| INTER PARFUMS INC Item 1A Risk Factors |
| You should carefully consider these risk factors, together with all of the other information contained or incorporated by reference in this prospectus, before you decide to purchase shares of our common stock |
| These factors could cause our future results to differ materially from those expressed or implied in forward-looking statements made by us |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business |
| The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment |
| We are dependent upon Burberry for a significant portion of our sales, and the loss of this license will have a material adverse effect on us |
| Burberry is our leading prestige brand name, as sales of Burberry products represented 60prca, 62prca and 56prca of net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| In October 2004 our Paris-based subsidiary, Inter Parfums, SA, entered into a 12dtta5-year, exclusive world-wide fragrance license with Burberry Limited, effective as of July 1, 2004, which replaced the original 1993 license |
| This license includes an additional five-year optional term that requires the consent of both Burberry and Inter Parfums, SA, and must be exercised, if at all, prior to December 31, 2014 |
| In addition, Burberry has the right on December 31, 2009 and December 31, 2011 to buy back the license at its then fair market value |
| Further, this license provides for a termination on a change in control of either Inter Parfums, SA, the licensee, or Inter Parfums, Inc, the guarantor |
| This license is subject to Inter Parfums, SA making required royalty payments (which are subject to certain minimums), minimum advertising and promotional expenditures and meeting minimum sales requirements |
| The new royalty rates, which are approximately double the rates under the prior license, commenced as of July 1, 2004 |
| The new advertising and promotional expenditures, which commenced on January 1, 2005, as well as the minimum sales requirements, are substantially higher than under the prior license |
| 13 _________________________________________________________________ We are dependent upon the continuation and renewal of various licenses for a significant portion of our sales, and the loss of one or more licenses could have a material adverse effect on us |
| Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties and our business is dependent upon the continuation and renewal of such licenses on terms favorable to us |
| Each license is for a specific term and may have additional optional terms |
| In addition, each license is subject to us making required royalty payments (which are subject to certain minimums), minimum advertising and promotional expenditures and meeting minimum sales requirements |
| Just as the loss of a license may have a material adverse effect on us, a renewal on less favorable terms may also negatively impact us |
| If we are unable to protect our intellectual property rights, specifically trademarks and brand names, our ability to compete could be negatively impacted |
| The market for our products depends to a significant extent upon the value associated with our trademarks and brand names |
| We own, or have licenses or other rights to use, the material trademark and brand name rights used in connection with the packaging, marketing and distribution of our major products both in the United States and in other countries where such products are principally sold |
| Therefore, trademark and brand name protection is important to our business |
| Although most of our brand names are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or brand name protection |
| In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States |
| The costs required to protect our trademarks and brand names may be substantial |
| The success of our products is dependent on public taste |
| Our revenues are substantially dependent on the success of our products, which depends upon, among other matters, pronounced and rapidly changing public tastes, factors which are difficult to predict and over which we have little, if any, control |
| In addition, we have to develop successful marketing, promotional and sales programs in order to sell our fragrances and cosmetics |
| If we are not able to develop successful marketing, promotional and sales programs, then such failure will have a material adverse effect on our business, financial condition and operating results |
| We are subject to extreme competition in both the prestige and mass markets |
| The market for fragrances and beauty related products is highly competitive and sensitive to changing market preferences and demands |
| Many of our competitors in this market (particularly in the prestige fragrance and cosmetic industry) are larger than we are and have greater financial resources than are available to us, potentially allowing them greater operational flexibility |
| 14 _________________________________________________________________ Our success in the prestige fragrance and cosmetic industry is dependent upon our ability to continue to generate original strategies and develop quality products that are in accord with ongoing changes in the market |
| Our success in the mass market fragrance industry is dependent upon our ability to competitively price quality products and to quickly and efficiently develop and distribute new products |
| Our success in the mass market color cosmetics and health and beauty aids industry is dependent upon the continued positive brand recognition of our Aziza and Intimate brand names, in addition to our ability to compete on price |
| If there is insufficient demand for our existing fragrances, cosmetics and health and beauty aids, we do not develop future strategies and products that withstand competition or we are unsuccessful in competing on price terms, then we could experience a material adverse effect on our business, financial condition and operating results |
| Consumers may reduce discretionary purchases of our products as a result of a general economic downturn |
| We believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income |
| Accordingly, we may experience sustained periods of declines in sales during economic downturns, or if terrorism or diseases affect customers’ purchasing patterns |
| In addition, a general economic downturn may result in reduced traffic in our customers’ stores which may, in turn, result in reduced net sales to our customers |
| Any resulting material reduction in our sales could have a material adverse effect on our business, financial condition and operating results |
| We are dependent upon Gap to approve and sell products that we develop for Gap |
| In addition, we anticipate incurring expenses prior to any products being launched and the initial lines of products are not scheduled to be launched until 2006 and 2007 |
| We recently reported that we entered into an exclusive agreement with Gap to develop, produce, manufacture and distribute personal care and home fragrance products for Gap and Banana Republic brand names to be sold in Gap and Banana Republic retail stores in the United States and Canada |
| Under the terms of such agreement, the products that we develop are subject to the approval of Gap and sales and marketing efforts of Gap |
| Although the initial line has not been finalized, potential products include fragrances and related personal care products |
| The new products are expected to launch at Banana Republic in the fall of 2006 and at Gap in 2007 |
| We are currently incurring staffing, product development and other start-up expenses, including those of a third-party design and marketing firm |
| If we are unable to cooperate successfully with Gap in creating successful new products, our future growth potential could be negatively impacted |
| If we are unable to acquire or license additional brands, or obtain the required financing for these agreements and arrangements, the growth of our business could be impaired |
