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 September 30, 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 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 October 29, 1999 there were 7,555,781 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 September 30, 1999 (unaudited) and December 31, 1998 (audited) 2 Consolidated Statements of Income for the Three Month and Nine Month Periods Ended September 30, 1999 (unaudited) and September 30, 1998 (unaudited) 3 Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1999 (unaudited) and September 30, 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 Item 1. Litigation 12 Item 2. Changes in Securities and Use of Proceeds 13 Item 6. Exhibits and Reports on Form 8-K 13 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, 1998 included in the Company's annual report filed on Form 10-K. The results of operations for the nine months ended September 30, 1999 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 <TABLE> <CAPTION> September 30, December 31, 1999 1998 ------------ ------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 18,063,219 $ 23,355,915 Accounts receivable, net 30,240,638 28,013,811 Inventories 18,698,394 21,938,972 Receivables, other 1,286,008 617,110 Other 1,069,170 1,084,512 Deferred tax benefit 834,017 1,107,285 ------------ ------------ Total current assets 70,191,446 76,117,605 Equipment and leasehold improvements, net 2,691,984 2,988,365 Other assets 716,989 921,849 Intangible assets, net 7,030,770 7,710,910 ------------ ------------ $ 80,631,189 $ 87,738,729 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable, banks $ 4,934,408 $ 4,171,558 Accounts payable 18,129,644 18,192,388 Income taxes payable 2,519,159 4,155,305 ------------ ------------ Total current liabilities 25,583,211 26,519,251 ------------ ------------ Long-term debt, less current portion 60,710 199,929 ------------ ------------ Minority interests 7,634,277 7,339,559 ------------ ------------ Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 7,368,581 and 8,462,781 shares at September 30, 1999 and December 31, 1998, respectively 7,369 8,463 Additional paid-in capital 21,038,972 20,729,692 Retained earnings 50,695,763 47,342,754 Foreign currency translation adjustment (3,065,965) (811,884) Treasury stock, at cost, 3,528,403 and 2,383,203 shares at September 30, 1999 and December 31, 1998, respectively (21,323,148) (13,589,035) ------------ ------------ 47,352,991 53,679,990 ------------ ------------ $ 80,631,189 $ 87,738,729 ============ ============ </TABLE> See notes to financial statements. Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $21,651,858 $22,504,625 $63,427,706 $67,403,931 Cost of sales 11,648,556 12,420,087 33,488,426 36,162,149 ----------- ----------- ----------- ----------- Gross margin 10,003,302 10,084,538 29,939,280 31,241,782 Selling, general and administrative 7,620,437 8,029,956 23,014,326 24,419,462 ----------- ----------- ----------- ----------- Income from operations 2,382,865 2,054,582 6,924,954 6,822,320 ----------- ----------- ----------- ----------- Other charges (income): Interest 133,444 113,474 322,916 350,730 Loss on foreign currency 51,478 13,980 168,284 110,907 Interest and dividend (income) (198,719) (157,100) (543,979) (583,263) Loss (gain) on sale of stock of subsidiary, net (325) 281 25,889 36,119 ----------- ----------- ----------- ----------- (14,122) (29,365) (26,890) (85,507) ----------- ----------- ----------- ----------- Income before income taxes 2,396,987 2,083,947 6,951,844 6,907,827 Income taxes 938,088 776,112 2,761,748 2,751,518 ----------- ----------- ----------- ----------- Net income before minority interest 1,458,899 1,307,835 4,190,096 4,156,309 Minority interest in net income of consolidated subsidiary 254,439 235,688 744,716 704,061 ----------- ----------- ----------- ----------- Net income $ 1,204,460 $ 1,072,147 $ 3,445,380 $ 3,452,248 =========== =========== =========== =========== Net income per common share: Basic $ 0.16 $ 0.12 $ 0.45 $ 0.39 Diluted $ 0.15 $ 0.12 $ 0.43 $ 0.38 =========== =========== =========== =========== Number of common shares outstanding: Basic 7,397,423 8,724,076 7,572,983 8,784,828 Diluted 8,211,713 8,946,954 8,014,319 9,040,959 =========== =========== =========== =========== </TABLE> See notes to financial statements. Page 3
INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine months ended September 30, 1999 1998 ----------- ----------- <S> <C> <C> Operating activities: Net income $ 3,445,380 $ 3,452,248 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,238,149 984,351 Loss on sale of stock of subsidiary 25,889 36,119 Minority interest in net income 744,716 704,061 Increase (decrease) in cash from changes in: Accounts receivable (3,899,845) (4,157,911) Inventories 2,003,161 (1,416,995) Other assets (515,184) 52,568 Deferred tax benefit 246,492 (244,005) Accounts payable 1,023,583 (339,640) Income taxes payable (1,365,191) 477,348 ----------- ----------- Net cash provided by (used in) operating activites 2,947,150 (451,856) ----------- ----------- Investing activities: Purchase of equipment and leasehold improvements (580,700) (1,164,001) Trademark and license acquisitions (334,288) (22,788) ----------- ----------- Net cash (used in) investing activities (914,988) (1,186,789) ----------- ----------- Financing activities: Increase in loan payable, bank 1,105,071 3,167,976 Proceeds from sale of stock of subsidiary 30,805 58,589 Proceeds from exercise of stock options 309,331 43,827 Dividends paid (92,371) Purchase of treasury stock (7,735,258) (2,260,716) ----------- ----------- Net cash provided by (used in) financing activities (6,382,422) 1,009,676 ----------- ----------- Effect of exchange rate changes on cash (942,436) 521,971 ----------- ----------- (Decrease) in cash and cash equivalents (5,292,696) (106,998) Cash and cash equivalents at beginning of period 23,355,915 18,721,525 ----------- ----------- Cash and cash equivalents at end of period $18,063,219 $18,614,527 =========== =========== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 364,000 $ 255,000 Income taxes 3,666,000 1,552,000 </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, 1998. 