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, 2004.
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 10, 2004 there were 19,170,936 shares of common stock, par value $.001 per share, outstanding.
INDEX
Part I. Financial Information
Part II. Other Information
Signatures Certifications | Page Number 1
5
17 17 17 17 19 20 |
Part I. Financial Information
Item 1. Financial Statements
In the opinion of management, the accompanying unaudited consolidated 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, 2003 included in our annual report filed on Form 10-K.
The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year.
CONSOLIDATED BALANCE SHEETS | ||||
ASSETS | ||||
|
| March 31, |
| December 31, |
|
| (unaudited) |
| |
Current assets: |
|
| ||
Cash and cash equivalents | $ 56,393,000 | $ 58,958,000 | ||
Account receivable, net | 62,284,000 | 63,467,000 | ||
Inventories | 57,070,000 | 54,255,000 | ||
Receivables, other | 1,739,000 | 1,631,000 | ||
Other current assets | 1,965,000 | 1,638,000 | ||
Income tax receivable | 495,000 | 1,110,000 | ||
Deferred tax asset | 1,268,000 | 1,381,000 | ||
|
|
| ||
Total current assets | 181,214,000 | 182,440,000 | ||
|
|
| ||
Equipment and leasehold improvements, net | 4,958,000 | 4,967,000 | ||
|
| |||
Trademarks and licenses, net | 6,234,000 | 6,323,000 | ||
|
| |||
Other assets | 425,000 | 271,000 | ||
|
| |||
$ 192,831,000 | $ 194,001,000 |
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
| ||||
Current liabilities: | ||||
Loans payable - banks | $ 4,534,000 | $ 121,000 | ||
Accounts payable | 36,113,000 | 45,152,000 | ||
Accrued expenses | 15,753,000 | 17,403,000 | ||
Income taxes payable | 5,085,000 | 3,411,000 | ||
Dividends payable | 575,000 | 383,000 | ||
| ||||
Total current liabilities | 62,060,000 | 66,470,000 | ||
| ||||
Deferred tax liability | 1,380,000 | 1,417,000 | ||
Minority interest | 22,125,000 | 21,198,000 | ||
Shareholders' equity: | ||||
Preferred stock, $.001 par; authorized | ||||
Common stock, $.001 par; authorized | 19,000 | 19,000 | ||
Additional paid-in capital | 34,387,000 | 34,363,000 | ||
Retained earnings | 91,580,000 | 87,376,000 | ||
Accumulated other comprehensive income | 7,526,000 | 9,404,000 | ||
Treasury stock, at cost, 7,180,579 common | | | ||
107,266,000 | 104,916,000 | |||
$ 192,831,000 | $ 194,001,000 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| Three months ended | ||
|
| 2004 |
| 2003 |
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ 58,392,000 |
| $ 37,564,000 |
|
|
|
|
|
Cost of sales |
| 28,207,000 |
| 19,615,000 |
|
|
|
| |
Gross margin |
| 30,185,000 |
| 17,949,000 |
|
|
|
| |
Selling, general and administrative |
| 20,052,000 |
| 13,220,000 |
|
|
|
| |
Income from operations |
| 10,133,000 |
| 4,729,000 |
|
|
|
|
|
Other expenses (income): |
|
|
|
|
Interest expense |
| 103,000 |
| 137,000 |
Loss (gain) on foreign currency: |
| 492,000 |
| (55,000) |
Interest income |
| (232,000) |
| (175,000) |
Loss on subsidiary's issuance of stock |
| --- |
| 11,000 |
|
|
|
|
|
|
|
|
|
|
| 363,000 |
| (82,000) | |
|
|
|
|
|
Income before income taxes |
| 9,770,000 |
| 4,811,000 |
|
|
|
|
|
Income taxes |
| 3,464,000 |
| 1,711,000 |
|
|
|
|
|
Income before minority interest |
| 6,306,000 |
| 3,100,000 |
|
|
|
|
|
Minority interest in net income |
| |
|
|
|
|
|
|
|
Net income |
| $ 4,779,000 |
| $ 2,503,000 |
|
|
|
|
|
Net income per share: |
|
|
|
|
Basic |
| $0.25 |
| $0.13 |
Diluted |
| $0.23 |
| $0.13 |
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
Basic |
| 19,169,477 |
| 18,816,503 |
Diluted |
| 20,614,308 |
| 19,907,660 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Three months ended | |||
|
| 2004 |
| 2003 |
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
Net income |
| $ 4,779,000 |
| $ 2,503,000 |
