(In millions) |
2004
|
|
2003
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
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Selling, general & administrative |
$ 25.3
|
|
$ 19.1
|
|
$ 60.6
|
|
$ 46.7
|
|
|
|
|
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|
|
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Selling, general & administrative
as a % of net sales |
38%
|
|
33%
|
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35%
|
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34%
|
|
Selling, general and administrative expense increased 32% and 30% for the three and nine-month
periods ended September 30, 2004, respectively, as compared to the corresponding periods of the prior
year. As a percentage of sales selling, general and administrative was 38% and 35% of sales for the three
and nine-month periods ended September 30, 2004, respectively, as compared to 33% and 34% for the
corresponding periods of the prior year. The increase in selling, general and administrative expenses as a
percentage of sales for the three-month period ended September 30, 2004, as compared to the
corresponding period of the prior year is primarily the result of increased royalties required under our
new license with Burberry.
In addition, growth in our prestige product lines require higher selling, general and administrative
expenses because promotion and advertising are prerequisites for sales of designer prestige products.
We develop a complete marketing and promotional plan to support our growing portfolio of prestige
brands and to build upon each brand's awareness. Promotion and advertising included in selling, general
and administrative expenses was approximately 10% and 11% of prestige product sales for the three and
nine-month periods ended September 30, 2004, as compared to 11% and 12% for the three and nine-month periods ended September 30, 2003. Our mass-market product lines do not require extensive
advertising and therefore, more of our selling, general and administrative expenses are fixed rather than
variable.
As previously reported, IPSA was a party to litigation with Jean Charles Brosseau, S.A.
("Brosseau"), the owner of the Ombre Rose trademark. In October 1999, IPSA received notice of a
judgment in favor of Brosseau, which awarded damages of approximately $0.85 million (at current
exchange rates). On appeal, in February 2001, the Court required IPSA to pay $0.14 million as an
advance for damages claimed by Brosseau.
In February 2004, the Court of Appeal ordered IPSA to pay total damages of $0.39 million of which
$0.14 million has already been advanced. Brosseau had until the end of May 2004 to appeal this
decision. No appeal has been filed, and therefore, in May 2004, IPSA reversed its remaining litigation
reserve aggregating approximately $0.46 million. This reversal is included as a reduction of
administrative expenses in the accompanying consolidated statement of income.
Interest expense aggregated $0.2 million and $0.4 million for the three and nine-month periods ended
September 30, 2004, as compared to $0.1 million and $0.2 million for the corresponding periods of the
prior year. We use the credit lines available to us, as needed, to finance our working capital needs and
short-term financing for acquisitions. In connection with the acquisition of the Lanvin license referred to
above, IPSA financed the license fee by utilizing one of its short-term credit facilities which in July 2004
was converted into a $19.2 million five-year credit agreement.
Foreign currency gains and (losses) aggregated $0.5 million and ($0.3) million for the nine-month periods ended September 30, 2004 and September 30, 2003, 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 34% for the three months ended September 30, 2004, as
compared to 35% for the corresponding period of the prior year. Our effective income tax rate was
35% for both the nine months ended September 30, 2004 and September 30, 2003. These rates differ
from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions. No
significant changes in tax rates were experienced nor were any expected in jurisdictions where we
operate.
Net income was $4.0 million for the three months ended September 30, 2004, as compared to $4.7
million for the corresponding period of the prior year. Net income was $12.2 million for the nine months
ended September 30, 2004, as compared to $10.1 million for the corresponding period of the prior
year.
Diluted earnings per share was $0.20 for the three months ended September 30, 2004, as
compared to $0.23 for the corresponding period of the prior year. Diluted earnings per share was
$0.60 for the nine months ended September 30, 2004, as compared to $0.51 for the corresponding
period of the prior year.
Weighted average shares outstanding aggregated 19.2 million for both the three and nine-month
periods ended September 30, 2004, as compared to 19.0 million for the corresponding periods of the
prior year. On a diluted basis, average shares outstanding were 20.4 million and 20.5 million,
respectively, for the three and nine-month periods ended September 30, 2004, as compared to 20.2
million and 20.0 million, respectively, for the corresponding periods of the prior year. The increase in
the average diluted shares outstanding is the result of the effect of dilutive securities resulting from an
increase in our average stock price. The average stock price of our common shares was $20.87 per
share for the nine-month period ended September 30, 2004, as compared to $8.16 per share for the
corresponding period of the prior year.
Liquidity and Capital Resources
Our financial position remains strong. At September 30, 2004, working capital aggregated
$115 million and we had a working capital ratio of 2.6 to 1. Cash and cash equivalents aggregated
$34.7 million.
