,458,000 of accumulated translation adjustment losses from accumulated other comprehensive loss to loss on discontinued operations.

See accompanying notes to consolidated financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	Basis of Presentation and Description of Business

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. Jafra S.A., a Luxembourgsociété anonyme(“Jafra S.A.”), was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A. a Luxembourgsociété anonyme(“CDRJ”).

On May 27, 2004, Vorwerk & Co. eins GmbH acquired substantially all of the issued and outstanding capital stock of Jafra S.A. (the “Acquisition”). As a result of the Acquisition, 100% of the voting securities of the Parent are held indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The purchase transaction has not been pushed down to the Parent due to the outstanding registered public debt.

On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (“JCI”) and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution”, and together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into new senior credit facilities (the “Senior Credit Agreement”) and issuing $200 million of 103/4% Senior Subordinated Notes due 2011 (the “103/4% Notes” and such transactions collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 113/4% Senior Subordinated Notes due 2008 (the “113/4% Notes”) of JCI and Jafra Cosmetics International, S.A. de C.V. (“Jafra Cosmetics S.A.”), to repay all amounts outstanding under the then existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made liquidating distributions of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution, to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

Jafra Distribution was organized in February 2003 to conduct the distribution functions of the Parent’s Mexican operations. The Parent was organized in February 2003 as a holding company to conduct the worldwide Jafra cosmetics business through its subsidiaries. CDRJ was a holding company that, until the Recapitalization, conducted the Jafra cosmetics business through its subsidiaries. Since the commencement of the liquidation, CDRJ has conducted no operations other than those incident to winding up its activities.

The accompanying audited consolidated financial statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 reflect the operations of the Parent and its subsidiaries and include the operations of CDRJ and its subsidiaries through May 20, 2003. The historical consolidated financial statements of CDRJ are equivalent to the operations of the Parent. CDRJ and its subsidiaries and the Parent and its subsidiaries are referred to collectively as “the Company.” All significant intercompany accounts and transactions have been eliminated in consolidation.

Description of Business

The Company is a direct seller of skin and body care products, color cosmetics, fragrances and other personal care products. The Company sells its Jafra brand products through a direct selling network of independent consultants, who market and sell the Company’s products to their customers. The Company operates in three primary markets: Mexico, the United States and Europe.


(2)	Summary of Significant Accounting Policies

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents. Cash and cash equivalents include cash, time deposits and all highly liquid debt instruments with a maturity of three months or less when purchased.

Inventories. Inventories are stated at the lower of cost, as determined by thefirst-in, first-out basis, or market. The Company provides a reserve for estimated obsolete and unsaleable inventory based on assumptions as to future demand of product.

Property and Equipment. Property and equipment are stated at cost. Depreciation of property and equipment is provided for over the estimated useful lives of the respective assets using the straight-line method. Estimated useful lives are 20 or 40 years for buildings, the lesser of the useful life or the term of the lease for improvements, 5 to 15 years for machinery and equipment and 3 to 8 years for hardware and software. Maintenance and repairs, including cost of minor replacements, are charged to operations as incurred. Costs of additions and betterments are added to property and equipment accounts provided that such expenditures increase the useful life or the value of the asset. During 2005, the Company recorded additional depreciation expense of $5,289,000 related to the accelerated depreciation of its JD Edwards Commercial software due to a change in useful life.

Rent and leasing, The Company records rental expense associated with operating leases using a straight line method over the term of the lease.

Intangible Assets. Intangible assets principally consist of goodwill and trademarks. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill and certain other indefinite life intangible assets, but tests those intangible assets for impairment at least annually. Goodwill and trademarks resulted from the Company’s acquisition from Gillette in 1998.

Deferred Financing Costs. In connection with the Recapitalization, the Company incurred approximately $14,688,000 of costs related to the issuance of the 103/4% Notes and the establishment of the Senior Credit Agreement. On August 16, 2004, the Parent and the issuers entered into a Restated Senior Credit Agreement (the “Restated Credit Agreement”). With the borrowings from the Restated Credit Agreement and other borrowings, the Company paid in full all existing amounts under the Senior Credit Agreement. In connection with the Acquisition, holders of $500,000 principal amount of the 103/4% Notes redeemed such notes. In 2004, in connection with the full repayment of the Senior Credit Agreement and the purchase of $500,000 of the outstanding 103/4% Notes, the Company wrote off approximately $4,464,000 of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying consolidated statements of operations. During 2004, the Company capitalized approximately $866,000 of costs related to the Restated Credit Agreement. On February 17, 2005, the Issuers redeemed $69,500,000 of the 103/4% Notes. In connection with the February 17, 2005 redemption of the 103/4% Notes, the Company wrote off approximately $2,281,000 of previously capitalized deferred financing fees. All capitalized costs are being amortized on a basis that approximates the interest method over the expected term of the related debt. Except for the impact of translation, accumulated amortization at December 31, 2005 and 2004 was $2,150,000 and $1,837,000, respectively. (See Note 7).

Impairment of Long-Lived Assets and Intangibles. Long-lived assets are reviewed for impairment, based on undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, the Company will recognize an impairment loss, measured by the future discounted cash flow method. Indefinite lived intangibles are tested for impairment annually, as of December 31, or whenever events or changes in circumstances indicate that the carrying amount of intangibles may not be recoverable. Based on the provisions of SFAS No. 142, the Company first determines if the fair value is less than the carrying value of the intangible. If the fair value is less than the carrying value, the Company would then allocate the fair value to all the assets and liabilities to determine the amount of impairment. (See Note 5).

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Option Contracts. The Company enters into foreign currency option contracts to reduce the effect of potentially adverse exchange rate fluctuations in the exchange rate of the Mexican peso to the U.S. dollar. The Company accounts for these contracts pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivative instruments be recorded based on fair value.

As a matter of policy, the Company does not hold or issue foreign currency contracts for trading or speculative purposes. Under SFAS No. 133, the Company’s use of foreign currency contracts to hedge certain forecasted transactions may qualify for hedge accounting. Gains and losses from qualifying hedged derivative instruments can be deferred as a separate component of other comprehensive loss, and will then be recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such contracts with the corresponding gains and losses generated by the underlying hedged transactions. Under SFAS No. 133, certain of the Company’s foreign currency contracts do not qualify for hedge accounting and therefore, are remeasured based on fair value, with gains and losses included as a component of net income (loss). The Company ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date were recorded directly as a component of exchange loss (gain). At December 31, 2005 and 2004, the carrying value of the option contracts was $2,944,000 and $1,433,000, respectively, and was included in accrued liabilities in the accompanying consolidated balance sheets.

Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value because of the short-term maturities of these instruments. The fair value of the 103/4% Notes at December 31, 2005 and 2004 was $142,220,000 and $227,430,000, respectively. As the Company’s revolving credit facility and due to Vorwerk in 2004 are variable rate debt, and the interest rate spread paid by the Company is adjusted for changes in certain financial ratios of the Company, the fair value of the revolving credit facility and the due to Vorwerk approximated their carrying amounts at December 31, 2004.

Revenue Recognition. During 2005, the Company corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements”, net sales, cost of sales and related direct and incremental selling expenses are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. The Company currently insures shipments and assists consultants by replacing lost or damaged shipments impacting the risk of loss. Prior to 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by the Company at the point of shipment. As a result, commencing with the second quarter of 2005, the Company’s results have been reported based upon recognizing sales at the point of delivery. The Company has determined that this correction did not have a material impact on the prior period financial statements which have therefore not been restated. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, the Company’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $5,111,000, cost of sales of $1,171,000, gross profit of $3,940,000, selling, general and administrative expenses of $1,659,000, income from operations of $2,281,000 and net income of $1,515,000. The Company has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.

Amounts billed to consultants for shipping and handling costs are included in net sales. Sales are reduced by commissions paid to consultants on their personal sales pursuant to Emerging Issues Task Force Issue (“EITF”)No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.”

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cost of Sales. The Company’s cost of sales primarily represents the cost to the Company of the products it sells to its consultants and costs associated with free product on certain promotional arrangements. Cost of sales also includes manufacturing and other production-related expenses, freight in, purchasing, warehousing, inventory transfer costs and charges related to obsolete and slow-moving inventory.

Selling, General and Administrative Expense. Selling, general and administrative expenses (“SG&A”) include sales promotional expenses, including the cost of various sales incentives, distribution expenses, and shipping and handling costs, as well as selling, marketing and administrative expenses, including general management, finance, human resources, information technology and bad debt expense related to uncollectible accounts receivable. SG&A expenses also include override payments to managers, who earn a percentage of the sales generated by consultants recruited directly or indirectly by them. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Overrides and incentives are accrued when earned.

Advertising Costs. The Company expenses advertising costs as incurred. Total advertising costs aggregated $1,371,000, $709,000 and $505,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Shipping and Handling Costs. Shipping and handling costs of $30,433,000, $31,210,000 and $30,470,000 for the years ended December 31, 2005, 2004 and 2003, respectively, are included in selling, general and administrative expenses.

Income Taxes. The Company accounts for income taxes under the balance sheet approach that requires the recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in the Company’s financial statements or income tax returns. Management provides a valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized.

Foreign Currency Translation. The functional currency for foreign subsidiaries is generally the local currency. Assets and liabilities of such foreign subsidiaries 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.

Approximately 79%, 77% and 74% of the Company’s net sales for the years ended December 31, 2005, 2004 and 2003, respectively, were generated by operations located outside of the United States. Mexico is the Company’s largest foreign operation, accounting for 71%, 67% and 63% of the Company’s net sales for the years ended December 31, 2005, 2004 and 2003, respectively. As such, the Company’s results of operations are subject to fluctuations in the exchange rate of the Mexican peso to the U.S. dollar.

Additionally, Jafra Mexico had outstanding U.S. dollar-denominated debt of $78,000,000 and $128,450,000 at December 31, 2005 and 2004, respectively. This debt is remeasured at each reporting date with the impact of the remeasurement being recorded in net income (loss), subjecting the Company to additional foreign exchange risk.

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. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of SFAS No. 151 is not expected to have a material impact on the operations of the Company.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In March 2005, the FASB issued Interpretation (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and was effective for the Company’s fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on the Company’s consolidated financial statements.


(3)	Inventories

Inventories consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Raw materials and supplies	$	11,165	$	10,744
Finished goods		27,765		29,631

Total inventories	$	38,930	$	40,375

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(4)	Property and Equipment

Property and equipment consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Land	$	16,193	$	15,733
Buildings and improvements		17,255		16,805
Machinery, equipment and other		56,982		52,754

		90,430		85,292
Less accumulated depreciation		36,018		23,529

Property and equipment, net	$	54,412	$	61,763


(5)	Goodwill and Trademarks

The Company’s intangible assets consist of trademarks and goodwill. Trademarks, principally the Jafra name, resulted from the acquisition of the Jafra business from Gillette. The Company has determined trademarks to have an indefinite life. The carrying value of trademarks increased $1,974,000 to $43,437,000 at December 31, 2005 from $41,463,000 at December 31, 2004 as a result of foreign currency translation. The changes in the carrying amount of goodwill for the years ended December 31, 2005 are as follows (in thousands):


	United						All		Consolidated
Goodwill	States		Mexico		Europe		Others		Total

Balance as of December 31, 2004	$	32,188	$	26,558	$	4,092	$	—	$	62,838
Translation effect		—		1,279		677		—		1,956

Balance as of December 31, 2005	$	32,188	$	27,837	$	4,769	$	—	$	64,794

In accordance with SFAS No. 142, the Company has identified all reporting units and has allocated all goodwill accordingly. During the year ended December 31, 2003, the Company identified impairment indicators regarding the Venezuelan operations given the Company’s decision to exit this market. The Company recorded an impairment loss of $137,000 for goodwill allocated to the Venezuelan reporting unit. The Company did not recognize any impairment of Goodwill during the years ended December 31, 2005 and 2004.


(6)	Accrued Liabilities

Accrued liabilities consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Sales promotions, commissions and overrides	$	23,136	$	21,307
Accrued interest		1,692		2,662
Compensation and other benefit accruals		18,444		16,529
State and local sales taxes and other taxes		6,006		5,526
Other		9,154		7,475

Total accrued liabilities	$	58,432	$	53,499

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(7)	Debt

Debt consists of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Subordinated Notes, unsecured, interest payable semi-annually at 103/4% due in 2011	$	130,000	$	199,500
Revolving loan, secured, interest due in quarterly installments, interest rate at 4.5% at December 31, 2004		—		20,750
Due to Vorwerk, principal and interest paid in January 2005, interest rate at 4.8% at December 31, 2004		—		20,000

Total debt		130,000		240,250
Less current maturities		—		20,000

Long-term debt	$	130,000	$	220,250

The Company’s long-term debt matures in 2011.

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. In 2004, in connection with the Acquisition, holders of $500,000 principal amount of the 103/4% Notes redeemed such notes. As a result of this and the February 2005 redemption, $130.0 million principal amount of the 103/4% Notes was outstanding at December 31, 2005.

In addition, on May 20, 2003, the Issuers entered into the Senior Credit Agreement, which provided for senior secured credit facilities in an aggregate principal amount of $90 million, consisting of a $50 million senior secured term loan facility and a $40 million senior secured revolving credit facility. The Senior Credit Agreement was allocated 40% to JCI and 60% to Jafra Distribution.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

borrow up to 100% and Jafra Distribution can borrow up to 60% of the total Restated Credit Agreement. On August 16, 2004, the Company borrowed $43,500,000 of the loans. Borrowings under the Restated Credit Agreement bear interest at an annual rate of Libor plus 2.50%. As of December 31, 2005, there were no borrowings under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

The Company also entered into a Loan Contract (the “Loan Contract”) in August 2004 to borrow up to $20,000,000 from Vorwerk at an annual interest rate of Libor plus 2.625%. The Loan Contract was allocated 100% to JCI and was repaid in full on January 6, 2005.

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

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)

On May 23, 2003, with proceeds from the issuance of the 103/4% Notes and borrowings under the Senior Credit Agreement, JCI and Jafra Cosmetics S.A. redeemed the 113/4% Notes in the aggregate outstanding principal amount of $75,180,000 at a premium of approximately $4,417,000. Additionally, JCI and Jafra Cosmetics S.A. repaid $7,375,000 under its existing credit agreement and terminated the agreement. In connection with the redemption of the 113/4% Notes and the termination of the agreement, the Company wrote off approximately $2,203,000 of capitalized deferred financing fees. Total costs related to the redemption of the 113/4% Notes and the repayment of amounts outstanding under the agreement were $6,620,000 and were recorded as loss on extinguishment of debt on the accompanying consolidated statements of operations.

The Company capitalized approximately $14,646,000 of costs related to the issuance of the 103/4% Notes and the Senior Credit Agreement as deferred financing fees (net of a credit of approximately $42,000 in the year ended December 31, 2004) and approximately $866,000 of costs related to the Restated Credit Agreement. In connection with the full repayment of the Senior Credit Agreement and the purchase of $500,000 of the outstanding 103/4% Notes, the Company wrote off approximately $4,464,000 of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying consolidated statements of operations during year ended December 31, 2004. In connection with the February 17, 2005 redemption of the 103/4% Notes, the Company wrote off approximately $2,281,000 of previously capitalized deferred financing fees. As a result, the Company recorded a $9,753,000 loss on extinguishment of debt.

As of December 31, 2005 and 2004, approximately $4,262,000 and $7,742,000 of unamortized deferred financing fees, respectively, were included as a noncurrent asset in the accompanying consolidated balance sheets (excluding translation effects). 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.

As of December 31, 2005, the Company had irrevocable standby letters of credit outstanding totaling $2.9 million. These letters of credit, expiring on various dates, collateralize the Company’s obligation to a third-party in connection with certain lease agreements.


(8)	Equity

During the year ended December 31, 2005, through a series of transactions, Jafra S.A. subscribed to 316,270 newly issued shares of common stock of the Company for approximately $79,100,000 in cash. The proceeds of the private equity offering were used to redeem a portion of the 103/4% Notes (See Note 7)


(9)	Income Taxes

The Company’s income before income taxes consists of the following (amounts in thousands):


	Years Ended December 31,
	2005		2004			2003

Income from continuing operations before income taxes:
United States	$	10,528	$	(13,430	)	$	(6,039	)
Foreign		35,681		22,579			11,713

	$	46,209	$	9,149		$	5,674

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Actual income tax expense differs from the “expected” tax expense (computed by applying the U.S. Federal corporate rate of 35% and the Mexican Federal corporate rate of 30% in 2005, 33% in 2004 and 34% in 2003) to income before income taxes as a result of the following:


	Years Ended December 31,
	2005			2004			2003

Provision for income taxes at federal statutory rate	$	14,230		$	2,690		$	1,857
Foreign income subject to tax other than at federal statutory rate		2,846			2,470			2,139
Foreign tax and other credits		(2,443	)		(2,436	)		(2,214	)
State income taxes		856			(661	)		(220	)
Valuation allowance — domestic		—			95			(35	)
Valuation allowance — foreign		1,179			(2,000	)		3,510
Losses with no tax benefit		—			—			1,641
Reversal of income tax reserve		—			(2,348	)		—
Tax examination settlements and reserves		1,282			—			—
Other		1,673			(122	)		1,580

Income tax expense (benefit)	$	19,623		$	(2,312	)	$	8,258

The components of income tax expense (benefit) are as follows (in thousands):


	Years Ended December 31,
	2005			2004			2003

Current:
Federal	$	10		$	—		$	—

Foreign:
Mexico		15,275			11,423			12,994
Europe		50			10			28
Other		14			(1,737	)		2,644

		15,349			9,696			15,666
State		856			(661	)		(220	)

Total current		16,205			9,035			15,446
Deferred — foreign		(14	)		(5,125	)		(3,248	)
Deferred — domestic		3,432			(6,088	)		(4,835	)
Foreign deferred allocated to other comprehensive loss		—			(134	)		895

Total deferred		3,418			(11,347	)		(7,188	)
Total income taxes from continuing operations		19,623			(2,312	)		8,258
Income tax on discontinued operations		—			—			36

Total income tax expense (benefit)	$	19,623		$	(2,312	)	$	8,294

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of deferred income tax assets and deferred income tax liabilities at December 31, 2005 and 2004 are as follows (in thousands):


	2005			2004

Deferred income tax assets:
Accounts receivable	$	2,958		$	2,586
Net operating loss carryforwards		15,491			18,960
Foreign tax and other credit carryforwards		4,392			5,768
Accrued sales promotions		1,422			1,514
Other accrued liabilities		4,683			4,241
Prepaid purchases and expenses		—			4,002
Guarantee fee		—			838
Other		9,014			4,918

Total deferred income tax assets		37,960			42,827
Less valuation allowance		(14,527	)		(13,348	)

Net deferred income tax assets		23,433			29,479
Deferred income tax liabilities:
Transaction and deferred financing costs		(930	)		(1,286	)
Property and equipment		(2,329	)		(2,444	)
Trademark and goodwill		(18,008	)		(16,682	)
Inventories		(4,702	)		(4,756	)
Prepaid purchases and expenses		(48	)		(4,135	)
Guarantee fee		—			(838	)
Other		(3,210	)		(1,714	)

Total deferred income tax liabilities		(29,227	)		(31,855	)

Net deferred income tax liabilities	$	(5,794	)	$	(2,376	)

The Company records a valuation allowance on deferred income tax assets to reduce the total to an amount that management believes is more likely than not to be realized. The valuation allowances at December 31, 2005 and 2004 were based upon the Company’s estimates of the future realization of deferred income tax assets. Valuation allowances at December 31, 2005 and 2004 were provided principally to offset operating loss carryforwards and foreign tax credit carryforwards of the Company’s U.S., European and South American subsidiaries.

At December 31, 2005, the Company’s deferred income tax assets for carryforwards totaled $19,883,000 comprised of foreign asset and other credit carryforwards of $4,392,000 and operating loss carryforwards of $15,491,000. At December 31, 2004, the Company’s deferred income tax assets for carryforwards totaled $24,728,000 comprised of foreign asset and other credit carryforwards of $5,768,000 and operating loss carryforwards of $18,960,000. These deferred income tax assets were reduced by a valuation allowance of $14,527,000 and $13,348,000 at December 31, 2005 and 2004, respectively. The tax loss and certain credit carryforwards expire in varying amounts between 2006 and 2015. Realization of the income tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying value of the income tax carryforwards will be realized.

In 2004, Mexico enacted new tax legislation that provided for a reduction in the corporate statutory tax rate from 33% in 2004 under the previous legislation to 30% in 2005, 29% in 2006 and 28% in 2007 and years thereafter.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2003, the Company recorded a reserve of $1,641,000 against certain income tax benefits in the United States and recorded the reserve as an accrued liability on the accompanying consolidated balance sheets. During the year ended December 31, 2004, the Company released an accrued liability of $2,348,000 which was originally recorded during 2002 against certain income tax benefits in the United States.


(10)	Benefit Plans

Certain former employees of the Company’s German subsidiary participate in a defined benefit pension plan covering key employees (the “Germany Plan”). Benefits are based on age, years of service and the level of compensation during the final years of employment. The Company’s funding policy is to contribute annually to the Germany Plan the amount necessary to meet the minimum funding standards. The Company recognized pension expense of $11,000, $25,000 and $22,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The assets and liabilities related to the Germany plan are not material to the consolidated financial statements.

Under Mexican labor laws, employees of Jafra Mexico are entitled to a payment when they leave the Company if they have fifteen or more years of service, or with less tenure under certain conditions. In addition, the Company makes government mandated employee profit sharing distributions equal to ten percent of the taxable income of the subsidiary in which they are employed. Total expense under these programs was $2,126,000, $1,082,000 and $1,506,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The total liability was approximately $3,242,000 and $1,888,000 at December 31, 2005 and 2004, respectively, and is classified as a noncurrent liability in the accompanying consolidated balance sheets.

The Company’s U.S. subsidiary has an employee savings plan which permits participants to make voluntary contributions by salary deferrals pursuant to section 401(k) of the Internal Revenue Code, which allows employees to defer up to 20% of their total compensation, subject to statutory limitations. Employee contributions of up to 10% of compensation are matched by the Company at the rate of 50 cents per dollar. Employees do not vest in the Company contribution until they have reached two years of service, at which time they become fully vested. The Company’s expense under this program was $500,000, $571,000 and $553,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company’s U.S. subsidiary also has a non-qualified supplemental excess benefit savings plan, which permits participants to make unlimited voluntary contributions. Employee contributions are matched on the same basis as under the employee savings plan, and the vesting provisions are the same. The Company’s net expense under this program was $178,000, $161,000 and $185,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Employee and employer contributions under such plan are placed into a “rabbi” trust exclusively for the uses and purposes of plan participants and general creditors of the Company. The Company has recorded an asset within deferred financing fees and other, net and the related liability within other long-term liabilities in the accompanying consolidated balance sheets of $4,229,000 and $3,419,000 at December 31, 2005 and 2004, respectively.

See Note 16 for management incentive arrangements.


(11)	Related Party Transactions

Pursuant to a consulting agreement entered into in 1998 and subsequent amendments, Clayton, Dubilier & Rice, an affiliate of Jafra S.A.’s primary shareholder, received an annual fee (and reimbursement ofout-of-pocket expenses) for providing advisory, management consulting and monitoring services to the Company. The annual fee was $1,000,000. The Company incurred $417,000 during the year ended December 31, 2004 through termination of this agreement and $1,000,000 in the year ended December 31, 2003. The consulting agreement terminated upon the consummation of the Acquisition in May 2004.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In August 2004, the Company entered the Loan Contract with Vorwerk (see Note 7). The Loan Contract bears interest at Libor plus 2.625%. The amount was repaid in full in January 2005. In addition, certain officers and directors of Vorwerk or its affiliates serve as directors of the Company.


