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, 2001. 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 INTER PARFUMS, 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) (212) 983-2640 --------------------------------------------------- (Registrants telephone number, including area code) 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 May 7, 2001 there were 11,630,777 shares of common stock, par value $.001 per share, outstanding.
INTER PARFUMS, INC. AND SUBSIDIARIES INDEX Page Number Part I. Financial Information Item 1. Financial Statements 1 Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000 (audited) 2 Consolidated Statements of Income for the Three Months Ended March 31, 2001 (unaudited) and March 31, 2000 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 (unaudited) and March 31, 2000 (unaudited) 4 Notes to Unaudited Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Part II. Other Information 12 Signatures 12
INTER PARFUMS, 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, 2000 included in the Company's annual report filed on Form 10-K. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the entire fiscal year. Page 1
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 2001 2000 --------------- ------------ CURRENT ASSETS: Cash and cash equivalents $30,176,813 $27,598,771 Accounts receivable, net 30,054,557 30,844,146 Inventories 28,645,389 25,340,440 Receivables, other 370,249 496,663 Other 1,427,341 1,807,680 Deferred tax benefit 546,803 435,211 ------------- ------------- Total current assets 91,221,152 86,522,911 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 3,157,972 3,162,177 OTHER ASSETS 312,150 347,324 INTANGIBLE ASSETS, NET 4,270,312 4,538,663 ------------- ------------- $ 98,961,586 $ 94,571,075 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable, banks $2,049,933 $2,542,286 Accounts payable 23,218,214 18,223,812 Accrued expenses 7,353,823 6,961,322 Income taxes payable 859,901 1,107,968 ------------- ------------- Total current liabilities 33,481,871 28,835,388 ------------- -------------- DEFERRED TAXES PAYABLE 650,202 684,304 ------------- ------------- LONG-TERM DEBT, LESS CURRENT PORTION 1,345,895 1,416,631 ------------- ------------- MINORITY INTERESTS 8,507,806 8,573,594 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 11,630,777 and 11,676,277 shares at March 31, 2001 and December 31, 2000, respectively 11,631 11,676 Additional paid-in capital 27,729,177 27,729,177 Retained earnings 60,699,071 58,667,619 Accumulated other comprehensive income (8,280,015) (6,573,513) Treasury stock, at cost, 5,781,905 and 5,736,405 shares at March 31, 2001 and December 31, 2000, respectively (25,184,052) (24,773,801) ------------- ------------- 54,975,812 55,061,158 ------------- ------------- $98,961,586 $94,571,075 ============= ============= See notes to financial statements. Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2001 2000 ----------- ---------- NET SALES 31,043,176 22,168,514 COST OF SALES 15,429,058 12,244,820 ----------- ---------- GROSS MARGIN 15,614,119 9,923,694 SELLING, GENERAL AND ADMINISTRATIVE 11,869,694 7,466,092 ----------- ---------- INCOME FROM OPERATIONS 3,744,425 2,457,602 ----------- ---------- OTHER CHARGES (INCOME): Interest 49,612 57,905 Loss on foreign currency 52,076 39,157 Interest and dividend (income) (282,537) (227,988) Realized (gain) on sale of investments (500,151) ----------- ---------- (180,849) (631,077) ----------- ---------- INCOME BEFORE INCOME TAXES 3,925,274 3,088,679 INCOME TAXES 1,454,413 1,413,329 ----------- ---------- NET INCOME BEFORE MINORITY INTEREST 2,470,861 1,675,350 MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY 439,409 253,012 ----------- ---------- NET INCOME $2,031,452 $1,422,338 =========== ========== NET INCOME PER COMMON SHARE: BASIC $0.17 $0.12 DILUTED $0.16 $0.11 =========== =========== NUMBER OF COMMON SHARES OUTSTANDING: BASIC 11,632,010 11,767,250 DILUTED 13,093,290 12,925,178 =========== =========== See notes to financial statements. Page 3
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2001 2000 ----------- ------------ OPERATING ACTIVITIES: Net income $2,031,452 $1,422,338 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 417,554 453,199 Minority interest in net income 439,409 253,012 Increase (decrease) in cash from changes in: Accounts receivable (457,531) 289,762 Inventories (4,489,260) (4,283,806) Other assets 467,254 (285,547) Accounts payable and accrued expenses 6,314,603 2,324,156 Income taxes payable (211,594) 182,805 ----------- ----------- Net cash provided by operating activites 4,511,888 355,919 ----------- ----------- INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements (425,460) (850,681) Trademark and license acquisitions (950) Proceeds from sale of marketable securities 1,060,843 ----------- ----------- Net cash provided by (used in) investing activities (425,460) 209,212 ----------- ----------- FINANCING ACTIVITIES: Increase (decrease) in loan payable, bank (382,125) 2,242,922 Proceeds from exercise of stock options 57,500 Purchases of treasury stock (410,296) (682,092) ----------- ----------- Net cash provided by (used in) financing activities (792,421) 1,618,330 ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (715,965) (592,226) ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 2,578,042 1,591,235 Cash and cash equivalents at beginning of period 27,598,771 24,936,361 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,176,813 $26,527,596 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest $51,000 $60,000 Income taxes 1,666,000 550,000 See notes to financial statements. Page 4