2. Comprehensive Income: Comprehensive income aggregated $1,191,299 and $5,025,334 for the nine months ended September 30, 1999 and 1998, respectively, as a result of foreign currency translation adjustments. 3. Geographic areas: Segment information related to domestic and foreign operations is as follows: Nine months ended Nine months ended September 30, 1999 September 30, 1999 ------------------ ------------------ Net sales: United States $ 19,835,657 $ 23,452,612 Europe 43,667,049 43,669,940 South America 622,523 Eliminations (75,000) (341,144) ------------ ------------ $ 63,427,706 $ 67,403,931 ============ ============ Net Income: United States $ 815,605 $ 1,158,730 Europe 2,727,839 2,705,393 South America (98,064) (495,531) Eliminations 83,656 ------------ ------------ $ 3,445,380 $ 3,452,248 ============ ============ 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: September 30, 1999 December 31, 1998 ------------------ ----------------- Raw materials and component parts $ 7,256,141 $ 7,570,613 Finished goods 11,442,253 14,368,359 ------------ ------------ $ 18,698,394 $ 21,938,972 ============ ============ 6. Litigation: As previously reported, Inter Parfums S.A., the Company's majority owned French subsidiary ("IP France"), is a party to litigation with Jean Charles Brosseau, S.A. ("Brosseau"), the licensor of the Ombre Rose trademark. The licensor has claimed damages of approximately $7.0 million and is seeking termination of the license agreement. In October 1999, IP France received notice of a judgement in favor of Brosseau, which awarded damages of approximately $600,000, and which directed IP France to turn over its license to Brosseau within six months. IP France is appealing the judgment as it vigorously and categorically denies the claims of Brosseau, and believes that it has meritorious defenses to such claims. The payment of the judgement has been stayed, and IP France can continue to operate under the license agreement during the appeal process. The Company has been advised by its special litigation counsel that, in its opinion, it is unlikely that the monetary judgment will be sustained on appeal, or that any final, substantial monetary judgement will be entered against IP France. Management does not believe that such litigation will have any material adverse effect on the financial condition or operations of the Company. Page 6
INTER PARFUMS, 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 and creativity are combined to produce quality products for our customers around the world. The Company specializes in prestige fragrances (62% of net sales for the nine months ended September 30, 1999) and consumer fragrances and cosmetics: o Prestige products -- For each prestige brand, owned or licensed, the Company creates an original concept for the perfume consistent with world market trends; o Consumer products -- The Company designs, markets and distributes inexpensive fragrances and personal care products including alternative designer fragrances and mass market cosmetics. The Company also designs, markets and distributes a broad range of inexpensive fragrances, highlighting the "Made in France" label. Three and Nine Months Ended September 30, 1999 as Compared to the Three and Nine Months Ended September 30, 1998 Net sales for the three months ended September 30, 1999 were $21.7 million, as compared to $22.5 million for the corresponding period of the prior year. Net sales for the nine months ended September 30, 1999 were $63.4 million, as compared to $67.4 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales for the three months ended September 30, 1999 were virtually unchanged from that of the corresponding period of the prior year. For the three months ended September 30, 1999, net sales within the Company's prestige fragrance lines declined 3.5%, as compared to the corresponding period of the prior year. Theses results were in line with management's expectations as no new product launches were scheduled for the period. While several new prestige fragrance projects are on the drawing board, with the exception of the Company's Christian Lacroix product line which was launched in October 1999, all 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 name, as well as two new perfume lines under the S.T. Dupont name. Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES In October 1999, the Company launched its first Christian Lacroix product line, pursuant to an exclusive license agreement entered into with the Christian Lacroix Company, a division of LVMH Moet Hennessy Louis Vuitton S.A. ("LVMH"). In addition, as previously reported LVMH has taken a significant equity position in the Company. This new association, with the worlds largest luxury goods manufacturer is expected to further strengthen the Company's position in prestige fragrance distribution. (See "Liquidity and Capital Resources" for further discussion of the contemplated transaction with LVMH). Management is also actively pursuing new license agreements to build upon the strength of its existing portfolio. Net sales within the Company's consumer products lines declined only 4.2% for the three months ended September 30, 1999, as compared to the corresponding period of the prior year. This result is a significant improvement from the decline of 23% reported for the six months ended June 30, 1999. As previously reported, the downward trend resulted from the economic situation in Eastern Europe, Brazil and other Latin American countries. Further, the market for the Company's consumer products has been very price sensitive and the consolidation of customers through numerous announced mergers of mass market customers also affected sales as customers reduced inventory levels and eliminated duplicate vendors. This trend appears to be leveling off, and we may see a gradual reversal of this trend over the next several quarters. Gross profit margins increased to 46% and 47% of net sales for the three and nine month periods ended September 30, 1999, respectively, as compared to 45% and 46% for the three and nine month periods ended September 30, 1998, respectively. Gross profit margins have remained relatively constant for the past two years. However, the Company has seen some gross profit margin improvement as a result of the strength of the US dollar relative to the French franc, as certain European sales are denominated in US dollars. The Company's prestige fragrance lines continue to generate a slightly higher gross profit margin than the Company's consumer product lines and these gross profit margin benefits have offset the negative affect of lower margin consumer product sales and closeout sales. Selling, general and administrative expenses declined to $7.6 million for the three months ended September 30, 1999, as compared to $8.0 million for the corresponding period of the prior year and declined to 35% of sales in the 1999 period, as compared to 36% in the 1998 period. Selling, general and administrative expenses declined to $23.0 million for the nine months ended September 30, 1999, as compared to $24.4 million for the corresponding period of the prior year and aggregated 36% of sales in both periods. Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES Domestic selling, general and administrative expenses declined to $2.3 million for the three months ended September 30, 1999, as compared to $2.9 million for the corresponding period of the prior year. Selling, general and administrative expenses declined to 30% of net sales for the three months ended September 30, 1999, as compared to 38% of net sales for the corresponding period of the prior year. As a result of weak domestic consumer product sales, management has instituted extraordinarily tight controls in an effort to keep spending in line with sales. Selling, general and administrative expenses incurred by IP France were $5.3 million for the three months ended September 30, 1999, as compared to $5.2 million for the corresponding period of the prior year. Some savings have been achieved in distribution and freight costs. However, a reasonable level of advertising is necessary to support the Company's growing portfolio of prestige fragrance brands and to build upon each brand's awareness. Interest expense was $0.1 million and $0.3 million for the three and nine month periods ended September 30, 1999, respectively, which is consistent with that incurred in the corresponding 1998 periods. The Company uses its credit lines, as needed, to finance its working capital needs. 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. Such investments did not have any material effect on the Company's results of operations for the three and nine month periods ended September 30, 1999 and 1998. The Company's effective income tax rate was 39% and 40% for the three and nine month periods ended September 30, 1999, respectively, as compared to 37% and 40% for the corresponding periods of the prior year. The effective tax rate for the three months ended September 30, 1998 reflects the tax benefit to be realized as a result of the Company's decision to close its Brazilian subsidiary. Net income increased 12% to $1.2 million for the three months ended September 30, 1999, as compared to $1.1 million for the corresponding period of the prior year. Earnings per diluted share increased 25% to $0.15 for the three months ended September 30, 1999, as compared to $0.12 for the corresponding period of the prior year. Net income was $3.45 million for both the nine months ended September 30, 1999 and the corresponding period of the prior year. Earnings per diluted share increased 13% to $0.43 for the nine months ended September 30, 1999, as compared to $0.38 for the corresponding period of the prior year. Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES Weighted average shares outstanding aggregated 7.4 million and 7.6 million for the three and nine month periods ended September 30, 1999, respectively, as compared to 8.7 million and 8.8 million for the three and nine month periods ended September 30, 1998, respectively. On a diluted basis, average shares outstanding were 8.2 million and 8.0 million for the three and nine month periods ended September 30, 1999, respectively, as compared to 8.9 million and 9.0 million for the three and nine month periods ended September 30, 1998, respectively. Such decline is the result of the Company's ongoing stock repurchase program. Liquidity and Capital Resources As a result of continued profitable operating results, the Company's financial position remains very strong. At September 30, 1999, working capital aggregated $45 million with a working capital ratio of almost 3 to 1. The Company had cash and cash equivalents on hand of $18 million, and its net book value aggregated $6.43 per outstanding share as of September 30, 1999. Furthermore, the Company had virtually no long-term debt. In addition, and as previously reported, LV Capital USA, Inc. ('LV Capital"), a wholly-owned subsidiary of LVMH, and the two principal shareholders of the Company, reached an agreement in principle for LV Capital to increase its equity ownership of the Company to approximately 20% of the outstanding shares at $12.00 per share, by purchasing outstanding shares held by the principal shareholders, and shares underlying outstanding options. LV Capital has already purchased, in the open market, approximately 10.5% of the outstanding shares of the Company. At closing, which is expected to occur prior to December 31, 1999, the Company is to receive proceeds of approximately $4.0 million, as a result of the exercise of stock options. The agreement in principle, is subject to the execution and delivery of formal, written agreements, and routine closing conditions, including regulatory compliance. The contemplated agreements acknowledge that the Company has become a successful player and competitor in the prestige fragrance industry, which has been evidenced in large part by its success in the upscale fragrance market with Burberry and ST Dupont, and the recent licenses signed with the British designer, Paul Smith and the French couture designer Christian Lacroix. The Company is hopeful that this strategic alliance with LVMH will bring further opportunities to the Company in licensing and distribution. Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES The Company is confident in the long-term growth potential of its business. As such, it has consistently used its common stock repurchase program in an effort to increase shareholder value. During the nine month period ended September 30, 1999, the Company continued to repurchase its shares. During such period the Company repurchased 1,145,200 shares of its common stock at an average purchase price of $6.76. The Company's short-term financing requirements are expected to be met by available cash at September 30, 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 $2.9 million for the nine months ended September 30, 1999 as compared to a use of cash for operating activities of $0.5 million for the corresponding period of the prior year. 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. 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 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 nine months ended September 30, 1999. Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES 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 3,4 and 5 are omitted as they are either not applicable or have been included in Part I. Item 1. Litigation As previously reported, litigation was commenced against Inter Parfums S.A., the Company's majority owned French subsidiary ("IP France"), regarding the Ombre Rose fragrance license in the French Commercial Court of Paris in February 1997 by the licensor, Jean Charles Brosseau, S.A. ("Brosseau"). IP France asserted claims against Brosseau for interference with its distributors. In response, Brosseau then claimed damages of approximately $7 million against IP France, allegedly for the decreased value of his fragrance brands. In October 1999, IP France received notice of a judgement in favor of Brosseau, which awarded damages of approximately $600,000, and which directed IP France to turn over its license to Brosseau within six months. IP France is appealing the judgment as it vigorously and categorically denies the claims of Brosseau, and believes that it has meritorious defenses to such claims. Payment of the judgement has been stayed, and IP France can continue to operate under the license agreement during the appeal process. The Company has been advised by its special litigation counsel that, in its opinion, it is unlikely that the monetary judgment will be sustained on appeal, or that any final, substantial monetary judgement will be entered against IP France. Management does not believe that such litigation will have any material adverse effect on the financial condition or operations of the Company. Page 12
INTER PARFUMS, INC. AND SUBSIDIARIES Item 2. Changes in Securities and Use of Proceeds The Company issued the following shares of Common Stock upon exercise of stock options to 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 September 2, 1999 500 $ 2,875 September 29, 1999 44,500 $ 283,456 Item 6. Exhibits and Reports on Form 8-K (b) (i) A Current Report on Form 8-K, date of report, August 5, 1999 was filed, reporting items 5 and 7 and, (ii) a Current Report on Form 8-K, date of report, September 28, 1999 was filed, reporting item 5. 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 10th day of November 1999. INTER PARFUMS, INC. By: /s/ Russell Greenberg -------------------------------- Russell Greenberg, Executive Vice President and Chief Financial Officer Page 13