|
Adjustments to reconcile net income to |
|
|
|
|
|
Depreciation and amortization |
| 539,000 |
| 487,000 |
|
Minority interest in net income of consolidated |
| |
| |
|
Deferred tax provision |
| 92,000 |
| 395,000 |
|
Loss on subsidiary's issuance of stock |
| --- |
| 11,000 |
|
Changes in: |
|
|
|
|
|
Accounts receivable, net |
| (255,000) |
| (1,401,000) |
|
Inventories |
| (4,054,000) |
| (3,515,000) |
|
Other assets |
| (678,000) |
| (759,000) |
|
Accounts payable and accrued expenses |
| (9,404,000) |
| 4,519,000 |
|
Income taxes payable, net |
| 2,390,000 |
| 146,000 |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
| (5,064,000) |
| 2,983,000 |
|
|
|
|
|
| |
Cash flows from investing activities: |
|
|
|
|
|
Purchase of equipment and leasehold improvements |
| (612,000) |
| (771,000) |
|
|
|
|
|
|
|
Net cash used in investing activities |
| (612,000) |
| (771,000) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Increase (decrease) in loans payable - bank |
| 4,504,000 |
| (720,000) |
|
Proceeds from sale of stock of subsidiary |
| --- |
| 4,000 |
|
Proceeds from exercise of options |
| 24,000 |
| 5,000 |
|
Dividends paid |
| (383,000) |
| (284,000) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
| 4,145,000 |
| (995,000) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
| (1,034,000) |
| 912,000 |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
| (2,565,000) |
| 2,129,000 |
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period |
| 58,958,000 |
| 38,290,000 |
|
|
|
|
|
|
|
Cash and cash equivalents - end of period |
| $ 56,393,000 |
| $ 40,419,000 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
Interest |
| $ 88,000 |
| $ 137,000 |
|
Income taxes |
| 1,518,000 |
| 1,254,000 |
|
See notes to consolidated financial statements.
Notes to Consolidated 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, 2003. 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. 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 | |
| 2004 | 2003 |
|
|
|
Reported net income | $ 4,779,000 | $ 2,503,000 |
Stock-based employee compensation expense included in |
|
|
Stock-based employee compensation determined under the |
|
|
|
|
|
Pro forma net income | $ 4,686,000 | $ 2,481,000 |
|
|
|
Income per share, as reported: |
|
|
Basic | $ 0.25 | $ 0.13 |
Diluted | $ 0.23 | $ 0.13 |
Pro forma net income per share: | ||
Basic | $ 0.24 | $ 0.13 |
Diluted | $ 0.23 | $ 0.12 |
The weighted average fair values of the options granted during the 2004 and 2003 periods are estimated as $6.85 and $2.07 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield 0.5% in 2004 and 1.0% in 2003; volatility of 50% in both 2004 and 2003; risk-free interest rates at the date of grant, 1.81% in 2004 and 1.70% in 2003; and an expected life of the option of two years.
Notes to Consolidated Financial Statements
3. Comprehensive Income:
| Three months ended | |
| 2004 | 2003 |
Comprehensive Income: |
|
|
Net income | $ 4,779,000 | $ 2,503,000 |
Other comprehensive income, net of tax: |
|
|
Foreign currency translation adjustment | (1,866,000) | 1,618,000 |
Change in fair value of derivatives | (11,000) | 23,000 |
|
|
|
Comprehensive income | $ 2,902,000 | $ 4,144,000 |
4. Geographic Areas:
Segment information related to domestic and foreign operations is as follows:
| Three months ended | |
| 2004 | 2003 |
Net Sales: |
|
|
United States | $ 10,138,000 | $ 10,412,000 |
Europe | 48,289,000 | 27,215,000 |
Eliminations | (35,000) | (63,000) |
|
|
|
| $ 58,392,000 | $ 37,564,000 |
|
|
|
Net Income: |
|
|
United States | $ 198,000 | $ 498,000 |
Europe | 4,579,000 | 2,006,000 |
Eliminations | 2,000 | (1,000) |
|
|
|
| $ 4,779,000 | $ 2,503,000 |
Notes to Consolidated Financial Statements
5. 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.
