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, 2000. 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 issuers classes of common stock, as of the latest practicable date. At May 9, 2000 there were 7,835,981 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, 2000 (unaudited) and December 31, 1999 (audited) 2 Consolidated Statements of Income for the Three Months Ended March 31, 2000 (unaudited) and March 31, 1999 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 (unaudited) and March 31, 1999 (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 Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 5. Other Information 12 Signatures 13
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, 1999 included in the Company's annual report filed on Form 10-K. The results of operations for the three months ended March 31, 2000 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, 2000 1999 ----------- ------------ Current assets: Cash and cash equivalents $ 26,527,596 $ 24,936,361 Marketable securities 4,381,945 4,424,043 Accounts receivable, net 24,825,526 26,032,673 Inventories 22,968,604 19,450,212 Receivables, other 1,049,514 874,829 Other 1,256,505 1,168,480 Deferred tax benefit 1,161,323 858,035 ------------ ------------ Total current assets 82,171,013 77,744,633 Equipment and leasehold improvements, net 3,564,055 3,126,162 Other assets 431,917 508,184 Intangible assets, net 5,480,647 5,843,720 ------------ ------------ $ 91,647,632 $ 87,222,699 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable, banks $ 2,920,665 $ 786,217 Accounts payable 18,651,681 18,449,190 Accrued expenses 5,528,557 4,351,536 Income taxes payable 1,707,056 768,940 Deferred taxes payable 947,517 987,654 ------------ ------------ Total current liabilities 29,755,476 25,343,537 ------------ ------------ Long-term debt, less current portion 1,458,364 1,531,394 ------------ ------------ Minority interests 8,014,729 7,988,208 ------------ ------------ Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 7,832,481 and 7,888,481 shares at March 31, 2000 and December 31, 1999, respectively 7,832 7,888 Additional paid-in capital 26,579,517 26,522,027 Retained earnings 53,500,634 52,078,296 Accumulated other comprehensive income (5,028,097) (4,289,854) Treasury stock, at cost, 3,661,203 and 3,595,203 shares at March 31, 2000 and December 31, 1999, respectively (22,640,823) (21,958,797) ------------ ------------ 52,419,063 52,359,560 ------------ ------------- $ 91,647,632 $ 87,222,699 ============ ============= See notes to financial statements. Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2000 1999 ------ ------ Net sales $22,168,514 $19,583,551 Cost of sales 12,244,820 10,099,031 ----------- ----------- Gross margin 9,923,694 9,484,520 Selling, general and administrative 7,466,092 7,133,969 ----------- ----------- Income from operations 2,457,602 2,350,551 ----------- ----------- Other charges (income): Interest 57,905 105,852 Loss on foreign currency 39,157 68,464 Interest and dividend (income) (227,98) (199,335) Realized (gain) on sale of investments (500,151) ----------- ----------- (631,077) (25,019) ----------- ----------- Income before income taxes 3,088,679 2,375,570 Income taxes 1,413,329 977,956 ----------- ----------- Net income before minority interest 1,675,350 1,397,614 Minority interest in net income of consolidated subsidiary 253,012 240,684 ----------- ----------- Net income $1,422,338 $1,156,930 =========== ============ Net income per common share: Basic $0.18 $0.15 Diluted $0.17 $0.15 =========== ============ Number of common shares outstanding: Basic 7,844,833 7,888,373 Diluted 8,616,785 7,975,223 =========== ============ See notes to financial statements. Page 3
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three months ended March 31, 2000 1999 ---------------- ------------------ <S> <C> <C> Operating activities: Net income $1,422,338 $1,156,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 453,199 414,990 Minority interest in net income 253,012 240,684 Deferred tax (benefit) provision 27,209 Increase (decrease) in cash from changes in: Accounts receivable 289,762 1,088,775 Inventories (4,283,806) (506,585) Other assets (285,547) (980,840) Accounts payable and accrued expenses 2,324,156 441,162 Income taxes payable 182,805 481,876 ---------------- ------------------ Net cash provided by operating activites 355,919 2,364,201 ---------------- ------------------ Investing activities: Purchase of equipment and leasehold improvements (850,681) (139,344) Trademark and license acquisitions (950) (1,700) Sale of marketable securities 1,060,843 ---------------- ------------------ Net cash (used in) investing activities 209,212 (141,044) ---------------- ------------------ Financing activities: Increase