-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+Ai+ZeK3qilIvKGvkQNx1BDsoOvCYVYk0GJRtBkadqQ3D/CF6o0g9j92HIvme2L k+UN0aCd4/Dujp/6X4gUzw== 0000950123-97-009420.txt : 19971114 0000950123-97-009420.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950123-97-009420 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971112 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALFIN INC CENTRAL INDEX KEY: 0000724989 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 133032734 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09135 FILM NUMBER: 97714513 BUSINESS ADDRESS: STREET 1: 720 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2123337700 MAIL ADDRESS: STREET 1: 720 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: ALFIN FRAGRANCES INC DATE OF NAME CHANGE: 19870323 10-K405 1 ALFIN, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JULY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM _________TO___________ Commission File Number: 1-9135 ALFIN, INC. (Exact name of Registrant as specified in its charter) NEW YORK 13-3032734 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 720 Fifth Avenue, New York, New York 10019 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 333-7700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange Common Stock, $.01 par on which registered value per share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 for 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 if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price on November 5, 1997, was $2,615,090. As of November 5, 1997, the Registrant had 11,787,983 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders is incorporated by reference into Part III of this Annual Report on Form 10-K. 2 PART I ITEM 1. BUSINESS GENERAL Alfin Inc., a New York corporation (the "Company"), is engaged through its wholly-owned subsidiary, ADRIEN ARPEL, INC. ("ARPEL"), in distributing cosmetics and other beauty products and providing facial and other beauty services in department stores and in specialty stores throughout the United States and Canada. From April 1994 through January 1997, ARPEL also distributed specially packaged cosmetic products through television marketing on the Home Shopping Network ("HSN"). PRODUCTS AND MAJOR DISTRIBUTION AGREEMENTS CURRENT PRODUCTS The Company develops, distributes and sells skin care and cosmetic products under the trademark "ADRIEN ARPEL". ARPEL acts as an operator of service-oriented skin care salons in department and specialty stores. From April 1994 through January 1997, ARPEL also distributed specially packaged cosmetic products through television marketing on the HSN. The Company's relationship with HSN ended as of January 27, 1997, following a contract dispute between the Company and Ms. Adrienne Newman which led to the departure of Ms. Newman from the Company. Ms. Newman served as the President of ARPEL and had been the Company's selling host, under the name of Adrien Arpel, in its sales program on HSN. For a detailed discussion of the legal action between the Company and Ms. Newman as a result of this dispute see "Item 3. Legal Proceedings". ARPEL'S product line consists of a line of high quality natural based skin care products and a line of make up products. ARPEL products are positioned in the better segment of the market and are competitively priced with other comparable brands. In fiscal 1997, approximately 48.4% of ARPEL'S net sales were made to HSN and approximately 51.6% were made to department stores. DISCONTINUED PRODUCTS The Company was originally engaged in the manufacturing, importation, distribution, marketing and merchandising of fine imported fragrance products. Beginning in 1993, the Company significantly reduced its distribution of fragrance products and in July 1995, the Company ceased its distribution of fragrance products. During March 1996 the Company sold its exclusive worldwide manufacturing, distribution and licensing rights for FRACAS and BANDIT and other fragrances by Robert Piquet to Fashion Fragrances and Cosmetics Ltd. ("FF&C") for an aggregate price of $1.2 million to be payable in installments. During the first quarter of fiscal 1997 the Company and FF&C agreed to reduce the purchase price payable by FF&C to the Company by $100,000. This adjustment was necessary because certain molds included in the purchase price were damaged and unusable. The Company received the remaining purchase price installment of $350,000 from this transaction in July 1997. SALES AND MARKETING The Company's major domestic accounts include Boscov's, Burdines, Dayton/Hudson, Dillards, Federated Department Stores, Foley's, Hechts, HSN, Kaufmanns, and Mercantile. ARPEL also sells directly to the Canadian department store, the Bay. Sales to department stores accounted for approximately 51.6% of sales for fiscal 1997. The arrangement with HSN represented approximately 48.4% of sales for fiscal 1997. No 1 3 other single domestic account, foreign distributor or independent sales agent accounted for sales in an aggregate amount equal to 10% or more of the Company's consolidated net sales. As is common in the fragrance and cosmetic industry, the Company provides its domestic customers with the limited right to return merchandise in order to balance inventory and stock levels. The rate of return experienced by the Company was approximately 4.7%, 6.1% and 3.0% for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. Sales to foreign accounts, expressed as a percentage of net sales, were 7.2%, 6.4% and 3.0% for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. On August 6, 1997 the Company entered into an agreement with Target Mailing Lists, Inc., ("Target"). Under the agreement the Company and Target will place advertisements in publications for the sale of specialty packaged cosmetic and skin care products. Target will advance all production costs for advertisements approved by the Company and the Company will advance all creative costs associated with such advertising. Expenses incurred by Target and the Company shall be reimbursed pro rata from gross revenues received from the sale of products. All revenues remaining after payment of expenses shall be allocated 49.5% to Target, 40.5% to the Company and 10% to other parties. The agreement terminates on February 6, 1999 and renews automatically if the advertising placed by Target and the Company generates more than $1.5 million in retail sales within a one year period from the date the advertisement first appears in the media. The Company has developed a professionally designed Catalogue. The initial edition was mailed during October and November 1997 to approximately 70,000 consumers and featured approximately 25 of Arpel's most popular products and skin care kits. The Company plans to have subsequent editions featuring approximately 50 products and to mail its catalogue four times each year during the winter, spring, summer and fall, with an anticipated