The following table sets forth the computation of basic and diluted earnings per share:
| Three months ended | |
| 2004 | 2003 |
Numerator: |
|
|
Net income | $ 4,779,000 | $ 2,503,000 |
|
|
|
Denominator: |
|
|
Weighted average shares | 19,169,477 | 18,977,827 |
Effect of dilutive securities: | ||
Stock options | 1,444,831 | 929,833 |
|
|
|
| 20,614,308 | 19,907,660 |
6. Inventories:
Inventories consist of the following:
| March 31, | December 31, |
|
|
|
Raw materials and component parts | $ 19,627,000 | $ 19,776,000 |
Finished goods | 37,443,000 | 34,479,000 |
|
|
|
| $ 57,070,000 | $ 54,255,000 |
7. Acquisition of Business:
In April 2004, the Company's French subsidiary, Inter Parfums, S.A., ("IPSA") acquired a 64% interest in Nickel S.A. ("Nickel") for approximately $5.6 million in cash. The purchase agreement contains a provision for a follow-on cash infusion by IPSA of approximately $3.7 million, which would bring IPSA's ownership to 74%. In addition, minority shareholders have the right to sell their remaining interest in Nickel to IPSA from January 2007 through June 2007. The purchase price will be based upon a formula applied to Nickel's sales for the year ending December 31, 2006, pro rated for the minority holders' equity in Nickel. The acquisition will be accounted for under purchase accounting and the results of Nickel will be included in the Company's consolidated financial statements beginning at the date of acquisition.
Item 2: MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
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 renewal of existing license agreements, 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".
OverviewWe operate in a single segment in the fragrance and cosmetic industry, and manufacture, market and distribute a wide array of fragrances, cosmetics and health and beauty aids. We specialize in prestige perfumes and cosmetics and mass market perfumes, cosmetics and health and beauty aids. Most of our prestige products are produced and marketed by our 76% owned subsidiary in Paris, Inter Parfums, S.A., which is also a publicly traded company as 24% of Inter Parfums, S.A. shares trade on the Paris Bourse.
- Prestige products - For each prestige brand, owned or licensed by us, we develop an original concept for the perfume or cosmetic line consistent with world market trends.
- 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.
Our prestige product lines, which are manufactured and distributed by us primarily under license agreements with brand owners, represented approximately 82% of net sales for the three-month period ended March 31, 2004. Since 1992 we have built a portfolio of brands under licenses which include Burberry, S.T. Dupont, Paul Smith, Christian Lacroix, Celine, and Diane von Furstenberg, which are distributed in over 120 countries around the world. In terms of sales, Burberry is our most significant license, and sales of Burberry products represented 67% and 43% of net sales for the three month periods ended March 31, 2004 and 2003, respectively. Our current Burberry license takes us through December 31, 2006. We believe it is important to have a long term relationship with Burberry at this time, because product development and marketing strategies, including planning for product launches can, and often do, extend over several years. Accordingly, a new license agreement is under serious discussion with Burberry. We are hopeful for a positive outcome by the summer of 2004.
We have two licenses with affiliates of our strategic partner, LV Capital, USA Inc. ("LV Capital"), a wholly-owned subsidiary of LVMH Moet Hennessy Louis Vuitton S.A. LV Capital owns approximately 18% of our outstanding common shares. 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. We believe that our association with LV Capital has enhanced our credibility in the cosmetic industry, which should lead us to additional opportunities in our industry that might not have been otherwise available to us.
Our mass market product lines, which represent 18% of sales for the three-month period ended March 31, 2004, are comprised of alternative designer fragrances, cosmetics, health and beauty aids and personal care products. These lines are sold under trademarks owned by us or pursuant to license agreements we have for the trademarks Jordache, Tatiana and FUBU.
We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or out-right acquisitions of brands. Second, we grow through the creation of product line extensions for the existing brands in our portfolio. Every two to three years, we create a new family of fragrances for each brand in our portfolio.
Our business is not very capital intensive, and it is important to note that we do not own any manufacturing facilities. Rather, we act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several outside fillers which manufacture the finished good for us and ship it back to our distribution center.
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 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. These accounting policies generally 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 our domestic subsidiaries are denominated in U.S. dollars and sales of such products by our 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 our analysis of the customer's financial position as well as previously established buying patterns. Generally, we do not bill customers for shipping and handling costs and, accordingly, we classify such costs as selling and administrative expenses. We recognize revenues 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.
Sales Returns
Generally, we do not permit 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 upon 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 our estimates, if factors such as economic conditions, inventory levels or competitive conditions differ from our expectations.