(12)	Restructuring and Impairment Charges and Related Accruals

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 of substantially all of its skin and body care manufacturing operations to its facilities in Mexico from the United States. The transfer of these operations was substantially complete during the second quarter of 2004. Of these charges, $423,000 was for the impairment of assets not transferred and the remaining amount was primarily termination benefits. 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 subsequent to the Acquisition. In total, the restructuring charges includes termination benefits for thirteen people.

The additions that the aforementioned accruals include severance and fixed asset disposals, and are summarized as follows (in thousands):


	Year Ended
	December 31,
	2004

Additions — charges to income:
Severance	$	4,594
Asset impairment		423

Total additions	$	5,017

A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):


	Years Ended			Years Ended
	December 31,			December 31,
	2005			2004

Opening balance	$	2,391		$	—
Additions		—			5,017
Charges against reserves		(1,932	)		(2,626	)

Ending balance	$	459		$	2,391

The remaining accrual at year-end represents termination benefits to be paid during 2006.


(13)	Transaction Related Expenses

During the year ended December 31, 2004, the Company incurred $29,848,000 of transaction fees related to the Acquisition and to certain other transactions contemplated but subsequently terminated. Included in these amounts was $20,282,000 of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,922,000 of special bonus payments paid directly by the former shareholder. During the year ended December 31, 2003, the Company recorded $16,786,000 of transaction expenses related to the Recapitalization and to other transactions contemplated but subsequently terminated. In connection with the Recapitalization, the Board of Directors authorized CDRJ to reprice all existing outstanding stock options. In order to compensate option holders for any diminished value of the outstanding options, the Board of Directors further authorized $10,391,000 in bonus payments to current option holders. Additionally, during the year ended December 31, 2003, the Company authorized a special bonus of $2,715,000 to certain members of management and to non-employee directors for contributions to completing the Recapitalization of CDRJ.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(14)	Financial Reporting for Business Segments

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

The accounting policies used to prepare the information reviewed by 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.”

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


			United
			States and
			the							Corporate,
			Dominican				All			Unallocated			Consolidated
	Mexico		Republic		Europe		Others			and Other			Total
	(Dollars in thousands)

As of and for the year ended December 31, 2005
Net sales	$	306,385	$	91,604	$	31,574	$	493		$	—		$	430,056
Income from operations		85,687		10,166		2,951		(1,739	)		(19,969	)		77,096
Depreciation		4,104		8,411		360		30			—			12,905
Capital expenditures		2,939		965		391		—			—			4,295
Segment assets		210,868		82,448		15,009		776			(1,061	)		308,040
Assets from discontinued operations		—		—		—		60			—			60
Goodwill		27,837		32,188		4,769		—			—			64,794
As of and for the year ended December 31, 2004
Net sales	$	278,418	$	98,006	$	34,956	$	4,794		$	—		$	416,174
Income from operations		77,149		16,701		2,859		(2,140	)		(53,350	)		41,219
Depreciation		2,661		3,449		458		90			—			6,659
Capital expenditures		3,408		2,005		226		40			—			5,679
Segment assets		188,832		91,861		17,571		1,376			(1,355	)		298,285
Assets from discontinued operations		—		—		—		133			—			133
Goodwill		26,558		32,188		4,092		—			—			62,838
As of and for the year ended December 31, 2003
Net sales	$	241,750	$	102,141	$	32,874	$	7,094		$	—		$	383,859
Income from operations		66,080		16,368		1,927		(4,860	)		(34,917	)		44,598
Depreciation and amortization		2,240		2,853		442		208			—			5,743
Capital expenditures		5,890		4,396		333		84			—			10,703
Segment assets		180,818		91,138		18,244		4,861			(1,456	)		293,605
Assets from discontinued operations		—		—		—		138			—			138
Goodwill		26,428		32,188		4,480		—			—			63,096

Corporate, unallocated and other include (in thousands):


	Years Ended December 31,
	2005			2004			2003

Corporate expenses	$	(18,464	)	$	(15,687	)	$	(14,856	)
Transaction related expenses		—			(29,848	)		(16,786	)
Restructuring and impairment charges		—			(5,017	)		—
Unusual charges(1)		(1,505	)		(2,798	)		(3,275	)

Total corporate, unallocated and other	$	(19,969	)	$	(53,350	)	$	(34,917	)


(1)		Unusual charges include severance, loss or gain on sale of assets, holding company expenses and other charges (including certain severance charges) not related to the normal operations of the business.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additional business segment information regarding product lines is as follows:


	2005					2004					2003
			Percentage					Percentage					Percentage
	Sales by		of Total			Sales by		of Total			Sales by		of Total
	Product Line		Sales			Product Line		Sales			Product Line		Sales
	($ In millions)					($ In millions)					($ In millions)

Skin care	$	72.2		17.3	%	$	78.6		19.5	%	$	73.8		19.9	%
Body care and personal care		49.4		11.9			48.3		12.0			47.2		12.7
Color cosmetics		85.5		20.5			83.5		20.7			84.9		22.8
Fragrances		165.0		39.6			146.4		36.3			127.3		34.3
Other products(1)		44.4		10.7			46.6		11.5			38.3		10.3

Subtotal before shipping and other fees, less commissions		416.5		100.0	%		403.4		100.0	%		371.5		100.0	%

Shipping and other fees, less commissions		13.6					12.8					12.4

Total	$	430.1				$	416.2				$	383.9


(1)		Includes sales aids (e.g., party hostess gifts, demonstration products, etc.) and promotional materials purchased by consultants, which typically do not qualify for commissions or overrides.

As discussed in Note 2 to the consolidated financial statements, during the six months ended June 30, 2005 the Company corrected its revenue recognition policy to recognize net sales, cost of sales and related direct and incremental selling expenses at the point of delivery. Historically, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by the Company at the point of shipment. The following table provides the reduction caused by the correction in revenue recognition policy for the segments impacted for the six months ended June 30, 2005. The Company has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.


			United States
			and the Dominican		Consolidated
	Mexico		Republic		Total

For the six months ended June 30, 2005
Net sales	$	3,992	$	1,119	$	5,111
Income (loss) from operations	$	1,750	$	531	$	2,281

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(15)	Commitments and Contingencies

The Company leases office and warehouse facilities as well as manufacturing, transportation and data processing equipment under operating leases which expire at various dates through 2010. The leases contain certain renewal options and require payment of property taxes, utilities, common area maintenance and insurance and contain rent escalation clauses based on consumer price indices. Future minimum lease payments under noncancelable operating leases as of December 31, 2005 are (in thousands) are as follows:


2006	$	4,155
2007		3,518
2008		1,863
2009		1,298
2010		925

	$	11,759

Rental expense was $3,105,000, $3,240,000 and $3,757,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company has implemented a structure in a certain foreign jurisdiction to minimize import taxes. While management believes this structure adequately protects and minimizes the Company’s exposure to import taxes, the Company may be adversely impacted if this structure does not withstand challenges by local tax authorities. Management believes that the resolution of a tax authority challenge, if any, will not have a material adverse effect on the Company’s business, financial condition or results of operations.

The Company is involved from time to time in routine legal matters incidental to its business. The Company believes that the resolution of such matters will not have a material adverse effect on the Company’s business, financial condition or results of operations.


(16)	Management Incentive Arrangements

Company Plan

Effective 1998, CDRJ adopted a stock incentive plan (the “Stock Incentive Plan”), which provided for the sale to members of senior management of up to 52,141 shares of common stock of CDRJ and the issuance of options to purchase up to 104,282 additional shares of common stock. CDRJ reserved 156,423 shares for issuance under the Stock Incentive Plan. Upon the consummation of the Acquisition, all outstanding stock issued under the Stock Incentive Plan was sold to Vorwerk and all outstanding options were cancelled. The Stock Incentive Plan was subsequently effectively terminated. There were no shares issued or repurchased from December 31, 2001 until the Acquisition and termination of the Stock Incentive Plan during 2004. During the year ended December 31, 2004, all outstanding options were cancelled.

In connection with the Recapitalization, the Board of Directors approved an amendment to CDRJ’s stock incentive plan to reflect the equity instruments as rights to shares in Jafra S.A. rather than shares in CDRJ. In addition, as of May 21, 2003, the Board approved a reduction in the exercise price of all existing options granted with an exercise price of $100, $150 and $210 to $39.91, $59.86 and $83.80, respectively, due to the Recapitalization. The repricing was based on an equity valuation performed by a third-party which indicated a fair value per share of approximately $317 immediately prior to the Recapitalization. In order to affect this re-pricing, the exercise price per share of all existing options of CDRJ was reduced such that the awards aggregate intrinsic value immediately after the Recapitalization was not greater than the aggregate intrinsic value immediately before Recapitalization and the ratio of the exercise price per option to the market value per share was not reduced.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status and activity of the options under the Stock Incentive Plan is as follows:


	2004				2003
			Weighted Average				Weighted Average
	Shares		Exercise Price		Shares		Exercise Price

Outstanding at beginning of year		84,242	$	44.84		84,242	$	44.84
Granted		—		—		—		—
Exercised		—		—		—		—
Canceled		84,242	$	44.84		—		—

Outstanding at year-end		—		—		84,242	$	44.84

Options exercisable at year-end		—		—		68,120	$	44.75
Options available for grant		—		—		19,093		—

The Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations in accounting for these options. As the options were granted with exercise prices equal to the fair value at the date of grant, no compensation cost was recognized by the Company upon issuance of such options. The fair value of each option granted by the Company was estimated using the minimum value option pricing model.

Had the Company recorded compensation cost based on the fair value of options granted at the grant date, as prescribed by FASB Statement No. 123 “Accounting for Stock Based Compensation,” pro forma net loss for the year ended December 31, 2003 would have been as follows (in thousands). There would have been no proforma compensation cost for the years ended December 31, 2005 and 2004 as all options were cancelled and option holders were compensated for the cancellation.


	Year Ended
	December 31,
	2003

Net loss, as reported	$	(7,951	)
Pro forma compensation cost		51

Pro forma net loss	$	(8,002	)

Employment Agreements

Certain senior executive officers have employment agreements, which provide for annual bonuses if the Company achieves the performance goals established under its annual incentive plan for executives. If the Company exceeds the performance goals, certain senior executive officers are entitled to a percentage of the excess of the performance goal. In addition, certain members of management have long term incentive bonus contracts to provide a future bonus if the Company meets certain bonus objectives. The Company accrues for these long term incentives over the period the bonus is earned.

Prior to 2005, the Company had a bonus plan for U.S. based employees which provided that 50% of the bonus earned by any Vice President or Director shall be deferred and shall vest in three equal annual installments. As of 2005, the Company terminated the deferred bonus plan. However, all amounts deferred prior to 2005 will still vest under the provisions of the bonus plan. As of December 31, 2005 and 2004, $637,000 and $450,000 of bonuses were deferred, respectively. The Company recognizes compensation expense as the vesting requirements are met.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Bonus Payments

During the year ended December 31, 2004, the Company expensed $20,282,000 in compensation expenses for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,922,000 of special bonus payments paid directly by the former shareholder.

During the year ended December 31, 2003, in order to compensate option holders for any diminished value of the outstanding options, the Board of Directors authorized $10,391,000 in compensatory payments to current option holders. Additionally, the Company authorized a special bonus of $2,715,000 (excluding employer taxes) to certain members of management and non-employee directors for contributions in completing the Recapitalization of CDRJ. These payments were recorded as compensation expense as a component of selling, general and administrative expenses within the consolidated statements of operations.


(17)	Manufacturing Agreement

The Company and a third-party contractor (the “Contractor”) entered into a manufacturing agreement, dated as of June 10, 1999, (the “Manufacturing Agreement”) pursuant to which the Contractor manufactured all of the Company’s requirements for certain cosmetic and skin care products for a term of five years. The Manufacturing Agreement expired on July 1, 2004. Substantially all of the Company’s product requirements are now manufactured by Jafra Mexico. Notwithstanding the foregoing, on July 2, 2004, JCI and Contractor entered into a new manufacturing agreement pursuant to which the Contractor manufactures only a limited number cosmetic and skin care products for JCI.


(18)	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 places foreign currency option contracts based on its forecasted U.S. dollar cash outflows from Jafra Mexico and does not hedge transactions that are not included in the forecast on the date the contract is initiated. As a matter of policy, the Company does not hold or issue forward contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features. Prior to entering into option contracts, the Company evaluates the counterparties’ credit ratings. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company does not currently anticipate non-performance by such counter-parties.

Under SFAS No. 133, the Company’s use of option contracts to hedge certain forecasted transactions may qualify for hedge accounting. Gains and losses from such derivatives can be deferred as a separate component of other comprehensive loss, and then will be recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such option contracts with the corresponding gains and losses generated by the underlying hedged transactions. Contracts that do not qualify for hedge accounting under SFAS No. 133 or contracts to which hedge accounting is not applied are remeasured based on fair value and the gains and losses are included as a component of net income

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(loss). The Company ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date, were recorded directly as a component of exchange loss (gain). As of December 31, 2005, the fair value of the option contracts was included in accrued liabilities in the accompanying consolidated balance sheets and in exchange loss on the accompanying consolidated statements of operations. No amounts at December 31, 2005 were included in other comprehensive loss as the Company did not apply hedge accounting to any outstanding options at December 31, 2005.

The Company designated certain of its contracts as cash flow hedges of forecasted U.S. dollar-denominated inventory purchases, forecasted U.S. dollar-denominated intercompany charges from JCI to Jafra Mexico, forecasted management fee charges from JCI to Jafra Mexico, and U.S. dollar-denominated interest payments. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative was deferred as a component of other comprehensive loss. Such amounts were reclassified from other comprehensive loss into net (loss) income when the underlying hedged exposure was recognized in income.

During the years ended December 31, 2005 and 2004, the Company recognized losses of approximately $5,035,000 and $1,545,000 (including the reclassification of other comprehensive income), respectively, as a component of exchange loss (gain) on the accompanying consolidated statements of operations. During the year ended December 31, 2003, the Company recognized gains of approximately $789,000 on option contracts (including the reclassification of other comprehensive income) as a component of exchange loss in the accompanying consolidated statements of operations.

At December 31, 2003, the Company had $278,000 of gains on option contracts deferred as a component of other comprehensive income. During the year ended December 31, 2004, the Company deferred as a component of other comprehensive loss $353,000 of losses on option contracts qualifying for hedge accounting under SFAS No. 133. During the year ended December 31, 2004, approximately $7,000 of losses were reclassified from other comprehensive loss to exchange loss and approximately $3,000 of losses were reclassified as cost of sales upon the recognition of the underlying hedged exposure.

At December 31, 2004, the Company had $65,000 of losses on option contracts deferred as a component of other comprehensive income. During the year ended December 31, 2005, the Company deferred as a component of other comprehensive loss $60,000 of losses on option contracts qualifying for hedge accounting under SFAS No. 133. During the year ended December 31, 2005, approximately $128,000 of losses were reclassified from other comprehensive loss to exchange loss and approximately $3,000 of gains were reclassified as cost of sales upon recognition of the underlying hedged exposure. At December 31, 2005, the Company did not have any gains or losses deferred as a component of other comprehensive income.

The fair value of the option contacts at December 31, 2005 represented an unrealized loss of $2,944,000 in which the Company did not apply hedge accounting and as such are recorded directly as a component of net income.

The fair value of the option contacts at December 31, 2004 represented an unrealized loss of $1,433,000, consisting of $65,000 of unrealized losses recorded as a component of other comprehensive loss for qualifying hedges and $1,368,000 of unrealized losses for contracts where hedge accounting was not applied and as such are recorded directly as a component of net income.

During the year ended December 31, 2005 and 2004 the ineffectiveness generated by the Company’s forward contracts and option contracts designated as hedges was insignificant and no amounts were reclassified into earnings.

The outstanding option contracts had notional values denominated in Mexican pesos of 828,000,000 and 545,000,000 in put and call positions at December 31, 2005 and 2004, respectively. The option contracts outstanding at December 31, 2005 mature at various dates through June 30, 2007 and the option contracts outstanding at December 31, 2004 mature at various dates through March 31, 2006. Notional amounts do not

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

quantify market or credit exposure or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts.

The following tables provide information about the details of the Company’s option contracts as of December 31, 2005 and 2004 (in thousands, except for average strike price):


	Coverage in				Fair Value in
Foreign Currency	Mexican Pesos		Average Strike 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	)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Coverage in				Fair Value in
Foreign Currency	Mexican Pesos		Average Strike Price		U.S. Dollars(1)			Maturity Date

At December 31, 2004:
Purchased puts (Company may sell peso/buy USD)
Mexican peso		107,000		12.62-12.76	$	298		Jan.-Mar. 2005
Mexican peso		179,000		12.50-12.94		443		Apr.-June 2005
Mexican peso		81,000		12.68-13.07		87		July-Sept. 2005
Mexican peso		108,000		13.21-13.32		163		Oct.-Dec. 2005
Mexican peso		70,000		12.99-13.19		23		Jan.-Mar. 2006

		545,000			$	1,014

Written calls (Counterparty may buy peso/sell USD)
Mexican peso		107,000		11.44-11.56	$	(29	)	Jan.-Mar. 2005
Mexican peso		179,000		11.34-11.73		(131	)	Apr.-June 2005
Mexican peso		81,000		11.48-11.84		136		July-Sept. 2005
Mexican peso		108,000		11.97-12.06		210		Oct.-Dec. 2005
Mexican peso		70,000		11.77-11.95		233		Jan.-Mar. 2006

		545,000			$	419


(1)		The fair value as quoted by the financial institutions of the option contracts presented above, unrealized losses of $2,944,000 at December 31, 2005 and of $1,433,000 at December 31, 2004, represents the carrying value and was recorded in accrued liabilities at December 31, 2005 and December 31, 2004 in the consolidated balance sheets.


(19)	Discontinued Operations and Ceased Operations

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 sold distribution rights in Brazil and Argentina to third-party distributors who will purchase products directly from the Company’s Mexico or United States subsidiaries. Because the Company has established distribution agreements in Brazil and Argentina, the Company has not classified these operations as discontinued. As a result, the Company reclassified $3,141,000 and $29,000 of accumulated translation adjustment losses from accumulated other comprehensive loss to other loss, during the year ended December 31, 2005 and 2004, respectively. Additionally, during the year ended December 31, 2004, the Company ceased direct selling operation in Thailand. As a result, during the year ended December 31, 2004, the Company reclassified $240,000 of accumulated translation adjustment losses from accumulated other comprehensive loss to other loss.

During the year ended December 31, 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. Final liquidation of the assets in Chile occurred during the year ended December 31, 2005 and final liquidation of the assets in Venezuela occurred during the year ended December 31, 2004. Final liquidation of Colombia and Peru is expected to be complete during 2006. As such, the results of the operations of these markets have been classified as discontinued operations in all periods disclosed on the statements of operations. The assets and liabilities from the discontinued operations have been segregated on the accompanying balance sheets.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net sales and loss on discontinued operations is as follows:


	Venezuela			Colombia			Chile			Peru			Total
	(In thousands)

For the year ended December 31, 2005
Net sales	$	—		$	—		$	—		$	—		$	—
(Loss) gain on discontinued operations, net of income tax expense		(3	)		34			(6	)		—			25
For the year ended December 31, 2004
Net sales	$	—		$	—		$	—		$	—		$	—
Loss on discontinued operations, net of income tax expense		(95	)		(66	)		(13	)		(38	)		(212	)
For the year ended December 31, 2003
Net sales	$	1,255		$	1,004		$	97		$	127		$	2,483
Loss on discontinued operations, net of income tax expense		(2,300	)		(2,623	)		(280	)		(164	)		(5,367	)

The loss on discontinued operations for the year ended December 31, 2003, included $144,000, $97,000, $12,000 and $35,000 of losses related to the write off of assets in Venezuela, Colombia, Chile and Peru, respectively.

During the year ended December 31, 2003 the Company reclassified $1,102,000, $1,431,000 and $4,000 of accumulated translation adjustment losses related to its operations in Venezuela, Colombia and Peru respectively and $79,000 of accumulated translation adjustment gains related to its operations in Chile from accumulated other comprehensive loss to loss on discontinued operations.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of assets and liabilities of the discontinued operations is as follows (in thousands):


	Colombia		Chile		Peru		Total

As of December 31, 2005
Assets:
Cash	$	—	$	—	$	7	$	7
Prepaid and other current assets		33		—		20		53

Total assets	$	33	$	—	$	27	$	60

Liabilities:
Accounts payable	$	—	$	—	$	7	$	7
Accrued liabilities		33		—		—		33

Total liabilities	$	33	$	—	$	7	$	40

As of December 31, 2004
Assets:
Cash	$	45	$	32	$	7	$	84
Receivables, net		28		—		—		28
Prepaid and other current assets		—		—		21		21

Total assets	$	73	$	32	$	28	$	133

Liabilities:
Accounts payable	$	12	$	—	$	7	$	19
Accrued liabilities		110		—		—		110

Total liabilities	$	122	$	—	$	7	$	129

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

Jafra Cosmetics International, Inc.

Westlake Village, CA

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Jafra Cosmetics International, Inc. and its subsidiaries at December 31, 2005, and the results of their operations and their cash flows for year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Los Angeles, California

March 24, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder

of Jafra Cosmetics International, Inc.