INTER PARFUMS, 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, 2000. 2. COMPREHENSIVE INCOME: <TABLE> <CAPTION> Three months ended Three months ended March 31, 2001 March 31, 2000 ------------------ ------------------- <S> <C> <C> Comprehensive income: Net income $ 2,031,452 $ 1,422,338 Other comprehensive income, net of tax: Foreign currency translation adjustment (1,508,656) (1,274,725) Cumulative effect of adopting SFAS 133 as of January 1, 2001 274,201 Gains on derivatives reclassified into earnings (274,201) Change in fair value of derivatives (197,846) Unrealized gains on securities: Unrealized holding gains arising during period 760,340 Less: reclassification adjustment for gains realized in net income (223,859) $ $324,950 $684,094 Comprehensive income =========== ========== </TABLE> 3. GEOGRAPHIC AREAS: Segment information related to domestic and foreign operations is as follows: <TABLE> <CAPTION> Three months ended Three months ended March 31, 2001 March 31, 2000 ------------------ ------------------ <S> <C> <C> Net sales: United States $ 7,949,112 $ 8,043,092 Europe 23,129,064 14,155,422 Eliminations (35,000) (30,000) ------------- ------------ $ 31,043,176 $ 22,168,514 ============= ============ Net Income: United States $ 512,944 $ 569,543 Europe 1,518,508 856,928 South America (0) (4,133) ------------- ------------ $ 2,031,452 $ 1,422,338 </TABLE> Page 5
INTER PARFUMS, 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: March 31, 2001 December 31, 2000 -------------- ----------------- Raw materials and component parts $ 8,980,899 $ 8,775,558 Finished goods 19,664,490 16,564,882 -------------- ------------ $ 28,645,389 $ 25,340,440 ============== ============ 6. Recent Accounting Developments: The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for all quarters of fiscal years beginning after June 15, 2000 and does not permit retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. Generally, increases or decreases in fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative is designated and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument will be recorded in other comprehensive income. We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and to manage risks related to future sales expected to be denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, we determine that a high degree of initial effectiveness exists between the change in the value of the hedged item and the change in the value of the derivative from a movement in foreign currency rates. High effectiveness means that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item. We measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness as defined by SFAS No. 133 is recognized in the income statement. On January 1, 2001 we adopted SFAS No. 133. The transition adjustment for derivatives in cash flow hedges was to record an asset in the amount of $274,000 and was recognized as a cumulative-effect-type adjustment in accumulated other comprehensive income. Page 6
INTER PARFUMS, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are a leading manufacturer and distributor of fragrances, cosmetics and personal care products. Innovation and creativity are combined to produce quality products for our customers around the world. We operate in the fragrance and cosmetic industry, specializing in prestige fragrances and mass market fragrances and cosmetics: X Prestige products -- For each prestige brand, owned or licensed by us, we create an original concept for the perfume consistent with world market trends; X Mass market products -- We design, market and distribute inexpensive fragrances and personal care products including alternative designer fragrances, health and beauty aids and mass market cosmetics. Statements in this document, 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. Given these risks, uncertainties and other factors, persons are cautioned not to place undue reliance on the forward-looking statements. Such factors include effectiveness of sales and marketing efforts and product acceptance by consumers, dependence upon management, competition, currency fluctuation and international tariff and trade barriers, governmental regulation and possible liability for improper comparative advertising or "Trade Dress". THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 Net sales for the three months ended March 31, 2001 increased 40% to a record $31.0 million, as compared to $22.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 47% from that of the corresponding period of the prior year. The increase in net sales represents the sixth consecutive quarter of revenue growth and is due to the strength of our prestige fragrance lines, which is continuing its broader geographic rollout of PAUL SMITH and Burberry Touch, two new fragrance collections that debuted in the second half of 2000. Our new Christian Lacroix Eau Florale was introduced in the first quarter 2001 and shares some of the credit for our first quarter revenue gains. Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES In addition to expanding the geographic distribution of products launched in 2000, we have new prestige product launches scheduled to roll out during 2001. We are leveraging the popularity of "Burberry Touch" by bringing to market a new bath line for men and women, which is scheduled for introduction later this year. Additionally, development is going well with Celine, our second LVMH license, and the initial launch of two new Celine fragrances is on target for the fourth quarter of 2001. Our FUBU fragrance line is also under development and will debut in either late 2001 or early 2002. Net sales of mass market products, which were relatively unchanged in the first quarter of 2001 as compared to the corresponding period of the prior year, should show strong gains in the second quarter. This is due to the second quarter launch of an entirely new line of health and beauty aids ("HBA"), which are being sold under our Intimate brand name. We are also planning for further HBA line expansion throughout 2001. Sales generated from our existing lines of mass market fragrances continue to be strong. Our Aziza cosmetic line, which was launched in the first quarter of 2000 continues to perform very well. Additional product line extensions are also in process. Growing sales within existing product lines, new product launches and an active new business development program are how we plan to continue to grow our business. With respect to new business development, several licensing and acquisition opportunities are presently under discussion. However, we cannot assure you that any such transactions will be completed. Gross profit margin was 50% of net sales for the three months ended March 31, 2001, as compared to 45% for the corresponding period of the prior year. Our target gross margin percentage has historically been 45% to 46%. However, gross profit margins have increased recently as a result of the strength of the US dollar in relation to the Euro, as certain European sales are denominated in US dollars. In addition, our prestige fragrance lines, which have been growing at a faster rate than our mass market lines, generate a higher gross profit margin than our mass market product lines. Selling, general and administrative expenses aggregated $11.9 million for the three months ended March 31, 2001, as compared to $7.5 million for the corresponding period of the prior year. As a percentage of sales, selling, general and administrative expenses was 38% for the three months ended March 31, 2001, as compared to 34% for the corresponding period of the prior year. In the United States, selling, general and administrative expenses were virtually unchanged for the quarter as compared to the corresponding period of the prior year. Our mass market sales do not require extensive advertising and therefore, more of our selling, general and administrative expenses are fixed rather than variable. Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES Selling, general and administrative expenses incurred by our French subsidiary, Inter Parfums, S.A., increased to $9.5 million for the three months ended March 31, 2000, as compared to $5.1 million for the corresponding period of the prior year. As a percentage of sales, Inter Parfums, S.A. selling, general and administrative expenses was 41% for the three months ended March 31, 2001, as compared to 36% for the corresponding period of the prior year. Promotion and advertising are prerequisites for sales of designer products. We develop a complete marketing and promotional plan to support our growing portfolio of prestige fragrance brands and to build upon each brand's awareness. We typically budget advertising and promotion expenditures based upon sales of each of our product lines. As a result of the success of the Burberry Touch and Paul Smith launches in late 2000, we increased advertising and promotional activities in 2001 to keep the momentum of the second half of 2000 going. During the three months ended March 31, 2000 we sold a portion of our investment in marketable securities and realized a gain of $500,000 ($230,000 after taxes and minority interest) on such sale. On occasion, we invest excess cash in marketable securities, which are classified as available-for-sale. These funds are available to support current operations or to take advantage of other investment opportunities. Our effective income tax rate was 37% for the three months ended March 31, 2001, as compared to 46% for the corresponding period of the prior year. The effective tax rate for the three months ended March 31, 2000 includes a $330,000 ($255,000 after minority interest) accrual to cover the potential exposure related to tax audits of Inter Parfums, S.A. commenced by the French Tax Authorities. Net income increased 43% to $2.0 million for the three months ended March 31, 2001, as compared to $1.4 million for the corresponding period of the prior year. Net income for the three months ended March 31, 2000 includes a charge of $255,000 and a gain of $230,000, both after taxes and minority interest. The charge relates to a potential tax assessment and the gain represents a realized gain on sale of marketable securities. Diluted earnings per share increased 45% to $0.16 for the three months ended March 31, 2001, as compared to $0.11 for the corresponding period of the prior year. Weighted average shares outstanding (basic) aggregated 11.6 million for the three months ended March 31, 2001, as compared to 11.8 million for the corresponding period of the prior year. On a diluted basis, average shares outstanding were 13.1 million for the three months ended March 31, 2001, as compared to 12.9 million for the corresponding period of the prior year. The increase in our stock price has increased the dilutive effect of outstanding stock options, thereby increasing diluted shares outstanding. This was partially offset by shares repurchased pursuant to our stock repurchase program. Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES Our financial position remains very strong as a result of continued profitable operating results. At March 31, 2001, working capital aggregated $58 million and we had a working capital ratio of almost 3 to 1. Cash and cash equivalents aggregated $30 million and our net book value was $4.73 per outstanding share as of March 31, 2001. Furthermore, we had only $1.3 million in long-term debt. On occasion we use a portion of our cash to make investments in marketable equity securities, which are classified as available-for-sale. These funds are available to support current operations or to take advantage of other investment opportunities. These investments are made to maximize our return on cash. As of March 31, 2001, we had no marketable security positions. During the three months ended March 31, 2001, we continued our stock repurchase program by acquiring 45,500 of our common shares at an average cost of $9.02 per share. We believe that our stock price does not reflect our growth rate, prospects for future growth, the value of our licenses and our worldwide distribution network. In addition, the market capitalization of our 78% ownership interest in, Inter Parfums, S.A., our publicly traded Paris subsidiary, is in excess of $150 million, which exceeds that of the company as a whole. Our short-term financing requirements are expected to be met by available cash at March 31, 2001, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2001 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 $4.5 million for the three months ended March 31, 2001 as compared to $0.4 million for the corresponding period of the prior year. In addition to increase profits, favorable payment terms from our vendors helped us generate cash from operations while we build up our inventory levels in anticipation of net sales growth. Cash provided by operating activities continues to be the primary source of funds to finance operating needs, investments in new ventures, as well as to finance our stock repurchase program. We believe that funds generated from operations, supplemented by our present cash position and available credit facilities, will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs. Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES 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 should not have a material impact on our consolidated financial statements. Inflation rates in the U.S. and foreign countries in which we operate have not had a significant impact on operating results for the three months ended March 31, 2001. Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL We address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts in order to reduce the effects of fluctuating foreign currency exchange rates. We have entered into one (1) interest rate swap in an attempt to take advantage of low variable interest rates as compared to the fixed rate on our long-term debt. We do not engage in the trading of foreign currency forward exchange contracts or interest rate swaps. FOREIGN EXCHANGE RISK MANAGEMENT We enter into forward exchange contracts to hedge receivables denominated in foreign currencies for periods consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the receivables and cash flows of Inter Parfums, S.A., our French subsidiary, whose functional currency is French francs. All foreign currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which are rated as strong investment grade. Gains and losses related to qualifying hedges of these exposures are deferred and recognized in operating income when the underlying hedged transaction occurs. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote and in any event would not be material. The contracts have varying maturities with none exceeding one year. Costs associated with entering into such contracts have not been material to our financial results. At March 31, 2001, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately $7.5 million. The foreign currencies included in these contracts are principally the U.S. dollar. Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES INTEREST RATE RISK MANAGEMENT We mitigate interest rate risk by continually monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We have entered into one (1) interest rate swap to take advantage of declining interest rates. At March 31, 2001 we had one (1) interest rate swap agreement outstanding to convert $1.3 million of principal fixed rate debt with an interest rate of 4.56% to floating interest rate debt, at the EURIBOR rate, over the life of our long-term debt due in 2005. At March 31, 2000, the EURIBOR rate was 4.9%. If interest rates were to rise 1% per annum over the remaining term of the long-term debt, then we would incur a loss of $50,000. 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 2001. INTER PARFUMS, INC. By: /s/ Russell Greenberg -------------------------------- Russell Greenberg, Executive Vice President and Chief Financial Officer Page 12