in loan payable, bank 2,242,922 192,308 Proceeds from exercise of stock options 57,500 Purchase of treasury stock (682,092) (5,515,649) ---------------- ------------------ Net cash (used in) financing activities 1,618,330 (5,323,341) ---------------- ------------------ Effect of exchange rate changes on cash (592,226) (926,857) ---------------- ------------------ Increase (decrease) in cash and cash equivalents 1,591,235 (4,027,041) Cash and cash equivalents at beginning of period 24,936,361 23,355,915 ---------------- ------------------ Cash and cash equivalents at end of period $26,527,596 $19,328,874 ================ ================== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $60,000 $113,000 Income taxes 550,000 467,000 </TABLE> 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, 1999. 2. Comprehensive Income: <TABLE> <CAPTION> Three months ended Three months ended March 31, 2000 March 31, 1999 ------------------ ------------------ <S> <C> <C> Comprehensive income: Net income $ 1,422,338 $ 1,156,930 Other comprehensive income, net of tax: Foreign currency translation adjustment ( 1,274,725) ( 2,166,650) Unrealized gains on securities: Unrealized holding gains arising during period 760,340 Less: reclassification adjustment for gains realized in net income ( 223,859) --------------- -------------- Comprehensive income $ 684,094 ( $ 1,009,720) =============== ============== </TABLE> 3. Geographic areas: Segment information related to domestic and foreign operations is as follows: Three months ended Three months ended March 31, 2000 March 31, 1999 ------------------ ------------------ Net sales: United States $ 8,043,092 $ 6,326,329 Europe 14,155,422 13,282,222 Eliminations ( 30,000) ( 25,000) ----------------- ----------------- $ 22,168,514 $ 19,583,551 ============= ============= Net Income: United States $ 569,543 $ 288 664 Europe 856,928 905,641 South America ( 4,133) ( 37,375) ----------------- ----------------- $ 1,422,338 $ 1,156,930 ============== ============== 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: <TABLE> <CAPTION> March 31, 2000 December 31, 1999 -------------- ----------------- <S> <C> <C> Raw materials and component parts $ 8,933,065 $ 8,239,528 Finished goods 14,035,539 11,210,684 ------------- ------------- $ 22,968,604 $ 19,450,212 </TABLE> 6. Other matters: Income taxes for the three months ended March 31, 2000 includes a $330,000 addition to the accrual, originally established in 1999, to cover the potential exposure related to a tax audit of Inter Parfums, S.A. commenced by the French Tax Authorities. The original accrual of $260,000 was established to cover an estimate of potential exposure based on an assessment issued by the French Tax Authorities for the 1996 tax year. This additional accrual covers, what we believe could be our exposure for the 1997 and 1998 tax years on issues similar to that of the 1996 tax year. Page 6
INTER PARFUMS, INC. AND SUBSIDIARIES Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Company is 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 specialize in the production of both prestige fragrances and mass market fragrances and cosmetics: o Prestige products -- For each prestige brand, owned or licensed, we create an original concept for the perfume consistent with world market trends; o Mass market products -- We design, market and distribute inexpensive fragrances and personal care products including alternative designer fragrances and mass market cosmetics. Three Months Ended March 31, 2000 as Compared to the Three Months Ended March 31, 1999 Net sales for the three months ended March 31, 2000 increased 13% to $22.2 million, as compared to $19.6 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales for the three months ended March 31, 2000 increased 23% from that of the corresponding period of the prior year. The increase in net sales represents the second consecutive quarter of revenue growth and is attributable to across-the-board increases in both our prestige and mass market product lines. The precipitous rise of the US dollar relative to the French franc masks the reality of our real revenue growth rate. Growth in net sales of prestige products, which was up approximately 20% for the quarter in constant dollars, was fueled in part by the launch of our new S.T. Dupont "Signature" line. Our "Signature" line, was designed around the theme of writing, for which S.T. Dupont is famous, and is a perfect complement to our successful S.T. Dupont "Paris" fragrance line. New product launches are scheduled to roll out throughout the year and include the introduction of our first Paul Smith Fragrance line, and our newest Burberry offering. Management believes that when you combine the strong market conditions we are experiencing with existing products, with the new product offerings we have planned, this 20% constant dollar growth rate can be maintained throughout the remainder of this year. Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES Net sales of mass market products achieved a 27% growth rate for the three months ended March 31, 2000 as compared to the corresponding period of the prior year. We first reported signs of a turnaround in our mass market business when we reported results for the third quarter of 1999. We were well prepared to capitalize on the economic recoveries of certain Latin American countries, armed with a strong line of new products available to both our export and domestic customers. In March 2000, we introduced our newest mass market fragrance line which is a large size fragrance, packaged in a unique canister decorated using the latest in graphic arts technology. Priced to sell, this line's success is presently exceeding our original expectations. During 1999, we also designed our new Aziza II line of eye shadow kits, mascaras, colorful lip gloss products and pencils. Aziza II, which hit the stores in February 2000, was created primarily for the "Discount Store" market, and is achieving widespread acceptance and reorders with distribution in over 12,000 doors. Growing sales within existing product lines, new product launches and an active new business development program is how we plan to continue to grow our business. With respect to new business development, several licensing and acquisition opportunities are presently under discussion. We are in the final stages of negotiation on a licensing venture which we believe could be a new avenue of growth in sales and earnings. However, no assurance can be given that such transaction will be completed. Gross profit margin was 45% of net sales for the three months ended March 31, 2000, as compared to 48% for the corresponding period of the prior year. Our target gross margin percentage has historically been 45% to 46%. Over the past three years, increased prestige product sales have enabled us to steadily improve our gross margins quarter after quarter. During the three months ended March 31, 2000 a combination of the sales mix together with an increase in mass market product sales resulted in a gross margin decline. Selling, general and administrative expenses aggregated $7.5 million for the three months ended March 31, 2000, as compared to $7.1 million for the corresponding period of the prior year. As a percentage of sales, selling, general and administrative expenses declined to 34% for the three months ended March 31, 2000, as compared to 36% for the corresponding period of the prior year. Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES In the United States, selling, general and administrative expenses were $2.3 million for both the three months ended March 31, 2000 and March 31, 1999. As a percentage of sales, selling, general and administrative expenses declined to 29% for the three months ended March 31, 2000, as compared to 36% for the corresponding period of the prior year. We are experiencing the benefit of the cost cutting initiatives put into place in 1999. We are well positioned to grow our sales without incurring significant increases in selling, general and administrative expenses. Selling, general and administrative expenses incurred by our French subsidiary Inter Parfums, S.A. were $5.1 million for the three months ended March 31, 2000, as compared to $4.8 million for the corresponding period of the prior year. As a percentage of sales, selling, general and administrative expenses aggregated 36% of sales for both the three months ended March 31, 2000 and March 31, 1999. Our existing prestige product lines together with new product launches require a reasonable level of advertising to support their growth and to build upon each brand's awareness. 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 ($224,000 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 46% for the three months ended March 31, 2000, as compared to 41% 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) addition to an accrual, originally established in 1999, to cover the potential exposure related to a tax audit of Inter Parfums, S.A. commenced by the French Tax Authorities. The original accrual of $260,000 was established to cover, what we believed to be, our exposure based on an assessment issued by the French Tax Authorities for the 1996 tax year. This additional accrual covers, what we believe could be our exposure for the 1997 and 1998 tax years on issues similar to that of the 1996 tax year. Net income increased 23% to $1.4 million for the three months ended March 31, 2000, as compared to $1.2 million for the corresponding period of the prior year. As discussed above, net income for the three months ended March 31, 2000 includes a charge of $255,000 and a gain of $224,000, 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. Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES Diluted earnings per share increased 13% to $0.17 for the three months ended March 31, 2000, as compared to $0.15 for the corresponding period of the prior year. Weighted average shares outstanding aggregated 7.8 million for the three month period ended March 31, 2000, as compared to 7.9 million for the corresponding period of the prior year. On a diluted basis, average shares outstanding were 8.6 million for the three months ended March 31, 2000, as compared to 8.0 million for the corresponding period of the prior year. Shares issued upon exercise of options were offset by shares repurchased pursuant to our stock repurchase program. The increase in our stock price has increased the dilutive effect of outstanding stock options, thereby increasing diluted shares outstanding. Liquidity and Capital Resources Profitable operating results continues to strengthen our financial position. At March 31, 2000, working capital aggregated $52 million and we had a working capital ratio of almost 3 to 1. Cash and marketable securities on hand aggregated $31 million and our net book value was $6.69 per outstanding share as of March 31, 2000. Furthermore, we had only $1.5 million in long-term debt. We recently used a portion of our cash to make an investment 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. This investment was made to maximize our return on cash. During the three months ended March 31, 2000, we continued our stock repurchase program by acquiring 66,000 of our common shares at an average cost of $10.33 per share. Our 77% owned publically traded French subsidiary, Inter Parfums, S.A., has a current market cap in excess of $130 million, which exceeds that of the Company. Management is of the opinion that the current market price of the Company's common shares understates its real value. The Company's short-term financing requirements are expected to be met by available cash at March 31, 2000, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2000 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. Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES Cash provided by operating activities aggregated $0.4 million for the three months ended March 31, 2000 as compared to $2.4 million for the corresponding period of the prior year. In anticipation of growth in net sales we have built up our inventory levels so as to be in a position to meet our customer demands. 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 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. 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 the Company's consolidated financial statements. 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, 2000. 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, currency fluctuations and competition. Given these uncertainties, persons are cautioned not to place undue reliance on the forward looking statements. Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES Part II. Other Information Items 3,4 and 6 are omitted as they are either not applicable or have been included in Part I. Item 1. Legal Proceedings Income taxes for the three months ended March 31, 2000 includes a $330,000 addition to the accrual, originally established in 1999, to cover the potential exposure related to a tax audit of Inter Parfums, S.A. commenced by the French Tax Authorities. The original accrual of $260,000 was established to cover an estimate of potential exposure based on an assessment issued by the French Tax Authorities for the 1996 tax year. This additional accrual covers, what we believe could be our exposure for the 1997 and 1998 tax years on issues similar to that of the 1996 tax year. Item 2. Changes in Securities and Use of Proceeds The Company issued the following shares of Common Stock upon exercise of stock options to four (4) employees of the Company. These issuances were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), under Section 4(2) of the Securities Act. Date Number of shares Proceeds received March 8, 2000 10,000 $ 57,500 April 3, 2000 10,000 $ 57,500 April 27, 2000 3,500 $ 21,250 Item 5. Other Information Our Board of Directors has approved a three-for-two stock split, payable on June 15, 2000 to shareholders of record as of the close of business on June 1, 2000. Fractional shares will be rounded up to the nearest whole share. Page 12
INTER PARFUMS, 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 12th day of May 2000. INTER PARFUMS, INC. By: /s/ Russell Greenberg --------------------- Russell Greenberg Executive Vice President and Chief Financial Officer Page 13