increase in volume from mailing to mailing. This Catalogue was conceived primarily in response to customer demands. The Company is in the final stages of preparing to introduce its products in Italy through Shopping America an Italian home shopping program. The format will be similar to HSN and QVC in the United States and Teleshopping, the most successful home shopping show in France. This shopping network will reach 40 million viewers which represents 81.7% total coverage in Italy. The Company plans to launch a test market during November 1997 and is scheduled to be the exclusive cosmetic line. RESEARCH AND DEVELOPMENT The Company did not spend a material amount on research and development during the fiscal years ended July 31, 1997, 1996 and 1995. The Company introduces new products and improves its packaging in response to changing consumer demands. ADVERTISING The Company advertises through cooperative advertising programs, and catalogues. Advertising costs as a percentage of consolidated retail store sales for the fiscal years ended July 31, 1997, 1996 and 1995 were 11.7%, 9.7%, and 9.4%, respectively. The Company also promotes its products through the use of promotional materials, special promotions and in-store displays. 2 4 MANUFACTURING The Company does not maintain any manufacturing facilities. It subcontracts to manufacture its products, in accordance with the Company's specifications and formulas. (Note: See Trademark and Regulations paragraph). The Company believes that other manufacturing subcontractors are available if alternative production sources need to be obtained. The Company believes that it is in compliance with all applicable laws and regulations pertaining to its business and to any federal, state or local laws and regulations designated to protect the environment. TRADEMARKS AND REGULATIONS The Company owns the relevant trademarks of the products which are distributed by the Company. The ADRIEN ARPEL and ARPEL names are registered as trademarks in the United States and a number of foreign countries. The Food and Drug Administration ("FDA") monitors certain aspects of the cosmetic industry, particularly those that relate to advertising claims and purported benefits with respect to cosmetic products and the physical composition of cosmetics. The Company has not been notified by the FDA, nor, to its knowledge, have any of its manufacturers been notified by the FDA, that any of the products that the Company distributes are presently the subject of any FDA investigation or that any claims or complaints have been made or are threatened against the products that the Company distributes. Notwithstanding the foregoing, the Company does not believe that any FDA approvals or consents are required with respect to any of the products the Company distributes. The Federal Trade Commission ("FTC") monitors certain other aspects of the Company's business, particularly as they relate to product packaging and advertising. The Company designs the packaging of all products it distributes, and for which it owns the relevant trademark. The Company has not been notified by the FTC that any of the Company's products or practices are presently the subject of any FTC investigation or that any, claims or complaints have been made or are threatened against the Company. The Company believes that it is in compliance with all applicable laws and regulations pertaining to its business. PRODUCT LIABILITY The Company believes that the manufacturers of its products carry product liability insurance in an amount sufficient to cover any foreseeable product liability claim and that the Company is protected thereunder. In addition, the Company maintains product liability coverage in an amount which it believes is adequate to cover any exposure it may have with respect to its products. The Company has never been the subject of any material product liability litigation. COMPETITION The market for cosmetics is volatile, competitive and sensitive to changing consumer preferences and demands. There are products which are better known than the products distributed by the Company and there are many companies which are substantially larger, more diversified and which have substantially greater resources than the Company and which have the ability to develop and market products which are similar to and competitive with those distributed by the Company. 3 5 GENERAL ECONOMIC CONDITIONS Retail cosmetic purchases are discretionary and are frequently made by customers using consumer credit. The Company believes that a decline in consumer credit purchases could adversely affect the business and financial condition of department stores and therefore, the Company. EMPLOYEES As of July 31, 1997, the Company had 84 employees. Of these, 59 were engaged in sales and marketing activities, 18 in administrative functions and 7 in distribution activities. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in New York City and occupies approximately 7,400 rentable square feet under a lease expiring on November 30, 2001. The lease provides for annual payments of approximately $240,000. During June 1997 the Company sold its Norwood, New Jersey distribution and administration center for $1,416,000. From the proceeds of this sale the Company satisfied the remaining balance of its term promissory note in the amount of $450,000 which was due to PNC Bank. The Company occupies approximately 15,000 rentable square feet in the same facility under a lease expiring June 2000. The lease provides for annual payments of $107,000. ITEM 3. LEGAL PROCEEDINGS On October 28, 1996 the Company received notice from Adrienne Newman purporting to terminate her April 4, 1990 Employment Agreement with the Company (such agreement as subsequently amended is the "Employment Agreement"), based on an alleged breach of the Employment Agreement by the Company. Ms. Newman served as the President of ARPEL, the Company's wholly-owned subsidiary, and had been selling host, under the name of Adrien Arpel, in its sales program on HSN. The Employment Agreement provided for salary, fringe benefits and commission payments based upon 33% of the revenues, net of direct expenses attributable to television shopping sales. Ms. Newman also had vested rights in 625,000 warrants, 500,000 of which were scheduled to expire in November 1998 and the remaining 125,000 of which were scheduled to expire on July 31, 2001. On November 8, 1996 the Company and Adrienne Newman reached an agreement (the "Interim Agreement") whereby Ms. Newman agreed to appear as the selling host for ARPEL on HSN shows scheduled for November and December 1996 and January 1997 (the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman acted as an independent contractor and not as an employee of the Company. The Company and Ms. Newman also agreed to refrain from initiating legal action against the other in connection with their dispute over Ms. Newman's termination