Promotional Allowances
We have various performance-based arrangements with certain 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.
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 and Other Long-Lived Assets
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, or market acceptance of products, could result in shortened useful lives.
Long-lived assets, including trademarks and licenses, 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, then 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.
Results of Operations
Three Months Ended March 31, 2004 as Compared to the Three Months Ended March 31, 2003
Net sales | Three months ended March 31, | ||||
(in millions) | 2004 | % Change | 2003 | ||
|
|
|
| ||
Prestige product sales | $ 48.0 | 80% | $ 26.7 | ||
Mass market product sales | 10.4 | ( 5% ) | 10.9 | ||
|
|
|
| ||
Total net sales | $ 58.4 | 55% | $ 37.6 | ||
Net sales for the three months ended March 31, 2004 increased 55% to a record $58.4 million, as compared to $37.6 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 43% for the period.
Prestige product sales surged 80% to $48.0 million for the three months ended March 31, 2004, as compared to $26.7 for the corresponding period of the prior year. Growth in prestige product sales is primarily attributable to the global rollout of Burberry Brit for women, which began in the third quarter of 2003, and has expanded during the first quarter of 2004 to Asia, South America and the Middle East. We anticipate that Burberry Brit for women will be the best selling fragrance in our history. We are also looking forward to the launch in the fall of the Burberry Brit for men line in selected markets.
In September 2003, we launched our first prestige cosmetics line, Diane von Furstenberg Beauty, at about 33 of the finest retail doors in the United States as well as in the designer's boutiques in New York and Miami. Initial sales have been satisfactory and efforts are being made to increase consumer awareness. During the first quarter of 2004, we undertook many promotional events including personal appearances, free makeovers and gift with purchase programs in an attempt to increase sell through at store level. Diane von Furstenberg products are now available on Sephora.com and will be available at several Sephora retail locations this summer.
The year 2004, will not be without its share of brand extensions. During the second quarter of 2004, we plan to launch a limited edition warm weather, seasonal fragrance for our Celine and Christian Lacroix brands. In July, we will unveil new fragrance families for both S.T. Dupont and Paul Smith. Les Eaux De S.T. Dupont will be available in versions for both men and women, as will Paul Smith London. Late 2004 or in early 2005, we will introduce a new Christian Lacroix fragrance fragrance family for men and women.
With respect to our mass market product lines, net sales were off 5% for the three months ended March 31, 2004, as compared to the corresponding period of the prior year. Sales gains were achieved in the US dollar store retail environment as our customers continued to open additional doors and carry more of our product offerings. These gains however, were more than offset by a decline in export sales primarily to Mexico and Central and South America. We continue to closely monitor our credit risk in those territories and are willing to forego some sales volume to minimize our overall credit exposure.
Our new product development program for all of our product groups is well under way, and we expect to roll out new products throughout 2004. In addition, we are actively pursuing other new business opportunities. However, we cannot assure you that any new license or acquisitions will be consummated.
In April 2004, the Company's French subsidiary, Inter Parfums, S.A., ("IPSA") acquired a 64% interest in Nickel S.A. ("Nickel") for approximately $5.6 million in cash. The purchase agreement contains a provision for a follow-on cash infusion by IPSA of approximately $3.7 million, which would bring IPSA's ownership to 74%. In addition, minority shareholders have the right to sell their remaining interest in Nickel to IPSA from January 2007 through June 2007. The purchase price will be based upon a formula applied to Nickel's sales for the year ending December 31, 2006, pro rated for the minority holders' equity in Nickel.
Established in 1996 by Philippe Dumont, Nickel has developed two innovative concepts in the world of cosmetics: spas exclusively for male customers and skin care product lines for men. The Nickel range of some fifteen skin care products for the face and body is sold through prestige department and specialty stores primarily in France (500 outlets), the balance of Western Europe (900 outlets) and in the United States (300 outlets), as well as through its men's spas in Paris, New York and, most recently, San Francisco.
