10-Q 1 f10qk2.txt INTER PARFUMS. FORM 10Q MARCH 31, 2003 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, 2003. 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At May 5, 2003 there were 19,002,517 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, 2003 (unaudited) and December 31, 2002 (audited) 2 Consolidated Statements of Income for the Three Months Ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited) 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited) 4 Notes to Unaudited Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 Part II. Other Information 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K. 16 Signatures 17 Certifications 18 INTER PARFUMS, INC. AND SUBSIDIARIES Part I. Financial Information Item 1. Financial Statements In our opinion, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission. Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2002 included in our annual report filed on Form 10-K. The results of operations for the three months ended March 31, 2003 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, 2003 2002 ---------- ------------ Current assets: Cash and cash equivalents $40,419,240 $38,289,774 Accounts receivable, net 43,802,258 41,232,233 Inventories 36,464,504 32,197,654 Receivables, other 1,733,417 1,211,010 Other current assets 2,514,669 2,122,181 Income tax receivable 1,260,667 2,014,274 Deferred tax asset 703,809 1,098,414 ---------- ------------ Total current assets 126,898,564 118,165,540 Equipment and leasehold improvements, net 4,658,837 4,212,706 Intangible assets, net 6,789,979 6,745,090 Other assets 195,229 246,249 ---------- ------------ $138,542,609 $129,369,585 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable, banks $1,104,252 $1,794,218 Accounts payable 23,548,408 20,008,011 Accrued expenses 12,690,780 10,733,407 Income taxes payable 915,194 1,518,484 Dividends payable 379,561 284,644 ---------- ------------ Total current liabilities 38,638,195 34,338,764 ---------- ------------ Deferred tax liability 672,295 649,814 ---------- ------------ Minority interest 14,547,504 13,465,978 ---------- ------------ Shareholders' equity: Common stock, $.001 par; authorized 30,000,000 shares; outstanding 18,978,007 and 18,976,207 shares at March 31, 2003 and December 31, 2002, 18,978 18,976 respectively Additional paid-in capital 33,445,869 33,440,670 Retained earnings 77,186,054 75,062,624 Accumulated other comprehensive 246,511 (1,394,444) income Treasury stock, at cost, 7,305,638 shares at March 31, 2003 and December 31, 2002 (26,212,797) (26,212,797) ----------- ------------- 84,684,615 80,915,029 ------------ ------------- $138,542,609 $129,369,585 ============= ============== See notes to financial statements. Page 2 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2003 2002 ------------- ------------ Net sales $37,563,918 $28,417,646 Cost of sales 19,615,308 14,711,524 ------------- ------------ Gross margin 17,948,610 13,706,122 Selling, general and administrative 13,219,513 9,885,774 ------------- ------------ Income from operations 4,729,097 3,820,348 ------------- ------------ Other charges (income): Interest 136,744 79,950 (Gain) on foreign currency (54,728) (876) Interest and dividend (174,706) (87,763) (income) Loss on subsidiary's 10,731 issuance of stock ------------- ------------ (81,959) (8,689) ------------- ------------ Income before income taxes 4,811,056 3,829,037 Income taxes 1,710,715 1,385,572 ------------- ------------ Net income before minority interest 3,100,341 2,443,465 Minority interest in net income of consolidated subsidiary 597,350 433,769 ------------- ------------ Net income $2,502,991 $2,009,696 ============ ============ Net income per common share: Basic $0.13 $0.11 Diluted $0.13 $0.10 ============ ============ Number of common shares outstanding: Basic 18,816,503 18,750,327 Diluted 19,907,660 19,961,367 ============ ============ See notes to financial statements. Page 3 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2003 2002 ------------ ------------ Operating activities: Net income $2,502,991 $2,009,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 487,114 383,316 Minority interest in net income of consolidated 597,350 431,591 subsidiary Deferred tax provision 394,605 340,000 Loss on subsidiary's issuance of stock 10,731 Increase (decrease) in cash from changes in: Accounts receivable, net (1,400,682) 50,884 Inventories (3,515,369) (627,331) Other assets (758,481) (148,202) Accounts payable and accrued expenses 4,519,044 801,573 Income taxes payable 145,587 362,433 ------------ ------------ Net cash provided by operating activites 2,982,890 3,603,960 ------------ ------------ Investing activities: Purchase of equipment and leasehold improvements (770,882) (361,777) ------------ ------------ Net cash (used in) investing activities (770,882) (361,777) ------------ ------------ Financing activities: (Decrease) in loan payable, bank (719,921) (338,364) Proceeds from sale of stock of subsidiary 4,292 Proceeds from exercise of options 5,200 216,062 Dividends paid (284,644) ------------ ------------ Net cash (used in) financing activities (995,073) (122,302) ------------ ------------ Effect of exchange rate changes on cash 912,531 (190,198) ------------ ------------ Increase in cash and cash equivalents 2,129,466 2,929,683 Cash and cash equivalents at beginning of period 38,289,774 28,562,296 ------------ ------------ Cash and cash equivalents at end of period $40,419,240 $31,491,979 ============ ============ Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $137,000 $81,000 Income taxes 1,254,000 746,000 See notes to financial statements. Page 4 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Unaudited Financial Statements 1. Significant Accounting Policies: The accounting policies we follow are set forth in the notes to our financial statements included in our Form 10-K which was filed with the Securities and Exchange Commission for the year ended December 31, 2002. We also discuss such policies in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. 