of the Employment Agreement until after the expiration of the HSN Selling Period. On January 28, 1997, after the expiration of the HSN Selling Period, the Company was served by Adrienne Newman with a summons and complaint returnable in the Supreme Court, New York County whereby Ms. Newman asserted claims for damages against the Company based upon alleged breaches by the Company of Ms. Newman's Employment Agreement and the Interim 4 6 Agreement. Unspecified damages were claimed. A further claim requested a judicial determination that the Employment Agreement was materially breached by the Company resulting in its termination. On March 19, 1997 the Company served an Answer and Counterclaim in response to the action commenced by Ms. Newman. The Company's Counterclaim asserts various claims against Ms. Newman, seeking damages and injunctive relief. Among other things, it is the position of the Company that Ms. Newman was in material breach of her Employment Agreement when she terminated the Employment Agreement on October 28, 1996. As a consequence, it is the Company's belief that Ms. Newman's refusal to provide services to the Company throughout the term of her Employment Agreement which expires in April 1998, particularly her willful refusal and failure to appear as the Company's selling host on HSN, will damage the Company in the sum of at least eleven million dollars ($11,000,000). The Company also asserted claims against Ms. Newman for breaches of her covenant not to compete and her covenant not to disclose trade secrets and proprietary data. During May 1997, Ms. Newman started appearing on HSN as a representative of her own company selling cosmetic products under the name "Signature Club A". Ms. Newman has subsequently appeared on HSN on a monthly basis. The Company and its attorneys are currently reviewing these appearances and may seek further legal remedies and actions against Ms. Newman. During these appearances Ms. Newman was not acting on behalf of the Company or its trademark protected Adrien Arpel product line. The case is currently in the discovery phase. Upon completion of discovery the action will be ready for trial but no trial date has yet been fixed. In addition to the above, the Company, in the normal course of business, is a defendant in numerous actions/lawsuits. The Company does not believe the outcome of these action/lawsuits will have a material impact on the Company's financial position or results from operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS In July 1997 the Company, was advised by the American Stock Exchange (the "ASE") that it wished to review with the Company its continued listing eligibility on the ASE based upon the Company falling below certain ASE continued listing guidelines. The Company met with representatives of the ASE and made both oral and written presentations to the ASE. The Company was advised by the ASE, by letter dated September 15, 1997, that the Company's listing on the ASE would be continued subject to future review by the ASE of the Company's favorable progress in satisfying the ASE's guidelines for continued listing and to the ASE's routine periodic reviews of the Company's SEC and other filings. The ASE has requested an updated report from the Company to be submitted on or before December 17, 1997 which must address, among other things, the Company's ability to satisfy its cash needs and to achieve its projections of profitability. There can be no assurance that the ASE will continue to permit the Company to be listed on the ASE. 5 7 Since May 5, 1986, shares of the Company's $.01 par value Common Stock, have traded on the American Stock Exchange (symbol "AFN"). The following table sets forth, for the periods indicated and as reported by the American Stock Exchange, the high and low sales prices for shares of the Company's Common Stock. Quarter Ended High Low ------------- ---- --- JULY 31, 1995 2-1/8 11/16 October 31, 1995 1-3/4 1-1/16 January 31, 1996 1-9/16 15/16 April 30, 1996 2-1/8 1-1/8 JULY 31, 1996 3-1/16 1-1/4 October 31, 1996 2-3/8 1-1/2 January 31, 1997 1-11/16 1-1/8 April 30, 1997 1-9/16 13/16 JULY 31, 1997 1-1/4 1/2 The number of shareholders of record of the Common Stock on November 7, 1997 was 2,228. The Company believes that there are a significant number of beneficial owners of its Common Stock whose shares are held in "Street Name". The Company has paid no cash dividends with respect to its Common Stock since its inception. 6 8 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report.
(000's omitted, except Fiscal Years Ended July 31 per share amounts) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 0perating Data: Net sales $ 24,701 $ 34,733 $ 32,151 $ 29,358 $ 34,764 Gross profit 16,517 23,353 22,859 21,707 21,729 Operating (loss)income (3,877) 2,820 1,960 (924) (7,555) Other income (expense) 948 54 (460) (503) 832 (Loss) income before provision for income taxes (2,929) 2,874 1,500 (1,427) (6,723) Net (Loss) income $ (3,009) $ 2,693 $ 1,365 $ (1,427) $ (6,723) -------- -------- -------- -------- -------- Net (loss)income per Common equivalent share: $ (0.25) $ 0.22 $ 0.12 $ (0.14) $ (0.85) ======== ======== ======== ======== ======== Balance Sheet Data: Working Capital $ 1,254 $ 988 $ (2,629) $ (5,905) $ (6,835) Total assets 4,611 11,228 10,756 12,362 14,615 Short-term debt 0 1,938 2,863 5,421 7,641 Long-term debt 0 425 725 149 149 Shareholders' equity $ 1,181 $ 4,131 $ 1,388 $ 24 $ 151 ======== ======== ======== ======== ========
7 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - Certain statements in this report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding future cash requirements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions; industry capacity; industry trends, competition, litigation, material costs and availability; the loss of any significant management personnel; the loss of any significant customers; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgement of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and other factors referenced in this report. The following table sets forth items in the Statements of Operations as a percent of net sales:
Relationship to Net Sales for the Fiscal Years Ended July 31, 1997 1996 1995 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of goods sold 33.1 32.8 28.9 Selling, general and administrative expenses 71.7 59.1 65.0 Write off of goodwill 10.9 -- -- Operating (loss) income (15.7) 8.1 6.1 Other income (expense) , net 3.8 0.2 (1.4) Net (loss) income before provision for income tax (11.9) 8.3 4.7 ------ ------ ------ Net (loss) income (12.2)% 7.8% 4.2% ====== ====== ======