In April 2004, IPSA acquired a 67.5% interest in Nickel for approximately $8.3 million in cash
including an additional capital infusion of $2.8 million made in June 2004, aggregating approximately
$4.4 million, net of cash acquired. We funded this acquisition with cash on hand and do not expect it to
have any further significant effect on our financial position.
In June 2004, IPSA entered into an exclusive, worldwide license agreement with Lanvin to create,
develop and distribute fragrance lines under the Lanvin brand name. The fifteen-year license agreement
takes effect July 1, 2004 and provided for an upfront license fee of $19.2 million and the purchase of
existing inventory of $7.6 million. IPSA initially financed the license fee by utilizing $18.0 million from
one of its short-term credit facilities. In July, IPSA converted the loan into a $19.2 million five-year
credit agreement. This long-term credit facility, which bears interest at 0.60% above the Eurobor rate,
provides for principal to be repaid in 20 equal quarterly installments of $0.96 million and requires the
maintenance of certain financial covenants.
In October 2004, IPSA entered into a new long-term fragrance license with Burberry. This new
agreement replaces the existing license and provides for an increase in the royalty rate effective as of
July 1, 2004 and additional resources to be devoted to marketing commencing in 2005. In connection
with the new license agreement IPSA agreed to pay to Burberry an upfront license fee of approximately
$3.6 million.
Our short-term cash requirements are expected to be met by available cash at September 30, 2004,
cash generated by operations and short-term credit lines provided by domestic and foreign banks. The
principal credit facilities consist of a $12.0 million unsecured revolving line of credit provided by a
domestic commercial bank and approximately $45.0 million in credit lines provided by a consortium of
international financial institutions. Historically, borrowings under these facilities have been minimal as
we typically use our cash to finance all of our working capital needs. However, as of September 30,
2004 we drew down approximately $7.8 million on our credit lines to help finance our working capital
needs.
Cash used in operating activities aggregated $20.3 million for the nine-month period ended
September 30, 2004, as compared to cash used in operating activities of $0.7 million for the
corresponding period of the prior year. We finance our growth primarily with working capital and to a
lesser extent our available credit lines. Cash used in operating activities for 2004 reflects a significant
increase in inventory and accounts receivable (approximately $14.0 million and $15.1 million,
respectively). The increase in accounts receivable, which represents a 23% increase from the
December 31, 2003 accounts receivable balance, is not unusual considering the Company's sales
growth of 17% and 26% for the three and nine month periods ended September 30, 2004,
respectively, as compared to the corresponding periods of the prior year. The increase in inventories,
which represents a 26% increase from the December 31, 2003 inventory balance, includes most of the
$7.2 million acquired at the end of June 2004 from Lanvin in connection with our new license
agreement. Factoring out the Lanvin inventory, the increase is also not unusual considering the
Company's sales growth in 2004.
Cash flows used in investing activities normally consists of approximately $1.0 to $2.0 million
per year spent on tools and molds, depending on our new product development calendar, with the
balance of capital expenditures representing office fixtures, computer equipment and industrial
equipment needed at our distribution centers. For the nine-month period ended September 30, 2004,
cash flows used in investing activities aggregated $26.8 million. Included in this amount is approximately
$20.3 million paid for the purchase of the Lanvin license (including legal expenses and fees) and
approximately $4.4 million paid for the Nickel acquisition, net of cash acquired.
In March 2004, our board of directors increased our cash dividend to $.12 per share, approximately
$2.3 million per annum, payable $.03 per share on a quarterly basis. This increased cash dividend in
2004 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.
Contractual Obligations
We lease our office and warehouse facilities under operating leases expiring through 2013.
Obligations pursuant to these leases for the years ended December 31, 2004, 2005, 2006, 2007, 2008
and thereafter are $3.6 million, $2.9 million, $1.8 million, $1.7 million, $1.6 million and $4.2 million,
respectively.
We are obligated under a number of license agreements for the use of trademarks and rights in
connection with the manufacture and sale of our products. Obligations pursuant to these license
agreements has increased significantly as a result of the recent signing of a new license with Burberry
and the acquisition of the Lanvin license. Obligations pursuant to all license agreements for the years
ended December 31, 2004, 2005, 2006, 2007, 2008 and thereafter are $5.2 million, $23.1 million,
$25.0 million, $27.7 million, $28.6 million and $252.1 million, respectively.
Item 3: QUANTITATIVE 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. Our French subsidiary primarily enters
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.
