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 March 31, 1997. 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) Registrants 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 issuers classes of common stock, as of the latest practicable date. At May 9, 1997 there were 9,522,481 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 March 31, 1997 (unaudited) and December 31, 1996 (audited) 2 Consolidated Statements of Income for the Three Months Ended March 31, 1997 (unaudited) and March 31, 1996 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 (unaudited) and March 31, 1996 (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 5. Other Information 9 Signatures 10
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, 1996 included in the Company's annual report filed on Form 10-K. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the entire fiscal year.
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 1997 1996 --------- ------------ Current assets: Cash and cash equivalents $21,010,009 $20,205,393 Accounts receivable, net 24,202,091 25,136,555 Inventories 24,704,820 23,327,815 Receivables, other 1,524,496 1,124,160 Other 1,333,253 1,057,092 Deferred tax benefit 1,842,475 1,875,218 ----------- ----------- Total current assets 74,617,144 72,726,233 Equipment and leasehold improvements, net 2,018,001 1,734,554 Other assets 1,621,284 1,859,837 Intangible assets, net 7,852,006 9,264,585 ----------- ----------- $86,108,435 $85,585,209 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable, banks $9,367,299 $9,467,954 Accounts payable 16,745,510 14,740,145 Income taxes payable 2,013,452 1,950,619 ----------- ----------- Total current liabilities 28,126,261 26,158,718 Long-term debt, less current portion 451,172 484,924 ----------- ----------- Minority interests 5,331,676 5,575,954 ----------- ----------- Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 9,602,481 shares at March 31, 1997 and December 31, 1996 9,602 9,602 Additional paid-in capital 20,685,873 20,685,873 Retained earnings 38,563,963 38,223,179 Foreign currency translation adjustment (1,117,039) 390,032 Treasury stock, at cost, 1,236,003 shares at March 31, 1997 and December 31, 1996 (5,943,073) (5,943,073) 52,199,326 53,365,613 $86,108,435 $85,585,209 =========== =========== See notes to financial statements. Page 2
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1997 1996 ---- ---- Net sales $20,969,089 $23,302,276 Cost of sales 10,922,548 12,209,683 ----------- ----------- Gross margin 10,046,541 11,092,593 Selling, general and administrative 8,089,541 7,872,021 Loss on relinquishment of license 1,300,000 ----------- ----------- Income from operations 657,000 3,220,572 ----------- ----------- Other charges (income): Interest 182,061 210,307 Loss on foreign currency 33,824 20,243 Interest and dividend (income) (208,452) (141,112) ----------- ----------- 7,433 89,438 ----------- ----------- Income before income taxes 649,567 3,131,134 Income taxes 163,622 1,055,120 ----------- ----------- Net income before minority interest 485,945 2,076,014 Minority interest in net income of consolidated subsidiary 145,161 303,191 ----------- ----------- Net income $340,784 $1,772,823 =========== =========== Net income per common and common equivalent share $0.04 $0.18 =========== =========== Number of common and common equivalent shares outstanding 9,605,404 10,083,757 =========== =========== See notes to financial statements. Page 3
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three months ended March 31, 1997 1996 ---- ---- <S> <C> <C> Operating activities: Net income $340,784 $1,772,823 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 353,329 450,024 Loss on relinquishment of license 1,300,000 Minority interest in net income 145,161 303,192 Increase (decrease) in cash from changes in: Accounts receivable (179,546) (2,816,023) Inventories (2,228,627) (1,168,231) Other assets (603,744) (1,370,082) Deferred tax benefit (17,025) 1,174,684 Accounts payable 2,170,592 3,294,984 Income taxes payable 141,962 (468,365) ----------- ----------- Net cash provided by operating activites 1,422,886 1,173,006 ----------- ----------- Investing activities: Purchase of equipment and leasehold improvements (482,755) (268,163) Trademark and license acquisitions (6,733) Proceeds from sale of trademark 1,575,000 ----------- ----------- Net cash provided by (used in) investing activities (482,755) 1,300,104 ----------- ----------- Financing activities: Increase (decrease) in loan payable, bank 431,093 (1,138,887) Purchase of treasury stock (1,083,363) ----------- ----------- Net cash provided by (used in) financing activities 431,093 (2,222,250) ----------- ----------- Effect of exchange rate changes on cash (566,606) (94,678) ----------- ----------- Increase in cash and cash equivalents 804,618 156,182 Cash and cash equivalents at beginning of period 20,205,391 14,203,713 ----------- ----------- Cash and cash equivalents at end of period $21,010,009 $14,359,895 =========== =========== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $180,000 $210,000 Income taxes 85,000 883,000 </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, 1996. 