8 10 FISCAL YEARS ENDED JULY 31, 1997 AND 1996 The Company recorded a net loss of $3,008,562 for the fiscal year ended July 31, 1997, as compared to net income of $2,692,692 for the fiscal year ended July 31, 1996. The net loss per common and common equivalent share was $0.25 for the year ended July 31, 1997, as compared to income of $0.22 for the year ended July 31, 1996. Included in the loss is the write off of goodwill in the amount of $2,620,081 recorded during the fourth quarter of the current fiscal year, as a result of the Company's assessment of future operating cash flows in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Excluding the effect of the write off of goodwill the net loss for the fiscal year ended July 31, 1997, was $407,307. Excluding the effect of the write off of goodwill the net loss per common and common equivalent shares was $0.03 for the fiscal year ended July 31, 1997. Net sales for the fiscal year ended July 31, 1997, decreased to $24,700,684 from $34,733,375 recorded in the prior fiscal year, a decrease of $10,032,691 or 28.9%. The sales decrease is primarily related to an end to the Company's relationship with the Home Shopping Network ("HSN") combined with a decrease in sales to department stores. Sales to HSN for the year ended July 31, 1997, were $11,965,350 as compared to $17,858,631 for the year ended July 31, 1996, a decrease of $5,893,281 or 33.0%. The Company's relationship with HSN ended during January 1997 due to the Company's contract dispute with Adrienne Newman. For a further discussion of the Company's relationship with Adrienne Newman and HSN see Item 3, "Legal Proceedings". Net Sales to department stores for the year ended July 31, 1997, decreased to $12,735,334 from $16,570,070 for the year ended July 31, 1996, a decrease of $3,834,736, or 23.1%. The Company was selling its Arpel product line in 243 locations throughout the United States and Canada at July 31, 1997, as compared to 315 locations at July 31, 1996. The Company no longer distributes its products through Federated Department Stores Macy's East and Macy's West Divisions. Distribution through Macy's East and Macy's West ceased during October 1996 and May 1997, respectively. Cost of goods sold as a percentage of net sales was 33.1% for the fiscal year ended July 31, 1997, as compared to 32.8% for the fiscal year ended July 31, 1996. The decrease is primarily related to product mix offset by the decrease in HSN sales. Selling, general and administrative expenses decreased to $17,774,382 for the fiscal year ended July 31, 1997, from $20,532,894 for the fiscal year ended July 31, 1996, a 13.4% decrease. The decrease is primarily related to a decrease of approximately $1,688,000 in compensation payments to Adrienne Newman. Ms. Newman's employment agreement with the Company required that the Company compensate Ms. Newman for 33.3% of the net revenues after direct expenses attributable to sales of products on HSN. Contributing to the expense decrease was the expense reduction program which has been implemented by the Company during January 1997. In accordance with SFAS No. 121, the Company recorded a noncash write off of $2,620,081 in the fourth quarter of fiscal year 1997 as a result of its evaluation of expected future cash flows from operations before interest. The Company recorded net interest expense for the fiscal year ended July 31, 1997, in the amount of $38,013 as compared to interest expense for the fiscal year ended July 31, 1996, in the amount of $313,100. This decrease is primarily attributable to significantly lower debt levels. The Company has reduced bank debt to $0 at July 31, 1997. During June 1997 the Company satisfied the remaining balance due on its Term Promissory note with PNC Bank. 9 11 The Company recorded other income of $986,320 for the fiscal year ended July 31, 1997, related to the sale of its Norwood, New Jersey distribution and administration facility in June 1997. For the fiscal year ended July 31, 1996, the Company recorded a gain of $394,392 related to the sale of its licensing and distribution rights for certain fragrances by Robert Piguet to Fashion Fragrances and Cosmetics Ltd. ("FF&C"). The remaining NOL available to the Company for federal income tax reporting purposes at July 31, 1997, is approximately $5.4 million. The Company has $2.2 million of the NOL carryforward available for use for the fiscal year ended July 31, 1998. The Company has recorded a valuation allowance equal to the amount of deferred assets for the fiscal year ended July 31, 1997. In making this determination the Company considered the operating history of the Company and the end of the Company's relationship with HSN during January 1997 following the departure of Adrienne Newman from the Company. FISCAL YEARS ENDED JULY 31, 1996 AND 1995 The Company recorded net income of $2,692,692 for the fiscal year ended July 31, 1996 as compared to $1,364,646 for the fiscal year ended July 31, 1995. Net sales for the fiscal year ended July 31, 1996 increased to $34,733,375 from $32,151,204 recorded in the prior fiscal year, an increase of $2,582,171 or 8.0%. Sales of cosmetic products increased to $34,428,701 from $31,073,515 as compared to the prior year, a 10.8% increase. Sales of fragrance products decreased to $304,674 from $1,077,689, as compared to the prior fiscal year, a 71.7% decrease attributable in large part to the Company's decision to suspend its fragrance business during the latter part of fiscal 1995. The fiscal 1996 fragrance sales were related to the sale of the Company's remaining inventory of fragrance products. The cosmetic sales increase of $3,355,186 was primarily attributable to the Company's continued success in selling cosmetic products through HSN. Sales to HSN increased to $17,858,631 from $15,667,416 recorded in the prior fiscal year, an increase of $2,191,215 or 14.0%. The Company commenced selling products through HSN of Canada during January 1996 with $933,261 of sales to HSN of Canada being recorded during the fiscal year ended July 31, 1996. Sales of cosmetic products to department stores increased to $16,570,070 from $15,406,099 recorded in the prior fiscal year, an increase of $1,163,971 or 7.6%. This increase was primarily due to increased awareness of the ARPEL brand name as a result of the Company's appearances on HSN, as well as normalization of the Company's inventory out of stock situation in the second half of fiscal 1996. Cost of goods sold as a percentage of net sales was 32.8% for the fiscal year ended July 31, 1996, as compared to 28.9% for the fiscal year ended July 31, 1995. Cost of goods sold for cosmetic products was 32.1% for the fiscal year ended July 31, 1996, as compared to 28.5% for the fiscal year ended July 31, 1995. The increase in the cosmetic cost of goods sold percentage was primarily related to sales of cosmetic products to HSN. Selling, general and administrative expenses decreased to $20,532,894 for the fiscal year ended July 31, 1996 from $20,898,893 for the fiscal year ended July 31, 1995, a 1.8% decrease. The decrease was primarily attributable to decreases in advertising and promotional expenses related to the Company's decision to cease its fragrance business. Interest expenses decreased to $313,100 for the fiscal year ended July 31, 1996, from $439,743 recorded during the prior fiscal year ended July 31, 1995, a 28.8% decrease. This decrease is primarily attributable to lower debt levels. The Company recorded a gain of $394,392 related to the sale of its licensing and distribution rights for certain fragrances by Robert Piquet to FF&C during March 1996. 