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 September 30, 2004, we had foreign currency contracts in the form of forward
exchange contracts in the amount of approximately U.S. $22.3 million and GB Pounds 9.1 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 the end of the period covered by 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 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. Accordingly, no changes
were required at this time.
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 11 at page 8 relating to the exercise of outstanding stock
options by the Chief Executive Officer and the President is incorporated by reference herein. The
transactions were exempt from the registration requirements of Section 5 of the Securities Act under
Sections 4(2) and 4(6) of the Securities Act.
In addition, a former executive officer exercised a stock option to purchase 18,000 shares of or
common stock in a transaction exempt from the registration requirements of Section 5 of the Securities
Act under Sections 4(2) of the Securities Act. All of such persons agreed to purchase our 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 the following
non-audit services to be performed by our auditors.
1. We authorized the engagement of Mazars LLP if deemed necessary to
provide tax consultation in the ordinary course of business for fiscal year ending 31
December 2004.
2. We authorized the engagement of Mazars LLP if deemed necessary to
provide tax consultation as may be required on a project by project basis that would
not be considered in the ordinary course of business, of up to a $5,000 fee limit per
project, subject to an aggregate fee limit of $25,000 for fiscal year ending 31
December 2004. If we require further tax services from Mazars LLP, then the
approval of the audit committee must be obtained.
3. If we require other services by Mazars LLP on an expedited basis such that
obtaining pre-approval of the audit committee is not practicable, then Francois
Heilbronn, the Chairman of the Committee, has authority to grant the required pre-approvals for all such services.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following documents are filed herewith:
| Exhibit No. |
Description |
|
|
| 10.109 |
Lease For Asnieres (92600) -- 107, Quai Du Docteur Dervaux, (French Original)
|
| 10.109.1 |
Lease For Asnieres (92600) -- 107, Quai Du Docteur Dervaux, (English Translation)
|
| 10.110 |
Lease For 48 Rue Des Francs-Bourgeois, In Paris, 3rd District (French Original) |
|
|
| 10.110.1 |
Lease For 48 Rue Des Francs-Bourgeois, In Paris,, 3rd District (English Translation) |
|
|
| 10.111 |
Licence Agreement among Burberry Ltd., Inter Parfums, S.A. and Inter Parfums, Inc.
dated 12 October 2004 (Filed in Excised Form - Certain disclosure schedules and
other attachments are omitted, but will be furnished supplementally to the Commission
upon request.) |
|
|
| 10.112 |
Confidential Treatment Agreement among Burberry Ltd., Inter Parfums, S.A., Inter
Parfums, Inc. and LV Capital USA, Inc., et al., dated 12 October 2004 |
| |
|
| 10.113 |
Indemnity Agreement among Burberry Ltd., Inter Parfums, S.A. and Inter Parfums,
Inc. dated 12 October 2004 |
|
|
| 31 |
Certifications required by Rule 13a-14(a) |
|
|
| 32 |
Certification Required by Section 906 of the Sarbanes-Oxley Act |
|
|
(b) We filed or furnished the following Current Reports on Form 8-K:
(1) Date of event - 13 September 2004, reporting Items 4.01 and 9.01;
(2) Date of event - 12 October 2004, reporting Items 1.01 and 1.02;
(3) Date of event - 13 October 2004, reporting Items 2.02, 7.01 and 9.01; and
(4) Date of event - 15 October 2004, reporting Item 4.01.
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 November 2004.
INTER PARFUMS, INC.
By: /s/ Russell Greenberg
Executive Vice President and
Chief Financial Officer
Exhibit 31
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is being prepared;
b) [omitted]
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in
case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: November 12, 2004
/s/ Jean Madar
Jean Madar, Chief Executive Officer
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is being prepared;
b) [omitted]
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in
case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: November 12, 2004
/s/ Russell Greenberg
Russell Greenberg
Chief Financial Officer and Principal Accounting Officer
Exhibit 32
CERTIFICATION
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Inter Parfums, Inc., that the Quarterly
Report of Inter Parfums, Inc. on Form 10-Q for the period ended September 30, 2004, fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in
such report fairly presents, in all material respects, the financial condition and results of operation of Inter
Parfums, Inc.
Date: November 12, 2004
By: /s/ Jean Madar
Jean Madar
Chief Executive Officer
Date: November 12, 2004
By: /s/ Russell Greenberg
Russell Greenberg
Executive Vice President,
Chief Financial Officer and Principal Accounting Officer
A signed original of this written statement required by Section 906 has been provided to Inter
Parfums, Inc. and will be retained by Inter Parfums, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.