Westlake Village, California

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jafra Cosmetics International, Inc. and subsidiaries as of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S generally accepted accounting principles. Also, in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Los Angeles, California

March 4, 2005

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	December 31,
	2005			2004

ASSETS
Current assets:
Cash and cash equivalents	$	9,479		$	5,748
Receivables, less allowances for doubtful accounts of $631 in 2005 and $621 in 2004		3,852			4,775
Inventories, less allowances of $1,583 in 2005 and $1,381 in 2004		9,398			11,464
Receivables from affiliates		8,251			24,644
Prepaid and other current assets		2,344			2,934
Deferred income taxes		10,511			14,430

Total current assets		43,835			63,995
Property and equipment, net		17,118			24,988
Other assets:
Goodwill		36,957			36,280
Notes receivable from affiliates		13,338			20,082
Deferred financing fees, net		1,869			3,262
Employee supplemental savings plan and other assets		5,938			5,276

Total assets	$	119,055		$	153,883


LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	2,728		$	3,497
Accrued liabilities		22,124			20,389
Income taxes payable		2,472			2,463
Payables to affiliates		6,406			18,349
Due to Vorwerk		—			20,000

Total current liabilities		33,730			64,698
Long-term debt		52,000			91,800
Deferred income taxes		5,852			6,339
Employee supplemental savings plan and other long-term liabilities		5,917			5,131

Total liabilities		97,499			167,968

Commitments and contingencies (Note 15)		—			—
Stockholder’s deficit:
Common stock, par value $.01; authorized, issued and outstanding, 1,000 shares in 2005 and 2004		—			—
Additional paid-in capital		35,958			4,296
Retained deficit		(12,173	)		(16,275	)
Accumulated other comprehensive loss		(2,229	)		(2,106	)

Total stockholder’s equity (deficit)		21,556			(14,085	)

Total liabilities and stockholder’s equity (deficit)	$	119,055		$	153,883

See accompanying notes to consolidated financial statements.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Net sales to third parties	$	123,178		$	132,962		$	135,356
Sales to affiliates		986			7,811			14,682

Net sales		124,164			140,773			150,038
Cost of sales		29,257			36,961			44,937

Gross profit		94,907			103,812			105,101
Selling, general and administrative expenses		102,490			104,806			107,677
Transaction related expenses		—			27,097			14,599
Restructuring and impairment charges		—			4,790			—
Management fee income from affiliates		(6,482	)		(10,420	)		(9,743	)
Royalty income from affiliates, net		(23,666	)		(21,154	)		(18,060	)
Market subsidy expense to affiliates		—			—			4,600

Income (loss) from operations		22,565			(1,307	)		6,028
Other income (expense):
Exchange (loss) gain, net		(455	)		24			(393	)
Interest expense		(7,571	)		(10,893	)		(8,986	)
Interest income		452			446			504
Loss on extinguishment of debt		(3,963	)		(1,905	)		(4,778	)
Other expense		(26	)		(465	)		(370	)
Other income		294			176			132

Income (loss) before income taxes		11,296			(13,924	)		(7,863	)
Income tax expense (benefit)		7,194			(6,140	)		(785	)

Net income (loss)	$	4,102		$	(7,784	)	$	(7,078	)

See accompanying notes to consolidated financial statements.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)


	Years Ended December 31,
	2005					2004					2003
	Shares		Amount			Shares		Amount			Shares		Amount
	(In thousands, except for shares)

Common Stock:
Balance, beginning of year		1,000	$	—			1,000	$	—			1,000	$	—

Balance, end of year		1,000		—			1,000		—			1,000		—
Additional Paid-in Capital:
Balance, beginning of year				4,296					—					39,649
Distribution to stockholder				—					—					(39,649	)
Deemed contribution of capital				—					4,922					—
Equity contribution from Parent				31,662					—					—
Distribution to Parent				—					(626	)				—

Balance, end of year				35,958					4,296					—
Retained (Deficit) Earnings:
Balance, beginning of year				(16,275	)				(8,491	)				3,249
Distribution to stockholder				—					—					(4,662	)
Net income (loss)				4,102					(7,784	)				(7,078	)

Balance, end of year				(12,173	)				(16,275	)				(8,491	)
Accumulated Other Comprehensive Loss:
Balance, beginning of year				(2,106	)				(2,625	)				(2,742	)
Currency translation adjustments				(123	)				519					117

Balance, end of year				(2,229	)				(2,106	)				(2,625	)

Total Stockholder’s Equity (Deficit)		1,000	$	21,556			1,000	$	(14,085	)		1,000	$	(11,116	)

Comprehensive Income (Loss):
Net income (loss)			$	4,102				$	(7,784	)			$	(7,078	)
Currency translation adjustments				(123	)				519					117

Total Comprehensive Income (Loss)			$	3,979				$	(7,265	)			$	(6,961	)

See accompanying notes to consolidated financial statements.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Cash flows from operating activities:
Net income (loss)	$	4,102		$	(7,784	)	$	(7,078	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		8,771			3,907			3,295
Provision for uncollectible accounts receivable		505			794			670
Non-cash compensation expense		—			4,922			—
Write off and amortization of deferred financing fees		1,397			2,659			2,898
Asset impairment charge/loss on disposal of fixed assets		139			423			251
Unrealized foreign exchange loss (gain)		248			(7	)		787
Deferred income taxes		3,432			(6,222	)		(4,835	)
Changes in operating assets and liabilities:
Receivables		77			(1,060	)		534
Inventories		1,549			1,418			(908	)
Prepaid expenses and other current assets		220			(307	)		(73	)
Affiliate receivables and payables		14,607			(7,726	)		6,757
Other assets		(215	)		(29	)		(248	)
Accounts payable and accrued liabilities		1,509			(3,666	)		7,030
Income taxes payable		233			2,076			(428	)
Other long-term liabilities		1,001			330			1,014

Net cash provided by (used in) operating activities		37,575			(10,272	)		9,666

Cash flows from investing activities:
Purchases of property and equipment		(1,356	)		(2,231	)		(4,729	)
Other		(741	)		(281	)		(780	)

Net cash used in investing activities		(2,097	)		(2,512	)		(5,509	)

Cash flows from financing activities:
Proceeds from issuance of subordinated debt due 2011		—			—			80,000
Proceeds from issuance of term loan		—			—			20,000
Repurchase of subordinated debt due 2008		—			—			(45,108	)
Repurchase of subordinated debt due 2011		(27,800	)		(200	)		—
(Repayment of) Proceeds from issuance of Vorwerk note		(20,000	)		20,000			—
Repayments under term loan facility		—			(19,000	)		(7,000	)
Repayments under revolving credit facility		(55,000	)		(42,000	)		(17,700	)
Borrowings under revolving credit facility		43,000			54,000			17,700
Net transactions with affiliates		(3,200	)		(3,060	)		(6,328	)
Distribution of additional paid-in capital to stockholder		—			—			(39,649	)
Equity contribution from Parent		31,662			—			—
Distribution to stockholder from retained earnings		—			—			(4,662	)
Distribution to Parent		—			(626	)		—
Deferred financing fees		—			(396	)		(6,048	)

Net cash (used in) provided by financing activities		(31,338	)		8,718			(8,795	)

Effect of exchange rate changes on cash		(409	)		935			429

Net increase (decrease) in cash and cash equivalents		3,731			(3,131	)		(4,209	)
Cash and cash equivalents at beginning of year		5,748			8,879			13,088

Cash and cash equivalents at end of year	$	9,479		$	5,748		$	8,879

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	7,148		$	10,188		$	8,058
Income taxes	$	840		$	271		$	723

See accompanying notes to consolidated financial statements.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	Basis of Presentation and Description of Business

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 subsidiary of Jafra S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.), a Luxembourgsociété anonyme,(“Jafra S.A.”). Jafra S.A. was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourgsociété anonyme (“CDRJ”).

The accompanying consolidated financial statements reflect the operations of JCI and its subsidiaries (collectively, “JCI”). JCI is an operating subsidiary in the United States, and currently has operating subsidiaries in Austria, Germany, Italy, the Netherlands, Switzerland and the Dominican Republic. All significant intercompany accounts and transactions have been eliminated in consolidation.

On May 20, 2003, the Parent, JCI and Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution”, and together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into new senior credit facilities (the “Senior Credit Agreement”) and issuing $200 million of 103/4% Senior Subordinated Notes due 2011 (the “103/4% Notes” and such transactions, collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 113/4% Senior Subordinated Notes due 2008 (the “113/4% Notes”) of JCI and Jafra Cosmetics International, S.A. de C.V. (“Jafra Cosmetics S.A.”), to repay all amounts outstanding under the then existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made liquidating distributions of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution, to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

The 103/4% Notes represent several obligations of JCI and Jafra Distribution. JCI and Jafra Distribution have fully and unconditionally guaranteed the obligations of the other under the 103/4% Notes on a senior subordinated basis, subject to a30-day standstill period prior to enforcement of such guarantees. As the cross-guarantee of Jafra Distribution and JCI is subject to a30-day standstill period, the Parent is filing these separate financial statements of JCI on its Report onForm 10-K.

Description of Business

JCI is a direct seller of skin and body care products, color cosmetics, fragrances, and other personal care products, primarily in the United States, but also through subsidiaries in Austria, Germany, Italy, the Netherlands, Switzerland, the Dominican Republic and in a number of additional countries through distributors. JCI sells its Jafra brand products through a direct selling network of independent consultants, who market and sell JCI’s products to their customers.


(2)	Summary of Significant Accounting Policies

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents. Cash and cash equivalents include cash, time deposits and all highly liquid debt instruments with a maturity of three months or less when purchased.

Inventories. Inventories, which consist substantially of finished goods, are stated at the lower of cost, as determined by thefirst-in, first-out basis, or market. JCI provides a reserve for estimated obsolete and unsaleable inventory based on assumptions as to future demand of product.

Property and Equipment. Property and equipment are stated at cost. Depreciation of property and equipment is provided for over the estimated useful lives of the respective assets using the straight-line method. Estimated useful lives are 20 to 40 years for buildings, the lesser of the useful life or the term of the lease for improvements, 5 to 15 years for machinery and equipment and 3 to 8 years for hardware and software. Maintenance and repairs, including cost of minor replacements, are charged to operations as incurred. Costs of additions and betterments are added to property and equipment accounts provided that such expenditures increase the useful life or the value of the asset. During 2005, JCI recorded additional depreciation expense of $5,289,000 related to the accelerated depreciation of its JD Edwards Commercial software due to a change in estimated useful life.

Rent and leasing, JCI records rental expense associated with operating leases using a straight line method over the term of the lease.

Intangible Assets. Intangible assets principally consist of goodwill and trademarks. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and other Intangible Assets” JCI does not amortize goodwill and certain other intangible assets, but tests those intangible assets for impairment at least annually. Goodwill and trademarks resulted from the acquisition from Gillette.

Deferred Financing Costs. In connection with the Recapitalization, JCI incurred approximately $6,007,000 of costs related to the issuance of the 103/4% Notes and the establishment of the Senior Credit Agreement. On August 16, 2004, the Parent and the issuers entered into a Restated Senior Credit Agreement (the “Restated Credit Agreement”). With the borrowings from the Restated Credit Agreement and other borrowings, JCI paid in full all existing amounts under the Senior Credit Agreement. In connection with the Acquisition, holders of $200,000 principal amount of the 103/4% Notes redeemed such notes. In 2004, in connection with the full repayment of the Senior Credit Agreement and the purchase of $200,000 of the outstanding 103/4% Notes, JCI wrote off approximately $1,905,000 of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying consolidated statements of operations. During 2004, JCI capitalized approximately $438,000 of costs related to the Restated Credit Agreement. On February 17, 2005, JCI redeemed $27,800,000 of the 103/4% Notes. In connection with the February 17, 2005 redemption of the 103/4% Notes, JCI wrote off approximately $974,000 of previously capitalized deferred financing fees. All capitalized costs are being amortized on a basis that approximates the interest method over the expected term of the related debt. Accumulated amortization at December 31, 2005 and 2004 was $914,000 and $765,000, respectively.

Impairment of Long-Lived Assets and Intangibles. Long-lived assets are reviewed for impairment, based on undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, JCI will recognize an impairment loss, measured by the future discounted cash flow method. Indefinite lived intangibles are tested for impairment annually, as of December 31, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Based on the provisions of SFAS No. 142, JCI first determines if the fair value is less than the carrying value of the intangible. If the fair value is less than the carrying value, JCI would then allocate the fair value to all the assets and liabilities to determine the amount of impairment. (See Note 5).

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value because of the short-term maturities of these instruments. The fair value of the 103/4% Notes at December 31, 2005 and 2004 was $56,888,000 and $90,972,000, respectively. As JCI’s revolving credit facility and due to Vorwerk and in 2004 are variable rate debt, and the interest rate spread paid by JCI is adjusted for changes in certain financial ratios of the Parent, the fair value of the revolving credit facility and due to Vorwerk approximated their carrying amounts at December 31, 2005 and 2004.

Revenue Recognition. During 2005, JCI corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements”, net sales, cost of sales and related direct and incremental selling expenses are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. JCI currently insures shipments and assists consultants by replacing lost or damaged shipments impacting the risk of loss. Prior to 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by JCI at the point of shipment. As a result, commencing with the second quarter of 2005, JCI’s results have been reported based upon recognizing sales at the point of delivery. JCI has determined that this correction did not have a material impact on the prior period financial statements which have therefore not been restated. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, JCI’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $1,119,000, cost of sales of $233,000, gross profit of $886,000, selling, general and administrative expenses of $355,000, income (loss) from operations of $531,000 and net income of $325,000. JCI has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.

Shipping and Handling Costs. Shipping and handling costs of $11,506,000, $13,503,000 and $13,772,000 for the years ended December 31, 2005, 2004 and 2003, respectively, are included in selling, general and administrative expenses.

Cost of Sales. JCI’s cost of sales primarily represents the cost to JCI of the products it sells to its consultants and affiliates and costs associated with free product on certain promotional arrangements. Cost of sales includes manufacturing and other production-related expenses, freight in, purchasing, warehousing, inventory transfer costs and charges related to obsolete and slow-moving inventory.

Selling, General and Administrative Expense. Selling, general and administrative expenses (“SG&A”) include sales promotional expenses, including various sales incentives, distribution expenses, and shipping and handling costs, as well as selling, marketing and administrative expenses, including general management, finance, human resources, information technology and bad debt expense related to uncollectible accounts receivable. SG&A expenses also include override payments to managers, who earn a percentage of the sales generated by consultants recruited directly or indirectly by them. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Overrides and incentives are accrued when earned.

Advertising Costs. JCI expenses advertising costs as incurred. Total advertising costs aggregated $1,139,000, $482,000 and $349,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Research and Development. Research and development costs are expensed as incurred. Total research and development expense included in selling, general and administrative expenses aggregated $1,562,000, $1,377,000 and $1,271,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The portion of the above-identified research and development expenses incurred by JCI and charged to Jafra Mexico as part of JCI’s

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

management fee income (see Note 11) aggregated $1,540,000, $879,000 and $1,012,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Income Taxes. JCI accounts for income taxes under the balance sheet approach that requires the recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in JCI’s financial statements or income tax returns. Management provides a valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized. Income tax expense of JCI is computed on a separate-company basis.

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 is effective for JCI beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to impact JCI 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”) IssueNo. 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 IssueNo. 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 inEITF 04-10 should be applied for fiscal years ending after September 15, 2005. The adoption of EITF IssueNo. 04-10 did not have a material impact on the disclosure of JCI’s segments.

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. JCI has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

In March 2005, the FASB issued Interpretation (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and was effective for JCI’s fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on JCI’s consolidated financial statements.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. JCI does not expect the adoption of SFAS No. 154 to have a material effect on the consolidated financial statements.


(3)	Inventories

Inventories consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Raw materials and supplies	$	55	$	62
Finished goods		9,343		11,402

Total inventories	$	9,398	$	11,464


(4)	Property and Equipment

Property and equipment consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Land	$	6,188	$	6,188
Buildings and improvements		7,200		7,212
Machinery, equipment and other		25,174		25,131

		38,562		38,531
Less accumulated depreciation		21,444		13,543

Property and equipment, net	$	17,118	$	24,988


(5)	Goodwill and Trademarks

JCI’s intangible assets consist of trademarks and goodwill. Trademarks, principally the Jafra name, resulted from the acquisition of the Jafra business from Gillette. JCI has determined trademarks to have an indefinite life. The carrying value of trademarks was $284,000 as of December 31, 2005 and was included in other assets on the

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accompanying consolidated balance sheets. The changes in the carrying amount of goodwill for the years ended December 31, 2003, 2004 and 2005 are as follows (in thousands):


	United					Consolidated
Goodwill	States		Europe			Total

Balance as of December 31, 2003	$	32,188	$	4,480		$	36,668
Translation effect		—		(388	)		(388	)

Balance as of December 31, 2004		32,188		4,092			36,280
Translation effect		—		677			677

Balance as of December 31, 2005	$	32,188	$	4,769		$	36,957


(6)	Accrued Liabilities

Accrued liabilities consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Sales promotions, commissions and overrides	$	3,032	$	3,389
Accrued interest		668		1,049
Compensation and other benefit accruals		12,788		10,900
State and local sales taxes and other taxes		1,195		1,233
Other		4,441		3,818

Total accrued liabilities	$	22,124	$	20,389


(7)	Debt

Debt consists of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Subordinated Notes, unsecured, interest payable semi-annually at 103/4% at December 31, 2005 and 2004, respectively	$	52,000	$	79,800
Revolving loan, secured, interest due in quarterly installments, interest rate at 4.5% at December 31, 2004		—		12,000
Payable to Vorwerk, principal and interest due in January 2005, interest rate of 4.8% at December 31, 2004		—		20,000

Total debt		52,000		111,800
Less current maturities		—		20,000

Long-term debt	$	52,000	$	91,800

JCI’s long-term debt matures in 2011

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

guaranteed the obligations of the other under the 103/4% Notes on a senior subordinated basis, subject to a30-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 $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. In 2004, in connection with the Acquisition, holders of $200,000 principal amount of the 103/4% Notes redeemed such notes. As a result of this and the February 2005 redemption, $52.0 million principal amount of the 103/4% Notes was outstanding at December 31, 2005.

On August 16, 2004, the Issuers entered into the Restated Credit Agreement which provides for a revolving credit facility of up to an aggregate of $60 million, which can be increased by the 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. On August 16, 2004, JCI borrowed $16,750,000 of the loans. Borrowings under the Restated Credit Agreement bear interest at an annual rate of Libor plus 2.50%. As of December 31, 2005, there were no borrowings under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

JCI also entered into a Loan Contract (the “Loan Contract”) in August 2004 to borrow up to $20,000,000 from Vorwerk at an annual interest rate of Libor plus 2.625%. The Loan Contract was repaid in full on January 6, 2005.

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

Both the Indenture and the Restated Credit Agreement contain certain covenants that limit the 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 December 31, 2005, the Parent and its subsidiaries were in compliance with all covenants.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the failure by JCI, Jafra Distribution or any of their significant subsidiaries (as defined in the Indenture), to pay any indebtedness for borrowed money when due, or on the acceleration of any other debt obligations exceeding $10.0 million. The Indenture also contains provisions that, under certain circumstances, permit the holders of certain senior indebtedness (including the loans made under the Restated Credit Agreement) to block payments on the 103/4% Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

The terms of the Indenture significantly restrict the 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.

On May 23, 2003, with proceeds from the issuance of the 103/4% Notes and borrowings under the Senior Credit Agreement, JCI redeemed the 113/4% Notes in the aggregate outstanding principal amount of $45,108,000 at a premium of approximately $2,650,000. Additionally, JCI repaid $5,000,000 under its existing credit agreement and terminated the agreement. In connection with the redemption of the 113/4% Notes and the termination of the agreement, JCI wrote off approximately $2,128,000 of capitalized deferred financing fees. Total costs related to the redemption of the 113/4% Notes and the repayment of amounts outstanding under the agreement were $4,778,000 and were recorded as a component loss on extinguishment of debt on the accompanying consolidated statements of operations.

JCI capitalized approximately $6,006,000 of costs related to the issuance of the 103/4% Notes and the Senior Credit Agreement as deferred financing fees (net of a credit of approximately $42,000 in the year ended December 31, 2004). In connection with the full repayment of the Senior Credit Agreement and the purchase of $200,000 of the outstanding 103/4% Notes, JCI wrote off approximately $1,905,000 of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying consolidated statements of operations during year ended December 31, 2004. In connection with the February 17, 2005 redemption of the 103/4% Notes, JCI wrote off approximately $974,000 of previously capitalized deferred financing fees. As a result, JCI recorded a $3,963,000 loss on extinguishment of debt during the year ended December 31, 2005.

As of December 31, 2005 and 2004, approximately $1,869,000 and $3,262,000 of unamortized deferred financing fees were included 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.


(8)	Equity

During the year ended December 31, 2005, the Parent contributed $31,662,000 to JCI in order for JCI to redeem a portion of the 103/4% Notes (See Note 7).

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2004, the former primary shareholder of Jafra S.A. paid certain members of management and non-employee board of director members a special bonus of $4,922,000. As this amount was paid directly to the recipients from the former primary shareholder, Jafra S.A. recorded $4,922,000 as deemed contributed capital and as a non-cash transaction expense representing compensation. Jafra S.A. then contributed $4,922,000 to the Parent who then contributed the amount to JCI. This contribution was partially offset by a cash distribution of $626,000 to the Parent.


(9)	Income Taxes

JCI’s income before income taxes consists of the following (amounts in thousands):


	Years Ended December 31,
	2005		2004			2003

Income (loss) before income taxes:
United States	$	10,528	$	(13,430	)	$	(6,039	)
Foreign		768		(494	)		(1,824	)

	$	11,296	$	(13,924	)	$	(7,863	)

Actual income tax expense differs from the “expected” tax expense (computed by applying the U.S. Federal corporate rate of 35% to income before income taxes) as a result of the following:


	Years Ended December 31,
	2005			2004			2003

Provision (benefit) for income taxes at federal statutory rate	$	3,954		$	(4,873	)	$	(2,752	)
Foreign income subject to tax other than at federal statutory rate		2,846			2,470			2,139
Permanent difference — non-deductible expense		37			1,597			—
Foreign tax and other credits		(2,443	)		(2,436	)		(2,214	)
State income taxes		856			(661	)		(220	)
Valuation allowance — domestic		—			95			(35	)
Valuation allowance — foreign		(219	)		183			666
Losses without tax benefit		—			—			1,641
Tax examination settlement, reserves and other		2,163			(2,515	)		(10	)

Income tax expense (benefit)	$	7,194		$	(6,140	)	$	(785	)

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of income tax (benefit) expense are as follows (in thousands):


	Years Ended December 31,
	2005		2004			2003

Current:
Federal	$	10	$	—		$	—

Foreign:
Foreign withholding taxes		2,846		2,470			2,139
Europe		50		10			28
Other		—		(1,737	)		2,103

		2,906		743			4,270
State		856		(661	)		(220	)

Total current		3,762		82			4,050
Deferred — domestic		3,432		(6,222	)		(4,835	)

Total deferred		3,432		(6,222	)		(4,835	)

Total income tax expense (benefit)	$	7,194	$	(6,140	)	$	(785	)

The components of deferred income tax assets and deferred income tax liabilities at December 31, 2005 and 2004 are as follows (in thousands):


	2005			2004

Deferred income tax assets:
Net operating loss carryforward	$	7,437		$	12,265
Foreign tax and other credit carryforwards		4,221			5,584
Accrued liabilities		5,976			3,131
Other		3,293			2,591

Total deferred income tax assets		20,927			23,571
Less valuation allowance		(7,814	)		(8,033	)

Net deferred income tax assets		13,113			15,538
Deferred income tax liabilities:
Property and equipment		(1,544	)		(1,385	)
Trademark and goodwill		(5,910	)		(5,114	)
Other		(1,000	)		(948	)

Total deferred income tax liabilities		(8,454	)		(7,447	)

Net deferred income tax assets	$	4,659		$	8,091

JCI records a valuation allowance on deferred income tax assets to reduce the total to an amount that management believes is more likely than not to be realized. The valuation allowances at December 31, 2005 and 2004 were based upon JCI’s estimates of the future realization of deferred income tax assets. Valuation allowances at December 31, 2005 were provided to primarily offset foreign operating loss carryforwards of $7,437,000. Valuation allowance at December 31, 2004 were provided to primarily offset foreign operating loss carryforwards of $12,265,000. The tax loss carryforwards expire in varying amounts between 2006 and 2021. Realization of the income tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the carryforwards.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2003, JCI recorded a reserve of $1,641,000 against certain income tax benefits and recorded the reserve as an accrued liability. During the year ended December 31, 2004, JCI released an accrued liability of $2,348,000 which was originally recorded during 2002 against certain income tax benefits.


(10)	Benefit Plans

Certain former employees of JCI’s German subsidiary participate in a defined benefit pension plan covering key employees (the “Germany Plan”). Benefits are based on age, years of service and the level of compensation during the final years of employment. JCI’s funding policy is to contribute annually to the Germany Plan the amount necessary to meet the minimum funding standards. JCI recognized pension expense of $11,000, $25,000 and $22,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The assets and liabilities related to the Germany plan are not material to the consolidated financial statements.

JCI’s U.S. subsidiary has an employee savings plan which permits participants to make voluntary contributions by salary deferrals pursuant to section 401(k) of the Internal Revenue Code, which allows employees to defer up to 20% of their total compensation, subject to statutory limitations. Employee contributions of up to 10% of compensation are matched by JCI at the rate of 50 cents per dollar. Employees do not vest in JCI contribution until they have reached two years of service, at which time they become fully vested. JCI’s expense under this program was $500,000, $571,000 and $553,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

JCI also has a non-qualified supplemental excess benefit savings plan, which permits participants to make unlimited voluntary contributions. Employee contributions are matched on the same basis as under the employee savings plan, and the vesting provisions are the same. JCI’s net expense under this program was $178,000, $161,000 and $185,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Employee and employer contributions under such plan are placed into a “rabbi” trust exclusively for the uses and purposes of plan participants and general creditors of JCI. JCI has recorded an other asset and the related other long-term liability in the accompanying consolidated balance sheets of $4,229,000 and $3,419,000 at December 31, 2005 and 2004, respectively.