10 12 Net income per common and common equivalent share for the fiscal year ended July 31, 1996 was $0.22 as compared to $0.12 for the fiscal year ended July 31, 1995. The remaining NOL available to the Company for federal income tax reporting purposes at July 31, 1996 is approximately $4,300,000. The Company had $707,000 of the NOL carryforward available for use for the tax year ending July 31, 1997. FISCAL YEARS ENDED JULY 31, 1995 AND 1994 The Company recorded net income of $1,364,646 for the fiscal year ended July 31, 1995 as compared to a net loss of ($1,427,148) for the fiscal year ended July 31, 1994. This marked the first year since fiscal 1989 that the Company has recorded profits. Net sales for the fiscal year ended July 31, 1995 increased to $32,151,204 from $29,357,922 recorded in the prior fiscal year, an increase of $2,793,282 or 9.5%. Sales of cosmetic products increased to $31,073,515, from $24,771,150 or 24.5%, while sales of fragrance products decreased to $1,077,689 from $4,586,772 or 76.5%, as compared to the prior fiscal year. The cosmetic sales increase of $6,302,365 was primarily attributable to the success of selling cosmetic products through HSN. Sales to HSN amounted to $15,667,416 for the fiscal year ended July 31, 1995. The Company commenced marketing products through HSN during April 1994 with sales of $4,574,262 for the final four months of the fiscal year ended July 31, 1994. Net sales of cosmetic products through department stores decreased by $773,089 primarily due to a net decrease of 38 unprofitable locations through which ARPEL products were sold. The fragrance sales decrease of $3,509,083 was primarily attributable to the Company's decision to temporarily suspend its current fragrance business, during the latter part of fiscal 1995. The Company's fragrance sales have decreased during the last three fiscal years as follows:
Fiscal Year Ended July 31, Net Sales $ Decrease % Decrease - ------------------------------------------------------------------------------------------------------------------- 1995 $ 1,077,689 $ 3,509,083 76% 1994 4,586,772 6,184,468 57% 1993 10,771,240 6,242,760 36%
Cost of goods sold as a percentage of net sales was 28.9% for the fiscal year ended July 31 1995, as compared to 26.1% for the fiscal year ended July 31, 1994. Cost of goods sold for cosmetic products was 28.5% for the fiscal year ended July 31, 1995, as compared to 22.4% for the fiscal year ended July 31, 1994. Cost of goods sold for fragrance products was 40.4% for the fiscal year ended July 31, 1995 as compared to 46.1% for the fiscal year ended July 31, 1994. The improvement in the fragrance cost of goods sold percentage was primarily attributable to lower margins earned during fiscal 1994 related to the sale of discontinued product lines and inventory overstocks. Selling, general and administrative expenses decreased 7.7% to $20,898,893 for the fiscal year ended July 31, 1995 from $22,630,785 for the fiscal year ended July 31, 1994. The decrease was primarily attributable to decreases in advertising and promotional expenses related to the Company's reduction in its fragrance business and the expenses related to 11 13 ARPEL'S former relationship with Premier. The July 31, 1995 fiscal year selling, general and administrative expenses included a charge of $500,000 related to salon assets, which were determined to be outdated. Net expenses from non-operating items were $460,632 for the fiscal year ended July 31, 1995, as compared to $503,296 for the fiscal year ended July 31, 1994. The decrease was primarily attributable to decreased interest expenses related to lower debt levels. Net income per common and common equivalent share for the fiscal year ended July 31, 1995 was $0.12 as compared to a net loss of ($0.14) for the fiscal year ended July 31, 1994. The remaining NOL available to the Company for federal income tax reporting purposes at July 31, 1995 was approximately $4,300,000. OTHER Revenue is recognized upon shipment of merchandise to the customer with a reserve for return recorded based upon historical experience. The Company expenses all advertising costs in the period in which the cost is incurred. Trade Receivables are shown net of certain valuation allowances which consist of reserves for bad debts, reserves for returns and provisions for advertising and salary chargebacks. The provisions for advertising and salary chargebacks are based on agreements with department stores with which the Company does business. The Company is liable for certain advertising and salary charges which take place at the store level which will be deducted by the department store at the time payment is made to the Company. The Company believes that this presentation more accurately reflects the actual amount which will be collected as cash receipts. At July 31, 1997, and 1996 the Company's provision for advertising and salary deductions was $844,162 and $661,353 respectively. The Company has implemented financial and distribution software that is year 2000 compliant. The Company assessed the impact of the year 2000 on its operations, including the development of cost estimates for and the extent of programming changes required to address the issue and determined the costs related thereto would not have a material impact on its ongoing results of operation. LIQUIDITY AND CAPITAL RESOURCES The Company had positive working capital of $1,254,149 at July 31, 1997, an increase of $267,352 from working capital of $986,797 at July 31, 1996. Total bank borrowings were reduced by $2,325,000 to $0 at July 31, 1997. On November 29, 1996, the Company paid the remaining balance of its revolving secured line of credit with Credit Lyonnais, New York. This loan was secured by domestic accounts receivable of ARPEL. At July 31, 1996, borrowings under this line of credit were $1.6 million. On June 23, 1997, the Company paid the remaining balance of its term promissory note with PNC Bank (formerly Midlantic National Bank). The term promissory note was collateralized by a distribution and administration facility which was sold by the Company. The balance under this term promissory note was $725,000 at July 31, 1996. During fiscal year 1997, significant losses from operations and cash used in operations were incurred as a result of the discontinuance of appearances on HSN resulting from the dispute with Adrienne Newman. The Company has been significantly dependent on HSN during 12 14 the fiscal years 1995 and 1996. The Company does not maintain any external financing arrangements and relies upon cash