UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 REPORT ON FORM 10-K AMENDMENT (Mark one) /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1995 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. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share. Indicate by checkmark 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 by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any other amendment to this Form 10K. / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant (based on the closing price on March 25, 1996 of $7.375): $35,916,611. Indicate the number of shares outstanding of the registrant's $.001 par value common stock as of the close of business on the latest practicable date (March 25, 1996): 10,009,981. Documents Incorporated By Reference: None. 1 Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operation 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, has enabled the Company to report another record year for growth in sales. However, current year earnings excluding the gain on sale of stock of subsidiary, reflect the obstacles encountered in bringing the newly acquired Cutex nail care and lip color lines to the profitability levels originally anticipated. As discussed in more detail below, current earnings reflect a nonrecurring charge of $2.2 million, before taxes, relating to the discontinuance of the Cutex lip color line in October 1995. 1995 as Compared to 1994 Net sales increased 25% to $93.7 million, as compared to $75.1 million in 1994. This increase reflects the Company's ability to integrate new product lines with existing product offerings. Sales generated by the Company's domestic operations increased 19%. Such growth is the result of the August 1994 acquisition of the Cutex nail care and lip color line, and the continued growth in the core Alternative Designer Fragrance lines. Net sales generated by Cutex product lines increased $5.3 million over 1994 net sales. This increase was well below original expectations as the result of excessive product returns caused in part from the required change in the Uniform Product Code from that of Chesebrough-Ponds, increased competitive pressures for retail shelf space and disappointing sales of the lip color line. Management believes that the significant factor which led to disappointing sales of the Cutex lip color line is the failure of consumers to associate lip color cosmetics with the Cutex brand name to the same extent that consumers do with nail products, wherein the Cutex brand has significantly stronger appeal. In October 1995 the Company decided to discontinue production of the Cutex lip color line and as a result, has taken a nonrecurring charge aggregating $2.2 million, before taxes, in the fourth quarter of 1995. This charge represents a writedown of current lip product inventory of approximately $741,000 and a reserve for returns of lip products of $1,481,000 which may be required on lip products in 1996. The discontinued lip color line did not contribute to net sales in 1995 as customer returns exceeded new product shipments. As a result of the issues relating to the Cutex product lines, the Company and the licensor have agreed to a reduction of the minimum royalties payable under the Cutex license. The Company believes that such relief along with the discontinuance of 13 the lip color line will enable the Company to direct all Cutex marketing efforts and resources to building upon the core nail care business for which Cutex is famous. Sales by the Company's foreign subsidiaries increased 36%; at comparable foreign currency exchange rates, sales by the Company's foreign subsidiaries increased 22%. Such increase reflects new product introductions under the Ombre Rose and Burberrys labels and initial sales by Jean Philippe Brasil, the Company's recently organized Brazilian subsidiary, which commenced operations in October 1995. The Company continues to focus its sales efforts on development of new product categories for sale to our expanding customer base. The February 1996 relaunch of the Aziza(R) hypo allergenic eye cosmetic line is well under way. Gross profit margin was 48% in both 1995 and 1994. Ordinarily, increased sales of Cutex products would have enabled the Company to improve overall gross margin. However, with the excessive customer returns experienced in 1995, markdowns and inventory writedowns of returned products were necessary. In addition, gross margin has been negatively impacted from incremental closeout sales of discontinued or returned product at reduced prices. While in the ordinary course of business the Company closes out such inventory, management had taken an increased initiative to reduce excess inventory to improve the Company's cash flow and in preparation of moving to our new distribution center in Dayton NJ. The Company's business lines, excluding Cutex, generated a 46% gross margin in both 1995 and 1994. Selling, general and administrative expenses represented 35% of net sales in 1995 as compared to 32% in 1994. The increase is primarily the result of promotion and advertising expenses required for the Cutex product lines and reflect the fact that sales of the Cutex color lines have been below original expectations. Management is taking the steps it deems necessary to bring the Cutex nail color line to an acceptable profitability level. In addition, most licensed product lines call for royalties to be paid based on sales volume and some require minimum advertising expenditures. Royalty expense aggregated $2.6 million for 1995 as compared to $1.6 million for 1994. The increase in 1995 represents a full year of sales of Cutex products as compared to four (4) months of sales of Cutex Products in 1994. Interest expense increased to $1.1 million in 1995 from $0.8 million in 1994. The Company uses its available credit lines, as needed, to finance its working capital needs. The Company realized a gain on foreign currency aggregating $197,000 in 1995 as compared to a loss of $161,000 in 1994. The Company, on occasion enters into foreign currency forward exchange contracts as a hedge for short-term intercompany borrowings. 