See Note 16 for management incentive arrangements.


(11)	Related Party Transactions

JCI distributes skin and body products to other subsidiaries of the Parent (“affiliates”). Sales to affiliates, primarily in Mexico and South America, were $986,000, $7,811,000 and $14,682,000 for the years ended December 31, 2005, 2004 and 2003, respectively. These sales were made at cost plus a markup ranging from 0 to 11%. During the year ended December 31, 2004, the Parent transferred substantially all of its skin and body care manufacturing operations to it’s facilities in Mexico from the United States. JCI also purchases color and fragrance products from Jafra Mexico totaling $16,311,000, $14,308,000 and $10,797,000 for the years ended December 31, 2005, 2004 and 2003, 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.

During the year ended December 31, 2005, JCI sold product formulas to Jafra Distribution for $1,311,000. JCI recorded this sale in management fee income on the accompanying consolidated statements of operations.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Jafra Mexico charges JCI a royalty fee for the right to use the Jafra trademark in the United States and Europe. The total royalty expense charged by Jafra Mexico to JCI was $2,975,000, $3,214,000 and $3,179,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and is offset against royalty income from affiliates in the accompanying consolidated statements of operations.

JCI owns the worldwide rights to its multi level sales know-how (referred to as the “Jafra Way”). The Jafra Way was initially developed in the United States for lineage, training, and compensation of consultants. JCI charges Jafra Mexico a royalty fee for the use of the Jafra Way. The royalty fees charged by JCI were $26,641,000, $24,368,000 and $21,239,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and were based upon a percentage of Jafra Mexico’s third party sales.

JCI has granted loans to certain affiliates at annual interest rates ranging from 6% to 9%. Such loans are due to be repaid five years from the date of grant, with no prepayment penalty. Notes receivable from affiliates at December 31, 2005 and 2004 consists primarily of loans JCI has made to subsidiaries of the Parent to fund certain of their operations in South America. Net interest income from affiliates was $399,000, $446,000 and $490,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

In 2003 JCI reimbursed certain foreign affiliates for $4,600,000 for the expenses that they incurred in establishing a direct selling distribution system and customer base in new markets.

Pursuant to a consulting agreement entered into in 1998 and subsequent amendments, Clayton, Dubilier &Rice, an affiliate of Jafra S.A.’s primary shareholder, received an annual fee (and reimbursement ofout-of-pocket expenses) for providing advisory, management consulting and monitoring services to the Parent. The annual fee was $1,000,000. JCI incurred $417,000 during the year ended December 31, 2004 through termination of this agreement and $1,000,000 in the years ended December 31, 2003. The consulting agreement terminated upon the consummation of the Acquisition in May 2004.


(12)	Restructuring and Impairment Charges and Related Accruals

Restructuring and Impairment 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 of substantially all of its skin and body care manufacturing operations to the Parent’s facilities in Mexico from the United States. The transfer of these operations was substantially complete during the second quarter of 2004. Of these charges, $423,000 was for the impairment of assets not transferred and the remaining amount was primarily termination benefits. Additionally, during the year ended December 31, 2004, JCI recorded $2,179,000 of severance related charges related to the resignation of four member of management subsequent to the Acquisition. In total, the restructuring charge includes termination benefits for thirteen people.

The additions that the aforementioned accruals include severance and fixed asset disposals, and are summarized as follows (in thousands):


	Year Ended
	December 31,
	2004

Additions — charges to income:
Severance	$	4,367
Asset impairment		423

Total additions	$	4,790

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A rollforward of the activity of the restructuring accruals is summarized as follows (in thousands):


	Year Ended			Year Ended
	December 31,			December 31,
	2005			2004

Opening balance	$	2,391		$	—
Additions		—			4,790
Charges against reserves		(1,932	)		(2,399	)

Ending balance	$	459		$	2,391

The remaining accrual at each year-end represents termination benefits to be paid during 2006.


(13)	Transaction Related Expenses

During the year ended December 31, 2004, JCI incurred $27,097,000 of transaction fees related to the Acquisition and to certain other transactions contemplated but subsequently terminated. Included in these amounts was $18,337,000 of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,125,000 of special bonus payments paid directly by the former shareholder. During the year ended December 31, 2003, JCI recorded $14,599,000 of transaction expenses related to the Recapitalization and to other transactions contemplated but subsequently terminated. In connection with the Recapitalization, the Board of Directors authorized CDRJ to reprice all existing outstanding stock options. In order to compensate option holders for any diminished value of the outstanding options, the Board of Directors further authorized $9,445,000 in bonus payments to current option holders. Additionally, during the year ended December 31, 2003, JCI authorized a special bonus of $2,365,000 to certain members of management and to non-employee directors for contributions to completing the Recapitalization of CDRJ.


(14)	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. As of the beginning of 2004, JCI includes the results of the Dominican Republic with the results of the United States as JCI’s chief operating decision makers evaluate the results of the Dominican Republic with the results of the United States. All prior period results have been reclassified to be consistent with the 2004 presentation. Business results for the subsidiary in Thailand is included in the following table under the caption “All Others”.

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,

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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
	Dollars in thousands

As of and for the Year ended December 31, 2005
Net sales	$	91,604	$	31,574	$	—		$	986		$	124,164
Income (loss) from operations		10,166		2,951		—			9,448			22,565
Depreciation		8,411		360		—			—			8,771
Capital expenditures		965		391		—			—			1,356
Segment assets		82,448		15,009		9			21,589			119,055
Goodwill		32,188		4,769		—			—			36,957
As of and for the Year ended December 31, 2004
Net sales	$	98,006	$	34,956	$	—		$	7,811		$	140,773
Income (loss) from operations		16,701		2,859		—			(20,867	)		(1,307	)
Depreciation		3,449		458		—			—			3,907
Capital expenditures		2,005		226		—			—			2,231
Segment assets		91,861		17,233		63			44,726			153,883
Goodwill		32,188		4,092		—			—			36,280
As of and for the Year ended December 31, 2003
Net sales	$	102,141	$	32,874	$	341		$	14,682		$	150,038
Income (loss) from operations		16,368		1,927		(445	)		(11,822	)		6,028
Depreciation		2,853		442		—			—			3,295
Capital expenditures		4,396		333		—			—			4,729
Segment assets		91,138		18,003		1,345			35,768			146,254
Goodwill		32,188		4,480		—			—			36,668


(1)		excludes Poland, an indirect wholly-owned subsidiary of the Parent, an affiliate of JCI.

Corporate, unallocated and other includes (in thousands):


	Years Ended December 31,
	2005			2004			2003

Corporate expenses	$	(19,818	)	$	(18,833	)	$	(17,869	)
Transaction related charges		—			(27,097	)		(14,599	)
Restructuring and impairment charges		—			(4,790	)		—
Transaction with affiliates		30,148			31,574			23,203
Unusual charges(1)		(882	)		(1,721	)		(2,557	)

Total corporate, unallocated and other	$	9,448		$	(20,867	)	$	(11,822	)


(1)		Unusual charges include severance, loss or gain on sale of assets, holding company expenses and other charges (including certain severance charges) not related to the normal operations of the business.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additional business segment information regarding product lines is as follows:


	2005					2004					2003
	Sales by		Percentage			Sales by		Percentage			Sales by		Percentage
	Product		of Total			Product		of Total			Product		of Total
	Line		Sales			Line		Sales			Line		Sales
	(In millions)					(In millions)					(In millions)

Skin care	$	37.3		31.4	%	$	41.8		32.7	%	$	42.4		32.8	%
Body care and personal care		20.5		17.3			21.0		16.4			20.3		15.7
Color cosmetics		16.4		13.8			17.0		13.3			18.6		14.4
Fragrances		26.8		22.6			28.4		22.2			28.9		22.4
Other products(1)		17.7		14.9			19.7		15.4			19.0		14.7

Subtotal before shipping, other fees and sales to affiliates, less commissions		118.7		100.0	%		127.9		100.0	%		129.2		100.0	%

Shipping and other fees, less commissions		4.5					5.1					6.1
Sales to affiliates		1.0					7.8					14.7

Total	$	124.2				$	140.8				$	150.0


(1)		Includes sales aids (e.g.; party hostess gifts, demonstration products, etc.) and promotional materials purchased by consultants, which typically do not qualify for commissions or overrides.

As discussed in Note 2 to the consolidated financial statements, during the six months ended June 30, 2005 JCI corrected its revenue recognition policy to recognize net sales, cost of sales and related direct and incremental selling expenses at the point of delivery. Historically, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by JCI at the point of shipment. The following table provides the reduction caused by the correction in revenue recognition policy for the segments impacted for the six months ended June 30, 2005. Further, JCI has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.


	United States
For the Three and Six Months	and the Dominican		Consolidated
Ended September 30, 2005	Republic		Total

Net sales	$	1,119	$	1,119
Income (loss) from operations	$	531	$	531


(15)	Commitments and Contingencies

JCI leases office and warehouse facilities as well as manufacturing, transportation and data processing equipment under operating leases which expire at various dates through 2010. The leases contain certain renewal options and require payment of property taxes, utilities, common area maintenance and insurance and rent

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

escalation clauses based upon consumer price indices. Future minimum lease payments under noncancelable operating leases as of December 31, 2005 are as follows (in thousands):


2006	$	1,247
2007		986
2008		783
2009		750
2010		700

	$	4,466

Rental expense was $1,344,000, $1,450,000 and $1,147,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

JCI is involved from time to time in routine legal matters incidental to its business. JCI believes that the resolution of such matters will not have a material adverse effect on JCI’s business, financial condition or results of operations.


(16)	Management Incentive Arrangements

Company Plan

Effective 1998, CDRJ adopted a stock incentive plan (the “Stock Incentive Plan”), which provided for the sale to members of senior management of up to 52,141 shares of common stock of CDRJ and the issuance of options to purchase up to 104,282 additional shares of common stock. CDRJ reserved 156,423 shares for issuance under the Stock Incentive Plan. Upon the consummation of the Acquisition, all outstanding stock issued under the Stock Incentive Plan was sold to Vorwerk and all outstanding options were cancelled. The Stock Incentive Plan was subsequently effectively terminated. There were no shares issued or repurchased from December 31, 2001 until the Acquisition and termination of the Stock Incentive Plan. During the year ended December 31, 2004, all outstanding options were cancelled.

In connection with the Recapitalization, the Board of Directors approved an amendment to CDRJ’s stock incentive plan to reflect the equity instruments as rights to shares in Jafra S.A. rather than shares in CDRJ upon final liquidation of CDRJ. In addition, as of May 21, 2003, the Board approved a reduction in the exercise price of all existing options granted with an exercise price of $100, $150 and $210 to $39.91, $59.86 and $83.80, respectively, due to the Recapitalization. The repricing was based on an equity valuation performed by a third-party which indicated a fair value per share of $317 immediately prior to the Recapitalization. In order to affect this re-pricing, the exercise price per share of all existing options of CDRJ was reduced such that the awards aggregate intrinsic value immediately after the Recapitalization was not greater than the aggregate intrinsic value immediately before

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recapitalization and the ratio of the exercise price per option to the market value per share was not reduced. A summary of the status and activity of the options under the Stock Incentive Plan is as follows:


	2004				2003
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Shares		Price		Shares		Price

Outstanding at beginning of year		84,242	$	44.84		84,242	$	44.84
Granted		—		—		—		—
Exercised		—		—		—		—
Canceled		84,242	$	44.84		—		—

Outstanding at year-end		—		—		84,242	$	44.84

Options exercisable at year-end		—		—		68,120	$	44.75
Options available for grant		—		—		19,093		—

JCI applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for these options. As the options were granted with exercise prices equal to the fair value at the date of grant, no compensation cost was recognized by JCI upon issuance of such options. The fair value of each option granted by JCI was estimated using the minimum value option pricing model.

Had JCI recorded compensation cost based on the fair value of options granted at the grant date, as prescribed by FASB Statement No. 123, “Accounting for Stock Based Compensation,” pro forma net (loss) income for the years ended December 31, 2003 would have been as follows (in thousands). There would have been no proforma compensation cost for the year ended December 31, 2005 and 2004 as all options were cancelled and option holders were compensated for the cancellation.


	Year Ended
	December 31,
	2003

Net loss, as reported	$	(7,078	)
Pro forma compensation cost		47

Pro forma net loss	$	(7,125	)

Employment Agreements

Certain senior executive officers have employment agreements which provide for annual bonuses if the Parent achieves the performance goals established under its annual incentive plan for executives. If the Parent exceeds the performance goals, certain senior executive officers are entitled to a percentage of the excess of the performance goal. In addition, certain members of management have long term incentive bonus contracts to provide a future bonus if the Parent meets certain bonus objectives. JCI accrues for these long term incentives over the period the bonus is earned.

Prior to 2005, JCI had a bonus plan for U.S. based employees which provides that 50% of the bonus earned by any Vice President or Director shall be deferred and shall vest in three equal annual installments. As of 2005, JCI terminated the deferred bonus plan. However, all amounts deferred prior to 2005 will still vest under the provisions of the bonus plan. As of December 31, 2005 and 2004, $637,000 and $450,000 of bonuses were deferred, respectively. JCI recognizes compensation expense as the vesting requirements are met.

JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Bonus Payments

During the year ended December 31, 2004, JCI expensed $18,337,000 in compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and $4,125,000 of special bonus payments paid directly by the former shareholder.

During the year ended December 31, 2003, in order to compensate option holders for any diminished value of the outstanding options, the Board of Directors authorized $9,445,000 in compensatory payments to current option holders. Additionally, the Parent authorized a special bonus of $2,365,000 (excluding employer taxes) to certain members of management and non-employee directors for contributions in completing the Recapitalization of CDRJ. These payments were recorded as compensation expense as a component of selling, general and administrative expenses within the consolidated statements of operations.


(17)	Manufacturing Agreement

JCI and a third-party contractor (the “Contractor”) entered into a manufacturing agreement, dated as of June 10, 1999, (the “Manufacturing Agreement”) pursuant to which the Contractor manufactured all of JCI’s requirements for certain cosmetic and skin care products for a term of five years. The Manufacturing Agreement expired on July 1, 2004. Substantially all of JCI’s product requirements are now manufactured in Mexico by an affiliate company of JCI. Notwithstanding the foregoing, on July 2, 2004, JCI and Contractor entered into a new manufacturing agreement pursuant to which the Contractor manufactures only a limited number cosmetic and skin care products for JCI.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Distribuidora Comercial Jafra, S.A. de C.V.

Mexico City, Mexico D.F.

In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Distribuidora Comercial Jafra, S.A. de C.V. at December 31, 2005, and the results of their operations and their cash flows for year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers, S.C.

Mexico City, Mexico

March 24, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Distribuidora Comercial Jafra, S.A. de C.V.

Mexico City, Mexico D.F.

We have audited the accompanying consolidated balance sheets of Distribuidora Comercial Jafra, S.A. de C.V. (“Company”), as defined in Note 1, an indirect, wholly-owned subsidiary of Jafra Worldwide Holdings (Lux) S.ar.l. (Successor Parent to CDRJ Investments (Lux) S.A.) as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedules for the two years ended December 31, 2004 listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Distribuidora Comercial Jafra, S.A. de C.V. as of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S generally accepted accounting principles. Also, in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Mexico City, Mexico

March 4, 2005

100

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

BALANCE SHEETS
(In thousands, except share amounts)


	December 31,
	2005			2004

ASSETS
Current assets:
Cash	$	505		$	83
Receivables		366			297
Inventories, less allowances of $1,097 in 2005 and $1,170 in 2004		30,697			29,583
Receivables from affiliates		18,143			18,073
Prepaid income taxes		2,465			1,267
Deferred income taxes		1,109			—
Prepaid expenses and other current assets		5,232			2,690

Total current assets		58,517			51,993
Property and equipment, net		2,667			2,095
Other assets:
Intangible assets		1,311			—
Deferred financing fees, net		2,393			4,119
Investment in affiliated company		132,763			126,663
Other		2,368			2,664

Total assets	$	200,019		$	187,534


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,623		$	12,014
Accrued liabilities		1,794			1,892
Payables to affiliates		3,143			2,535
Deferred income taxes		—			1,063

Total current liabilities		17,560			17,504
Long-term debt		78,000			128,450
Deferred income taxes		5,412			1,820

Total liabilities		100,972			147,774

Commitments and contingencies (Note 12)		—			—
Stockholders’ equity:
Series B common stock, no par value: 151 shares authorized, issued and outstanding in 2005 and 2004		5			5
Additional Paid-in Capital		47,490			—
Retained earnings		52,495			45,338
Accumulated other comprehensive loss		(943	)		(5,583	)

Total stockholders’ equity		99,047			39,760

Total liabilities and stockholders’ equity	$	200,019		$	187,534

See accompanying notes to financial statements.

101

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

STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Third party net sales	$	40		$	—		$	—
Sales to affiliates		166,768			150,087			118,810

Net sales		166,808			150,087			118,810
Cost of sales		103,442			97,806			85,003

Gross profit		63,366			52,281			33,807
Selling, general and administrative expenses		1,709			1,736			3,155
Management fee expense to affiliate		1,473			4,099			4,519
Service fee expense to affiliate		35,064			30,606			25,215

Income from operations		25,120			15,840			918
Other income (expense):
Exchange gain (loss), net		3,452			15,125			(2,027	)
Interest expense		(10,354	)		(16,163	)		(10,122	)
Interest income		82			103			23
Loss on extinguishment of debt		(5,790	)		(2,559	)		—
Other expense		—			—			(555	)
Other income		—			29			—

Income (loss) before income taxes		12,510			12,375			(11,763	)
Income tax expense (benefit)		5,353			2,804			(9,499	)

Net income (loss)	$	7,157		$	9,571		$	(2,264	)

See accompanying notes to financial statements.

102

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

STATEMENTS OF STOCKHOLDERS’ EQUITY


	Years Ended December 31,
	2005					2004					2003
	Shares		Amount			Shares		Amount			Shares		Amount
	(In thousands, except for shares)

Common Stock:
Balance, beginning of year		151	$	5			151	$	5					—
Issuance of new stock		—		—			—		—			151	$	5

Balance, end of year		151		5			151		5			151		5

Additional Paid-in Capital:
Balance, beginning of year			$	—				$	—				$	—
Equity contribution from stockholders				47,490					—					—

Balance, end of year				47,490					—					—

Retained Earnings:
Balance, beginning of year				45,338					35,767					38,031
Net income (loss)				7,157					9,571					(2,264	)

Balance, end of year				52,495					45,338					35,767

Accumulated Other Comprehensive Loss:
Balance, beginning of year				(5,583	)				(6,143	)				(3,546	)
Currency translation adjustments				4,640					560					(2,597	)

Balance, end of year				(943	)				(5,583	)				(6,143	)

Total Stockholders’ Equity		151	$	99,047			151	$	39,760			151	$	29,629

Comprehensive Income (Loss):
Net income (loss)			$	7,157				$	9,571				$	(2,264	)
Currency translation adjustments				4,640					560					(2,597	)

Total Comprehensive Income (Loss)			$	11,797				$	10,131				$	(4,861	)

See accompanying notes to financial statements.

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

STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Cash flows from operating activities:
Net income (loss)	$	7,157		$	9,571		$	(2,264	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		293			210			134
Unrealized foreign exchange and derivative (gains) losses		(3,652	)		(521	)		8,710
Amortization of guarantee fee		475			458			294
Write off and amortization of deferred financing fees		1,862			3,631			702
Deferred income taxes		1,420			2,883			(10,676	)
Changes in operating assets and liabilities:
Receivables		(54	)		(140	)		7
Inventories		303			(2,236	)		(7,845	)
Prepaid expenses and other current assets		(764	)		—			361
Intercompany receivables and payables		1,632			(279	)		13,697
Other assets		—			8			122
Accounts payable and accrued liabilities		(2,962	)		7,027			(996	)
Income taxes payable / prepaid		(568	)		3			(600	)

Net cash provided by operating activities		5,142			20,615			1,646

Cash flows from investing activities:
Purchase of preferred shares of affiliate		—			—			(136,420	)
Purchase of intangible asset from affiliate		(1,311	)		—			—
Purchases of property and equipment		(761	)		(643	)		(150	)

Net cash used in investing activities		(2,072	)		(643	)		(136,570	)

Cash flows from financing activities:
Proceeds from issuance of subordinated debt due 2011		—			—			120,000
Proceeds from term loan		—			—			30,000
Repurchase of subordinated debt due 2011		(41,700	)		(300	)		—
Repayments under term loan facility		—			(28,500	)		(1,500	)
Payment of debt guarantee fee		—			—			(4,000	)
Repayments under revolving credit facility		(11,375	)		(52,250	)		(17,000	)
Borrowings under revolving credit facility		3,000			61,000			17,000
Contribution from stockholders		47,490			—			—
Deferred financing fees		—			(428	)		(8,640	)
Issuance and sale of common stock		—			—			5

Net cash (used in) provided by financing activities		(2,585	)		(20,478	)		135,865

Effect of exchange rate changes on cash		(63	)		66			(456	)

Net increase (decrease) in cash and cash equivalents		422			(440	)		485
Cash and cash equivalents at beginning of year		83			523			38

Cash and cash equivalents at end of year	$	505		$	83		$	523

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	10,358		$	14,380		$	9,484
Income taxes	$	5,410		$	—		$	—

See accompanying notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS

(1) Basis of Presentation and Description of Business

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. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.), a Luxembourgsociété anonyme(“Jafra S.A.”). Jafra S.A. was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourgsociété anonyme(“CDRJ”). Jafra Distribution was organized to conduct the Parent’s distribution business in Mexico. The distribution business was previously conducted by Distribuidora Venus, S.A. de C.V., (“Venus”), a wholly-owned subsidiary of Jafra Cosmetics International, S.A. de C.V. (“Jafra Cosmetics S.A.”). Jafra Cosmetics S.A. is also primarily owned by five indirect wholly-owned subsidiaries of the Parent. Jafra Distribution owns a minority interest of Jafra Cosmetics S.A.

On May 27, 2004, Vorwerk & Co. eins GmbH acquired substantially all of the issued and outstanding capital stock of Jafra S.A. (the “Acquisition”). As a result of the Acquisition, 100% of the voting securities of the Parent are held indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The purchase transaction has not been pushed down to Jafra Distribution due to the outstanding registered public debt.

The accompanying financial statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 reflect the operations of Jafra Distribution including the carved-out distribution operations of Venus, for all periods presented, which are now conducted by Jafra Distribution. The carve-out is for a portion of 2003, up until the purchase of the operations of Venus.

On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (“JCI”) and Jafra Distribution (and together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into new senior credit facilities (the “Senior Credit Agreement”) and issuing $200 million of 103/4% Senior Subordinated Notes due 2011 (the “103/4% Notes” and such transactions, collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 113/4% Senior Subordinated Notes due 2008 (the “113/4% Notes”) of JCI and Jafra Cosmetics S.A., to repay all amounts outstanding under the existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made liquidating distributions of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

The 103/4% Notes represent several obligations of Jafra Distribution and JCI. 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 a30-day standstill period prior to enforcement of such guarantees. As the cross-guarantee of JCI and Jafra Distribution is subject to a30-day standstill period, the Parent is filing these separate financial statements of Jafra Distribution as a schedule to its Annual Report onForm 10-K for the year ended December 31, 2005.