| Our future expansion through acquisitions or new product distribution arrangements, if any, will depend upon the capital resources and working capital available to us |
| We may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions or arrangements on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business |
| 15 _________________________________________________________________ We may engage in future acquisitions that we may not be able to successfully integrate or manage |
| These acquisitions may dilute our stockholders and cause us to incur debt and assume contingent liabilities |
| We continuously review acquisition prospects that would complement our current product offerings, increase our size and geographic scope of operations or otherwise offer growth and operating efficiency opportunities |
| The financing for any of these acquisitions could significantly dilute our stockholders, result in an increase in our indebtedness or both |
| While there are no current agreements or negotiations underway with respect to any material acquisitions, we may acquire or make investments in businesses or products in the future |
| Acquisitions may entail numerous integration risks and impose costs on us, including: · difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses; · diversion of management’s attention from our core business; · adverse effects on existing business relationships with suppliers and customers; · risks of entering markets in which we have no or limited prior experience; · dilutive issuances of equity securities; · incurrence of substantial debt; · assumption of contingent liabilities; · incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets; and · incurrence of significant immediate write-offs |
| Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition and operating results |
| We are dependent upon Messrs |
| Jean Madar and Philippe Benacin, and the loss of their services could harm our business |
| Jean Madar, our Chief Executive Officer, and Philippe Benacin, our President and Chief Executive Officer of Inter Parfums, SA, are responsible for day-to-day operations as well as major decisions |
| Termination of their relationships with us, whether through death, incapacity or otherwise, could have a material adverse effect on our operations, and we cannot assure you that qualified replacements can be found |
| We maintain key man insurance on the lives of both Mr |
| However, we cannot assure you that we would be able to retain suitable replacements for either Mr |
| Madar or Mr |
| 16 _________________________________________________________________ Our reliance on third party manufacturers could have a material adverse effect on us |
| We rely on outside sources to manufacture our fragrances and cosmetics |
| The failure of such third party manufacturers to deliver either components or finished goods on a timely basis could have a material adverse effect on our business |
| Although we believe there are alternate manufactures available to supply our requirements, we cannot assure you that current or alternative sources will be able to supply all of our demands on a timely basis |
| We do not intend to develop our own manufacturing capacity |
| As these are third parties over which we have little or no control, the failure of such third parties to provide components or finished goods on a timely basis could have a material adverse effect on our business, financial condition and operating results |
| Our reliance on third party distributors could have a material adverse effect on us |
| We sell our prestige fragrances mostly through independent distributors specializing in luxury goods |
| Given the growing importance of distribution, we plan to modify our distribution model, which may involve future formation of joint ventures or company owned subsidiaries within key markets |
| We have little or no control over third party distributors and the failure of such third parties to provide services on a timely basis could have a material adverse effect on our business, financial condition and operating results |
| In addition, if we replace existing third party distributors with new third party distributors or with our own distribution arrangements, then transition issues could have a material adverse effect on our business, financial condition and operating results |
| The loss of or disruption in our distribution facilities could have a material adverse effect on our business, financial condition and operating results |
| We currently have one distribution facility in Paris and one in New Jersey |
| The loss of one or both of those facilities, as well as the inventory stored in those facilities, would require us to find replacement facilities and assets |
| In addition, terrorist attacks, or weather conditions, such as natural disasters, could disrupt our distribution operations |
| If we cannot replace our distribution capacity and inventory in a timely, cost-efficient manner, it could have a material adverse effect on our business, financial condition and operating results |
| The international character of our business renders us subject to fluctuation in foreign currency exchange rates and international trade tariffs, barriers and other restrictions |
| In an effort to reduce our exposure to foreign currency exchange fluctuations, we engage in a program of cautious hedging of foreign currencies to minimize the risk arising from operations |
| Despite such actions, fluctuations in foreign currency exchange rates for the US dollar, particularly with respect to the Euro, could have a material adverse effect on our operating results |
| Possible import, export, tariff and other trade barriers, which could be imposed by the United States, other countries or the European Union might also have a material adverse effect on our business |
| 17 _________________________________________________________________ Our business is subject to governmental regulation, which could impact our operations |
| Fragrances and other cosmetics must comply with the labeling requirements of the Federal Food, Drug and Cosmetics Act as well as the Fair Packaging and Labeling Act and their regulations |
| Additional regulatory requirements for products which are “drugs” include additional labeling requirements, registration of the manufacturer and the semi-annual update of a drug list |
| Our fragrances are subject to the approval of the Bureau of Alcohol, Tobacco and Firearms as a result of the use of specially denatured alcohol |
| So far we have not experienced any difficulties in obtaining the required approvals |
| Our fragrances and cosmetics that are manufactured in France are subject to certain regulatory requirements of the European Union, but as of the date of this report, we have not experienced any material difficulties in complying with such requirements |
| However, we cannot assure you that, should we develop or market fragrances and cosmetics with different ingredients, or should existing regulations or requirements be revised, we would not in the future experience difficulty in complying with such requirements, which could have a material adverse effect on our results of operations |
| We may become subject to possible liability for improper comparative advertising or “Trade Dress |
| ” Brand name manufacturers and sellers of brand name products may make claims of improper comparative advertising or trade dress (packaging) with respect to the likelihood of confusion between some of our mass market fragrances, cosmetics and health and beauty aids, and those of brand name manufacturers and sellers |
| They may seek damages for loss of business or injunctive relief to seek to have the use of the improper comparative advertising or trade dress halted |
| However, we believe that our displays and packaging constitute fair competitive advertising and are not likely to cause confusion between our products and others |
| Further, we have not experienced to any material degree, any of such problems to date |