UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ( MARK ONE ) /X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1996. OR / / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________to _______. Commission File No. 0-16469 JEAN PHILIPPE FRAGRANCES, INC. ( Exact name of registrant as specified in its charter ) Delaware 13-3275609 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 551 Fifth Avenue, New York, New York 10176 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (212) 983-2640. 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 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 X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At November 12, 1996, there were 9,871,981 shares of common stock, par value $.001 per share, outstanding.
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES INDEX Page Number Part I. Financial Information Item I. Financial Statements 1 Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 (audited) 2 Consolidated Statements of Income for the Three Month and Nine Month Periods Ended September 30, 1996 (unaudited) and September 30, 1995 (unaudited) 3 Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1996 (unaudited) and September 30, 1995 (unaudited) 4 Notes to Unaudited Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 11 Signatures 12
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Part I. Financial Information Item I. Financial Statements In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the rules and regulations of the Securities and Exchange Commission and therefore, do not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1995 included in the Company's annual report filed on Form 10-K. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the entire fiscal year. Page 1
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> ASSETS September 30, December 31, 1996 1995 -------------------- -------------------- (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $17,907,329 $14,203,713 Accounts receivable, net 27,037,826 22,884,355 Inventories 25,388,306 26,093,106 Receivables, other 1,450,024 970,468 Other 1,323,151 987,017 Deferred tax benefit 1,181,030 2,400,935 -------------------- -------------------- Total current assets 74,287,666 67,539,594 Equipment and leasehold improvements, net 1,813,000 1,970,126 Other assets 1,727,986 1,313,694 Deferred tax benefit 581,507 Intangible assets, net 9,564,137 12,596,322 -------------------- -------------------- $87,392,789 $84,001,243 ==================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable, banks $12,193,177 $9,921,881 Accounts payable 14,610,104 15,012,125 Income taxes payable 144,583 1,241,933 -------------------- -------------------- Total current liabilities 26,947,864 26,175,939 -------------------- -------------------- Long-term debt 491,870 596,092 -------------------- -------------------- Minority interests 5,517,241 5,252,979 -------------------- -------------------- Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 9,871,981 and 10,009,981 shares at September 30, 1996 and December 31, 1995, respectively 9,872 10,010 Additional paid-in capital 20,609,985 20,609,985 Retained earnings 37,093,420 32,565,096 Foreign currency translation adjustment 695,925 1,681,305 Treasury stock, at cost, 948,503 and 810,503 shares at September 30, 1996 and December 31, 1995, respectively (3,973,388) (2,890,163) -------------------- -------------------- 54,435,814 51,976,233 -------------------- -------------------- $87,392,789 $84,001,243 ==================== ==================== </TABLE> See notes to financial statements. Page 2
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> Net sales $ 22,578,172 $ 25,479,586 $ 68,463,202 $ 69,244,113 Cost of sales 12,640,763 13,514,405 37,439,130 35,361,205 ------------ ------------ ------------ ------------ Gross margin 9,937,409 11,965,181 31,024,072 33,882,908 Selling, general and administrative 7,469,531 8,496,998 23,381,030 24,323,086 ------------ ------------ ------------ ------------ Income from operations 2,467,878 3,468,183 7,643,042 9,559,822 ------------ ------------ ------------ ------------ Other charges (income): Interest 239,700 296,639 647,526 826,565 Loss (gain) on foreign currency 24,389 (87,506) 170,527 171,142 Interest and dividend (income) (142,237) (66,002) (405,539) (191,554) (Gain) on sale of stock of subsidiary, net (12,183) (13,752) (32,064) ------------ ------------ ------------ ------------ 121,852 130,948 398,762 774,089 ------------ ------------ ------------ ------------ Income before income taxes 2,346,026 3,337,235 7,244,280 8,785,733 Income taxes 800,239 1,238,022 2,229,673 3,367,745 ------------ ------------ ------------ ------------ Net income before minority interest 1,545,787 2,099,213 5,014,607 5,417,988 Minority interest in net income of consolidated subsidiary 67,906 27,421 486,283 97,605 ------------ ------------ ------------ ------------ Net income $ 1,477,881 $ 2,071,792 $ 4,528,324 $ 5,320,383 ============ ============ ============ ============ Net income per common and common equivalent share $ 0.15 $ 0.20 $ 0.45 $ 0.51 ============ ============ ============ ============ Number of common and common equivalent shares outstanding 9,911,691 10,561,214 10,047,872 10,482,994 ============ ============ ============ ============ </TABLE> See notes to financial statements. Page 3