2. Comprehensive Income: Three months ended Three months ended March 31, 2003 March 31, 2002 ----------------- ------------------ Comprehensive income: Net income $ 2,502,991 $ 2,009,696 Other comprehensive income, net of tax: Foreign currency translation adjustment 1,618,303 ( 461,756) Loss (gain) on derivatives reclassified into earnings 96,268 ( 4,382) Change in fair value of derivatives ( 73,616) ( 10,128) -------------- ------------- Comprehensive income $ 4,143,946 $ 1,553,686 ============== ============= 3. Geographic Areas: Segment information related to domestic and foreign operations is as follows: Three months ended Three months ended March 31, 2003 March 31, 2002 ------------------ ------------------ Net sales: United States $ 10,412,029 $ 8,639,503 Europe 27,214,889 19,813,143 Eliminations ( 63,000) ( 35,000) ------------------ ------------------ $ 37,563,918 $ 28,417,646 ================== ================== Net Income: United States $ 498,598 $ 534,007 Europe 2,005,624 1,475,689 Eliminations ( 1,231) 0 ------------------ ------------------ $ 2,502,991 $ 2,009,696 ================== ================== 4. Earnings Per Share: We computed basic earnings per share using the weighted average number of shares outstanding during each period. We computed diluted earnings per share using the weighted average number of shares outstanding during each period, plus the incremental shares outstanding assuming the exercise of dilutive stock options. Page 5 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Unaudited Financial Statements 5. Inventories: Inventories consist of the following: March 31, 2003 December 31, 2002 --------------- ----------------- Raw materials and component $ 15,106,360 $ 11,080,046 Parts Finished goods 21,358,144 21,117,608 --------------- --------------- $ 36,464,504 $ 32,197,654 =============== =============== 6. Stock- based Compensation: The Company accounts for stock-based employee compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations ("APB 25"). The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which was released in December 2002 as an amendment of SFAS No. 123. The Company applies APB No. 25 and related interpretations in accounting for its stock option incentive plans. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards. Three months ended March 31, 2003 2002 ----------- ----------- Reported net income $2,502,991 $2,009,696 Stock-based employee compensation expense included in reported net income, net of related tax effects 0 0 Stock-based employee compensation determined under the fair value based method, net of related tax effects (21,691) (12,399) ----------- ----------- Pro forma net income $2,481,300 $1,997,297 =========== =========== Income per share, as reported: Basic $0.13 $0.11 Diluted $0.13 $0.10 Pro forma net income per share: Basic $0.13 $0.11 Diluted $0.12 $0.10 Page 6 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Unaudited Financial Statements 6. Stock-based Compensation (continued): The weighted average fair values of the options granted during 2003 and 2002 are estimated as $2.07 and $2.30 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield 1.0% in 2003 and 0.8% in 2002; volatility of 50% in both 2003 and 2002; risk-free interest rates at the date of grant, 1.70% in 2003 and 3.11% in 2002; and an expected life of the option of two years. 7. Shareholders Equity: In April 2003, the Chief Executive Officer exercised 67,500 outstanding stock options of the Company's common stock. The aggregate exercise price of $232,475 was paid by him tendering to the Company 33,692 shares of the Company's common stock, previously owned by him, valued at $6.90 per share, the fair market value on the date of exercise. All shares issued pursuant to the option exercises were issued from treasury stock of the Company. In addition, the Chief Executive Officer tendered an additional 9,298 shares for payment of withholding taxes resulting from the option exercises. As a result of this transaction, the Company expects to receive a tax benefit of approximately $233,000, which will be reflected as an increase to additional paid-in capital in the Company's financial statements. Page 7 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 health and beauty aids. We combine innovation and creativity to produce quality products for our customers around the world. We operate in the fragrance and cosmetic industry, specializing in prestige perfumes and mass market perfumes, cosmetics and health and beauty aids: 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, mass market cosmetics and health and beauty aids. 