A distribution business, previously conducted by Venus, was purchased by Jafra Distribution on May 20, 2003, including the purchase of preferred stock (see Note 6) and the purchase of certain fixed assets of Venus used to conduct the on going distribution business. The assets were purchased for $2,000,000, which was equivalent to their net book value.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

Description of Business

Jafra Distribution is a distributor of premium skin and body care products, color cosmetics, fragrances, and other personal care products to its Mexican affiliate and international subsidiaries of the Parent (referred to herein as the “affiliates”). All sales of Jafra Distribution are to affiliates or independent distributors. Jafra Distribution does not sell directly to consultants.

(2) Summary of Significant Accounting Policies

Cash and Cash Equivalents. Cash and cash equivalents include cash and time deposits with a maturity of three months or less when purchased.

Inventories. Inventories are stated at the lower of cost, as determined by the first-in, first-out basis, or market. Jafra Distribution provides a reserve for estimated obsolete and unsaleable inventory based on assumptions as to future demand of product.

Deferred Financing Costs. In connection with the Recapitalization of the Parent, Jafra Distribution incurred approximately $8,640,000 of costs related to the issuance of 103/4% Notes and the establishment of the Senior Credit Agreement. On August 16, 2004, the Parent and issuers entered into a Restated Credit Agreement (the “Restated Credit Agreement”). With the borrowings from the Restated Credit Agreement, Jafra Distribution paid in full all existing amounts under the Senior Credit Agreement. In connection with the Acquisition, holders of $300,000 principal amount of the 103/4% Notes redeemed such notes. In 2004, in connection with the full repayment of the Senior Credit Agreement and the purchase of $300,000 of the outstanding 103/4% Notes, Jafra Distribution wrote off approximately $2,559,000 capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying statements of operations. During 2004, Jafra Distribution capitalized approximately $428,000 of costs related to the Restated Credit Agreement. On February 17, 2005, Jafra Distribution redeemed $41,700,000 of the 103/4% Notes. In connection with the February 17, 2005 redemption of the 103/4 % Notes, Jafra Distribution wrote off approximately $1,307,000 of previously capitalized deferred financing fees as a component of loss on extinguishment of debt on the accompanying statements of operations. All capitalized costs are being amortized on a basis that approximates the interest method over the expected term of the related debt. Except for the impact of translation, accumulated amortization at December 31, 2005 and 2004 was $1,236,000 and $1,071,000, respectively.

Investment in Preferred Shares of Affiliated Company. On May 20, 2003, Jafra Distribution purchased 13,642 shares of Series C preferred stock of Jafra Cosmetics S.A. for $10,000 per share, for a total purchase price of $136,420,000. Holders of Series C preferred shares of Jafra Cosmetics S.A. have the right to vote only on matters submitted by law and are entitled to receive a preferred cumulative dividend equal to 4.5%, of the effective liquidation preference per share, upon any liquidation before any holder of Series B common stock of Jafra Cosmetics S.A. receives a dividend. Jafra Distribution has recorded the total investment in preferred shares of Jafra Cosmetics S.A. as an investment in affiliated company on the accompanying balance sheets. As Jafra Distribution

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NOTES TO FINANCIAL STATEMENTS — (Continued)

and Jafra Cosmetics S.A. are companies under common control, except for the effect of translation, which reduced the investment by approximately $3,657,000 as of December 31, 2005, Jafra Distribution carries the investment on its balance sheet at cost.

Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment based on undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-live assets is not recoverable, Jafra Distribution will recognize an impairment loss, measured by the future discounted cash flow method.

Foreign Currency Forward Contracts. During 2004 and 2003, Jafra Distribution entered into forward contracts with Jafra Cosmetics S.A. in Mexican pesos to reduce the effect of adverse exchange rate fluctuations. As of December 31, 2005 and 2004, there were no outstanding forward contracts.

Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents and accounts payable approximate their fair value because of the short-term maturities of these instruments. The fair value of the 103/4% Notes at December 31, 2005 was $85,332,000 based on trading prices. As Jafra Distribution’s revolving credit facility is variable rate debt, and the interest rate spread paid by Jafra Distribution is adjusted for changes in certain financial ratios of the Parent, the fair value approximated its carrying amounts at December 31, 2005.

Revenue Recognition. During 2005, Jafra Distribution corrected its revenue recognition policies to recognize net sales and cost of sales at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements”, net sales and cost of sales are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. Prior to 2005, net sales and cost of sales had been incorrectly recorded by Jafra Distribution at the point of shipment. As a result, commencing with the second quarter of 2005, Jafra Distribution’s results have been reported based upon recognizing sales at the point of delivery. Jafra Distribution has determined that this correction did not have a material impact on the prior period financial statements. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, Jafra Distribution’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $1,520,000, gross profit of $582,000, income from operations of $582,000 and net income of $396,000. Jafra Distribution has determined that the impact of recording this correction of an error was not material to the year ending December 31, 2005.

Cost of Sales. Jafra Distribution’s cost of sales primarily represents the cost to Jafra Distribution of the product it sells to its affiliates. Cost of sales includes manufacturing and other production related expense, freight in, purchasing, warehousing, inventory transfer costs and charges related to obsolete and slow-moving inventory.

Shipping and Handling Costs. Jafra Distribution’s shipping and handling services were provided by an affiliate and the related costs were included in service fee expense to affiliate.

Income Taxes. Jafra Distribution accounts for income taxes under the balance sheet approach that requires the recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in the financial statements or income tax returns. Management provides a valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized.

Foreign Currency Translation. 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.

Mexico has historically experienced periods of hyperinflation, and the value of the peso has been subject to significant fluctuations with respect to the U.S. dollar. Jafra Distribution had outstanding U.S. dollar-denominated debt of $78,000,000 at December 31, 2005. This debt is remeasured at each reporting date with the impact of the

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NOTES TO FINANCIAL STATEMENTS — (Continued)

remeasurement being recorded in net income (loss), subjecting Jafra Distribution to additional foreign exchange risk.

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 is effective for Jafra Distribution beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to 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. Jafra Distribution has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

In March 2005, the FASB issued Interpretation (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and was effective for Jafra Distribution’s fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on Jafra Distribution’s 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. Jafra Distribution does not expect the adoption of SFAS No. 154 to have a material effect on the consolidated financial statements.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

(3) Inventories

Inventories consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Raw materials and supplies	$	11,061	$	10,682
Finished goods		19,636		18,901

Total inventories	$	30,697	$	29,583

(4) Property and Equipment

Property and equipment consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Machinery, equipment and other	$	3,454	$	2,559
Less accumulated depreciation		787		464

Property and equipment, net	$	2,667	$	2,095

(5) Intangible Asset

During the year ended December 31, 2005, Jafra Distribution purchased product formulas from JCI for $1,311,000 and has classified this amount as an asset because Jafra Distribution will continue to sell products manufactured with these formulas in future years. Jafra Distribution will amortize the product formulas for seven years. Pursuant to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” Jafra Distribution will evaluate the assets for impairment when indicators of impairment are present.

(6) Investment in Affiliated Company

On May 20, 2003, Jafra Distribution subscribed for and purchased 2,015 shares of newly issued Series C preferred stock of Jafra Cosmetics S.A. for $10,000 per share, for a total purchase price of $20,150,000. Additionally, Jafra Distribution purchased 2,618, 2,387, 2,310, 2,233, and 2,079 preferred shares of Jafra Cosmetics S.A. from CDRJ Latin America Holding Company B.V., Latin Cosmetics Holdings B.V., Regional Cosmetics Holding B.V., Southern Cosmetics Holdings B.V. and CDRJ Mexico Holding Company B.V., respectively. Each share was purchased for $10,000 per share, for a total of $116,270,000. Holders of Series C preferred shares of Jafra Cosmetics S.A. have the right to vote only on matters submitted by law and are entitled to receive a preferred cumulative dividend equal to 4.5%, of the effective liquidation preference per share, upon any liquidation before any holder of Series B common stock of Jafra Cosmetics S.A. receives a dividend. Jafra Distribution has recorded the total investment in 13,642 preferred shares of Jafra Cosmetics S.A. of $136,420,000, less 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 $3,657,000 as of December 31, 2005, Jafra Distribution carries the investment on its balance sheet at cost.

(7) Accrued Liabilities

Accrued liabilities consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Accrued interest	$	1,024	$	1,613
Other		770		279

Total accrued liabilities	$	1,794	$	1,892

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

NOTES TO FINANCIAL STATEMENTS — (Continued)

(8) Debt

Debt consists of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Subordinated Notes, U.S. dollar-denominated, unsecured, interest payable semi-annually at 103/4% due in 2011	$	78,000	$	119,700
Revolving loan, secured, U.S. dollar-denominated, interest due in quarterly installments, interest rate at 4.5% at December 31, 2004		—		8,750

Total debt		78,000		128,450
Less current maturities		—		—

Long-term debt	$	78,000	$	128,450

Jafra Distribution’s long-term debt matures in 2011.

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 a30-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 $41,700,000 of the original $120 million of 103/4% Notes at a redemption price of 110.75 with the cash proceeds from an indirect equity contribution from the Parent of $47,490,000. In 2004, in connection with the Acquisition, holders of $300,000 principal amount of the 103/4% Notes redeemed such notes. As a result of this and the February 2005 redemption, $78.0 million principal amount of the 103/4% Notes was outstanding at December 31, 2005

On August 16, 2004, the Issuers entered into the Restated Credit Agreement which provides for a revolving credit facility of up to an aggregate of $60 million, which can be increased by the 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. On August 16, 2004, Jafra Distribution borrowed $26,750,000 of the loans. Borrowings under the Restated Credit Agreement bear interest at an annual rate

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NOTES TO FINANCIAL STATEMENTS — (Continued)

of Libor plus 2.50%. As of December 31, 2005, there were no borrowings under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are secured by substantially all of the assets of JCI and Jafra Distribution.

With the borrowings from the Restated Credit Agreement, Jafra Distribution paid in full all existing amounts under the Senior 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 December 31, 2005, 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 New Notes during the continuance of certain defaults that would allow the holders of such senior indebtedness to accelerate the relevant senior indebtedness.

Jafra Distribution originally capitalized approximately $8,640,000 of costs related to the issuance of the 103/4% Notes and the Senior Credit Agreement as deferred financing fees. In connection with the full repayment of the Senior Credit Agreement and the purchase of $300,000 of the outstanding 103/4% Notes, Jafra Distribution wrote off approximately $2,559,000 of capitalized deferred financing fees and recorded the write off as loss on extinguishment of debt on the accompanying consolidated statements of operations during year ended December 31, 2004. In

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NOTES TO FINANCIAL STATEMENTS — (Continued)

2005, in connection with the February 17, 2005 redemption of the 103/4% Notes, Jafra Distribution 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 year ended December 31, 2005.

As of December 31, 2005 and 2004, approximately $2,393,000 and $4,119,000 of unamortized deferred financing fees were included as a noncurrent asset in the accompanying consolidated balance sheets (excluding translation effects). 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.

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 December 31, 2005 and 2004, approximately $2,368,000 and $2,664,000, respectively, was classified as a non-current asset and the remaining unamortized amount was classified as a current asset on the accompanying balance sheets

(9) Equity

During the year ended December 31, 2005, the Parent through a series of equity transactions, indirectly contributed $47,490,000 to Jafra Distribution in order for Jafra distribution to redeem a portion of the 103/4% Notes. (Note 8).

(10) Income Taxes

Actual income tax (benefit) expense differs from the “expected” tax expense (computed by applying the Mexican federal corporate rate of 30% to income before taxes in 2005, 33% in 2004 and 34% in 2003) as a result of the following (in thousands):


	Years Ended December 31,
	2005		2004			2003

Provision (benefit) for income taxes at statutory rate	$	3,753	$	4,084		$	(3,999	)
Permanent differences, principally effect of inflation upon taxable income		1,251		2,928			1,149
Valuation allowance		—		(3,063	)		3,063
Change in net deferred income liabilities due to enactment of changes of Mexico’s future statutory rate		—		(749	)		—
Other		349		(396	)		266
Effect of carve out of Venus operations in 2003		—		—			(9,978	)

Income tax expense (benefit)	$	5,353	$	2,804		$	(9,499	)

Jafra Distribution does not file a consolidated return with Jafra Cosmetics S.A. and does not have a tax sharing agreement with Jafra Cosmetics S.A. As such, Jafra Distribution received a tax benefit related to carved out Venus income included in Jafra Distribution operations prior to the May 20, 2003 acquisition date for the related tax paid by Jafra Cosmetics S.A. During 2003, Jafra Distribution recorded a valuation allowance against net deferred tax assets because realization was not assured. During 2004, Jafra Distribution had pretax income and therefore released the valuation allowance established during 2003.

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

NOTES TO FINANCIAL STATEMENTS — (Continued)

The components of the income tax expense (benefit) are as follows (in thousands):


	Years Ended December 31,
	2005		2004			2003

Current	$	3,933	$	(79	)	$	1,177
Deferred		1,420		2,883			(10,676	)

Total income tax expense (benefit)	$	5,353	$	2,804		$	(9,499	)

The components of deferred income tax assets and deferred income tax liabilities at December 31, 2005 and 2004 are as follows (in thousands):


	2005			2004

Deferred income tax assets:
Prepaid expenses	$	2,529		$	4,002
Property and equipment		104			59
Other		—			8

Total deferred income tax assets		2,633			4,069
Deferred income tax liabilities:
Transaction and deferred financing costs		(670	)		(1,153	)
Inventories		(5,162	)		(4,961	)
Guarantee fee		(737	)		(838	)
Other		(367	)		—

Total deferred income tax liabilities		(6,936	)		(6,952	)

Net deferred income tax liabilities	$	(4,303	)	$	(2,883	)

In the fourth quarter of 2004, Mexico enacted new tax legislation that provided for a reduction in the corporate statutory tax rate to 30% in 2005, 29% in 2006 and 28% in 2007 and years thereafter.

The financial statements of Jafra Distribution reflect the carved-out distribution operations of Venus through May 20, 2003, the date of the Recapitalization. The actual income tax liability for all Venus distribution operations through May 20, 2003 belongs to Jafra Cosmetics S.A. and there is no tax sharing agreement in place between Jafra Cosmetics S.A. and Jafra Distribution. As a result, Jafra Distribution’s income tax benefit includes a $9,978,000 benefit for the carve-out of the Venus distribution income tax due by Jafra Cosmetics S.A.

(11) Related Party Transactions

Jafra Distribution sells color cosmetics and fragrance, and since mid 2004, certain skin and body care products to other subsidiaries of the Parent (“affiliates”). Sales to non-Mexican affiliates, primarily in the United States and Germany were $16,310,000, $14,391,000 and $10,878,000 for the years ended December 31, 2005, 2004 and 2003, respectively. These sales were made at cost plus a markup ranging from 0 to 11%. Jafra Distribution also purchases skin and body products from an affiliate. Purchases were $986,000, $7,608,000 and $14,457,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Jafra Distribution sells products purchased from an affiliate and other purchased inventory to its Mexico affiliate, Jafra Cosmetics S.A. Sales to Jafra Cosmetics S.A. were $150,458,000, $135,696,000 and $107,932,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Jafra Distribution receives administrative and certain 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.

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

NOTES TO FINANCIAL STATEMENTS — (Continued)

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.

(12) Commitments and Contingencies

Jafra Distribution is not a direct party to any lease obligation, but is charged rent expense as part of the service fee charged by Jafra Cosmetics S.A., for the lease of warehouse facilities by Jafra Cosmetics S.A. Rental expense was $492,000, $546,000 and $853,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Jafra Distribution is involved from time to time in routine legal matters incidental to its business. Jafra Distribution believes that the resolution of such matters will not have a material adverse effect on Jafra Distribution’s business, financial condition or results of operations.

(13) Foreign Currency Forward Contracts

Jafra Distribution is exposed to currency risk related to its U.S. dollar-denominated debt and related principal and interest payments. As part of its overall strategy to reduce the risk of adverse potential exchange rate fluctuations, Jafra Distribution has entered into foreign currency forward contracts (“forward contracts”) with Jafra Cosmetics S.A. Pursuant to SFAS No. 133, the contracts are remeasured based on fair value and the gains and losses are included as a component of exchange gain (loss) on the accompanying statements of operations. During the years ended December 31, 2004 and 2003, Jafra Distribution recognized gains of $14,892,000 and $9,737,000, respectively, related to the remeasurement of forward contracts. There were no forward contracts outstanding at December 31, 2005 or 2004.

114

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Jafra Cosmetics International,S.A. de C.V.

Mexico City, Mexico D.F.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Jafra Cosmetics International, S.A. de C.V. and its subsidiaries at December 31, 2005, and the results of their operations and their cash flows for year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers, S.C.

Mexico City, Mexico

March 24, 2006

115

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Jafra Cosmetics International, S.A. de C.V.

Mexico City, Mexico D.F.

We have audited the accompanying consolidated balance sheets of Jafra Cosmetics International, S.A. de C.V. and subsidiaries (the “Company”), (as defined in note 1) an indirect, wholly-owned subsidiary of Jafra Worldwide Holdings (Lux) S.aR.l. as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedules for the two years ended December 31, 2004 listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jafra Cosmetics International, S.A. de C.V. and subsidiaries as of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S generally accepted accounting principles. Also, in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Mexico City, Mexico

March 4, 2005

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

CONSOLIDATED BALANCE SHEETS


	December 31,
	2005			2004
	(In thousands, except share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	14,400		$	4,153
Receivables, less allowance for doubtful accounts of $9,967 in 2005 and $8,363 in 2004		39,035			37,146
Receivables from affiliates		4,579			3,499
Deferred income taxes		3,658			2,435
Prepaid expenses and other current assets		1,475			2,272

Total current assets		63,147			49,505
Property and equipment, net		34,564			34,600
Goodwill		27,837			26,558
Trademarks		43,303			41,314
Other		1,535			1,520

Total assets	$	170,386		$	153,497


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,595		$	2,200
Accrued liabilities		33,342			30,040
Income taxes payable		1,797			929
Payables to affiliates		19,839			32,516
Other current liabilities		328			371

Total current liabilities		58,901			66,056
Deferred income taxes		10,201			10,019
Other long-term liabilities		2,368			2,664

Total liabilities		71,470			78,739
Commitments and contingencies (Note 12)		—			—
Stockholders’ equity:
Series B common stock, no par value; 139,373 shares authorized, Issued and outstanding in 2005 and 2004		—			—
Series C preferred stock, no par value: 13,642 shares authorized, issued and outstanding in 2005 and 2004		—			—
Additional paid-in capital		54,334			54,334
Retained earnings		50,087			29,878
Accumulated other comprehensive loss		(5,505	)		(9,454	)

Total stockholders’ equity		98,916			74,758

Total liabilities and stockholders’ equity	$	170,386		$	153,497

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Net sales	$	306,345		$	278,419		$	241,749
Cost of sales		128,906			110,639			87,667

Gross profit		177,439			167,780			154,082
Selling, general and administrative expenses		152,686			138,318			115,864
Transaction related expenses		—			2,751			2,187
Management fee expense to affiliate		3,700			6,321			5,224
Service fee income from affiliate		(35,064	)		(30,606	)		(25,215	)
Royalty expense to affiliate, net		23,666			21,154			18,060

Income from operations		32,451			29,842			37,962
Other expense:
Exchange loss, net		(4,494	)		(16,224	)		(9,374	)
Interest expense		(143	)		(228	)		(2,099	)
Interest income		295			146			270
Loss on extinguishment of debt		—			—			(1,842	)
Other expense		(449	)		(321	)		(244	)
Other income		4			—			—

Income before income taxes		27,664			13,215			24,673
Income tax expense		7,455			1,024			18,001

Net income	$	20,209		$	12,191		$	6,672

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Years Ended December 31,
	2005					2004					2003
	Shares		Amount			Shares		Amount			Shares			Amount
	(In thousands, except for shares)

Series B Capital Stock:
Balance, beginning of year		139,373		—			139,373		—			151,000			—
Shares converted to Series C Preferred stock		—		—			—		—			(11,627	)		—

Balance, end of year		139,373		—			139,373		—			139,373			—

Series C Preferred Stock:
Balance, beginning of year		13,642		—			13,642		—			—			—
Shares converted from Series B Common stock		—		—			—		—			11,627			—
Issuance of Preferred Stock		—		—			—		—			2,015			—

Balance, end of year		13,642		—			13,642		—			13,642			—

Additional Paid-in Capital:
Balance, beginning of year			$	54,334				$	54,334					$	34,184
Issuance of Preferred Stock				—					—						20,150

Balance, end of year				54,334					54,334						54,334

Retained Earnings:
Balance, beginning of year				29,878					17,687						11,015
Net income				20,209					12,191						6,672

Balance, end of year				50,087					29,878						17,687

Accumulated Other Comprehensive Loss:
Balance, beginning of year				(9,454	)				(9,691	)					(4,026	)
Net unrealized and deferred realized gains (losses) on derivatives				65					(343	)					(15	)
Tax benefit (expense) on unrealized and deferred realized losses on derivatives				—					134						(235	)
Currency translation adjustments				3,884					446						(5,415	)

Balance, end of year				(5,505	)				(9,454	)					(9,691	)

Total Stockholders’ Equity			$	98,916				$	74,758					$	62,330

Comprehensive Income:
Net income			$	20,209				$	12,191					$	6,672
Unrealized and deferred realized losses on derivatives				(60	)				(353	)					(119	)
Reclassified to exchange loss				128					7						(550	)
Reclassified to cost of sales				(3	)				3						654
Tax benefit (expense) on unrealized and deferred realized losses on derivatives				—					134						(235	)
Currency translation adjustments				3,884					446						(5,415	)

Total Comprehensive Income			$	24,158				$	12,428					$	1,007

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Cash flows from operating activities:
Net income	$	20,209		$	12,191		$	6,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,812			2,451			2,106
Amortization of guarantee fee		(475	)		(458	)		(294	)
Amortization and write off of deferred financing fees		—			—			435
Provision for uncollectible accounts receivable		8,845			7,691			7,601
Unrealized foreign exchange and derivative losses		1,566			1,539			3,073
Deferred realized derivative gains (losses)		—			—			646
Deferred income taxes		(1,041	)		(8,008	)		8,323
Changes in operating assets and liabilities:
Receivables		(8,943	)		(10,778	)		(11,164	)
Inventories		711			(686	)		—
Prepaid expenses and other current assets		(120	)		109			(265	)
Intercompany receivables and payables		(15,102	)		8,930			(13,492	)
Other assets		57			(597	)		11
Accounts payable and accrued liabilities		1,841			(6,597	)		2,766
Income taxes payable/prepaid		1,479			(5,124	)		1,676

Net cash provided by operating activities		12,840			663			8,094

Cash flows from investing activities:
Purchases of property and equipment		(2,178	)		(2,765	)		(5,740	)

Net cash used in investing activities		(2,178	)		(2,765	)		(5,740	)

Cash flows from financing activities:
Repurchase of subordinated debt due 2008		—			—			(30,072	)
Repayments under term loan facility		—			—			(2,375	)
Receipt of guarantee fee from affiliate		—			—			4,000
Repayments under bank debt		—			—			(828	)
Sale of Series C preferred stock		—			—			20,150

Net cash used in financing activities		—			—			(9,125	)

Effect of exchange rate changes on cash		(415	)		422			(752	)

Net increase (decrease) in cash and cash equivalents		10,247			(1,680	)		(7,523	)
Cash and cash equivalents at beginning of year		4,153			5,833			13,356

Cash and cash equivalents at end of year	$	14,400		$	4,153		$	5,833

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	143		$	—		$	1,715
Income taxes	$	7,953		$	11,403		$	5,010

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Description of Business

Basis of Presentation

Jafra Cosmetics International, S.A. de C.V., asociedad anonima de capital variable(“Jafra Cosmetics S.A.”), organized under the laws of the United Mexican States, is primarily 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. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.), a Luxembourgsociété ànonyme(“Jafra S.A.”) Jafra S.A. was a wholly-owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourgsociété anonyme(“CDRJ”). A minority interest of Jafra Cosmetics S.A. is owned by Distribuidora Comercial Jafra S.A. de C.V. (“Jafra Distribution”).