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine months ended September 30, 1996 1995 ------------ ------------ (unaudited) (unaudited) <S> <C> <C> Operating activities: Net income $ 4,528,324 $ 5,320,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,075,646 1,022,884 Gain on sale of stock of subsidiary (13,672) (32,064) Minority interest in net income 486,283 97,605 Increase (decrease) in cash from changes in: Accounts receivable (4,882,471) (5,672,227) Inventories 43,800 (4,512,189) Other assets (1,337,982) 979,753 Deferred tax benefit 1,717,412 126,856 Accounts payable 48,979 963,339 Income taxes payable (1,052,350) (176,272) ------------ ------------ Net cash provided by (used in) operating activites 613,969 (1,881,932) ------------ ------------ Investing activities: Purchase of equipment and leasehold improvements (351,984) (489,667) Trademark and license acquisitions (14,176) (65,413) Proceeds from sale of trademark 2,150,000 ------------ ------------ Net cash provided by (used in) investing activities 1,783,840 (555,080) ------------ ------------ Financing activities: Increase (decrease) in loan payable, bank 2,683,296 4,944,936 Repayment of long-term debt (189,200) Proceeds from sale of stock of subsidiary 67,200 Proceeds from exercise of options and warrants 102,247 Purchase of treasury stock (1,083,363) (2,140,232) ------------ ------------ Net cash provided by financing activities 1,599,933 2,784,951 ------------ ------------ Effect of exchange rate changes on cash (294,126) 6,878 ------------ ------------ Increase in cash and cash equivalents 3,703,616 354,817 Cash and cash equivalents at beginning of period 14,203,713 5,275,142 ------------ ------------ Cash and cash equivalents at end of period $ 17,907,329 $ 5,629,959 ============ ============ Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 633,000 $ 826,000 Income taxes 853,000 3,907,000 </TABLE> See notes to financial statements. Page 4
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Notes to Unaudited Financial Statements 1. Significant Accounting Policies: The accounting policies followed by the Company are set forth in the notes to the Company's financial statements included in its Form 10-K which was filed with the Securities and Exchange Commission for the year ended December 31, 1995. 2. Earnings Per Share: Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding during each period. Common equivalent shares, which consist of unissued shares under options and warrants, are included in the computation when the results are dilutive. 3. Inventories: Inventories consist of the following: September 30, December 31, 1996 1995 ----------- ----------- Raw materials and component parts $11,592,669 $10,981,751 Finished Goods 13,795,637 15,111,355 ----------- ----------- $25,388,306 $26,093,106 =========== =========== Page 5
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's long-term business strategy of building core volume and profitability, developing products in new categories, exploring strategic acquisition opportunities, and pursuing expansion in international markets remains as management's primary long-term focus. Current quarter sales and earnings however, reflect the difficulties encountered in the current retail environment and obstacles encountered in bringing the Company's newly acquired lines to the profitability levels originally anticipated. Management has and will continue to take the steps it deems necessary to resume sales growth at improved profitability levels. Three Months Ended September 30, 1996 Compared to September 30, 1995 Net sales decreased 11% to $22.6 million, as compared to $25.5 million in 1995. This decline is primarily the result of the Company's decision to curtail certain promotional programs which did not contribute to the overall bottom line. The Company's decision not to repeat its Romantic Illusions promotion of 1995 was the result of a poor sell through which resulted in a very high return rate. Such returns negatively impacted net sales in the second and early part of the third quarters of 1996. Certain Jordache lip and nail promotions, which did not achieve the desired overall sell through, were either curtailed or deleted. Excluding the effect of the 1995 Romantic Illusion promotion and the related returns, sales of the Company's core Alternative Designer Fragrance lines increased 17% for the three months ended September 30, 1996. The Aziza hypo-allergenic eye cosmetic line, which made its debut in the latter part of the first quarter of 1996, represented just over 2% of sales for the three months ended September 30, 1996. Aziza continues to enjoy a very strong sell through at the retail level. However, the sell in, to mass market merchandisers and drug store chains, continues to be slow because competition for retail space in the eye care category remains very intense. Sales in the Cutex product categories were down approximately 9%, which is the result of decreased promotional activity. Page 6