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". We operate under various license agreements, including two licenses that are with affiliates of our strategic partner, LV Capital USA, Inc. ("LV Capital"), a wholly-owned subsidiary of LVMH Moet Hennessy Louis Vuitton S.A. In May 2000 we entered into an exclusive worldwide license for prestige fragrances for the Celine brand, and in March 1999 we entered into an exclusive worldwide license for Christian Lacroix fragrances. Both licenses are subject to certain minimum sales requirements, advertising expenditures and royalty payments as are customary in our industry. Page 8 INTER PARFUMS, INC. AND SUBSIDIARIES Three Months Ended March 31, 2003 as Compared to the Three Months Ended March 31, 2002 Net sales for the three months ended March 31, 2003 increased 32% to a record $37.6 million, as compared to $28.4 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 15% for the period. The increase in net sales is attributable to increases in both our prestige and mass market product lines. Prestige product sales grew 37% (12% in constant dollars) for the three months ended March 31, 2003, as compared to the 2002 period. The strong growth achieved in the second half of 2002 continued through the first quarter of 2003. All of our principal prestige brands achieved double-digit growth. In addition, the continued roll out of our Christian Lacroix Bazar fragrance line, as well as our two fragrance line extensions, Essence Pure by S.T. Dupont and Paul Smith Extreme also contributed to our top line growth. We have a strong line-up of new brands and brand extensions in our 2003 new product pipeline. In the second quarter of 2003 we plan to debut summer seasonal fragrances for both our Celine and Christian Lacroix fragrance lines. During the fourth quarter of 2003, we plan to unveil a completely new Burberry fragrance line and in October 2003 we plan to launch a fragrance and cosmetic line under the Diane von Furstenberg label. With respect to our mass market product lines, sales were up 21% for the three months ended March 31, 2003, as compared to the 2002 period. We continue to see growth in our mass market fragrances lines as a result of our acquisition of certain fragrance brands from Tristar Corporation ("Tristar"), a Debtor-in-possession in a Chapter 11 proceeding. In May 2002, we purchased trademarks and related intellectual property of certain brands for $3.2 million, and acquired certain existing inventory for approximately $3.7 million. Tristar was one of our most significant competitors in mass market fragrances and the brands acquired are being sold in the same distribution channels as that of our other mass market fragrance lines. New product line extensions and an expanding distribution network continue to benefit sales volume in our Intimate health and beauty aids and Aziza cosmetics lines. Our new product development program for all three of our mass market product groups is well under way, and we expect to roll out new mass market products throughout 2003. In addition, we are actively pursuing other new business opportunities. However, we cannot assure you that any new license or acquisitions will be consummated. Gross profit margins were 47.8% for the three months ended March 31, 2003, as compared to 48.2% for the 2002 period. The declining rate of the dollar relative to the euro put a bit of pressure on gross margins during the period ended March 31, 2003. Gross profit margins remain ahead of our target rates of 45% to 46%. If the dollar remains weak throughout 2003, gross margins are expected to hover around our target rates of 45% to 46%. Page 9 INTER PARFUMS, INC. AND SUBSIDIARIES Selling, general and administrative expenses aggregated $13.2 million for the three months ended March 31, 2003, as compared to $9.9 million for the corresponding period of the prior year. As a percentage of sales, selling, general and administrative expenses were 35.2% for the three months ended March 31, 2003, as compared to 34.8% for the 2002 period. Our mass market sales do not require extensive advertising and therefore, more of our selling, general and administrative expenses are fixed rather than variable. As a result, the increase in mass market sales enables us to spread our fixed costs over a larger net sales base. On the other hand, 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. In addition, recent increases in certain fixed costs, including insurance, rent and wages, is expected to cause a slight rise in selling, general and administrative expenses throughout 2003. Interest expense aggregated $137,000 and $80,000 for the three months ended March 31, 2003 and 2002, respectively. We use the credit lines available to us, as needed, to finance our working capital needs. Foreign currency gains aggregated $55,000 and $1,000 for the three months ended March 31, 2003 and 2002, respectively. Occasionally, we enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments. Our effective income tax rate was 35.6% for the three months ended March 31, 2003, as compared to 36.2% for the corresponding period of the prior year. Tax rates in France declined slightly in 2003. Net income increased 25% to $2.5 million for the three months ended March 31, 2003, as compared to $2.0 million for the corresponding period of the prior year. Diluted earnings per share increased 30% to $0.13 for the three months ended March 31, 2003, as compared to $0.10 for the corresponding period of the prior year. Weighted average shares outstanding aggregated 18.8 million for both the three months ended March 31, 2003 and 2002. On a diluted basis, average shares outstanding were 19.9 million for the three months ended March 31, 2003, as compared to 20.0 million for the corresponding period of the prior year. . Page 