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, 1999. 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 7, 1999 there were 7,417,581 shares of common stock, par value $.001 per share, outstanding.
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES INDEX Page Number Part I. Financial Information Item 1. Financial Statements 1 Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 (audited) 2 Consolidated Statements of Income for the Three Months Ended March 31, 1999 (unaudited) and March 31, 1998 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 (unaudited) and March 31, 1998 (unaudited) 4 Notes to Unaudited Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information 11 Signatures 11
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Part I. Financial Information Item 1. 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, 1998 included in the Company's annual report filed on Form 10-K. The results of operations for the three months ended March 31, 1999 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 ASSETS <TABLE> <CAPTION> March 31, December 31, 1999 1998 ---------------- ---------------- <S> <C> <C> <C> Current assets: Cash and cash equivalents $19,328,874 $23,355,915 Accounts receivable, net 25,464,613 28,013,811 Inventories 21,221,154 21,938,972 Receivables, other 1,490,702 617,110 Other 1,251,539 1,084,512 Deferred tax benefit 1,053,957 1,107,285 --------------- --------------- Total current assets 69,810,839 76,117,605 Equipment and leasehold 2,761,566 2,988,365 improvements, net Other assets 764,053 921,849 Intangible assets, net 7,049,260 7,710,910 --------------- --------------- $80,385,718 $87,738,729 =============== =============== <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> Current liabilities: Loans payable, banks $4,037,011 $4,171,558 Accounts payable and accrued expenses 17,679,006 18,192,388 Income taxes payable 4,354,354 4,155,305 --------------- --------------- Total current liabilities 26,070,371 26,519,251 --------------- --------------- Long-term debt 183,780 199,929 --------------- --------------- Minority interests 6,976,946 7,339,559 --------------- --------------- Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 7,614,581 and 8,462,781 shares at March 31, 1999 and December 31, 1998, respectively 7,615 8,463 Additional paid-in capital 20,729,692 20,729,692 Retained earnings 48,499,684 47,342,754 Accumulated other comprehensive income (2,978,534) (811,884) Treasury stock, at cost, 3,231,403 and 2,383,203 shares at March 31, 1999 and December 31, 1998, respectively (19,103,836) (13,589,035) --------------- --------------- 47,154,621 53,679,990 --------------- --------------- $80,385,718 $87,738,729 =============== =============== </TABLE> See notes to financial statements. Page 2
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended March 31, 1999 1998 --------------- -------------- <S> <C> <C> <C> Net sales $19,583,551 $20,806,102 Cost of sales 10,099,031 10,901,884 -------------- ------------- Gross margin 9,484,520 9,904,218 Selling, general and administrative 7,133,969 7,286,003 -------------- ------------- Income from operations 2,350,551 2,618,215 -------------- ------------- Other charges (income): Interest 105,852 121,366 Loss on foreign currency 68,464 43,679 Interest and dividend (income) (199,335) (205,180) Loss on sale of stock of subsidiary, net 17,564 -------------- ------------- (25,019) (22,571) -------------- ------------- Income before income taxes 2,375,570 2,640,786 Income taxes 977,956 1,190,215 -------------- ------------- Net income before minority interest 1,397,614 1,450,571 Minority interest in net income of consolidated subsidiary 240,684 228,496 -------------- ------------- Net income $1,156,930 $1,222,075 ============== ============= Net income per common share: Basic $0.15 $0.14 Diluted $0.15 $0.14 ============== ============= Number of common shares outstanding: Basic 7,888,373 8,825,731 Diluted 7,975,223 9,019,620 ============== ============= </TABLE> 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, 1999 1998 ---------------- ---------------- <S> <C> <C> <C> Operating activities: Net income $1,156,930 $1,222,075 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 414,990 299,734 Loss on sale of stock of subsidiary 17,564 Minority interest in net income 240,684 228,496 Increase (decrease) in cash from changes in: Accounts receivable 1,088,775 (241,285) Inventories (506,585) (3,157,123) Other assets (980,840) (704,761) Deferred tax benefit 27,209 60,207 Accounts payable 441,162 1,582,965 Income taxes payable 481,876 817,542 ------------- ------------- Net cash provided by operating activities 2,364,201 125,414 ------------- ------------- Investing activities: Purchase of equipment and leasehold improvements (139,344) (330,181) Trademark and license acquisitions (1,700) (5,542) ------------- ------------- Net cash (used in) investing activities (141,044) (335,723) ------------- ------------- Financing activities: Increase in loan payable, bank 192,308 660,243 Proceeds from exercise of options and warrants 43,827 Purchase of treasury stock (5,515,649) (402,188) ------------- ------------- Net cash provided by (used in) financing (5,323,341) 301,882 activities ------------- ------------- Effect of exchange rate changes on cash (926,857) (263,928) ------------- ------------- Increase (decrease) in cash and (4,027,041) (172,355) cash equivalents Cash and cash equivalents at beginning of period 23,355,915 18,721,525 ------------- ------------- Cash and cash equivalents at end of period $19,328,874 $18,549,170 ============= ============== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $113,000 $244,000 Income taxes $467,000 312,000 </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, 1998. 2. Comprehensive Income: Comprehensive income (loss) aggregated ($1,009,720) and $482,414 for the three months ended March 31, 1999 and 1998, respectively, as a result of foreign currency translation adjustments. 3. Geographic areas: Information on the Company's operations by geographic areas is as follows: Three months ended Three months ended March 31, 1999 March 31, 1998 -------------- -------------- Net sales: United States $ 6,326,328 $ 8,094,195 Europe 13,282,222 12,720,453 South America 85,414 Eliminations (25,000) (93,961) ------------- ------------- $ 19,583,550 $ 20,806,101 ============= ============= Net Income: United States $ 288,664 $ 530,595 Europe 905,641 903,480 South America (37,375) (212,000) ------------- ------------- $ 1,156,930 $ 1,222,075 ============= ============= Page 5