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Sales generated by the Company's French subsidiaries decreased 15%; at comparable foreign currency exchange rates, sales by the Company's French subsidiaries decreased 12%. Although the Company's French operations continue to endure a very competitive marketplace, new product introductions are underway to help fuel future growth. The decline in sales of the French operations was also affected by the sale of the Bal Versaille trademarks in March of 1996. Gross profit margin for 1996 was 44% of sales as compared to 47% in 1995. The lower gross margin is the result of the decline in high margin Cutex sales along with the decline in higher margin fragrance promotions. In addition, the Company continues to convert discontinued and returned merchandise into cash, via closeout sales, at prices below normal margins. The Company is in process of clearing its inventory of returns which resulted from the discontinuance of the Cutex Color Splash lip line. Selling, general and administrative expenses declined $1.0 million to $7.5 in 1996 from $8.5 in 1995 and represented 33% of net sales in both 1996 and 1995. Management has made it a top priority to control such expenditures and plans to continue to take the actions it deems necessary to reduce its overall selling, general and administrative expenses. Interest expense decreased to $240,000 in 1996 from $297,000 in 1995. The Company uses its available credit lines, as needed, to finance its working capital needs. In 1996, the Company incurred a loss on foreign currency of $24,000 as compared to a gain of $88,000 in 1995. The Company on occasion enters into foreign currency forward exchange contracts as a hedge for short-term intercompany borrowings. The Company's effective income tax rate decreased to 34% in 1996 from 37% in 1995. Such decline is due to the utilization of net operating loss carryforwards made available to the Company's foreign subsidiaries as a result of the March 1996 sale of the Bal Versailles trademarks. Net income was $1.5 million for the three months ended September 30, 1996 as compared to $2.1 million for the corresponding quarter of the prior year. Earnings per share was $0.15 per share as compared to $0.20 per share for the corresponding quarter of the prior year. The weighted average number of shares outstanding was 9,911,691 in 1996 and 10,561,214 in 1995; such decline is the result of the Company's ongoing stock buyback program. Page 7
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Nine Months Ended September 30, 1996 Compared to September 30, 1995 Net sales decreased 1% to $68.5 million, as compared to $69.2 million in 1995. This decline is primarily the result of the Company's third quarter decision to curtail certain promotional programs which did not contribute to the overall bottom line. The Company's decision not to repeat its Romantic Illusions promotion of 1995 was the result of a poor sell through which resulted in a very high return rate. Such returns negatively impacted net sales in the second and early part of the third quarters of 1996. Certain Jordache lip and nail promotions, which did not achieve the desired overall sell through, were either curtailed or deleted. Excluding the effect of the 1995 Romantic Illusion promotion and the related returns, sales of the Company's core Alternative Designer Fragrance lines increased 14% for the nine months ended September 30, 1996. The Aziza hypo-allergenic eye cosmetic line, which made its debut in the latter part of the first quarter of 1996, represented just over 3% of sales for the nine months ended September 30, 1996. Aziza continues to enjoy a very strong sell through at the retail level. However, the sell in, to mass market merchandisers and drug store chains, continues to be slow because competition for retail space in the eye care category remains very intense. Sales of the Cutex product lines were down approximately 23%, which is the result of decreased promotional activity and the discontinuance of the Cutex Color Splash lip line. Sales generated by the Company's French subsidiaries increased 3%; at comparable foreign currency exchange rates, sales by the Company's French subsidiaries increased 7%. Although the Company's French operations continue to endure a very competitive marketplace, new product introductions are underway to help fuel future growth. The sales growth of the French operations was achieved despite the sale of the Bal Versaille trademarks in March of 1996. Gross profit margin for 1996 was 45% of sales as compared to 49% in 1995. The lower gross margin is the result of the decline in high margin Cutex sales along with the decline in higher margin fragrance promotions. The decline is also the result of the absorption of returns of Romantic Illusion products and the cost to refurbish such products for eventual resale. In addition, the Company continues to convert discontinued and returned merchandise into cash, via closeout sales, at prices below normal margins. The Company is in process of clearing its inventory of returns which resulted from the discontinuance of the Cutex Color Splash lip line. Page 8
