Inter Parfums Inc. Business Information, Profile, and History

Company Perspectives:

When we started this Company ... we laid the foundation for the legacy of Jean Philippe Fragrances, a company that makes high quality products affordable for the benefit of millions of people around the world. As time went on we met with our employees and customers and it became apparent that what we were building was a world of opportunity--opportunity to provide our customers with quality products, opportunity to create value for our shareholders and opportunity for our employees. Our job was to take this company and move it forward; to make sure that future growth would define us, new products would enrich us and our operating culture would energize us year after year. In recent years, not every opportunity taken has produced the expected results. However, we have learned from these experiences and our flexibility enables us to overcome them.

History of Inter Parfums Inc.

Inter Parfums, Inc., formerly known as Jean Philippe Fragrances, is a New York City-based manufacturer and distributor of fragrances and cosmetics. The company's brand name and licensed designer fragrance lines, including Burberry, Ombre Rose, S.T. DuPont, and others, are marketed and sold through independent distributors, in-house executives, and international agents and importing companies. The company also produces so-called alternative or 'knockoff' fragrances (imitations of expensive designer fragrances) in perfume or cologne forms as well as in skin creams, body sprays, and deodorants. These are sold for low prices through mass merchandisers, supermarkets, and drug stores. Substantially all Inter-Parfums products are produced in the United States or France, in leased factories or plants using subcontractors for production requirements, in conjunction with its 79-percent owned French subsidiary, Inter Parfums S.A.

1980s Origins

The history of Inter Parfums may be traced to the 1985 founding of Jean Philippe Fragrances. Using a contraction of their first names to christen their new company, Jean Madar and Philippe Benacin set out to produce knockoff or inexpensive fragrances that imitated such higher priced designer fragrances as Passion and Calvin Kline's Obsession. Three years following incorporation, the company went public. In 1989, the company formed a subsidiary, Elite Parfums, Ltd., for its more upscale products. The following year, Jean Philippe bought fragrance and cosmetic rights from Jordache Enterprises along with the exclusive rights to the Jordache trademark. This move focused on the strength and awareness of the Jordache trademark, a brand name once hugely successful during the 1980s designer jeans craze.

In 1991, Jean Philippe acquired two French companies that also served as its major suppliers. Inter Parfums made fragrances that the company distributed exclusively in the United States and Canada. The other company, Selective Industrie, produced Regine perfume, among others, which Jean Philippe also sold in the United States. Since the two suppliers were enterprises under the control of Jean Philippe, their acquisition removed conflict-of-interest questions that had been aimed at the company.

In 1993, Jean Philippe's French subsidiary, Inter Parfums, S.A., acquired the license and inventory of the Ombre Rose fragrance brand from Alfin Inc. Jean Philippe regarded the Ombre Rose brand as complementing its existing line of fragrances, thereby allowing the use of existing distribution channels without incurring significantly greater costs. Also that year Jean Philippe's French subsidiary acquired the selective Burberry fragrance from the Royal Brands division of Brigade International, pursuant to a ten-year license agreement. This acquisition was the stepping-stone used by the company to build a portfolio of luxury brands through direct acquisition of existing brand names.

Building the Business: 1994-96

The perfume fragrance market at the time could be divided into two categories: selective lines, consisting of brand name products with luxury imaging, were distributed through perfumeries and department stores; while mass lines, consisting of moderately priced products, were distributed to a broad customer base with limited purchasing power via mass merchandisers. After the acquisition of the selective Burberry fragrance, Jean Philippe continued to aggressively expand its markets and product lines through licensing agreements or through direct acquisition of existing product lines. Licensing agreements allowed the right to use brand names, create and package new fragrances, and determine product positioning and distribution, in exchange for payment of royalties proportional to the brand's net sales.

The company purchased the Molyneux and Weil brand names in early 1994 from Cosmetiques et France-I.D., S.A. for approximately $3.6 million in cash and 200,000 shares of the company's common stock valued at approximately $2.2 million. The Molyneux brand name was originally created in the early 1900s by the fashion designer Edouard Molyneux. The Molyneux name enjoyed ranking among the institutional brand names of French perfumery, it had been well established in other Western European countries, and it enjoyed a very prominent market position in South America, especially through the 'Quartz' line for women. The company was also attracted to the synergies between the Molyneux name and the Burberry brand name.