2. Earnings Per Share: Net income per 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: March 31, December 31, 1997 1996 --------- ------------ Raw materials and component parts $10,825,477 $10,738,100 Finished goods 13,879,343 12,589,715 ----------- ----------- $24,704,820 $23,327,815 =========== =========== 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 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. The Company's recent decision to relinquish its Cutex(R) license is an integral part of a planned restructuring of the Company's domestic operations. As a result, the Company can now more efficiently focus its resources on its profitable core fragrance business in the United States and around the world. Three Months Ended March 31, 1997 Compared to March 31, 1996 Net sales aggregated $21.0 million in 1997, as compared to $23.3 million in 1996. Heavy discounting by certain competitors, which commenced in the fourth quarter of 1996, continued to affect the Company's Alternative Designer Fragrance lines in the first quarter of 1997. In January 1997, the Company matched the competition's pricing structure and has regained much of the market share initially lost as a result of such price competition. The Company only lowered its selling prices after completion of its newly developed program of product value analysis which assured the Company that gross margins would not be affected in the long-term. The positive impact of the measures taken are expected to be realized in the second half of 1997. Sales generated by the Company's French subsidiaries declined 5% for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996 as a result of the substantial increase of the US dollar relative to the French franc. At comparable foreign currency exchange rates, sales by the Company's French subsidiaries increased 6%. Recent new product introductions and product line enhancements with respect to the Company's Burberrys line have been very successful and continue to achieve substantial growth. Sales of Cutex(R) products increased $0.6 million for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. However, such increase also required an increase in selling expenses and did not contribute to the bottom line. On April 30, 1997, the Company closed on its agreement with Carson, Inc. whereby the Company relinquished its Cutex(R) nail and lip products license. Page 6
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES The Company's Aziza(R) hypo-allergenic eye cosmetic line, which made its debut in February 1996, represented approximately 3% of sales for the three months ended March 31, 1997. Aziza(R) continues to enjoy a very strong sell through at the retail level. Heavy competition for retail space in the eye-care category at mass market merchandisers and drug store chains continues. Gross profit margin was 48% of sales for both the 1997 and 1996 periods. As previously mentioned, in reaction to heavy discounting by certain competitors in the Alternative Designer Fragrance lines, the Company developed a program of product value analysis which enabled the Company to match the competition's pricing structure without affecting gross margin in the long-term. Gross margin in the first quarter of 1997 has been affected by the lower selling prices put into effect in January 1997. The positive impact of the measures taken is expected to be seen in the second half of 1997. The effect of the aforementioned was offset during the three months ended March 31, 1997 by increased, higher margin, Cutex(R) sales and increased margins from the Company's French subsidiaries, which sell products to certain customers, outside of France, in US dollars. Selling, general and administrative expenses increased to $8.1 million for the three months ended March 31, 1997, as compared to $7.9 million for the three months ended March 31, 1996 and represented 39% of sales for the 1997 period as compared to 34% of sales for the 1996 period. Such increase is primarily attributable to the increased sales of Cutex(R) products for the period as compared to that of the prior year. As a result of the April 30, 1997 relinquishment of the Cutex(R) license, the Company has restructured its domestic operations and reduced its domestic work force in excess of 20%. In