On May 27, 2004, Vorwerk & Co. eins GmbH acquired substantially all of the issued and outstanding capital stock of Jafra S.A. (the “Acquisition”). As a result of the Acquisition, 100% of the voting securities of the Parent are held indirectly by Vorwerk & Co. eins GmbH, which is an indirect wholly-owned subsidiary of Vorwerk & Co. KG, a family-owned company based in Wuppertal, Germany. The purchase transaction has not been pushed down to Jafra Cosmetics S.A. due to the outstanding registered public debt of the Parent.

The accompanying consolidated financial statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003, reflect the operations of Jafra Cosmetics S.A. and its subsidiaries, excluding the carved-out distribution operations of Distribuidora Venus, S.A. de C.V. (“Venus”) (collectively, “Jafra Cosmetics S.A.”). All significant intercompany accounts and transactions between entities have been eliminated in consolidation.

Jafra Distribution was organized under the laws of the United Mexican States in February 2003 to conduct the Parent’s distribution business in Mexico. The distribution business was previously conducted by Venus, awholly-owned subsidiary of Jafra Cosmetics S.A. Jafra Distribution is owned by five indirect wholly-owned subsidiaries of the Parent.

On May 20, 2003, the Parent, Jafra Cosmetics International, Inc. (“JCI”) and Jafra Distribution (together with JCI, the “Issuers”) completed a recapitalization of their operations by entering into new senior credit facilities (the “Senior Credit Agreement”) and issuing $200 million of 103/4% Senior Subordinated Notes due 2011 (the “103/4% Notes” and such transactions collectively, the “Recapitalization”). The proceeds from the Recapitalization were used to redeem the 113/4% Senior Subordinated Notes due 2008 (the “113/4% Notes”), of JCI and Jafra Cosmetics S.A. to repay all amounts outstanding under the existing credit facilities of JCI and Jafra Cosmetics S.A. and to make certain payments to CDRJ and employees of JCI and Jafra Cosmetics S.A. The stockholders of CDRJ then resolved that CDRJ be liquidated and appointed the Parent to act as its liquidator. Thereafter, CDRJ made liquidating distributions of such proceeds to its stockholders. In connection with the liquidation of CDRJ, Jafra S.A. transferred all of its assets and liabilities, including its direct and indirect holdings of JCI, Jafra Cosmetics S.A. and Jafra Distribution to the Parent in exchange for additional shares of common stock of the Parent. Jafra Cosmetics S.A. and Jafra Distribution are collectively referred to as “Jafra Mexico.”

Jafra Cosmetics S.A. sold its distribution business, previously conducted by Venus, a wholly-owned subsidiary, to Jafra Distribution on May 20, 2003, including the sale of preferred stock (see Note 5) and the purchase of certain fixed assets of Venus used to conduct the on going distribution business for $2,000,000, equivalent to the net book value.

The 103/4% Notes represent several obligations of Jafra Distribution and JCI. Jafra Cosmetics S.A. has fully and unconditionally guaranteed the obligations of Jafra Distribution under the 103/4% Notes. As Jafra Cosmetics S.A. is not a consolidated subsidiary of Jafra Distribution, the Parent is filing these separate financial statements of Jafra Cosmetics S.A. in its Annual Report onForm 10-K.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Description of Business

Jafra Cosmetics S.A. is a direct seller of skin and body care products, color cosmetics, fragrances, and other personal care products in Mexico. Jafra Cosmetics S.A. sells Jafra Brand products through a direct selling, multilevel distribution system comprised of self-employed salespersons (known as “consultants”).

(2) Summary of Significant Accounting Policies

Cash and Cash Equivalents. Cash and cash equivalents include cash, time deposits and all highly liquid debt instruments with a maturity of three months or less when purchased.

Property and Equipment. Property and equipment are stated at cost. Depreciation of property and equipment is provided for over the estimated useful lives of the respective assets using the straight-line method. Estimated useful lives are 20 years for buildings, the lesser of the useful life or the term of the lease for improvements, 5 to 10 years for machinery and equipment and 5 years for hardware and software. Maintenance and repairs, including cost of minor replacements, are charged to operations as incurred. Costs of additions and betterments are added to property and equipment accounts provided that such expenditures increase the useful life or the value of the asset.

Rent and leasing, Jafra Cosmetics S.A. records line rental expense associated with operating leases using a straight line method over the term of the lease.

Intangible Assets. Intangible assets consist of goodwill and trademarks. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and other Intangible Assets,” Jafra Cosmetics S.A. does not amortize goodwill and other indefinite life intangible assets, but tests those intangible assets for impairment at least annually.

Deferred Financing Costs. During the year ended December 31, 2003, Jafra Cosmetics S.A. redeemed its 113/4% Notes and repaid the balance under its existing credit agreement and then terminated the agreement. In connection with the redemption of the 113/4% Notes and the termination of the agreement, Jafra Cosmetics S.A. wrote off approximately $75,000 of capitalized deferred financing fees.

Impairment of Long-Lived Assets and Intangibles. Long-lived assets are reviewed for impairment based on undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, Jafra Cosmetics S.A. will recognize an impairment loss, measured by the future discounted cash flow method. Indefinite lived intangibles are tested for impairment annually, as of December 31, or whenever events or changes in circumstances indicate that the carrying amount of intangibles may not be recoverable. Based on the provisions of SFAS No. 142, Jafra Cosmetics S.A. first determines if the fair value is less than the carrying value of the intangible. If the fair value is less than the carrying value, Jafra Cosmetics S.A. would then allocate the fair value to all the assets and liabilities to determine the amount of impairment. (See Note 4).

Foreign Currency Forward and Option Contracts. Jafra Cosmetics S.A. enters into foreign currency option contracts to reduce the effect of potentially adverse exchange rate fluctuations in the exchange rate of the Mexican peso to the U.S. dollar. Jafra Cosmetics S.A. accounts for these contracts pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivative instruments be recorded based on fair value.

122

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a matter of policy, Jafra Cosmetics S.A. does not hold or issue foreign currency contracts for trading or speculative purposes. Under SFAS No. 133, Jafra Cosmetics S.A.’s use of foreign currency contracts to hedge certain forecasted transactions qualifies for hedge accounting. Gains and losses from qualifying hedged derivative instruments can be deferred as a separate component of other comprehensive loss, and will then be recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such contracts with the corresponding gains and losses generated by the underlying hedged transactions. Under SFAS No. 133, certain of Jafra Cosmetics S.A.’s foreign currency contracts do not qualify for hedge accounting and therefore, are remeasured based on fair value, with gains and losses included as a component of net income. Jafra Cosmetics S.A. ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date, were recorded directly as a component of exchange loss (gain).At December 31, 2005 and 2004, the carrying value of the option contracts was $2,944,000 and $1,433,000, respectively and was included in accrued liabilities in the accompanying consolidated balance sheets.

As Jafra Cosmetics S.A. provides treasury functions to Jafra Distribution and maintains foreign currency contracts with third parties, Jafra Cosmetics S.A. entered into forward contracts with Jafra Distribution in Mexican pesos to purchase Mexican pesos and sell U.S. dollars. There were no outstanding contracts at December 31, 2005 or 2004. At December 31, 2003, the fair value of these contracts was included within payables to affiliates in the accompanying consolidated balance sheets.

Revenue Recognition. During 2005, Jafra Cosmetics S.A. corrected its revenue recognition policies to recognize net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight at the point of delivery rather than shipment. Under the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements”, net sales, cost of sales and related direct and incremental selling expenses are recognized when both title and risk of loss have transferred to the consultant, generally at the time the product is received by the consultant. Jafra Cosmetics S.A. currently insures shipments and assists consultants by replacing lost or damaged shipments impacting the risk of loss. Prior to 2005, net sales, cost of sales and related direct and incremental selling expenses including overrides, sales promotion and freight had been incorrectly recorded by Jafra Cosmetics S.A. at the point of shipment. As a result, commencing with the second quarter of 2005, Jafra Cosmetics S.A.’s results have been reported based upon recognizing sales at the time of delivery. Jafra Cosmetics S.A. has determined that this correction did not have a material impact on the prior period financial statements which have therefore not been restated. Under the corrected revenue recognition policy, as a result of goods shipped and in transit at June 30, 2005, Jafra Cosmetics S.A.’s reported results reflect a decrease for the six months ended June 30, 2005 in net sales of $3,992,000, cost of sales of $1,520,000, gross profit of $2,472,000, selling, general and administrative expenses of $1,304,000, income from operations of $1,168,000 and net income of $795,000. Jafra Cosmetics S.A. has determined that the impact of recording this correction of an error is not expected to be material to the year ending December 31, 2005.

Cost of Sales. Jafra Cosmetics S.A.’s cost of sales primarily represents the cost to Jafra Cosmetics S.A. of the products it sells to its consultants and costs associated with free product on certain promotional arrangements. Cost of sales also includes manufacturing and other production-related expenses, freight in, purchasing, warehousing, inventory transfer costs and charges related to obsolete and slow-moving inventory.

123

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

handling costs, as well as selling, marketing and administrative expenses, including general management, finance, human resources, information technology and bad debt expense related to uncollectible accounts receivable. SG&A expenses also include override payments to managers, who earn a percentage of the sales generated by consultants recruited directly or indirectly by them. The overrides are paid to motivate and compensate the managers to train, recruit and develop downline consultants. Overrides and incentives are accrued when earned.

Advertising costs. Jafra Cosmetics S.A. expenses advertising costs as incurred. Total advertising costs aggregated $232,000, $226,000 and $156,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Shipping and Handling Costs. Shipping and handling costs of $19,387,000, $17,363,000 and $15,236,000 for the years ended December 31, 2005, 2004 and 2003, respectively, were included in selling, general and administrative expenses. Jafra Cosmetics S.A. provides certain shipping and handling services to Jafra Distribution which are included in service fee income from affiliate on the accompanying consolidated statements of operations.

Income Taxes. Jafra Cosmetics S.A. accounts for income taxes under the balance sheet approach that requires the recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in the financial statements or income tax returns. Management provides a valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized.

Foreign Currency Translation. 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 is effective for the Jafra Cosmetics S.A. beginning in the first quarter of 2006. The adoption of SFAS No. 123(R) is not expected to 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. Jafra Cosmetics S.A. has concluded that SFAS No. 153 will not have a material impact on its consolidated financial statements.

In March 2005, the FASB issued Interpretation (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and was effective for Jafra Cosmetics S.A.’s fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on Jafra Cosmetics S.A.’s consolidated financial statements.

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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. Jafra Cosmetics S.A. does not expect the adoption of SFAS No. 154 to have a material effect on the consolidated financial statements.

(3) Property and Equipment

Property and equipment consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Land	$	10,004	$	9,545
Buildings and improvements		10,056		9,593
Machinery, equipment and other		28,120		24,842

		48,180		43,980
Less accumulated depreciation		13,616		9,380

Property and equipment, net	$	34,564	$	34,600

(4) Goodwill and Trademarks

Jafra Cosmetics S.A.’s intangible assets consist of trademarks and goodwill. Trademarks, principally the Jafra name, resulted from the acquisition of the Jafra business from Gillette. Jafra Cosmetics S.A. has determined trademarks have an indefinite life. The carrying value of trademarks was $43,303,000 as of December 31, 2005. The carrying value of goodwill was $27,837,000 at December 31, 2005. Except for foreign currency translation adjustments, there were no changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004.

(5) Accrued Liabilities

Accrued liabilities consist of the following at December 31, 2005 and 2004 (in thousands):


	2005		2004

Sales promotions, commissions and overrides	$	20,104	$	17,918
Compensation and other benefit accruals		5,656		5,611
State and local sales taxes and other taxes		3,772		3,328
Other		3,810		3,183

Total accrued liabilities	$	33,342	$	30,040

(6) Debt

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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 December 31, 2005 and 2004, approximately $2,368,000 and $2,664,000, 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.

On May 23, 2003, with the proceeds from the guarantee fee paid by Jafra Distribution, the equity contribution by Jafra Distribution (see Note 7) and available cash, Jafra Cosmetics S.A. redeemed its 113/4% Notes in the aggregate principal amount of $30,072,000 at a premium of approximately $1,767,000. Additionally, Jafra Cosmetics S.A. repaid $2,375,000 under its then existing credit agreement and then terminated the agreement. In connection with the redemption of the 113/4% Notes and the termination of the then outstanding agreement, Jafra Cosmetics S.A. wrote off approximately $75,000 of capitalized deferred financing fees. Total costs related to the recall of the previous debt was $1,842,000 and was recorded as loss on extinguishment of debt for the year ended December 31, 2003 on the accompanying consolidated statements of income.

(7) Income Taxes

Actual income tax expense differs from the “expected” tax expense (computed by applying the Mexican federal corporate rate of 30% in 2005, 33% in 2004 and 34% in 2003 to income before income taxes) as a result of the following (in thousands):


	Years Ended December 31,
	2005			2004			2003

Provision for income taxes at statutory rate	$	8,299		$	4,360		$	8,389
Permanent differences, principally effect of inflation upon taxable income		1,383			(669	)		(1,004	)
Change in net deferred income tax liabilities due to enactment of changes of Mexico’s future statutory rate		—			(1,289	)		—
Effect of carve-out of Venus operations in 2003		—			—			9,978
Other		(2,227	)		(1,378	)		638

Income tax expense	$	7,455		$	1,024		$	18,001

Jafra Cosmetics S.A. does not include Jafra Distribution in its consolidated tax return and does not have a tax sharing agreement with Jafra Distribution. As such, Jafra Cosmetics S.A. recorded a tax expense related to carved-out Venus income included in Jafra Distribution operations prior to the May 20, 2003 acquisition date for the related tax paid by Jafra Cosmetics S.A.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of the income tax expense are as follows (in thousands):


	Years Ended December 31,
	2005			2004			2003

Current	$	8,496		$	9,032		$	9,678
Deferred		(1,041	)		(7,874	)		7,428
Deferred allocated to other comprehensive income		—			(134	)		895

Total deferred		(1,041	)		(8,008	)		8,323

Total income tax expense	$	7,455		$	1,024		$	18,001

The components of deferred income tax assets and deferred income tax liabilities at December 31, 2005 and 2004 are as follows (in thousands):


	2005			2004

Deferred income tax assets:
Accounts receivable	$	2,901		$	2,515
Net operating loss carryforward of certain subsidiaries		1,341			1,380
Asset tax credit carryforward		—			21
Accrued sales promotions		1,504			1,514
Other accrued liabilities		4,287			3,516
Guarantee fee		737			838
Other		829			501

Total deferred income tax assets		11,599			10,285
Deferred income tax liabilities:
Property and equipment		(889	)		(1,059	)
Trademarks and goodwill		(12,125	)		(11,568	)
Prepaid purchases and expenses		(2,576	)		(4,135	)
Other		(2,552	)		(1,107	)

Total deferred income tax liabilities		(18,142	)		(17,869	)

Net deferred income tax liabilities	$	(6,543	)	$	(7,584	)

At December 31, 2005 and 2004, Jafra Cosmetics S.A.’s deferred income tax assets included $1,341,000 and $1,380,000 for operating loss carryforwards. The tax loss and asset tax credit carryforwards expire in varying amounts through 2015. Although realization is not assured, management believes it is more likely than not that the net carrying value of the income tax loss and credit carryforwards will be realized.

In the fourth quarter of 2004, Mexico enacted new tax legislation that provided for a reduction in the corporate statutory tax rate from 33% in 2004 under the previous legislation to 30% in 2005, 29% in 2006 and 28% in 2007 and years thereafter. As a result, Jafra Cosmetics S.A.’s income tax expense decreased by $1,289,000 in 2004.

The financial statements of Jafra Cosmetics S.A. exclude the carved-out distribution operations of Venus through May 20, 2003, the date of the Recapitalization. The actual income tax liability for all Venus distribution operations through May 20, 2003 belong to Jafra Cosmetics S.A. As a result, Jafra Cosmetics S.A.’s income tax expense includes a $9,678,000 expense related to Venus distribution function income now included in Jafra Distribution.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(8)	Benefit Plans

Under Mexican labor laws, employees of Jafra Cosmetics S.A. are entitled to a payment when they leave Jafra Cosmetics S.A. if they have fifteen or more years of service, or with less tenure under certain conditions. In addition, Jafra Cosmetics S.A. makes government mandated employee profit sharing distributions equal to ten percent of the taxable income of the subsidiary in which they are employed. Total expense under these programs was $2,126,000, $1,082,000 and $1,506,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The total liability was approximately $3,242,000 and $1,888,000 at December 31, 2005 and 2004, respectively, and is classified as a noncurrent liability in the accompanying consolidated balance sheets.

See Note 13 for management benefit arrangements.


(9)	Related Party Transactions

Jafra Cosmetics S.A. purchases products from its Mexico affiliate, Jafra Distribution. The cost of these purchases was $150,458,000, $45,564,000 and $31,645,000 for the years ended December 31, 2005, 2004 and 2003, respectively. During 2004 and 2003, a subsidiary of Jafra Cosmetics S.A. also sold products to its Mexico affiliate, Jafra Distribution, which were subsequently resold by Jafra Distribution to a different subsidiary of Jafra Cosmetics S.A. The cost of purchase in 2004 and 2003 reflects the net purchase price.

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 S.A. charges JCI a royalty fee for the right to use the Jafra trademark in the United States and Europe. The total royalty income charged by Jafra Cosmetics S.A. to JCI was $2,975,000, $3,214,000 and $3,179,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and is offset against royalty expense to affiliates in the accompanying consolidated statements of income.

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. JCI charges Jafra Cosmetics S.A. a royalty fee for the use of the Jafra Way. The royalty fees charged by JCI were $26,641,000, $24,368,000 and $21,239,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and were based on a percentage of Jafra Cosmetics S.A.’s sales.


(10)	Transaction Related Expenses

During the year ended December 31, 2004, Jafra Cosmetics S.A. incurred $2,751,000 of transaction fees related to the Acquisition, including $2,721,000 of compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and special bonus payments paid directly by the former shareholder. During the year ended December 31, 2003, Jafra Cosmetics S.A. recorded $2,187,000 of transaction expenses related to the Recapitalization. In connection with the Recapitalization, the Board of Directors authorized CDRJ to reprice all existing outstanding stock options. In order to compensate option holders for any diminished value of the outstanding options, the Board of Directors further authorized $1,309,000 in bonus payments to current option

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holders and special bonuses to certain members of management for contributions to completing the Recapitalization of CDRJ.


(11)	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 Parent’s business is comprised of one industry segment, direct selling, with worldwide operations. The Parent is organized into geographical business units that each sell the full line of Jafra cosmetics, skin care, body care, fragrances, and other products. Jafra Cosmetics S.A. is included within Jafra Mexico, one of the Parent’s reportable business segments, and as such, the only additional business segment information presented is the following breakdown of sales by product lines:


	2005					2004					2003
	Sales by		Percentage			Sales by		Percentage			Sales by		Percentage
	Product		of Total			Product		of Total			Product		of Total
	Line		Sales			Line		Sales			Line		Sales
	(In millions)					(In millions)					(In millions)

Skin care	$	34.7		11.7	%	$	35.7		13.2	%	$	29.8		12.6	%
Body care and personal care		28.8		9.7			26.6		9.8			25.8		11.0
Color cosmetics		69.1		23.2			66.2		24.5			65.6		27.9
Fragrances		138.2		46.5			115.6		42.7			95.4		40.5
Other products(1)		26.6		8.9			26.6		9.8			18.8		8.0

Subtotal before shipping fees less commissions		297.4		100.0	%		270.7		100.0	%		235.4		100.0	%

Shipping fees less commissions		9.0					7.7					6.3

Total	$	306.4				$	278.4				$	241.7


(1)		Includes sales aids (e.g., party hostess gifts, demonstration products, etc.) and promotional materials purchased by consultants, which typically do not qualify for commissions or overrides.


(12)	Commitments and Contingencies

Jafra Cosmetics S.A. leases office facilities as well as manufacturing, transportation and data processing equipment under operating leases which expire at various dates through 2010. The leases contain certain renewal options and require payment of property taxes, utilities, common area maintenance and insurance and contain rent escalation clauses based upon consumer price indices. Future minimum lease payments under noncancelable operating leases as of December 31, 2005 are as follows (in thousands):


2006	$	2,884
2007		2,532
2008		1,080
2009		548
2010		227

	$	7,271

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Rental expense was $1,673,000, $948,000 and $1,398,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Jafra Cosmetics S.A. is involved from time to time in routine legal matters incidental to its business. Jafra Cosmetics S.A. believes that the resolution of such matters will not have a material adverse effect on Jafra Cosmetics S.A.’s business, financial condition or results of operations.


(13)	Management Incentive Arrangements

Effective 1998, CDRJ adopted a stock incentive plan (the “Stock Incentive Plan”), which provided for the sale to members of senior management of up to 52,141 shares of common stock of CDRJ and the issuance of options to purchase up to 104,282 additional shares of common stock. CDRJ reserved 156,423 shares for issuance under the Stock Incentive Plan. Upon the consummation of the Acquisition, all outstanding stock issued under the Stock Incentive Plan was sold to Vorwerk and all outstanding options were cancelled. The Stock Incentive Plan was subsequently effectively terminated. There were no shares issued or repurchased from December 31, 2001 until the Acquisition and termination of the Stock Incentive Plan. During the year ended December 31, 2004, all outstanding options were cancelled

Certain senior executive officers have employment agreements which provide for annual bonuses if Jafra Cosmetics S.A. and the Parent achieve the performance goals established under its annual incentive plan for executives.

Bonus Payments

During the year ended December 31, 2004, Jafra Cosmetics S.A. expensed $2,721,000 in compensation expense for the buyback and cancellation of options to purchase shares of Jafra S.A. and special bonus payments paid directly by the former shareholder.

During the year ended December 31, 2003, in order to compensate option holders for any diminished value of the outstanding options, the Board of Directors authorized $946,000 in compensatory payments to current option holders who are employees of Jafra Cosmetics S.A. Additionally, the Parent authorized a special bonus of $350,000 (excluding employer taxes) to certain members of management and non-employee directors for contributions in completing the Recapitalization of CDRJ. These payments were recorded as compensation expense as a component of selling, general and administrative expenses within the consolidated statements of operations.


(14)	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. purchases 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, Jafra Cosmetics S.A. sells 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. places foreign currency option contracts based on its forecasted U.S. dollar cash outflows from Jafra Mexico and does not hedge transactions that are not included in the forecast on the date the contract is initiated. As a matter of policy, the Company does not hold or issue forward contracts for trading or speculative purposes nor does it enter into contracts or agreements containing “embedded” derivative features. Prior to entering

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Under SFAS No. 133, Jafra Cosmetics S.A.’s use of option contracts to hedge certain forecasted transactions may qualify for hedge accounting. Gains and losses from such derivatives can be deferred as a separate component of other comprehensive loss, and then will be recognized in income at the same time that the underlying hedged exposure is recognized in income. This accounting treatment results in the matching of gains and losses from such option contracts with the corresponding gains and losses generated by the underlying hedged transactions. Contracts that do not qualify for hedge accounting under SFAS No. 133 or contracts to which hedge accounting is not applied are remeasured based on fair value and the gains and losses are included as a component of net income. Jafra S.A. ceased using hedge accounting effective March 31, 2004, and therefore all exchange losses and gains on options contracts put into place subsequent to that date were recorded directly as a component of exchange loss (gain). As of December 31, 2005, the fair value of the option contracts was included in accrued liabilities in the accompanying consolidated balance sheets and in exchange loss on the accompanying consolidated statements of operations. No amounts at December 31, 2005 were included in other comprehensive loss as Jafra Cosmetics S.A. did not apply hedge accounting to any outstanding options at December 31, 2005.