generated from operations. In addition, the Company has planned on implementing a number of new initiatives to improve upon its fiscal 1997 results. If the Company is not successful, they anticipate to continue to incur losses from operations. The combination of the above factors raises substantial doubt about the Company's ability to continue as a going concern and its ability to generate sufficient cash to support its operations during fiscal 1998. The Company implemented a restructuring plan during January 1997 designed to move its operations towards profitability and to reduce the adverse effect of the departure of Adrienne Newman. This plan included $2.2 million in annualized operating expense reductions implemented during January 1997. The Company continues to seek additional expense reductions beyond this amount. The Company is attempting to improve its current retail business by capitalizing on its niche salon / service presence and has identified areas of opportunity for fiscal 1998. Areas where the Company is focusing upon are as follows: - - The Company has developed a professionally designed Catalogue. The initial edition was mailed during October and November 1997 to approximately 70,000 consumers and featured approximately 25 of Arpel's most popular products and skin care kits. The Company plans to have subsequent editions featuring approximately 50 products and kits and to mail its catalogue four times each year during the winter, spring, summer and fall, with an increase in volume from mailing to mailing. This Catalogue was conceived primarily in response to customer demands. - - The Company is in the final stages of preparing to introduce its products in Italy through Shopping America an Italian home shopping network. The format will be similar to HSN and QVC in the United States and Teleshopping, the most successful home shopping show in France. This shopping network will reach 40 million viewers which represents 81.7% of the total population in Italy. The Company plans to launch a test market during November 1997 and is scheduled to be the exclusive cosmetic line on Shopping America. - - On August 6, 1997, the Company entered into an agreement with Target. Under the agreement the Company and Target will place advertisements in publications for the sale of specialty packaged cosmetic skin care products. Target will advance all production costs for advertisements approved by the Company and the Company will advance all creative costs associated with such advertising. Expenses incurred by Target and the Company shall be reimbursed pro rata from gross revenues received from the sale of products. All revenues remaining after payment of expenses shall be allocated 49.5% to Target, 40.5% to the Company and 10% to other parties. The agreement terminates on February 6, 1999 and renews indefinitely if the advertising placed by Target and the Company generates more than $1.5 million in retail sales within a one year period from the date the advertisement first appears in the media. - - The Company has appointed an agent the exclusive retail distribution rights for the Company's products in Saudi Arabia and the United Arab Emirates. The Company and the agent have until January 1, 1998 to agree on the proposed terms of the agreement. There can be no assurance that such an agreement will be reached. 13 15 Although there can be no assurance that management will successfully implement the initiatives discussed previously, they believe that its cost reduction programs combined with the new initiatives will enable the Company to improve upon its fiscal 1997 performance, minimize the impact of the end of the Company's relationship with HSN and provide satisfactory liquidity through fiscal 1998. EFFECTS OF INFLATION- The Company did not have any significant price increases for its products during the fiscal years ended July 31, 1997, 1996, or 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The required financial statements and supplementary financial information are attached at the end of this report. For page of reference, see the Index to the Consolidated Financial Statements appearing on page F-1 of this Annual Report on Form 10-K. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information with respect to the directors and executive officers of the Company will be included in the Company's Proxy Statement ("Proxy Statement") for its annual meeting of shareholders which is expected to be filed within 120 days from the end of the fiscal year and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information with respect to the executive compensation is incorporated herein by reference to the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is incorporated herein by reference to the Proxy Statement. 14 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The audited consolidated financial statements of the Company and its subsidiaries and the Report of Independent Public Accountants thereon, as required, are set forth in the Index to Consolidated Financial Statements on page F-1 of this report. (a) (2) Financial Statement Schedules Except for Schedule VIII, which is included herein, all other schedules have been omitted as not applicable or not required, or because information required is shown in the consolidated financial statements or notes thereto. (a) (3) Exhibits The following items are filed herewith or incorporated by reference: 3.1 Certificate of Incorporation of the Company, as amended (1) (Exhibit 3.1) 3.2 Certificate of Amendment to the Certificate of Incorporation of the Company, as amended, as filed with the New York State Department of State on September 11, 1991. (2)(Exhibit 3.2) 3.3 By-laws of the Company, as amended. (2) (Exhibit 3.3) 4.1 Form of specimen of the Company's Common Stock certificate. (3) (Exhibit 4.1) 10.1 Stock Option Plan. (4) (Exhibit 10.1) 10.2 New Jersey EA. Bond Financing Agreement, dated July 20,1983 and Note of Company thereunder.(5) (Exhibit 10.2) 10.3 Lease Agreement, dated November 30, 1983, for 720 Fifth Avenue, New York, New York. (6) (Exhibit 10.3) 10.4 Form of Stock Option Agreement under the Stock Option Plan. (4) (Exhibit 10.4) 10.5 Alfin, Inc. (f/k/a/ Alfin Fragrances, Inc.) Stock Option Plan, as amended. (3) (Exhibit 10.5) 10.6 Stock Purchase Agreement, dated April 5, 1990, among the Company, Adrien Arpel, Inc. and the Security holders of Adrien Arpel, Inc. (1) (Exhibit 10.6) 15 17 10.7 Employment Agreement, dated as of April 4, 1990, between the Company and Adrienne Newman, amending the employment agreement dated as of November 1, 1983, with Adrienne Newman and Seligman and Latz Inc. (2) (Exhibit 10.7) 10.8 Warrant Agreement, dated as of April 4, 1990, between the Company and Adrienne Newman. (2) (Exhibit 10.8) 10.9 Revolving Credit and Term Loan Agreement, dated as of July 31, 1990, among the Company, Adrien Arpel, Inc. and Midlantic National Bank. (6) (Exhibit 10.9) 10.10 Departmental License Agreement, dated as of July 10, 1991, between Bullock's, Inc. and Adrien Arpel, Inc.