Gross margins | Three months ended March 31, | ||
(in millions) | 2004 |
| 2003 |
|
|
|
|
Net sales | $ 58.4 |
| $ 37.6 |
Cost of sales | 28.2 |
| 19.6 |
|
|
|
|
Gross margin | $ 30.2 |
| $ 18.0 |
|
|
|
|
Gross margin as a % of net sales | 52% |
| 48% |
Gross profit margin was 52% for the three-month period ended March 31, 2004, as compared to 48% for the corresponding period of the prior year. Sales of products in our prestige fragrance lines generate a significantly higher gross profit margin than sales of our mass-market product lines. The gross margin improvement is primarily attributable to the 80% net sales growth rate achieved in our prestige product lines. In addition, it is important to point out that gross margins are also affected by changes in exchange rates and, since the cost of many promotional activities are included in cost of sales and the timing of promotional activities vary, we have experienced, and expect to continue to experience, fluctuations in our gross margin percentage.
Selling, general & administrative |
| ||||
(in millions) | Three months ended March 31, | ||||
| 2004 |
| 2003 |
| |
|
|
|
|
| |
Selling, general & administrative | $ 20.1 |
| $ 13.2 |
| |
|
|
|
|
| |
Selling, general & administrative |
|
|
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Selling, general and administrative expense increased 52% for the three-month period ended March 31, 2004, as compared to the corresponding period of the prior year. As a percentage of sales, however, selling, general and administrative expense declined to 34% of sales in the 2004 period as compared to 35% of sales in the 2003 period as a result of spreading fixed costs over a larger sales base. Sales 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 16% of prestige product sales for the three-month period ended March 31, 2004 and 13% for the three-month period ended March 31, 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.
Income from operations increased 114% or $5.4 million for the three-month period ended March 31, 2004, as compared to the corresponding period of the prior year. Operating margins were 17.4% of net sales in the current period as compared to 12.6% in the corresponding period of the prior year. The increase in operating margins reflects sales growth together with the improvements in gross margins and lower overall operating expenses.
Interest expense aggregated $0.1 million for both three-month periods ended March 31, 2004 and March 31, 2003. We use the credit lines available to us, as needed, to finance our working capital needs.
Foreign currency (losses) gains aggregated ($0.5) million and $0.1 million for the three-month periods ended March 31, 2004 and March 31, 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 35.5% for the three months ended March 31, 2004, as compared to 35.6% for the corresponding period of the prior year. 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 increased 91% to $4.8 million for the three months ended March 31, 2004, as compared to $2.5 million for the corresponding period of the prior year.
Diluted earnings per share increased 77% to $0.23 for the three months ended March 31, 2004, as compared to $0.13 for the corresponding period of the prior year.
Weighted average shares outstanding aggregated 19.2 million for the three months ended March 31, 2004, as compared to 19.0 million for the corresponding period of the prior year. On a diluted basis, average shares outstanding were 20.6 million for the three months ended March 31, 2004, as compared to 19.9 million for the corresponding period of the prior year. The increase is the result of the effect of dilutive securities resulting from an increase in our stock price. The average stock price of our common shares was $25.00 per share for the three-month period ended March 31, 2004, as compared to $7.06 per share for the corresponding period of the prior year.
Liquidity and Financed Resources
Profitable operating results continue to strengthen our financial position. At March 31, 2004, working capital aggregated $119 million and we had a working capital ratio of 2.9 to 1. Cash and cash equivalents aggregated $56.4 million and we had no long-term debt.
Our short-term cash requirements are expected to be met by available cash at March 31, 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, during the three months ended March 31, 2004 we drew down approximately $4.5 million on our credit lines to help finance our working capital needs.
Cash used in operating activities aggregated $5.1 million for the three-month period ended March 31, 2004, as compared to cash provided by operating activities of $3.0 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 the significant decline in accounts payable. As mentioned in our annual report on Form 10-K for the year ended December 31, 2003, a significant inventory buildup during the fourth quarter of 2003 was made to meet our sales commitments in early 2004 including the continued rollout of our Burberry Brit for women line. This buildup was financed primarily through normal credit terms with our vendors, and therefore did not have any significant impact on our cash flows from operations for the year ended December 31, 2003. The impact of that inventory buildup is however being felt in the first quarter of 2004 as our vendor's bills became due.
Cash flows used in investing activities, which are primarily capital expenditures, aggregated $0.6 million and $0.8 million for the three-month periods ended March 31, 2004 and 2003, respectively. Our business is not capital intensive and we do not own any manufacturing facilities. We typically spend between $1.0 and $2.0 million per year on tools and molds, depending on our new product development calendar. The balance of capital expenditures is for office fixtures, computer equipment and industrial equipment needed at our distribution centers.