In March 1994, Jean Philippe acquired the worldwide trademark for the Intimate and Chaz fragrance lines from Revlon Consumer Products Corp.; in June of the same year it acquired the worldwide trademarks for Aziza from Chesebrough-Pond's USA, an operating unit of Unilever N.V. Aziza was a hypoallergenic eye cosmetic line that at its peak was distributed in approximately 22,000 mass-market outlets with an estimated wholesale volume of $60 million. Aziza was also the first mass-market brand that focused solely on the eyes and the first brand of hypoallergenic makeup on the market. Chesebrough-Pond's discontinued the line in 1992 in the face of plummeting sales. For Jean Philippe, however, the AZIZA acquisition was a strategic move to expand into the mass-market fragrance and cosmetics industry. The company followed the acquisition with two years of extensive market research and product development with the goal of reintroducing the product line.

By August 1994, Jean Philippe had also obtained from Chesebrough-Pond's the rights to manufacture and distribute Cutex nail and lip color in the United States and Puerto Rico. Chesebrough, which had been marketing Cutex, retained ownership of the Cutex trademark and continued to distribute the Cutex nail polish removers. The licensing agreement fit into each company's strategic plans. Chesebrough planned to focus on skin care, oral care, and deodorants, while Jean Philippe intended to continue its focus on cosmetics and fragrances as well as expand into mass markets. According to trade publications, the Cutex nail care and lip color products division had a wholesale volume in excess of $20 million in 1993.

While the company had an impressive stable of alternative designer fragrances from other distribution channels, the company had no mass market entries until March 1995 when it introduced A Man & A Woman, a knockoff version of Calvin Klein's, CK One. Jean Philippe was keenly aware of the vast potential of the alternative designer fragrance market and wanted a piece of that pie. In 1995, after ten years of growth, the alternative market had grown from a $95 million retail business into a $275 million business. In July, the company advanced its participation in the mass market with the launching of Romantic Illusions, a collection of 12 imitations of department store perfumes packed in cartons designed to look like romance novels. That project allowed the company to differentiate itself from its competitors. Recognizing that romance novels represented a billion dollar industry and comprised nearly 40 percent of the paperbacks sold in the mass market, Jean Philippe decided to capitalize on women's interest in these books to create a new niche.

To appeal to the younger, trendy mass market consumer, the company introduced Jordache Denim, a group of three knockoffs. The collection consisted of Red Denim, a version of Giorgio's Red; White Denim, a knockoff of Vanilla Fields by Coty; and Blue Denim, an imitation of Elizabeth Arden's Sunflowers. This line not only imitated popular scents but also borrowed a marketing concept from the prestigious designer, Gianni Versace, who one year earlier introduced Red Jeans and Blue Jeans, a woman's and man's scent, respectively. The company planned to continue the trend with additional line extensions under the Jordache brand name.

By February 1996, Jean Philippe was ready to relaunch the Aziza hypoallergenic eye cosmetic line. The Aziza brand name recognition provided Jean Philippe the opportunity to introduce a new line of products to an existing loyal customer base. The line was developed to incorporate the 38 best selling eye care products to meet the needs of the 1990s consumer. The primary distribution channels for the new line were mass-market merchandisers, drug chains, and supermarkets.

Refocus and Restructure: 1996-98

In the mid-1990s, Jean Philippe began restructuring in an effort to focus its resources on its profitable core fragrance business in the United Stales and abroad. An integral part of that process was to relinquish the Cutex lip and nail product license and to begin expanding its prestige portfolio. It achieved the latter by signing an exclusive 11-year license agreement with S.T. Dupont for the creation, manufacture, and global distribution of S.T. Dupont perfumes.

Economic turbulence in Eastern Europe and Brazil resulted in sales declines during this time, and Jean Philippe was forced to close its Brazilian subsidiary, Jean Philippe Do Brazil in 1998. Still, Jean Philippe continued to market products in Brazil and entered into a distribution agreement with a well-known Brazilian fragrance distributor, which included the purchase of existing inventory. This action embodied the company's philosophy on the risks and benefits of global marketing, enumerated in the company's 1998 annual report: "The Company's worldwide position, which makes it subject to global economic turbulence, should also benefit the Company in the future, as countries emerge from their economic troubles. The economic conditions in a number of markets during 1998, such as Eastern Europe and Brazil, certainly dampened the Company's short-term results. However, the Company's long-term focus will not allow it to abandon these markets, as the company would lose the opportunity to capitalize on the potential resurgence of these countries." Jean Philippe did successfully weather the tumultuous periods brought on by its international markets by streamlining the sales and administrative structure of its U.S. operations.