(7) (Exhibit 10.10) 10.11 First Amendment, dated January 31, 1991, to Credit and Term Loan Agreement dated as of July 31, 1990, among the Company, Adrien Arpel, Inc. and Midlantic Bank. (7) (Exhibit 10.11) 10.12 Second Amendment, dated June 10, 1991, to Credit and Term Loan Agreement dated July 31, 1990, as amended, among the Company, Adrien Arpel, Inc. and Midlantic National Bank. (7) (Exhibit 10.12) 10.13 Form of Executive Incentive Compensation Plan Agreement, dated as of September 1991, between the Company and Adrienne Newman. (7) (Exhibit 10.13) 10.14 Amended and Restated Revolving Credit and Term Loan Agreement, dated June 30, 1992, between Midlantic National Bank and the Company and Adrien Arpel, Inc. (8) (Exhibit 10.14) 10.15 Continuing Letter of Credit Agreement, dated May 13, 1993, between the Company, Adrien Arpel, Inc. and Credit Lyonnais Bank. (8) (Exhibit 10.15) 10.16 Amended and Restated Loan Agreement, dated June 24, 1993, between the Company and Midlantic National Bank.(8) (Exhibit 10.16) 10.17 Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated August between Midlantic National Bank and the Company and Adrien Arpel, Inc. (9) (Exhibit 10.17) 10.18 Amendment No. 2, dated November 19, 1993, to Employment Agreement dated April 4, 1990, between the Company and Adrienne Newman. (9) (Exhibit 10.18) 10.19 Amendment No.1 to the Continuing Letter of Credit Agreement, dated February 28, 1994, between the Company, Adrien Arpel, Inc. and Credit Lyonnais Bank. (9) (Exhibits 10.19) 10.20 Term Promissory Note dated February 1994, between Midlantic National Bank and the Company. (9)(Exhibit 10.20) 16 18 10.21 Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated February 1994, between Midlantic National Bank and the Company and Adrien Arpel, Inc. (9),(Exhibit 10.21) 10.22 Warrant Agreement, dated November 19, 1993, between the Company and Adrienne Newman. (9)(Exhibit 10.22) 10.23 The 1993 Stock Option Plan of Alfin, Inc. (9)(Exhibit 10.23) 10.24 Agreement dated August 1, 1995 between the Company and CECE SA (Exhibit 10.24) 10.25 Fourth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated July 31, 1995, between the Company and Midlantic National Bank (Exhibit 10.25) 10.26 Agreement dated March 7,1996 between the Company and Fashion Fragrances and Cosmetics, Ltd. related to the sale of the business known as Robert Piquet (Exhibit 10.26). 10.27 Agreement dated April, 1996 between the Company and Fashion Fragrances and Cosmetics Ltd. related to the licensing of Robert Piquet (Exhibit 10.27). 10.28 Agreement dated December 11, 1995, between the Company and Lauren Greenwald (Exhibit 10.28) 10.29 Fifth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated December 11, 1995, between the Company and Midlantic National Bank (Exhibit 10.29) 10.30 Amendment No. 5 dated as of January 31, 1996, between the Company, Adrien Arpel, Inc. and Credit Lyonnais Bank (Exhibit 10.30) 10.31 Agreement dated November 8, 1996 between the Company and Adrienne Newman with respect to the sale of Adrien Arpel cosmetic products and kits on The Home Shopping Network. (Exhibit 10.31) 22 Subsidiaries of the Company - Adrien Arpel, Inc., a Delaware corporation; Suisse Laboratories Ltd., a Delaware corporation. (1) Incorporated by reference from the designated Exhibit of the Company's Current Report on Form 8-K, reporting an event on April 5, 1990 (File No. 1-9135). (2) Incorporated by reference from the designated Exhibit to the Company's Annual Report on Form 10-K for the year ended July 31, 1990. (File No. 1- 9135). (3) Incorporated by reference from the designated Exhibit to the Company's Annual Report on Form 10-K for the year ended July 31, 1989. (File No.1-9135). 17 19 (4) Incorporated by reference from the designated Exhibits to the Company's Annual Report on Form 10-K for the year ended July 31, 1985. (File No. 1- 9135). (5) Incorporated by reference from the designated Exhibit to the Company's Registration Statement on Form S-1. (File No. 2-85600). (6) Incorporated by reference from the designated Exhibits to the Company's Annual Report on from 10-K for the year ended July 31, 1984. (File No. 1-9135). (7) Incorporated by reference from the designated Exhibits to the Company's Annual Report on Form 10-K for the year ended July 31, 1992. (File No. 1-9135) (8) Incorporated by reference from the designated Exhibits to the Company's Annual Report on Form 10-K for the year ended July 31, 1993. (File No. 1-9135) (9) Incorporated by reference from the designated Exhibits to the Company's Annual Report on Form 10-K for the year ended July 31, 1994. (File No. 1-9135). (10) Incorporated by reference from the designated Exhibits to the Company's Annual report in Form 10K for the year ended July 31, 1995. (file No. 1-9135). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. 18 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: November 12, 1997 ALFIN, INC. By: /s/ Elisabeth Fayer ------------------------ Elisabeth Fayer Chief Executive Officer/ Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Elisabeth Fayer and his true and lawful attorneys-in-fact and agents, each acting alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on November 12, 1997 on behalf of the Registrant and in the capacities indicated. Signature Title S/Elisabeth Fayer Chief Executive Officer and Elisabeth Fayer Director S/Michael D. Ficke Vice President and Michael D. Ficke Chief Financial Officer S/Jacques Desjardins Director Jacques Desjardins S/Steven Korda Director Steven Korda S/Suzanne Langlois Director Suzanne Langlois 21 ALFIN, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of July 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the Three Fiscal Years Ended July 31, 1997. F-4 Consolidated Statements of Shareholders' Equity for the Three Fiscal Years Ended July 31, 1997. F-5 Consolidated Statements of Cash Flows for the Three Fiscal Years Ended July 31, 1997. F-6 Notes to Consolidated Financial Statements F-7 Schedule VIII - Valuation and Qualifying Accounts for the Three Fiscal Years Ended July 31, 1997 F-19 F-1 22 Report of Independent Public Accountants To Alfin, Inc.: We have audited the accompanying consolidated balance sheets of Alfin, Inc. (a New York corporation) and subsidiaries as of July 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial state ments and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alfin, Inc. and subsidiaries as of July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, during fiscal year ended July 31, 1997 significant losses from operations and cash used in operations were incurred as a result of the discontinuance of appearances on the Home Shopping Network ("HSN") resulting from the dispute with Adrienne Newman. The Company has been significantly dependent upon HSN during the fiscal years 1995 and 1996. The Company does not maintain any financing arrangements and relies upon cash generated from operations. The above factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. New York, New York November 11, 1997 ARTHUR ANDERSEN LLP F-2 23 ALFIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 31, 1997 AND 1996