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. Our first cash dividend of $.03 per share was paid on April 15, 2004 to shareholders of record on March 31, 2004. 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.
In April 2004, the Company's French subsidiary, Inter Parfums, S.A., ("IPSA") acquired a 64% interest in Nickel S.A. ("Nickel") for approximately $5.6 million in cash. The purchase agreement contains a provision for a follow-on cash infusion by IPSA of approximately $3.7 million, which would bring IPSA's ownership to 74%. We funded this acquisition with cash on hand and do not expect it to have any further significant effect on our financial position.
As previously reported, our French subsidiary, Inter Parfums, S.A., is a party to litigation with Jean Charles Brosseau, S.A. ("Brosseau"), the owner of the Ombre Rose trademark. In October 1999, Inter Parfums, S.A. received notice of a judgment in favor of Brosseau, which awarded damages of approximately $0.6 million and which directed Inter Parfums, S.A. to turn over its license to Brosseau within six months.
Inter Parfums, S.A. appealed the judgment as it vigorously and categorically denied the claims of Brosseau. In June 2000, as a result of certain developments, Inter Parfums, S.A. and its special litigation counsel considered it likely that the judgment would be sustained and therefore took a charge against earnings for $0.6 million, the full amount of the judgment. In February 2001, the Court of Appeal confirmed the Brosseau claim with respect to turning over the license. In addition, the Court named an expert to proceed with additional investigations and required Inter Parfums, S.A. to pay $0.14 million as an advance for damages claimed by Brosseau.
In February 2004, the Court of Appeal ordered Inter Parfums, S.A. to pay total damages of $0.39 million of which $0.14 million has already been advanced. Brosseau has until the end of May 2004 to appeal this decision and, therefore Inter Parfums, S.A. will maintain its current reserves until such time as all rights to appeal have expired. We do not believe that such litigation will have any further material adverse effect on our financial condition or operations.
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 $3.2 million, $2.3 million, $1.2 million, $1.1 million, $1.1 million and $2.6 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 for the years ended December 31, 2004, 2005, 2006, 2007, 2008 and thereafter are $5.4 million, $5.6 million, $5.7 million, $3.2 million, $2.7 million and $6.9 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 ManagementWe 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, 2004 , we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $4.0 million and GB Pounds 6.5 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 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.
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, 2, 3 and 4 are omitted as they are either not applicable or have been included in Part I.
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 did not authorize any non-audit services to be performed by our auditors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following documents are filed herewith:
Exhibit No.
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2.2 | Offer for purchase and sale of stock of the Nickel S.A. Company under conditions precedent among Inter Parfums S.A. and Philippe Dumont et al dated March 29, 2004- French original |
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2.2.1 | Offer for purchase and sale of stock of the Nickel S.A. Company under conditions precedent among Inter Parfums S.A. and Philippe Dumont et al dated March 29, 2004- English translation |
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2.3 | Agreement for Sale of Equity Capital with Condition Precedent dated March 29, 2004- French original |
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2.3.1 | Agreement for Sale of Equity Capital with Condition Precedent dated March 29, 2004- English translation |
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10.101 | Shareholders Agreement from Nickel SA Company dated March 29, 2004- French original |
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10.101.1 | Shareholders Agreement from Nickel SA Company dated March 29, 2004- English translation |
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10.102 | Agreement between BNP Paribas and Inter Parfums SA dated March 17, 2004- French Original |
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10.102.1 | Agreement between BNP Paribas and Inter Parfums SA dated March 17, 2004- English translation |
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31 | Certifications required by Rule 13a-14(a) |
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32 | Certification Required by Section 906 of the Sarbanes-Oxley Act |
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(b) We furnished the following Current Reports on Form 8-K:
(1) Date of event - January 7, 2004, reporting Items 4 and 7 and
(2) Date of event - January 14, 2004, reporting Items 7 and 9 and
(3) Date of event - January 7, 2004, amending on February 16, 2004 Form 8-K date of event - January 9, 2004, reporting Item 4 and 7 and
(4) Date of event - March 9, 2004, reporting Items 7 and 12 and
(5) Date of event - April 7, 2004, reporting Items 5 and 7 and
(6) Date of event - April 13, 2004, reporting Items 7, 9 and 12.
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 11 day of May 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: May 11, 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: May 11, 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 March 31, 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: May 11, 2004 By: /s/Jean Madar
Jean Madar
Chief Executive Officer
Date: May 11, 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.