14 The Company recognized a net gain on sale of stock of a subsidiary aggregating $3.3 million in 1995 and $0.2 million in 1994. The 1995 gain resulted primarily from the public offering by Inter Parfums, in France, of 308,000 shares of its common stock. The 1994 gain also resulted from the sale of common stock by Inter Parfums. Such sales of shares has been accounted for as a gain on sale of stock of a subsidiary and is not part of a broader corporate reorganization contemplated by the Company. Although additional shares may be issued in the future, the Company has no plans to spin-off its subsidiary nor to repurchase the shares previously issued. (See Liquidity and Financial Resources). The Company's effective income tax rate was 26% in 1995 and 37% in 1994. Both the 1995 and 1994 tax rates were favorably impacted as deferred taxes were not required to be provided on the gain on sale of stock by Inter Parfums. Excluding such gain the Company's effective tax rate was 35% in 1995 and 37% in 1994. Net income for the year ended December 31, 1995 increased 24% to $9.0 million compared to $7.3 million for the year ended December 31, 1994. Results for 1995 include a nonrecurring charge of $1.3 million, on an after tax basis, relating to the discontinuance of the lip color line. Results also include a net gain from the sale of common stock of a subsidiary of $3.3 million in 1995 and $0.2 million in 1994. Excluding the nonrecurring charge and such gains, net income was $7.1 million or $0.68 per share in 1995 and in 1994. The weighted average number of shares outstanding was 10,438,896 in 1995 and 10,454,555 in 1994. 1994 as Compared to 1993 Net sales increased 26% to $75.1 million, as compared to $59.5 million in 1993. The results for 1994 reflect the Company's success in integrating new product lines with pre existing product offerings, and creating greater opportunities to serve the needs of its customers. Sales generated by the Company's domestic operations increased 12%. Such growth reflects the positive impact of the recently acquired Cutex lip and nail product line and the negative impact of store closings of one of the Company's larger customers. Sales by the Company's foreign subsidiaries increased 62%; at comparable foreign currency exchange rates, sales by the Company's foreign subsidiaries increased 59%. Such increase reflects contributions from the Ombre Rose and Burberrys license agreements as well as the Parfums Molyneux and Parfums Weil fragrance lines. In connection with the Company's recent acquisitions and license agreements, the Company has restructured its retail sales force and has added additional 15 experienced salespeople. The Company's primary efforts are now focused on capitalizing on its expanding list of customer relationships. With efficient product development and a strong national sales force, the Company can now offer to all of its customers, its growing collection of fragrance, personal care and color cosmetic products. Gross profit margin for 1994 increased to 48% of sales from 45% in 1993. The Company's decision to purchase certain raw materials and component parts for its domestic operations at lower domestic prices continued to benefit the Company's gross margin throughout 1994. In addition, initial sales of Cutex products have enabled the Company to further improve its gross margin; without such sales gross profit margin would have been 46%. Selling, general and administrative expenses represented 32% of net sales in 1994 as compared to 27% and 1993. The increase is primarily the result of expenses incurred in connection with the restructuring of the Company's sales force and the transition of all of the Company's new product lines into its existing domestic and international business operations. In addition, most licensed product lines call for royalties to be paid based on sales volume and some require minimum advertising expenditures. Royalty expense aggregated $1.6 million for 1994 as compared to $0.6 million for 1993. The increase in 1994 represents a full year of sales of Ombre Rose and Burberry's products as compared to six (6) months of sales in 1993. Royalty expense for 1994 also included royalties on sale of Cutex product lines, which were acquired in August 1994. Interest expense increased to $803,000 in 1994 from $619,000 in 1993.The Company uses its available credit lines, as needed, to finance its working capital needs. In 1994, as a result of the decline of the U.S. dollar relative to the French franc, the Company incurred a loss on foreign currency of $161,000 as compared to a gain of $179,000 in 1993. The Company, on occasion enters into foreign currency forward exchange contracts as a hedge for short-term intercompany borrowings. No material hedge transactions were entered into during 1994. Gain on sale of stock of subsidiary aggregated $221,000 in 1994 as compared to a gain of $645,000 1993. The 1993 gain resulted from the issuance by Inter Parfums of 7.65% of its common stock. In 1994, an additional 10,000 shares were sold to enable the stock of Inter Parfums to commence trading in the over-the-counter stock market in Paris, and 11,536 shares were issued pursuant to the conversion terms of Inter Parfum's long-term debt. These issuances of shares by Inter Parfums have been accounted for as a gain on sale of stock of subsidiary; the issuances are not part of a broader corporate reorganization contemplated by the Company. Although additional shares may be issued in the future the Company has no plans to spin-off its subsidiary nor repurchase the shares previously issued. 