Jafra Cosmetics S.A. designated certain of its contracts as cash flow hedges of forecasted U.S. dollar-denominated inventory purchases, forecasted U.S. dollar-denominated intercompany charges from JCI, forecasted management fee charges from JCI and U.S. dollar-denominated interest payments. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative was deferred as a component of other comprehensive loss. Such amounts were reclassified from other comprehensive loss into net income when the underlying hedged exposure was recognized in income.

During the years ended December 31, 2005 and 2004, Jafra Cosmetics S.A. recognized losses of approximately $5,035,000 and $1,545,000 (including the reclassification of other comprehensive income), respectively, as a component of exchange loss on the accompanying consolidated statements of income. During the year ended December 31, 2003, Jafra Cosmetics S.A. recognized gains of approximately $789,000 on option contracts (including the reclassification of other comprehensive income) as a component of exchange loss in the accompanying consolidated statements of income.

At December 31, 2003, Jafra Cosmetics S.A. had $278,000 of gains on option contracts deferred as a component of other comprehensive loss. During the year ended December 31, 2004, Jafra Cosmetics S.A. deferred as a component of other comprehensive loss $353,000 of losses on option contracts qualifying for hedge accounting under SFAS No. 133. During the year ended December 31, 2004, approximately $7,000 of losses were reclassified from other comprehensive loss to exchange loss and approximately $3,000 of losses were reclassified as cost of sales upon the recognition of the underlying hedged exposure.

At December 31, 2004, Jafra Cosmetics S.A. had $65,000 of losses on option contracts deferred as a component of other comprehensive loss. During the year ended December 31, 2005, Jafra Cosmetics S.A. deferred as a component of other comprehensive loss $60,000 of losses on option contracts qualifying for hedge accounting under SFAS No. 133. During the year ended December 31, 2005, approximately $128,000 of losses were reclassified from other comprehensive loss to exchange loss and approximately $3,000 of gains were reclassified as cost of sales upon recognition of the underlying hedged exposure. At December 31, 2005, Jafra Cosmetics S.A. did not have any gains or losses deferred as a component of other comprehensive loss.

The fair value of the option contacts at December 31, 2005 represented an unrealized loss of $2,944,000 in which Jafra Cosmetics S.A. did not apply hedge accounting and as such are recorded directly as a component of net income.

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hedges and $1,368,000 of unrealized losses for contracts where hedge accounting was not applied and as such are recorded directly as a component of net income.

During the year ended December 31, 2005 and 2004 the ineffectiveness generated by Jafra Cosmetics S.A.’s forward contracts and option contracts designated as hedges was insignificant and no amounts were reclassified into earnings.

The following tables provide information about the details of Jafra Cosmetics S.A.’s option contracts as of December 31, 2005 and 2004 (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 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	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Coverage in
	Mexican		Average Strike		Fair Value in
Foreign Currency	Pesos		Price		U.S. Dollars(1)			Maturity Date

At December 31, 2004:
Purchased puts (Company may sell peso/buy USD)
Mexican peso		107,000		12.62-12.76	$	(298	)		Jan.-Mar. 2005
Mexican peso		179,000		12.50-12.94		(443	)		Apr.-June 2005
Mexican peso		81,000		12.68-13.07		(87	)		July-Sept. 2005
Mexican peso		108,000		13.21-13.32		(163	)		Oct.-Dec. 2005
Mexican peso		70,000		12.99-13.19		(23	)		Jan.-Mar. 2006

		545,000			$	(1,014	)

Written calls (Counterparty may buy peso/sell USD)
Mexican peso		107,000		11.44-11.56	$	29			Jan.-Mar. 2005
Mexican peso		179,000		11.34-11.73		131			Apr.-June 2005
Mexican peso		81,000		11.48-11.84		(136	)		July-Sept. 2005
Mexican peso		108,000		11.97-12.06		(210	)		Oct.-Dec. 2005
Mexican peso		70,000		11.77-11.95		(233	)		Jan.-Mar. 2006

		545,000			$	(419	)


(1)		The fair value as quoted by the financial institutions of the option contracts presented above, unrealized losses of $2,944,000 at December 31, 2005 and $1,433,000 at December 31, 2004, represents the carrying value and was recorded in accrued liabilities at December 31, 2005 and 2004 in the consolidated balance sheets.

Jafra Cosmetics S.A. provides treasury functions to Jafra Distribution. Jafra Distribution is exposed to currency risk related to its U.S. dollar-denominated debt and related principal and interest payments. As part of the Parent’s overall strategy to reduce the risk of adverse potential exchange rate fluctuations, Jafra Cosmetics S.A. has entered into foreign currency forward contracts with Jafra Distribution. Pursuant to SFAS No. 133, the contracts are remeasured based on fair value and the gains and losses are included as a component of exchange loss on the accompanying statements of income. During the years ended December 31, 2004 and 2003, Jafra Cosmetics S.A. recognized losses of $14,892,000 and $9,737,000, respectively, related to the remeasurement of forward contracts. There were no forward contracts outstanding at December 31, 2005 or 2004.

133

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(Information as of December 31, 2005 and 2004 and
for the Years Ended December 31, 2005, 2004 and 2003)

Jafra Worldwide Holdings (Lux) S.àr.l., (the “Parent”) a Luxembourgsocieté à responsabilité limitéeis a wholly-owned subsidiary of Jafra S.A. (formerly known as CDRJ North Atlantic (Lux) S.àr.l.) (“Jafra S.A.”).

The accompanying financial statements for the year ended December 31, 2005 and 2004 reflect the operations of the Parent. The accompanying financial statements for the year ended December 31, 2003 reflect the operations of the Parent and include the operations of CDRJ Investments (Lux) S.A. (“CDRJ”) through May 20, 2003.

The terms of the indenture governing the Company’s outstanding 103/4% Notes (the “Indenture”) significantly restrict the Parent and certain of its 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 or losses) accruing from October 1, 2002, plus specified other amounts. 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 Indenture) plus up to $5.0 million.

Condensed Balance Sheet Information:


	As of December 31,
	2005			2004
	(In thousands)

Assets:
Cash and other assets	$	202		$	192
Investment in subsidiaries		65,496			(44,583	)

Total assets	$	65,698		$	(44,391	)

Liabilities:
Payables and other liabilities	$	463		$	66

Total liabilities	$	463		$	66

Stockholder’s equity (deficit):
Common stock	$	31,642		$	15
Additional paid in capital		47,473			—
Retained deficit		(8,390	)		(35,001	)
Cumulative translation adjustment		(5,490	)		(9,471	)

Total Stockholder’s equity (deficit)	$	65,235		$	(44,457	)

Total liabilities and stockholder’s equity (deficit)	$	65,698		$	(44,391	)

134

Condensed Statements of Operations Information:


	Years Ended December 31,
	2005			2004			2003
	(In thousands)

Income:
Operating expense	$	(391	)	$	(45	)	$	(99	)
Equity (losses) in earnings of subsidiaries		27,002			11,294			(7,852	)

Net income (loss)	$	26,611		$	11,249		$	(7,951	)

Condensed Statement of Cash Flows Information:


	Years Ended December 31,
	2005			2004		2003
	(In thousands)

Cash flows provided by (used in) operating activities:
Operating activities	$	4		$	6	$	(831	)
Distribution from subsidiary		—			—		159,781

Net cash provided by (used in) operating activities		4			6		158,950
Cash flows used in investing activities:
Investment in subsidiaries		(79,100	)		—		—

Net cash used in investing activities		(79,100	)		—		—
Cash flows used in financing activities:
Equity contribution from stockholder		79,100			—		—
Distribution to stockholders		—			—		(159,014	)

Net cash provided by (used in) financing activities		79,100			—		(159,014	)
Net change in cash and cash equivalents		4			6		(64	)
Cash and cash equivalents, beginning of the year		6			—		64

Cash and cash equivalents, end of period	$	10		$	6	$	—

During the year ended December 31, 2003, CDRJ made liquidating distribution of $83,570,000 of additional paid-in capital and $75,444,000 of retained earnings to its shareholders of record at May 20, 2003.

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Jafra WorldWide Holdings Lux S.àR.L. and Subsidiaries:


			Charged
	Balance at		to				Balance
	Beginning		Costs and		Deductions-		at End
Descriptions	of Period		Expenses		Recoveries		of Period
	(In thousands)

Accounts Receivable:
2005	$	9,394	$	9,363	$	8,054	$	10,703
2004		8,233		9,046		7,885		9,394
2003		8,213		8,549		8,529		8,233
Inventories:
2005	$	2,811	$	2,072	$	1,923	$	2,960
2004		2,645		2,458		2,292		2,811
2003		2,632		2,155		2,142		2,645
Tax valuation allowances:
2005	$	13,348	$	1,398	$	219	$	14,527
2004		15,931		480		3,063		13,348
2003		12,456		3,510		35		15,931

Jafra Cosmetics International, Inc. and Subsidiaries:


			Charged
	Balance at		to				Balance
	Beginning		Costs and		Deductions-		at End
Descriptions	of Period		Expenses		Recoveries		of Period

Accounts Receivable:
2005	$	621	$	505	$	495	$	631
2004		553		794		726		621
2003		613		670		730		553
Inventories:
2005	$	1,381	$	705	$	503	$	1,583
2004		1,418		888		925		1,381
2003		1,700		1,371		1,653		1,418
Tax valuation allowances:
2005	$	8,033	$	—	$	219	$	7,814
2004		7,805		228		—		8,033
2003		7,174		666		35		7,805

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Distribuidora Comercial Jafra, S.A. de C.V.:


			Charged
	Balance at		to				Balance
	Beginning		Costs and		Deductions-		at End
Descriptions	of Period		Expenses		Recoveries		of Period

Inventories:
2005	$	1,170	$	1,337	$	1,410	$	1,097
2004		904		1,394		1,128		1,170
2003		854		661		611		904
Tax valuation allowances:
2004	$	3,063	$	—	$	3,063	$	—
2003		—		3,063		—		3,063

Jafra Cosmetics International, S.A. de C.V. and Subsidiaries:


			Charged
	Balance at		to				Balance
	Beginning		Costs and		Deductions-		at End
Descriptions	of Period		Expenses		Recoveries		of Period

Accounts Receivable:
2005	$	8,363	$	8,845	$	7,241	$	9,967
2004		6,987		7,691		6,315		8,363
2003		7,161		7,601		7,775		6,987

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Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

Under the supervision and with the participation of management, the Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2005, and, based on their evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 2005, these controls and procedures are effective to ensure that (i) information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company maintains a system of internal control over financial reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III


Item 10.	*Directors, Executive Officers and Significant Employees of the Company*

The names, ages and positions of the executive officers, significant employees and directors of the Company are set forth below.


Name	Age	Position

Ronald B. Clark	70	Chief Executive Officer; Director
Gonzalo R. Rubio	62	President and Director
Eugenio Lopez Barrios	64	Chief Operating Officer and President of Mexican Operations
Beatriz Gutai	46	Senior Vice President, Global Marketing & Strategic Planning
Gary Eshleman(1)	47	Vice President and Treasurer
Markus von Blomberg	48	Director
Achim Schwanitz	63	Director
Eberhard Pothmann	62	Director
Jochen Sarrazin	63	Director
Wolfgang Bahlmann	53	Director
Ronald Weber	52	Director


(1)		Mr. Eshleman served as Chief Financial Officer from October 2004 until December 31, 2005

None of the Company’s directors or officers has any family relationship with any other director or officer.

Messrs. Clark and Rubio were nominated to serve as directors and are serving in such capacity pursuant to their respective employment agreements. Messrs. Schwanitz, Pothmann, Sarrazin and Bahlmann are principals of Vorwerk. Mr. Weber was nominated and selected by Vorwerk. Other than as described above, none of the Company’s directors are currently serving as such pursuant to an arrangement or understanding between such director and any other person or entity. Messrs. Clark and Rubio have amended the term of their current employment agreements, which are now set to expire June 30, 2006 and April 30, 2006, respectively.

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The business experience during the past five years (and beyond, in some instances) of each of the directors and executive officers listed above is as follows:

Ronald B. Clarkhas served as a director and Chief Executive Officer since joining Jafra in May of 1998. From 1997 to 1998, Mr. Clark served as President of Richmont Europe (Mary Kay Holding Company). Mr. Clark joined Mary Kay in 1992 as President, Mary Kay Europe. Before joining Mary Kay, Mr. Clark spent two years as Executive Vice President of Primerica Corp., 4 years as President of Jafra Cosmetics International, Inc. and 6 years as Vice President of Avon Products, Inc. He joined Avon Products, Inc. in 1959.

Gonzalo R. Rubiohas served as a director, and President since joining Jafra in May of 1998. He served as Chief Operating Officer since joining Jafra in May of 1998 until November 16, 2005. From 1992 to 1997, Mr. Rubio served first as an Area Vice President and later President of the European operations of Mary Kay Inc. Before joining Mary Kay, Mr. Rubio was employed by Avon Products, Inc. where he spent five years as Area Director for Europe, two years as International Operations Director and five years as Area Director for Latin America. He joined Avon Products, Inc. in 1970.

Eugenio Lopez Barrioshas served as President of Mexican Operations since joining Jafra in June of 1998. He has also served as Chief Operating Officer since November 16, 2005. Prior to joining Jafra, Mr. Lopez was president of Mary Kay Mexico from 1993 to 1998. Before joining Mary Kay, Mr. Lopez spent 30 years with Avon Products, Inc. where he served from 1959 to 1989 in a series of different positions ending as Vice President of Sales of Avon Mexico. He retired for a couple of years and then from 1991 to 1993 he joined Avon again, this time as General Manager of Avon Products Ecuador.

Gary L. Eshlemanhas served as Vice President and Treasurer since January 1, 2006. He served as Chief Financial Officer from October 2004 until December 31, 2005. From April 2000 to October 2004, he served as Vice President & Treasurer. Prior to that time, and since joining Jafra in September of 1998, Mr. Eshleman served as Director of Treasury. Prior to joining Jafra, Mr. Eshleman held financial positions with various companies including: L.A. Gear from 1992 to 1998, Griffin Homes from 1989 to 1992, Marriot/Host International from 1986 to 1989, and Hughes Aircraft Company from 1984 to 1986.

Beatriz Gutaihas served as Senior Vice President, Global Marketing & Strategic Planning since September of 2004. In her capacity in that role, she has also served and President Jafra Europe. From September of 2000 until September of 2004, she served as General Manager of the Hispanic Division of United States Operations. Prior to that time, Ms. Gutai, served as Vice President of Sales for the Hispanic Division and in various sales and management positions since joining Jafra in 1982.

Markus von Blomberghas served as a director of Jafra since November 16, 2005. Mr. von Blomberg has served as General Partner of Vorwerk & Co. KG, since January of 2005; and since February of 2005, he has served as a director of Vorwerk & Co. Interholding GmbH. From January of 2002 until December of 2004, he served as Managing Director of Vorwerk Deutschland Stiftung & Co. KG. From October 1998 to December 2001 Mr. von Blomberg served as Chairman of the Board of Directors of Bocklenberg Motte GmbH.

Achim Kurt Schwanitzhas served as a director since joining Jafra in May of 2004. Since October of 2000, Mr. Schwanitz has served as director of Vorwerk U.S.A., Inc. Since April of 1997, Mr. Schwanitz has served as General Partner of Vorwerk Folletto s.a.s. di Achim Schwanitz and Co. Since 1995, he also has served as director of Vorwerk & Co. Interholding GmbH. He has been a General Partner of Vorwerk & Co. KG since 1995.

Eberhard Pothmannhas served as a director of Jafra since May of 2004. Mr. Pothmann has served as a member of the Executive Board of Vescore Solutions, AG, since November of 2001. Since June of 1996, he has been a director of August Mittelsten Scheid & Sohne GmbH and Vorwerk Household Appliances Co., Ltd. Since December 1991, Mr. Pothmann has been a member of the Advisory Board of Akf Bank GmbH & Co. KG and Akf Leasing GmbH & Co. KG serving as chairman since January of 2005. He has also served as a member of the Advisory Boards of Gothaer Versicherungsbank WAG and Gothaer Finanzholding AG since June of 2005 and May of 2005, respectively. Mr. Pothmann is currently the Executive Vice President and Chief Financial Officer of Vorwerk & Co. KG. He has had two separate tenures in this capacity since 1985.

139

Jochen Walter Julius Alfred Sarrazinhas served as a director since May of 2004. Since 2002, Mr. Sarrazin has served as Senior Vice-President Corporate Controling of Vorwerk & Co. KG. Since 1995, he has also served as a director of Vorwerk U.S.A. Inc. Mr. Sarrazin has been General Manager of Vorwerk International Mittelsten Scheid & Co. since 1992.

Wolfgang Antonius Bahlmannhas served as a director since joining Jafra in May of 2004. Since January 1996, Mr. Bahlmann has served as Executive Vice President & Chief Human Resources Officer in Vorwerk & Co. KG and Chairman of the Administrative Board of Vorwerk & Co. Medical Aid.

Ronald Francis Weberhas served as a director since joining Jafra in November 2004. Since 1988, he has served as founding partner and director of Fiduciaire Weber & Bontemps, société a responsabilité limiteé.

At present, all directors will hold office until their successors are elected and qualified, or until their earlier removal or resignation.

Corporate Governance

The Company has not adopted a written code of ethics. The Company intends to adopt a written code of ethics to the extent required by law or applicable stock exchange rules. The Company’s ultimate parent is currently controlled by a single shareholder, Vorwerk & Co eins GmbH, which owns most of the Company’s ultimate parent outstanding equity securities. Five principals of Vorwerk & Co eins GmbH currently serve as members of the Company’s board of directors.

The Company’s Audit Committee consists of Ronald B. Clark, Eberhard Pothmann, and Jochen Sarrazin. The Company does not currently have outstanding equity securities listed on an exchange or automated quotation system, and therefore is not required to have designated an audit committee financial expert. Therefore, the Company has not made an assessment as to whether any member of the Audit Committee qualifies as a financial expert.

140


Item 11.	*Executive Compensation*

Compensation Of Executive Officers

The following table sets forth the compensation earned by the Company’s Chief Executive Officer, the four additional most highly compensated executive officers of the Company during 2005 (each, a “named executive officer”) for each of the last three fiscal years.

Summary Compensation Table


							All Other
							Compensation
Name and Principal Position	Year		Salary($)		Bonus($)(1)		($)(2)

Ronald B. Clark		2005	$	735,520	$	1,066,825	$	45,688
Chief Executive Officer and		2004		714,662		788,910		35,733
Director		2003		699,386		3,220,264		34,969
Gonzalo R. Rubio		2005		612,917		994,909		79,854
President and Director		2004		595,557		718,245		47,435
		2003		582,807		3,149,620		44,570
Eugenio Lopez Barrios		2005		512,687		986,407		37,120
Chief Operating Officer and President of Mexican		2004		483,674		335,256		27,962
Operations		2003		473,372		1,326,148		26,877
Beatriz Gutai		2005		260,286		356,100		27,703
Senior Vice President, Global Marketing and Strategic Planning		2004		219,306		192,750		39,897
		2003		170,926		124,395		21,452
Gary Eshleman		2005		249,875		314,915		32,437
Vice President, Treasurer		2004		198,179		129,000		11,630
(Chief Financial Officer from October 2004 through December 31, 2005)		2003		151,134		103,157		9,732


(1)		Bonus amounts for 2004 include amounts paid directly to the employee from the former primary shareholder. Bonus amounts for 2003 include special one-time payments to option holders in connection with the Recapitalization.

(2)		Amounts shown in this column primarily constitute the Company’s contributions under its 401(k) and Supplemental Savings Plans, and, reimbursement of certain relocation and automobile expenses.

Compensation Of Directors

Members of the Board do not receive any additional compensation for their services in such capacity. The Company’s current non-employee director is a partner in the firm of Weber & Bontemps of 6 place de Nancy,L-2212 Luxembourg. During 2005 and 2004, Weber & Bontemps received approximately $30,000 and $14,000, respectively, for tax consulting, bookkeeping and administrative services of the Company.

Employment Agreements

In 1998, Messrs. Clark, Rubio and Lopez Barrios entered into employment agreements with the Company’s predecessor. The employment agreements were assumed by the Company and have a continuous “rolling” term of two years. The employment agreements for Messrs. Clark and Rubio were amended to shorten their term to June 30, 2006 and April 30, 2006, respectively. Pursuant to their respective agreements, as of their 2005 anniversary dates, Messrs. Clark, Rubio and Lopez Barrios receive annual base salaries of $744,232, $620,177 and $499,271, respectively. Under the employment agreements, the board will review the base salary annually and, in its sole discretion, may increase (but not decrease) such base salary from time to time based upon, among other things, the performance of the executive and prevailing industry salary levels; provided that the executives’ base salary will be automatically increased on each anniversary date by an amount equal to the average increase in the consumer price

141

index during the immediately preceding twelve month period, as reported in the Wall Street Journal. The employment agreements provide for a target annual bonus equal to 60% of annual base salary if the Company achieves the performance goals established under its annual incentive plan for executives. The executives may receive a larger bonus if such goals are exceeded. The employment agreements further provide that if the Company terminates any such named executive officer’s employment without “cause” (as defined in the employment agreement) or any such executive terminates his employment for “good reason” (as so defined), the officer will be entitled to continued payments of his base salary for the remaining term of his employment agreement and to payment of a pro rata annual bonus for the year of termination provided that the Company achieve the performance objectives established under the Company’s annual incentive plan applicable for such year. Each of the employment agreements also contains covenants regarding nondisclosure of confidential information, noncompetition and nonsolicitation. The employment agreements for Messrs. Clark and Rubio each provide that the Company will use its reasonable best efforts to cause each such executive to be nominated and elected to serve as a member of the Company’s board of directors during his term of employment. If the Company does not submit Mr. Clark’s or Mr. Rubio’s name to the Company’s shareholders for election to the board of directors, or if the Company otherwise fails to meet its obligation, both Messrs. Clark and Rubio will be entitled to terminate their employment for “good reason” pursuant to their employment agreements.

JCI entered into employment agreements with Ms. Gutai and Mr. Eshleman on November 11, 2004. Ms. Gutai and Mr. Eshleman receive annual base salaries of $262,500, and $252,000, respectively. The employment agreements provide that if the Company terminates the employment of either Ms. Gutai or Mr. Eshleman, without “cause” (as defined in the employment agreement), they will be entitled to continued payments of base salary for periods of 18 and 12 months, respectively.

Compensation Committee Interlocks and Insider Participation

The Company does not currently have a Compensation Committee. No current or former officers or employees of the Company participated in deliberations of the Board of Directors concerning executive officer compensation. No members of the Compensation Committee during 2005 were employees or former employees of the Company or any of its subsidiaries. During 2005, no executive officer of the Company served on the compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on the Company’s Compensation Committee or Board.