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Notes to Unaudited Financial Statements 4. Earnings Per Share: Basic earnings per share are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of shares outstanding during each period, plus the incremental shares outstanding assuming the exercise of dilutive stock options. 5. Inventories: Inventories consist of the following: <TABLE> <CAPTION> March 31, 1999 December 31, 1998 -------------- ----------------- <S> <C> <C> Raw materials and component parts $ 8,678,580 $ 7,570,613 Finished Goods 12,542,574 14,368,359 ------------ ------------ $ 21,221,154 $ 21,938,972 ============ ============ </TABLE> Page 6
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a leading manufacturer and distributor of fragrances, cosmetics and personal care products, where innovation, diversity and commitment to creating quality products for sale at intelligent prices are achieved. Jean Philippe Fragrances, Inc. and its French subsidiary Inter Parfums, S.A. ("Inter Parfums"), specialize in prestige perfumes (60% of net sales for the three months ended March 31, 1999) and consumer perfumes and cosmetics: o Prestige products -- For each prestige brand, owned or licensed, the Company develops an original concept for the perfume consistent with world market trends; o Consumer products -- Jean Philippe Fragrances designs, markets and distributes inexpensive fragrances and personal care products including alternative designer fragrances and mass market cosmetics. Inter Parfums designs, markets and distributes a broad range of inexpensive fragrances, highlighting the "Made in France" label. Three Months Ended March 31, 1999 as Compared to the Three Months Ended March 31, 1998 Net sales aggregated $19.6 million in 1999, as compared to $20.8 million in 1998. Sales generated by the Company's French subsidiary, Inter Parfums, increased 4.4% in 1999; however, at comparable foreign currency exchange rates, sales by Inter Parfums were virtually unchanged in 1999 as compared to 1998. The Company's prestige fragrance lines increased 8.5% while its consumer products line decreased 21.5%. The increase in sales of prestige fragrances reflects expanded distribution of the S.T. Dupont fragrance line which was launched in September 1998 and the continued success of the Burberry fragrance line. While several new prestige fragrance projects are on the drawing board, most have target launch dates in the year 2000. These projects include, the launch of the Company's Paul Smith fragrance line, two new perfume lines under the Burberry trade name, as well as two new perfume lines under the S.T. Dupont trade name. Page 7
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES In March 1999, the Company entered into an exclusive license agreement with the Christian Lacroix Company (a division of Group LVMH). This new association, with a prestigious fashion label, will further strengthen our position in prestige fragrance distribution. The first Christian Lacroix product line is expected to be launched internationally at the end of 1999, on the basis of a project currently under development. Management is also actively pursuing new license agreements to build upon the strength of its existing portfolio. The success of the Company's prestige fragrance lines was mitigated by sales declines in its consumer products lines, including the domestic alternative designer fragrances. Net sales generated by domestic operations decreased 22% in the 1999 period. The economic situation in Eastern Europe, Brazil and other Latin American countries continues to affect sales in these territories. In addition, the market for alternative designer fragrances is very price sensitive and the consolidation of customers through numerous announced mergers of mass market customers is also affecting sales as customers reduce inventory levels and eliminate duplicate vendors. This trend is expected to continue throughout 1999 and is affecting the entire industry. In an attempt to combat the negative impact of this industry-wide trend, in January 1999 the Company introduced its newest consumer products line, "Parfums Deja New." Parfums Deja New was conceived, designed and created entirely in-house, and is produced domestically. This line, which consists of an original fragrance, unique packaging and premium ingredients, has a suggested retail price of $15.00 to $35.00. It was created to capitalize on a recent developing trend in the fragrance market, the blurring of the distinction between prestige and mass market products. Initial orders have exceeded original expectations and management expects this line to contribute positively to sales and earnings in 1999. However, for the three month period ended March 31, 1999, sales generated by Parfums Deja New did not fully compensate for sales declines in the Company's other consumer product lines. Gross profit margin increased to 48.4% of net sales in 1999, as compared to 47.6% of net sales in 1998. The Company's prestige fragrance lines generate a slightly higher gross profit margin than the Company's consumer product lines. Sales of the Company's prestige line products continue to experience solid growth, and therefore, represent a greater portion of the Company's overall sales. Selling, general and administrative expenses aggregated $7.1 million and $7.3 million in 1999 and 1998, respectively, and represented 36% of net sales in 1999 and 35% of net sales in 1998. Domestic selling, general and administrative expenses declined to $2.3 million in 1999 as compared to $2.9 million in 1998 and as a percentage of net sales, was 36% for both periods. Page 8