16 The Company's effective income tax rate increased to 37.1% in 1994 from 36.8% in 1993. Both 1994 and 1993 were favorably impacted as deferred taxes were not required to be provided on the gain from issuance of common stock by Inter Parfums. Net income for the year ended December 31, 1994 was $7.3 million compared to $7.1 million for the year ended December 31, 1993. Results for the year include a net gain from the sale of common stock of a subsidiary of $221,000 or $0.02 per share in 1994 and $645,000 or $0.06 per share in 1993. Excluding such gain, net income increased 9.3% to $7.1 million or $0.68 per share compared to $6.5 million or $0.64 per share for the year ended December 31, 1993. The weighted average number of shares outstanding increased 3% to 10,454,555 in 1994 from 10,132,628 in 1993. This increase is primarily the result of the issuance of common stock in connection with the February 1994 acquisition of Parfums Molyneux and Parfums Weil. Liquidity and Financial Resources The Company's financial position continues to show solid strength as a result of profitable operating results. At December 31, 1995, working capital aggregated $41.4 million and the Company had cash and cash equivalents aggregating $14.2 million. The Company's Board of Directors has authorized the repurchase of up to 1,000,000 shares of the Company's common stock and as of December 31, 1995, 324,305 shares had been purchased at an average price per share of $8.91. Through February 1996 an additional 138,000 shares were purchased at an average price per share of $7.85. In November 1995, the Company's majority owned subsidiary, Inter Parfums sold to the public in France 308,000 shares of its capital stock at 130 French francs per share. Net proceeds of such offering aggregated 36.5 million French francs ($7.6 million U.S.). In connection with such offering, Inter Parfums Holding ("Holding"), a wholly-owned subsidiary of the Company and direct parent of Inter Parfums, exercised its right to convert a portion of its convertible debt into 250,000 shares of capital stock of Inter Parfums at 80 French francs per share. As a result of such offering and related debt to equity conversions, the interest of the Company in Inter Parfums, as held by Holding, was reduced from 90.64% to 76.72%. The Company's short-term financing requirements are expected to be met by available cash at December 31, 1995, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facility for 1996 is a $12.0 million unsecured revolving line of credit provided by a domestic 17 commercial bank. Borrowings under the domestic revolving line of credit are due on demand and bear interest at the bank's prime lending 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 $2.8 million of net cash in 1995 as compared to $2.1 million in 1994. As the Company continues to monitor and improve its procedures with respect to collection of outstanding receivables and closely monitor inventory levels, the Company anticipates continued improvement in cash flow. Current inventory levels reflect the necessary quantities to support the upcoming selling season and new product introductions. On October 25, 1995, the Company took occupancy of its new 145,000 square foot distribution center at 60 Stults Road in Dayton NJ. The premises have been leased by the Company for an eight year term and require monthly rental payments of $57,000, aggregating $684,000 per annum. In connection therewith, the Company has invested approximately $0.7 million in equipment and improvements and expects to invest an additional $0.3 million in 1996. 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 year ended December 31, 1995. 18 JEAN PHILIPPE FRAGRANCES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (in thousands except share and per share data) (NOTE A) - The Company and its Significant Accounting Policies: [1] Business of the Company: The Company is a manufacturer and distributor of domestic and international brand name and licensed fragrances, alternative designer fragrances and mass market cosmetics. [2] Basis of preparation: The consolidated financial statements include the accounts of Jean Philippe Fragrances, Inc. ("JPF") and its domestic and foreign subsidiaries (the "Company"). All material intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 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. [3] Foreign currency translation: For foreign subsidiaries that operate in a foreign currency, assets and liabilities are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses from translation adjustments are accumulated in a separate component of shareholders' equity. In instances where the financial statements of foreign entities are remeasured into their functional currency (U.S. dollars), the remeasurement adjustment is recorded in operations. [4] Cash equivalents: All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. [5] Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market. [6] Equipment and leasehold improvements: Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method and the declining balance method over the estimated useful asset lives and for equipment, which range between 3 and 10 years, and the shorter of the lease term or estimated useful asset lives for leasehold improvements. F-7