Prior to the Acquisition, the Compensation Committee of the Board of Directors consisted of Kenneth D. Taylor, Thomas E. Ireland and Siri Marshall. Mr. Ireland is a principal of CD&R, a limited partner of Associates V (the general partner of CD&R Fund V) and a shareholder and a director of Investment Associates II (a general partner of Associates). Pursuant to a consulting agreement that was terminated on May 27, 2004, CD&R received a fee for advisory, management consulting and monitoring services to the Company in the amount of approximately $0.4 million in 2004. As required by the terms of the Company’s prior lending arrangements, such fees were determined by arm’s-length negotiation and are believed by the Company to be reasonable. Parent also agreed to indemnify the members of the board employed by CD&R and CD&R against liabilities incurred under securities laws, liabilities to third parties, and liabilities relating to the provision by CD&R of advisory management, consulting and monitoring services.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

Parent owns, indirectly, all of the outstanding capital stock of JCI, Jafra Distribution and Jafra Cosmetics S.A. The Parent is a wholly-owned subsidiary of Jafra S.A. The table below sets forth, as of March 15, 2006, the

142

beneficial ownership of owners of 5% or more of Jafra S.A. Common Stock. There are no directors or named executives who own Common Stock of Jafra S.A.


	Number of		Percent of
Name and Address of Beneficial Owner(1)	Shares		Class(2)

Vorwerk(3)		828,413		99.99


(1)		In accordance withRule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed a “beneficial owner” of a security if he or she has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities which that person has the right to acquire beneficial ownership of within 60 days. More than one person may be deemed to be a beneficial owner of the same securities. Vorwerk has sole voting and investment power as to its shares.

(2)		Based upon 828,414 shares of common stock outstanding as of March 15, 2006. The remaining share of Jafra S.A. is owned by an affiliate company of Vorwerk.

(3)		Address for Vorwerk is Muhlenweg 17-37, D-42270 Wuppertal Germany.


Item 13.	*Certain Relationships and Related Transactions*

On January 6, 2005, the Company paid Vorwerk approximately $20,044,000 representing all accrued interest and outstanding principal owing to a certain loan agreement entered into by the Company as borrower and Vorwerk as lender on August 6, 2004.


Item 14.	*Principal Accounting Fees and Services*

Audit Fees. The Company’s principal accountant, PricewaterhouseCoopers LLP billed approximately $909,000 for audit services included in the annual audit of the financial statements, the reviews of quarterly reports, statutory reports required internationally and assistance with and review of documents filed with the SEC for 2005. In 2004 and 2003, the Company’s former principal accountant, Ernst & Young, LLP, billed approximately $850,000 and $1,059,000, respectively, for audit services including the annual audit of the financial statements, the reviews of quarterly reports, statutory reports required internationally and assistance with and review of documents filed with the SEC.

Audit-Related Fees. The Company principal accountant in 2005 did not bill any amounts for audit-related fees. The Company’s former principal accountant billed approximately $822,000 and $225,000 for audit-related fees for the year ended December 31, 2004 and 2003. These fees primarily related to professional services related to due diligence in connection with contemplated transactions not completed.

Tax Fees. The Company’s principal accountant billed approximately $99,000 related to tax compliance and tax planning for the year ended December 31, 2005. The Company’s former principal accountant billed $72,000 related to tax compliance and tax planning services for the year ended December 31, 2004. The Company’s former principal accountant did not bill any fees for tax compliance or tax planning services for the year ended December 31, 2003.

All Other Fees. The Company’s principal accountant or former principal accountant did not bill any fees for other services during the last two fiscal years.

The Audit Committee regularly reviews and determines whether specific projects or expenditures with the Company’s independent auditors, PricewaterhouseCoopers LLP and their affiliates, potentially affect their independence. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by PricewaterhouseCoopers LLP. Pre-approval is generally provided by the Audit Committee for up to one year, is detailed as to the particular service or category of services to be rendered, and is generally subject to a specific budget. The Audit Committee may also pre-approve additional services or specific engagements on acase-by-case basis. Management is required to provide quarterly updates to the Audit Committee regarding the extent of any services provided in accordance with this pre-approval, as well as the cumulative fees for all non-audit services incurred to date.

143

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*

(1) Financial Statements. Reference is made to the Index to Financial Statements and Schedules of the Company on page 44 of this Annual Report onForm 10-K.

(2) Financial Statement Schedules. Reference is made to the Index to Financial Statements and Financial Statement Schedules of the Company on page 44 of this Annual Report onForm 10-K. See also the following financial statement schedules which should be read in conjunction with the financial statements included in Item 8 of this Annual Report onForm 10-K.


	Pages in this
	Annual Report
	OnForm 10-K

Jafra Cosmetics International, Inc.:
Reports of Independent Registered Public Accounting Firms		75
Consolidated Balance Sheets as of December 31, 2005 and 2004		77
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		78
Consolidated Statements of Stockholder’s Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003		79
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		80
Notes to Consolidated Financial Statements		81
Distribuidora Comercial Jafra, S.A. de C.V.:
Reports of Independent Registered Public Accounting Firms		99
Balance Sheets as of December 31, 2005 and 2004		101
Statements of Operations for the years ended December 31, 2005, 2004 and 2003		102
Statements of Stockholder’s Equity for the years ended December 31, 2005, 2004 and 2003		103
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		104
Notes to Financial Statements		105
Jafra Cosmetics International, S.A. de C.V.:
Reports of Independent Registered Public Accounting Firms		115
Consolidated Balance Sheets as of December 31, 2005 and 2004		117
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003		118
Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2005, 2004 and 2003		119
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		120
Notes to Consolidated Financial Statements		121
Schedule I — Condensed Financial Information of Registrant		134
Schedule II — Valuation and Qualifying Accounts		136

144

(3) Exhibits. The following documents are exhibits to this Annual Report onForm 10-K..


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	3	.1	Certificate of Incorporation of CDRJ Acquisition Corporation, dated March 31, 1998	S-4	333-62989		3	.1	September 4, 1998
	3	.2	Amended and Restated By-laws of Jafra Cosmetics International, Inc. (formerly CDRJ Acquisition Corporation), as adopted on July 21, 1998	S-4	333-62989		3	.2	September 4, 1998
	3	.3	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Jafra Cosmetics International, S.A. de C.V., together with a unofficial summary thereof in English	S-4	333-62989		3	.3	September 4, 1998
	3	.4	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Dirsamex, S.A. de C.V., together with a unofficial summary thereof in English	S-4/A	333-62989		3	.4	October 27, 1998
	3	.5	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Jafra Cosmetics S.A. de C.V., formerly known as Jafra Cosmetics S. de R.L. de C.V., together with a unofficial summary thereof in English	S-4/A	333-62989		3	.5	October 27, 1998
	3	.6	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Quali fax, S.A. de C.V., together with a unofficial summary thereof in English	S-4/A	333-62989		3	.6	October 27, 1998
	3	.7	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Reday, S.A. de C.V., together with a unofficial summary thereof in English	S-4/A	333-62989		3	.7	October 27, 1998
	3	.8	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Cosmeticos y Fragancias, S.A. de C.V., together with an unofficial summary thereof in English	10-K	333-106666		3	.8	April 2, 2001
	3	.9	Notarial Deed and Resolutions, together with an unofficial summary thereof in English, for the transformation of Jafra Cosmetics S. de R.L. de C.V. into Jafra Cosmetics S.A. de C.V.	10-K	333-106666		3	.9	March 30, 2000
	3	.10	Approval, dated as of April 17, 2000, by the Public Registry of Commerce of the United Mexican States of the merger of Consultoria Jafra S.A. de C.V. and Distribuidora Venus, S.A. de C.V. with and into Reday, S.A. de C.V., together with supporting shareholders’ resolutions and the unofficial English translation thereof	10-Q	333-106666		3	.10	August 14, 2000

145


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	3	.11	Notarial Deed and Resolutions, together with an unofficial summary thereof in English, for the changing of the corporate name from Reday, S.A. de C.V. to Distribuidora Venus, S.A. de C.V. as a consequence of the merger of Distribuidora Venus, S.A. de C.V. into Reday, S.A. de C.V.	10-K	333-106666		3	.11	April 2, 2001
	3	.12	Notarial Deed and Resolutions, together with an unofficial summary thereof in English, for the renaming of Qualifax, S.A. de C.V. as Servi day S.A. de C.V.	10-Q	333-106666		3	.12	August 14, 2001
	3	.13	Deed of Incorporation (acta constitutiva) and current by-laws (estatutos sociales) of Distribuidora Comercial Jafra S.A. de C.V., together with an unofficial summary thereof in English, dated February 26, 2003	10-Q	333-106666		3	.13	May 8, 2003
	3	.14	Articles of Association of Jafra Worldwide Holdings (Lux) S. àr.l., together with an unofficial summary thereof in English, dated February 24, 2003	10-Q	333-106666		3	.14	May 8, 2003
	3	.15	Amendment, dated May 20, 2003 of Jafra Cosmetics International, S.A. de C.V.’s by-laws providing for preferred shares, translation in English	S-4/A	333-106666		3	.15	August 14, 2003
	3	.16	Deed of Incorporation (acta constitutiva), including all amendments thereto, and current by-laws (estatutos sociales) of Jafra Fin, S.A. de C.V., translation in English	S-4/A	333-106666		3	.16	August 14, 2003
	4	.1	Indemnity, Subrogation and Contribution Agreement, dated May 20, 2003, among Distribuidora Comercial Jafra, S.A. de C.V., Jafra Cosmetics International, S.A, de C.V., each Subsidiary of Jafra Cosmetics International, S.A. de C.V. listed on Schedule I thereto and Credit Suisse First Boston	S-4	333-106666		4	.1	June 30, 2003
	4	.2	JCI Guarantee Agreement, dated May 20, 2003, between Jafra Cosmetics International, Inc. and Credit Suisse First Boston	S-4	333-106666		4	.2	June 30, 2003
	4	.3	DCJ Guarantee Agreement, dated May 20, 2003, between Distribuidora Comercial, Jafra, S.A. de C.V. and Credit Suisse First Boston	S-4	333-106666		4	.3	June 30, 2003
	4	.4	Mexican Subsidiary Guarantee Agreement, dated May 20, 2003, among Jafra Cosmetics International, S.A. de C.V., and each of the subsidiaries of Jafra Cosmetics International, S.A. de C.V. or Distribuidora Comercial Jafra, S.A. de C.V. listed on Schedule I thereto	S-4	333-106666		4	.4	June 30, 2003
	4	.5	Parent Guarantee Agreement, dated May 20, 2003, between Jafra Worldwide Holdings (Lux) S.àr.l. and Credit Suisse First Boston	S-4	333-106666		4	.5	June 30, 2003

146


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	4	.6	Mexican Pledge Agreement, dated May 20, 2003, among CDRJ Latin America Holding Company B.V., Latin Cosmetics Holdings, B.V., Regional Cosmetics Holding, B.V., Southern Cosmetics Holdings B.V., CDRJ Mexico Holding Company B.V. and Credit Suisse First Boston	S-4	333-106666		4	.6	June 30, 2003
	4	.7	Pledge Agreement, dated May 20, 2003 among Jafra Cosmetics International, Inc. and each of the subsidiaries of Jafra Cosmetics International, Inc. listed on Schedule I thereto and Credit Suisse First Boston	S-4	333-106666		4	.7	June 30, 2003
	4	.8	Security Agreement, dated May 20, 2003, among Jafra Cosmetics International, Inc., each subsidiary of Jafra Cosmetics International, Inc. listed on Schedule I thereto and Credit Suisse First Boston	S-4	333-106666		4	.8	June 30, 2003
	4	.9	Mexican Security Agreement, dated May 20, 2003, among Distribuidora Comercial Jafra, S.A. de C.V., Jafra Cosmetics International, S.A. de C.V., Dirsamex, S.A. de C.V., Serviday, S.A. de C.V., Jafra Fin, S.A. de C.V., Jafra Cosmetics, S.A. de C.V., and Cosmeticos y Fragancias, S.A. de C.V., translation in English	S-4/A	333-106666		4	.9	August 14, 2003
	4	.10	Deed of Trust, with Assignment of Leases and Rents, Fixture Filing and Security Agreement, dated May 19, 2003, from Jafra Cosmetics International, Inc. to Title Serv Agency, Inc., as trustee for the benefit of Credit Suisse First Boston	S-4	333-106666		4	.10	June 30, 2003
	4	.11	Notarial Deed of Plede, dated May 20, 2003, with respect to the pledge to Credit Suisse First Boston of 24 ordinary shares of the capital stock of CDRJ Europe Holding Company B.V. by Jafr Cosmetics International, Inc	S-4	333-106666		4	.12	June 30, 2003
	4	.12	Notarial Deed of Pledge, dated May 20, 2003, with respect to the third party pledge to Credit Suisse First Boston of 40 ordinary shares of the capital stock of CDRJ Latin America Holding Company B.V. by CDRJ North Atlantic (Lux) S.àr.l	S-4	333-106666		4	.11	June 30, 2003
	4	.13	Indenture, date May 20, 2003, by and among Jafra Cosmetics International, Inc., Distribuidora Comercial Jafra, S.A. de C.V., Jafra Worldwide Holdings (Lux) S.àr.l., CDRJ Investments (Lux) S.A. and U.S. Bank National Association	S-4	333-106666		4	.14	June 30, 2003

147


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	4	.14	First Supplemental Indenture, dated as of May 20, 2003, by and among Jafra Cosmetics International, S.A. de C.V., Distribuidora Comercial Jafra, S.A. de C.V., Dirsamex, S.A.de C.V., Distribuidora Venus, S.A. de C.V., Serviday, S.A. de C.V., Cosmeticos y Fragancias, S.A. de C.V., Jafra Cosmetics S. A. de C.V., Jafra Fin S.A. de C.V., Jafra Cosmetics International, Inc. and U.S. Bank National Association.	S-4	333-106666		4	.14	June 30, 2003
	4	.15	Registration Rights Agreement, dated May 20, 2003, by and among Jafra Cosmetics International, Inc., Distribuidora Comercial Jafra, S.A. de C.V., Jafra Worldwide Holdings (Lux) S.àr.l., CDRJ Investments (Lux) S.A. and the Initial Purchasers.	S-4	333-106666		4	.15	June 30, 2003
	4	.16	Form of Global Note.	S-4	333-106666		4	.16	June 30, 2003
	4	.17	Restated Credit Agreement, dated as of August 16, 2004, among the Borrowers, the Company, the Lenders thereto, the Issuing Bank, The Bank of New York, as administrative agent and collateral agent for the Lenders.	8-K	333-106666		4	.17	August 19, 2005
	10	.1	Jafra Cosmetics International, Inc. Supplemental Savings Plan, dated October 27, 1998.*	10-Q	333-62989		10	.1	May 17, 1999
	10	.2	Jafra Cosmetics International, Inc. Special Supplemental Savings Plan for Non-United States-Source Income, dated January 20, 1999.*	10-Q	333-106666		10	.2	May 17, 1999
	10	.3	Asset Purchase Agreement, dated as of June 10, 1999, as amended by Amendment No. 1, dated as of June 10, 1999.	8-K	333-106666		10	.3	June 25, 1999
	10	.4	Amendment No. 1 to Asset Purchase Agreement, dated as of June 10, 1999.	8-K	333-106666		10	.4	June 25, 1999
	10	.5	Sale Agreement, dated as of September 29, 1999, between the Jafra Cosmetics International Inc. and Towns gate Road LLC.	10-Q	333-106666		10	.5	November 12, 1999
	10	.6	Sale Agreement, dated as of October 15, 1999, between the Jafra Cosmetics International Inc. and Selv in Properties.	10-Q	333-106666		10	.6	November 12, 1999
	10	.7	Trust Agreement dated May 20, 1999, by and between Jafra Cosmetics International, Inc. and Scudder Trust Company.	10-K	333-106666		10	.7	March 30, 2000
	10	.8	First Amendment to Amended and Restated Jafra Cosmetics International, Inc. Stock Incentive Plan.*	10-K	333-106666		10	.8	April 2, 2001
	10	.9	Administrative Servces Agreement, dated May 20, 2003, between Distribuidora Venus, S.A. de C.V. and Distribuidora Comercial Jafra, S.A. de C.V.	S-4	333-106666		10	.9	June 30, 2003

148


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	10	.10	Assignment Assumption and Liquidator Agreement, dated May 20, 2003, between CDRJ North Atlantic (Lux) Sàr.l and Jafra Worldwide Holdings (Lux) S.àr.l.	S-4	333-106666		10	.10	June 30, 2003
	10	.11	Stock Purchase Agreement, dated May 20, 2003, among Jafra Cosmetics International, S.A. de C.V., Distribuidora Comercial Jafra, S.A. de C.V., CDRJ Latin American Holding Company B.V, Latin Cosmetics Holdings, B.V., Regiona Cosmetics Holding, B.V., Southern Cosmetics Holdings, B.V. and CDRJ Mexico Holdings Company, B.V.	S-4	333-106666		10	.11	June 30, 2003
	10	.12	Stock Subscription and Guarantee Agreement, dated May 20, 2003, between Jafra Cosmetics International, S.A. de C.V. and Distribuidora Comercial Jafra, S.A. de C.V.	S-4	333-106666		10	.12	June 30, 2003
	10	.13	Purchase and Sale Agreement, dated May 20, 2003, between Distribuidora Venus, S.A. de C.V. and Distribuidora Comercial Jafra, S.A. de C.V.	S-4	333-106666		10	.13	June 30, 2003
	10	.14	Registration and Participation Agreement, dated May 20, 2003, among CDRJ North Atlantic (Lux) S.àr.l. and Clayton, Dubilier & Rice Fund V Limited Partnership and other parties thereto.	S-4	333-106666		10	.14	June 30, 2003
	10	.15	Form of Contribution Agreement and Power of Attorney, among CDRJ Investments (Lux) S.A., Jafra Worldwide Holdings (Lux)S.àr.l., and the stockholders of CDRJ Investments (Lux) S.A.	S-4	333-106666		10	.15	June 30, 2003
	10	.16	Form of Consent to Assignment of Stock Subscription Agreement, among CDRJ Investments (Lux) S.A., CDRJ North Atlantic (Lux) Sàr.l. and the stockholders of CDRJ Investments (Lux) S.A.*	S-4	333-106666		10	.16	June 30, 2003
	10	.17	Form of Consent to Assignment, Assumption and Novation of Employment Agreement, between CDRJ Investments (Lux) S.A., Jafra Worldwide Holdings (Lux) Sàr.l., Jafra Cosmetics International, Inc. and certain executives party to employment agreements pursuant to which such executives are employed by Jafra Cosmetics International, Inc.*	S-4	333-106666		10	.17	June 30, 2003
	10	.18	Purchase Agreement, dated as of May 2, 2003, by and among Jafra Cosmetics International, Inc., Distribuidora Comercial Jafra, S.A. de C.V., Jafra Worldwide Holdings (Lux)S.àr.l., CDRJ Investments (Lux) S.A.	S-4	333-106666		10	.18	June 30, 2003
	10	.19	Exchange Agreement among Jafra Cosmetics International, Inc., Distribuidora Comercial Jafra, S.A. de C.V. and U.S. Bank National Association.	10-K	333-106666		10	.19	November 13, 2003

149


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	10	.20	Redemption Agreement, dated February 13, 2004, between Ademar Serodio and CDRJ North Atlantic (Lux) S.àr.l.	10-K	333-106666		10	.20	March 30, 2004
	10	.21	Transfer of Option Agreement, dated February 13, 2004, by Ademar Serodio,	10-K	333-106666		10	.21	March 30, 2004
	10	.22	Employment Agreement, dated April 30, 1998, between Ronald B. Clark and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.22	March 30, 2004
	10	.23	Employment Agreement, dated June 1, 1998, between Michael DiGregorio and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.23	March 30, 2004
	10	.24	Addendum to Employment Agreement, dated June 4, 1999, among CDRJ Investments (Lux) S.A., Jafra Cosmetics International, Inc. and Michael DiGregorio.*	10-K	333-106666		10	.24	March 30, 2004
	10	.25	Employment Agreement, dated June 1, 1998, between Jaime Lopez Guirao and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.25	March 30, 2004
	10	.26	Employment Agreement, dated April 30, 1998, between Ralph S. Mason, III and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.26	March 30, 2004
	10	.27	Employment Agreement, dated April 30, 1998, between Gonzalo Rubio and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.27	March 30, 2004
	10	.28	Confidential General Release and Separation Agreement, dated as of March 2, 2004, between Jaime Lopez Guirao, CDRJ North Atlantic (Lux) S.àr.l. and Jafra Cosmetics International, Inc.*	10-K	333-106666		10	.28	March 30, 2004
	10	.29	Assignment, Assumption and Consent Agreement, dated February 6, 2004, among Michael DiGregorio, Dale Martin, Jr., as trustee, and CDRJ Investments (Lux) S.A.*	10-K	333-106666		10	.29	March 30, 2004
	10	.30	Stock Purchase Agreement, dated as of March 29, 2004, among Vorwerk & Co. eins GmbH, CDRJ North Atlantic (Lux) S.àr.l. and the stockholders of CDRJ Investments (Lux) S.A., the indirect owners of CDRJ North Atlantic (Lux) S.àr.l	10-Q	333-106666		10	.30	May 14, 2004
	10	.31	Employment Agreement with Gary Eshleman, effective October 1, 2004.*	8-K	333-106666		10	.31	January 28, 2005
	10	.32	Employment Agreement with Beatriz Gutai, effective October 1, 2004.*	10-K			10	.32	March 31, 2005
	10	.33	Amendments to employment agreements with (1) Ronald B. Clark, on May 17, 2005, (2) Gonzalo R. Rubio, on May 17, 2005, and (3) Eugenio Lopez Barrios, on May 20, 2005.*	8-K	333-106666		10	.33	May 26, 2005
	10	.34	Amendments, on May 26, 2005, to employment agreements with Gary Eshleman and Beatriz Gutai.*	8-K			10	.34	June 6, 2005

150


Exhibit				Incorporated by Reference
No.			Description of Document	Form	File No.	Exhibit			Filing Date

	10	.35	Engagement of PricewaterhouseCoopers LLP as independent accountants, effective August 16, 2005.	8-K	333-106666		10	.35	August 23, 2005
	10	.36	Amendment to Employment Agreement with Ron Clark, effective November 16, 2005.*	8-K	333-106666		10	.36	November 23, 2005
	10	.37	Amendment to Employment Agreement with Gonzalo R. Rubio, effective December 9, 2005.*	8-K	333-106666		10	.37	December 13, 2005
	10	.38	Amendment to Employment Agreement with Gary Eshleman , effective December 16, 2005.*	8-K	333-106666		10	.38	December 20, 2005
	21	.1	Subsidiaries of the registrant.						Filed herewith
	31	.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.						Filed herewith
	31	.2	Rule 13a-14(a)/15d-14(a) Certification by Principal Accounting Officer.						Filed herewith
	32	.1	Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.						Filed herewith
	32	.2	Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.						Filed herewith


*		Indicates a management contract or compensatory plan.

151

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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


	By:	/s/ RONALD B. CLARK

Name: Ronald B. Clark


	Title:	Chief Executive Officer and

Director

Date March 31, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ RONALD B. CLARK Ronald B. Clark	Chief Executive Officer and Director (Principal Executive Officer)	March 31, 2006

/s/ STACY WOLF Stacy Wolf	Vice President and Corporate Controller (Principal Accounting Officer)	March 31, 2006

/s/ GONZALO RUBIO Gonzalo Rubio	Director	March 31, 2006

/s/ MARKUS VON BLOMBERG Markus von Blomberg	Director	March 31, 2006

/s/ ACHIM SCHWANITZ Achim Schwanitz	Director	March 31, 2006

/s/ EBERHARD POTHMANN Eberhard Pothmann	Director	March 31, 2006

/s/ WOLFGANG BAHLMANN Wolfgang Bahlmann	Director	March 31, 2006

/s/ JOCHEN SARRAZIN Jochen Sarrazin	Director	March 31, 2006

/s/ Ronald Weber Ronald Weber	Director	March 31, 2006

152

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Constraining
Legalese
Litigious
Readability	8th grade Avg

Jafra Worldwide Holdings Lux Sarl Inactive 10-K2005 FY Annual report

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