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES Selling, general and administrative expenses incurred by Inter Parfums increased to $4.8 million or 36% of net sales in 1999 as compared to $4.4 million or 35% of net sales in 1998. Such increase is the result of expenses incurred to support the Company's growing portfolio of prestige fragrance brands in an effort to build upon each brand's awareness. Interest expense aggregated $0.1 million in 1999 which was slightly below 1998 levels. The Company uses its credit lines, as needed, to finance working capital needs. As a result of profitable operating results and positive cash flow, overall borrowing levels continue to decline. The Company incurred a loss on foreign currency of $0.07 million in 1999 as compared to a loss of $0.04 million in 1998. On occasion, the Company enters into foreign currency forward exchange contracts as a hedge for short-term inter company borrowings, and for receivables to be collected in a foreign currency. The Company's effective income tax rate was 41% in 1999, as compared to 45% in 1998. The 1998 rate was negatively impacted by losses from the Company's Brazilian subsidiary for which no tax benefit could be recognized at the time. The Company made its decision to close its Brazilian subsidiary during the second half of 1998, and simultaneously with that decision, the Company was able to recognize the expected tax benefit. Net income was $1.2 million or $0.15 per diluted share in 1999 as compared to $1.2 million or $0.14 per diluted share in 1998. The weighted average shares outstanding declined 10.6% to 7.9 million in 1999, as compared to 8.8 million in 1998. On a diluted basis, average shares outstanding was 8.0 million in 1999 and 9.0 million in 1998. Such decline is the result of the Company's ongoing stock buyback program. Liquidity and Capital Resources As a result of continued profitable operating results, the Company's financial position remains very strong. At March 31, 1999, working capital aggregated $44 million with a working capital ratio of almost 3 to 1. The Company had cash and cash equivalents on hand of $19 million, its net book value aggregated $6.19 per outstanding share as of March 31, 1999 and the Company had virtually no long-term debt. Page 9
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES The Company is confident in the long-term growth potential of its business. As such, it consistently uses its common stock repurchase program in an effort to increase shareholder value. The Company's net asset value per share is $6.19. Furthermore, the market value of the Company's investment in its publically traded French subsidiary, Inter Parfums, presently represents approximately $7.85 per share of the Company's outstanding common stock. Therefore, during the three month period ended March 31, 1999, the Company continued to repurchase its shares. During such period the Company repurchased 848,200 shares of its common stock at an average purchase price of $6.50. Since the inception of the repurchase program, which began in 1995, the Company repurchased 2.94 million shares of its common stock, or approximately 28% of outstanding shares, at an average price of $6.92 per share, bringing total shares outstanding to its present level of 7.42 million. The Company's short-term financing requirements are expected to be met by available cash at March 31, 1999, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 1999 are a $12.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $12.0 million in credit lines provided by a consortium of international financial institutions. Cash provided by operating activities aggregated $2.4 million for the three months ended March 31, 1999 as compared to $0.1 million for the corresponding period of the prior year. Cash provided by operating activities continues to be the Company's primary source of funds to finance operating needs, investments in new ventures, as well as to finance the Company's stock repurchase program. Management of the Company believes that funds generated from operations, supplemented by its present cash position and available credit facilities, will provide it with sufficient resources to meet all present and reasonably foreseeable future operating needs. The Company has substantially completed all projects to address "Year 2000" compliance with respect to its internal information systems. As such, management believes that "Year 2000" transition will not have a material adverse effect on future results. In January 1999, certain member countries of the European Union established permanent fixed rates between their existing currencies and the European Union's common currency ("the Euro"). The transition period for the introduction of the Euro is scheduled to phase in over a period ending January 1, 2002. The introduction of the Euro and the phasing out of the other currencies will not have a material impact on the Company's consolidated financial statements. Page 10
JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES 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 three months ended March 31, 1999. Statements included herein which are not historical in nature are forward looking statements. Forward looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from projected results. Such factors include changes in product acceptance by consumers, effectiveness of sales and marketing efforts and competition. Given these uncertainties, persons are cautioned not to place undue reliance on the forward looking statements. Part II. Other Information Items 1, 2, 3, 4, 5 and 6 are omitted as they are either not applicable or have been included in Part I. 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 12th day of May 1999. JEAN PHILIPPE FRAGRANCES, INC. By: /s/ Russell Greenberg ------------------------------ Russell Greenberg, Executive Vice President and Chief Financial Officer Page 11