10 INTER PARFUMS, INC. AND SUBSIDIARIES Liquidity and Capital Resources Profitable operating results continue to strengthen our financial position. At March 31, 2003, working capital aggregated $88 million and we had a working capital ratio of 3.3 to 1. Cash and cash equivalents aggregated $40 million and our net book value was $4.46 per outstanding share as of March 31, 2003. Furthermore, we had no long-term debt. Our short-term financing requirements are expected to be met by available cash at March 31, 2003, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2003 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 $3.0 million for the three months ended March 31, 2003 as compared to $3.6 million for the corresponding period of the prior year. In constant dollars, accounts receivable and inventories were up 3% and 11%, respectively, as compared to December 31, 2002. These increases are very reasonable considering the 15% constant dollar sales increase for the period. Cash provided by operating activities continues to be the primary source of funds to finance operating needs and investments in new ventures. Commencing in March 2002, our Board of Directors authorized our first cash dividend of $.06 per share, approximately $1.1 million per annum, payable $.015 per share quarterly. The first cash dividend of $.015 per share was paid on April 15, 2002 to shareholders of record on March 31, 2002. In March 2003, our board of directors increased the cash dividend to $.08 per share, approximately $1.5 million per annum, payable $.02 per share on a quarterly basis. The first cash dividend of $.02 per share was paid on 15 April 2003 to shareholders of record on 31 March 2003. This increased cash dividend represents a small part of our cash position and is not expected to have any significant impact on our financial position. 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. 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, 2003. Page 11 INTER PARFUMS, INC. AND SUBSIDIARIES Discussion of Critical Accounting Policies We make estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and which require our management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a brief discussion of the more critical accounting policies that we employ. Revenue Recognition We sell our products to department stores, perfumeries, mass market retailers, supermarkets and domestic and international wholesalers and distributors. Sales of such products by domestic subsidiaries are denominated in U.S. dollars and sales of such products by foreign subsidiaries are primarily denominated in either Euros or U.S. dollars. Accounts receivable reflect the granting of credit to these customers. We generally grant credit based upon analysis of the customer's financial position and previously established buying patterns. We do not generally bill customers for shipping and handling costs and, accordingly, classify such costs as selling and administrative expenses. Revenues are recognized when merchandise is shipped and the risk of loss passes to the customer. Net sales are comprised of gross revenues less returns and trade discounts and allowances. We do not generally allow customers to return their unsold products. However, on a case-by-case basis we occasionally allow customer returns. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns based primarily upon historic trends and relevant current data. We record estimated reserves for sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based on estimated realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from estimates if factors such as economic conditions, inventory levels or competitive conditions differ from expectations. Promotional Allowances We have various performance-based arrangements with retailers to reimburse them for all or a portion of their promotional activities related to our products. These arrangements primarily allow customers to take deductions against amounts owed to us for product purchases. Estimated accruals for promotions and co-operative advertising programs are recorded in the period in which the related revenue is recognized. We review and revise the estimated accruals for the projected costs for these promotions. Actual costs incurred may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers' programs or other conditions differ from our expectations. Page 12 INTER PARFUMS, INC. AND SUBSIDIARIES Inventories Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. We record adjustments to the cost of inventories based upon our sales forecast and the physical condition of the inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions or competitive conditions differ from our expectations. Equipment Equipment, which includes tools and molds, is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital spending strategy can result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of equipment could result in shortened useful lives. Other Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The estimate of undiscounted cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, economic conditions, changes to our business model or changes in consumer acceptance of our products. In those cases where we determine that the useful life of other long-lived assets should be shortened, we would depreciate the net book value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense. 