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Selling, general and administrative expenses declined $0.9 million to $23.4 in 1996 from $24.3 in 1995 and represented 34% of net sales in 1996 as compared to 35% in 1995. Management has made it a top priority to control such expenditures and plans to continue to take the actions it deems necessary to reduce its overall selling, general and administrative expenses. Interest expense decreased to $648,000 in 1996 from $827,000 in 1995. The Company uses its available credit lines, as needed, to finance its working capital needs. The Company incurred a loss on foreign currency of $171,000 in both 1995 and 1996. The 1995 loss was the effect of the steep decline of the U.S. dollar relative to the French franc and the 1996 loss was the effect of currency rate changes on a portion of intercompany borrowings, which were repaid by our French subsidiaries. The Company's effective income tax rate decreased to 31% in 1996 from 38% in 1995. Such decline is due to the utilization of net operating loss carryforwards made available to the Company's foreign subsidiaries as a result of the March 1996 sale of the Bal Versailles trademarks. Net income was $4.5 million for the nine months ended September 30, 1996 as compared to $5.3 million for the corresponding period of the prior year. Earnings per share was $0.45 per share compared to $0.50 per share for the corresponding period of the prior year. The weighted average number of shares outstanding was 10,047,872 in 1996 and 10,482,994 in 1995; such decline is the result of the Company's ongoing stock buyback program. Page 9
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Liquidity and Capital Resources The Company's financial position continues to show solid strength as a result of profitable operating results. At September 30, 1996, working capital aggregated $47.3 million and the Company had cash and cash equivalents on hand aggregating $17.9 million. The Company's working capital ratio has improved from 2.58 : 1 as of December 31, 1995 to 2.76 : 1 as of September 30, 1996 and the Company's book value per share aggregated $5.51 per share as of September 30, 1996. The Board of Directors has authorized the repurchase of up to 1,000,000 shares of the Company's common stock and as of September 30, 1996, 462,305 shares had been purchased at an average price per share of $8.60. The Company's short-term financing requirements are expected to be met by available cash at September 30, 1996, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 1996 are a $12.0 million unsecured revolving line of credit provided by a domestic commercial bank and $9.0 million in credit lines provided by a consortium of international financial institutions. Borrowings under the domestic revolving line of credit are due on demand and bear interest at the prime rate. Management of the Company believes that funds generated from operations, supplemented by its available credit facilities, will provide it with sufficient resources to meet all present and reasonably foreseeable future operating needs. Operating activities provided $0.6 million of net cash from operations for the nine months ended September 30, 1996 as compared to a use of $1.9 million of net cash for the nine months ended September 30, 1995. In prior years, the gear up for Christmas promotional selling required a use of funds for operating purposes. With current years reduced promotional activities and the ongoing inventory reduction activities, through closeout sales, the Company has been able to maintain a positive cash flow from operations. Inflation rates in the U.S. and foreign countries in which the Company operates have not had a significant impact on operating results for the period ended September 30, 1996. Page 10
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Part II. Other Information Items 1,2,3,5 and 6 are omitted as they are either not applicable or have been included in Part I. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Stockholders (the "Meeting") of Jean Philippe Fragrances, Inc. (the "Corporation") was held on July 9, 1996 at 10:00 a.m., local time, at the offices of the Corporation, 551 Fifth Avenue, New York, New York 10176. (b) The following individuals were nominated for election as members of the Board of Directors to hold office for a term of one (1) year until the next annual meeting of stockholders and until their successors are elected and qualify: Jean Madar, Philippe Benacin, Russell A. Greenberg, Francois Heilbronn and Joseph A. Caccamo. A vote was taken and the results thereof tabulated by the Inspector of Election. The results were as follows: 9,223,122 votes for Jean Madar, 109,450 withheld; 9,223,122 votes for Philippe Benacin, 109,450 withheld; 9,223,122 votes for Russell Greenberg, 109,450 withheld; 9,223,222 votes for Francois Heilbronn, 10,350 withheld; and 9,223,122 votes for Joseph A. Caccamo, 109,450 withheld. A plurality of the votes having been cast in favor of each of the above-named Directors, they were duly elected to serve a one (1) year term. (c) The final item of business was the proposal to ratify the appointment of Richard A. Eisner & Company LLP, the independent certified public accountants of the Corporation, for the current fiscal year. The results of the voting were as follows: 9,336,361 votes for the resolution, 29,230 votes against and 17,250 votes abstained. A majority of the votes cast at the meeting have voted for the resolution, and the resolution was duly passed. Page 11
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 14th day of November 1996. JEAN PHILIPPE FRAGRANCES, INC. By: /s/ Russell Greenberg, ----------------------------- Russell Greenberg, Executive Vice President and Chief Financial Officer Page 12