Building the Luxury Brand Portfolio: 1998-99

In April 1999, the company launched the Parfums Deja New fragrance line that aimed to appeal to a wide range of consumers in an emerging middle market and compensate for a relatively flat alternative-fragrance market. The goal of this action was to blur the distinction between prestige and mass market fragrances. Moreover, Jean Philippe introduced two successful S.T. Dupont fragrance lines in 1998. A line of complementary bath products was introduced in the first half of 1999, further enhancing the brand's image.

A 12-year exclusive license agreement with internationally renowned British designer Paul Smith, in December 1998, added to the build-up of the company's prestige fragrance portfolio. The agreement allowed for the creation, manufacture, and worldwide distribution of Paul Smith perfumes and cosmetics. The company's international launch of its first line of Paul Smith perfumes was scheduled for July 2000.

In March 1999, the company entered into an exclusive license agreement with the Christian Lacroix Company, a division of LVMH Moet Hennessy Louis Vuitton S.A. (LVMH) to enable the worldwide development, manufacture and distribution of perfumes. The new alliance with a prestigious fashion label that bottled such luxury fragrances as Christian Dior and Givenchy, was designed to further strengthen the company's position in the prestige fragrance industry.

In August 1999, LVMH acquired a 6.3 percent stake, some 467,000 shares, in Jean Philippe, which during this time changed its name to Inter Parfums, Inc. The stock transaction was valued at $4.2 million. LVMH disclosed in a Securities and Exchange Commission filing that they considered the Inter Parfums business portfolio complementary to their own and intended to open negotiations with Inter Parfums about increasing its ownership to a "significant minority" position. LVMH also stated in the filing that it intended to increase its participation on a friendly basis coincident with the execution of a customary strategic minority investment agreement. By November 1999, LVMH had increased its equity investment to approximately 20.5 percent.

The name change from Jean Philippe Fragrances, Inc. to Inter Parfums, Inc. in July recognized the success of its French subsidiary, Inter Parfums, S.A., over the previous five years. For the year ending December 31, 1998, the French subsidiary represented 66 percent of net sales. Since the French subsidiary had helped the company become a formidable competitor in the prestige industry, the company strategy held that the name change would allow even greater industry exposure and open the way for greater license and acquisition opportunities. The company, however, retained the brand name, Jean Philippe Fragrances, for its mass market products.

2000 and Beyond

Among Inter Parfums primary goals for the future were to focus on new product introductions and prestige brand names, as well as keep its U.S. operations profitable in the face of economic downturns abroad. Toward those ends, the company launched a totally new fragrance, Quartz by Molyneux, as well as a new line of S.T. Dupont "Signature" perfumes. The company looked forward to the international launch of its first line of Paul Smith perfumes and two new perfume lines under the Burberry name, which continued to be the company's leading selective brand name fragrance. In June 2000, Inter Parfums announced that it would produce and market a new line of fragrances under the FUBU name, a popular American line of fashions for young people. Also, the U.S. debut of Christian Lacroix was made in February 2000 through an exclusive distribution arrangement with Saks Fifth Avenue. Distribution of the Christian Lacroix line in South America was also planned for 2000. On the other end of the market spectrum, Inter Parfums planned a new AZIZA ll line of low priced eye shadow kits, mascaras, colorful lip-gloss products, and pencils created for the "dollar store" market.

Principal Subsidiaries: Inter Parfums, S.A. (79%; France).

Principal Competitors: Coty; French Fragrances; Parlux Fragrances.

Chronology

• Key Dates:

• 1985: Company is founded as Jean Philippe Fragrances.
• 1989: Elite Parfums, Ltd. subsidiary is formed.
• 1990: Jordache cosmetics and fragrances are acquired.
• 1991: Inter Parfums, S.A. and Selective Industrie, S.A. are acquired.
• 1993: Subsidiary Inter Parfums, S.A. acquires exclusive license for Burberry and Ombre Rose fragrances.
• 1998: Company's Brazilian subsidiary, Jean Philippe do Brazil, closes.
• 1999: Company's adopts name of its subsidiary Inter-Parfums.