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 do not engage in the trading of foreign currency forward exchange contracts or interest rate swaps. Page 13 INTER PARFUMS, INC. AND SUBSIDIARIES Foreign Exchange Risk Management 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. We enter into these exchange contracts 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 the Euro. 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. All derivative instruments are required to be reflected 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. Before entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement. 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, 2003, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $18.7 million and GB Pounds 4.2 million. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-14(c)) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q (the "Evaluation Date"). Based on their review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to our Company and its consolidated subsidiaries would be made known to them by others within those entities, so that such material information is recorded, processed and reported in a timely manner, particularly during the period in which this quarterly report on Form 10-Q was being prepared, and that no changes were required at this time. Page 14 INTER PARFUMS, INC. AND SUBSIDIARIES Changes in Internal Controls There were no significant changes in our Company's internal controls or in other factors that could significantly affect our internal controls after the Evaluation Date, or any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions were taken. Part II. Other Information Items 1, 3 and 4 are omitted as they are either not applicable or have been included in Part I. Item 2. Changes in Securities and Use of Proceeds The information contained in note 7 at page 7 relating to the exercise of an outstanding stock option is incorporated by reference herein. The transaction was exempt from the registration requirements of Section 5 of the Securities Act under Sections 4(2) and 4(6) of the Securities Act. The option holder agreed to purchase the common stock for investment and not for resale to the public. Item 5. Other Information In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, our Company is responsible for disclosing the "non-audit services" to be performed by our auditors that were approved by our Company's Audit Committee during the quarterly period covered by this report. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of the financial statements of the Company. During the quarterly period covered by this report, the Audit Committee authorized our Company to retain our auditors, Eisner LLP, to perform tax consultation and tax preparation services in the ordinary course of business for our Company for fiscal year ending December 31, 2003. In addition it authorized our Company to retain Eisner LLP for tax consultation services, as may be required on a project-by-project basis that would not be considered in the ordinary course of business up to a $5,000 fee limit per project, subject to an aggregate fee limit of $25,000; and that the approval of the Audit Committee would be required for any further tax services. Page 15 INTER PARFUMS, INC. AND SUBSIDIARIES During the quarterly period covered by this report, the Audit Committee also authorized our Company to retain KPMG Audit, a division of KPMG S.A., the external auditor of our consolidated wholly-owned subsidiary, Inter Parfums Holdings, S.A., its majority- owned subsidiary, Inter Parfums, S.A., and its wholly-owned subsidiaries, to provide tax consultation and tax preparation services in the ordinary course of business for Inter Parfums, S.A., for the fiscal year ended December 31, 2003. In addition, the Audit Committee also authorized our Company to retain KPMG Audit to provide tax consultation and advice with respect to repatriation of earnings of our company's French subsidiaries to us in the United States. Item 6. Exhibits and Reports on Form 8-K. The following documents are filed herewith: Exhibit Description Edgar No. Page Number 10.94 Second Amendment of Lease dated for 60 Stults Road, South Brunswick, NJ among Forsgate Industrial Complex, a limited partnership, and Jean Philippe Fragrances, LLC and Inter Parfums, Inc. dated April 22, 2003 10.95 Contrat De Prestations De Services Entre Inter Parfums, S.A. and Sagatrans, S.A, le 5 mai 1998 [French original] 10.95.1 Service Contract Between Inter Parfums, S.A. and Sagatrans,, S.A dated May 5, 1998 [English translation] 10.96 Avenant No. 1 Au Contrat De Prestations De Services Entre Inter Parfums, S.A. and Sagatrans, S.A, le 5 mai 1998 [French original] 10.96.1 Amendment No. 1 to the Service Contract Between Inter Parfums, S.A. and Sagatrans, S.A dated May 5, 1998 [English translation] 99.1 Certification Required by Section 906 of the Sarbanes-Oxley Act Page 16 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 2003. INTER PARFUMS, INC. By: /s/ Russell Greenberg_____ Russell Greenberg, Executive Vice President and Chief Financial Officer Page 17 INTER PARFUMS, INC. AND SUBSIDIARIES CERTIFICATIONS I, Jean Madar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Inter Parfums, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Jean Madar Jean Madar Chief Executive Officer Page 18 INTER PARFUMS, INC. AND SUBSIDIARIES CERTIFICATIONS I, Russell Greenberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Inter Parfums, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Russell Greenberg Russell Greenberg Chief Financial Officer Page 19