addition, the Company has taken a pre-tax charge against earnings of $1.3 million in the first quarter of 1997 to write-off intangible assets and other expenses relating to the relinquishment of the Cutex(R) license. The combination of the restructuring and the elimination of selling, general and administrative expenses relating to the Cutex(R) operations should enable the Company to significantly reduce its domestic selling, general and administrative expenses, both in the aggregate and as a percentage of sales. Interest expense decreased to $182,000 for the three months ended March 31, 1997, as compared to $210,000 for the three months ended March 31, 1996. The Company uses its available credit lines, as needed, to finance its working capital needs. The Company's effective income tax rate was 25% for the three months ended March 31, 1997, as compared to 34% for the three months ended March 31, 1996. Both the 1997 and 1996 rates were favorably impacted by reductions of valuation reserves on deferred tax assets, relating 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 a Versailles trademarks. Page 7
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Net income was $341,000 or $0.04 per share for the three months ended March 31, 1997, as compared to $1,773,000 or $0.18 per share for the three months ended March 31, 1996. Results for 1997 include a nonrecurring charge of $800,000, on an after tax basis, relating to the relinquishment of the Cutex(R) license. Excluding the nonrecurring charge, net income was $1,141,000 or $0.12 per share for the three months ended March 31, 1997. The weighted average number of shares outstanding was 9,605,404 for the 1997 period and 10,083,757 for the 1996 period. Such decline is the result of the Company's ongoing stock buyback program. Liquidity and Capital Resources The Company's financial position continues to show solid strength as a result of profitable operating results. At March 31, 1997, working capital aggregated $46.5 million and the Company had cash and cash equivalents on hand aggregating $21.0 million. The Company's book value per share aggregated $5.43 per share as of March 31, 1997. The Board of Directors of the Company has authorized the repurchase of up to 1,500,000 shares of the Company's common stock and as of March 31, 1997, 749,805 shares have been purchased at an average price per share of $7.93. The Company's short-term financing requirements are expected to be met by available cash at March 31, 1997, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 1997 are a $12.0 million unsecured revolving line of credit provided by a domestic commercial bank and $12.0 million in credit lines provided by a consortium of international financial institutions. The non recurring charge of $1.3 million, taken in the first quarter ended March 31, 1997, is primarily a noncash charge relating to the write-off of intangible assets associated with the relinquishment of the Company's Cutex(R) license. On April 30, 1997, such transaction closed and all current inventory was purchased and certain liabilities were assumed by Carson Products Company. 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. Page 8
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Operating activities provided $1.4 million of net cash from operations for the three months ended March 31, 1997 as compared to $1.2 million for the three months ended March 31, 1996. Improved techniques in forecasting and materials requisition planning continue to enable the Company to maximize cash flow. Inventory levels reflect anticipated needs for the upcoming selling season and new product introductions. 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 March 31, 1997. Part II. Other Information Items 1, 2, 3, 4, and 6 are omitted as they are either not applicable or have been included in Part I. Item 5. Other Information On April 30, 1997, Jean Philippe Fragrances, Inc. (the "Company") closed the transaction whereby it relinquished its Cutex nail and lip products license. At the closing, all current inventory was purchased and certain liabilities were assumed by Carson Products Company ("Buyer"), a wholly-owned subsidiary of Carson, Inc., a New York Stock Exchange listed Company. The Company received approximately $3.3 million in return for the sale of current inventory, which is subject to adjustment in accordance with the terms of the Asset Repurchase Agreement dated March 27, 1997 between the Company and Carson, Inc. Page 9
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 15th day of May 1997. JEAN PHILIPPE FRAGRANCES, INC. By: /s/ Russell Greenberg -------------------------------- Russell Greenberg, Executive Vice President and Chief Financial Officer Page 10