ASSETS 1997 1996 ------------ ------------ CURRENT ASSETS: CASH & CASH EQUIVALENTS $ 658,378 $ 2,210,972 ACCOUNTS RECEIVABLE, NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS AND CHARGEBACKS OF $891,532 AND $998,769 AT JULY 31, 1997 AND 1996, RESPECTIVELY AND SALES ALLOWANCES OF $80,197 AND $256,264 AT JULY 31, 1997 AND 1996, RESPECTIVELY 167,021 680,370 INVENTORIES 2,227,549 3,271,126 PREPAID EXPENSES & OTHER CURRENT ASSETS 880,938 746,513 ------------ ------------ TOTAL CURRENT ASSETS 3,933,886 6,908,981 ------------ ------------ PROPERTY & EQUIPMENT 2,333,028 4,998,954 LESS-ACCUMULATED DEPRECIATION & AMORTIZATION (1,740,341) (3,537,025) ------------ ------------ PROPERTY & EQUIPMENT, NET 592,687 1,461,929 OTHER ASSETS: GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $0 AND $472,957 AT JULY 31,1997 AND 1996, RESPECTIVELY -- 2,680,081 OTHER 83,938 177,195 ------------ ------------ TOTAL OTHER ASSETS 83,938 2,857,276 ------------ ------------ TOTAL ASSETS $ 4,610,511 $ 11,228,186 ============ ============
LIABILITIES & SHAREHOLDERS' EQUITY 1997 1996 ------------ ------------ CURRENT LIABILITIES: CURRENT PORTION OF MORTGAGE, NOTE & OTHER LOANS PAYABLE $ -- $ 1,933,499 DUE TO RELATED PARTIES -- 4,826 ACCOUNTS PAYABLE 1,365,767 2,177,078 ACCRUED EXPENSES-OTHER 1,313,971 1,806,781 ------------ ------------ TOTAL CURRENT LIABILITIES 2,679,738 5,922,184 NOTE PAYABLE -- 425,000 ------------ ------------ TOTAL LIABILITIES 2,679,738 6,347,184 ------------ ------------ REDEEMABLE PREFERRED STOCK 750,000 750,000 SHAREHOLDERS' EQUITY: COMMON STOCK, $.01 PAR VALUE 17,000,000 SHARES AUTHOR- IZED; 11,787,983 & 11,662,926 SHARES ISSUED & OUTSTANDING AT JULY 31,1997 & 1996, RESPECTIVELY 117,879 116,629 ADDITIONAL PAID-IN CAPITAL 12,953,123 12,787,290 ACCUMULATED DEFICIT (11,890,229) (8,772,917) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 1,180,773 4,131,002 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,610,511 $ 11,228,186 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. F-3 24 ALFIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED JULY 31
1997 1996 1995 ------------ ------------ ------------ NET SALES $ 24,700,684 $ 34,733,375 $ 32,151,204 COST OF GOODS SOLD 8,183,676 11,380,089 9,292,033 ------------ ------------ ------------ GROSS PROFIT ON SALES 16,517,008 23,353,286 22,859,171 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,774,382 20,532,894 20,898,893 WRITE OFF OF GOODWILL 2,620,081 -- -- ------------ ------------ ------------ OPERATING (LOSS) INCOME (3,877,455) 2,820,392 1,960,278 ------------ ------------ ------------ OTHER INCOME (EXPENSE) INTEREST EXPENSE,NET $ (38,013) $ (313,100) $ (439,743) GAINS ON SALES OF ASSETS 986,320 394,392 -- OTHER EXPENSE -- (27,992) (20,889) ------------ ------------ ------------ TOTAL OTHER INCOME 948,307 53,300 (460,632) ------------ ------------ ------------ (EXPENSE) (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (2,929,148) 2,873,692 1,499,646 PROVISION FOR INCOME TAXES 79,414 181,000 135,000 ------------ ------------ ------------ NET (LOSS) INCOME $ (3,008,562) $ 2,692,692 $ 1,364,646 PREFERRED STOCK DIVIDENDS 108,750 108,750 108,750 ------------ ------------ ------------ INCOME AVAILABLE TO COMMON SHAREHOLDERS (3,117,312) 2,583,942 1,255,896 ============ ============ ============ NET (LOSS) INCOME PER COMMON & COMMON EQUIVALENT SHARE $ (0.25) $ 0.22 $ 0.12 ============ ============ ============ NET (LOSS) INCOME PER SHARE AVAILABLE TO COMMON SHAREHOLDERS $ (0.26) $ 0.21 $ 0.11 ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. F-4 25 ALFIN, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997
====================================================================================================== NUMBER OF ADDITIONAL COMMON COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT ====================================================================================================== BALANCE, JULY 31, 1994 11,402,904 114,029 12,522,390 (12,612,755) STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 116,407 1,164 107,586 (108,750) NET INCOME 1,364,646 ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1995 11,519,311 $ 115,193 12,629,976 (11,356,859) STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 93,615 936 107,814 (108,750) STOCK ISSUED FOR OPTIONS 50,000 500 49,500 -- NET INCOME 2,692,692 ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1996 11,662,926 116,629 12,787,290 (8,772,917) STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 66,724 667 108,083 (108,750) STOCK ISSUED FOR OPTIONS 58,333 583 57,750 -- NET LOSS (3,008,562) ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1997 11,787,983 117,879 12,953,123 (11,890,229) =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. F-5 26 ALFIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995 - ------------------------------------- ----------- ----------- ----------- NET (LOSS) INCOME $(3,008,562) $ 2,692,692 $ 1,364,646 ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 461,485 749,887 1,491,472 LOSS ON DISPOSAL OF FIXED ASSETS 270,188 3,750 192,605 GAINS ON SALES OF ASSETS (986,320) (394,392) -- WRITE OFF OF GOODWILL 2,620,081 -- -- CHANGE IN ASSETS AND LIABILITIES: DECREASE ACCOUNTS RECEIVABLE 513,349 711,945 1,296,533 DECREASE (INCREASE) INVENTORY 1,043,577 55,441 (773,234) (INCREASE) DECREASE PREPAID EXPENSES AND OTHER (41,168) (56,726) 291,344 DECREASE ACCOUNTS PAYABLE & ACCRUED EXPENSES (1,304,121) (1,046,256) (989,177) ----------- ----------- ----------- TOTAL ADJUSTMENTS 2,577,071 23,649 1,509,543 ----------- ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (431,491) 2,716,341 2,874,189 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES CAPITAL EXPENDITURES (231,786) (346,485) (387,616) SALE OF LICENSE AGREEMENT -- 500,000 -- SALE OF BUILDING 1,415,675 -- -- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,183,889 153,515 (387,616) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES PAYMENT OF LINES OF CREDIT (1,600,000) (822,520) (1,371,408) BORROWINGS FROM LINE OF CREDIT -- 328,000 730,175 PAYMENTS TO RELATED PARTIES (4,826) (30,000) (265,174) PAYMENT OF DEBT OBLIGATIONS (33,499) (300,000) (1,074,974) PAYMENT OF TERM PROMISSORY NOTE (725,000) (400,000) -- PROCEEDS FROM SALE OF STOCK 58,333 50,000 -- ----------- ----------- ----------- CASH (USED IN), FINANCING ACTIVITIES (2,304,992) (1,174,520) (1,981,381) ----------- ----------- ----------- NET(DECREASE) INCREASE IN CASH (1,552,594) 1,695,336 505,192 CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 2,210,972 515,636 10,444 ----------- ----------- ----------- CASH & CASH EQUIVALENTS AT END OF YEAR $ 658,378 $ 2,210,972 $ 515,636 =========== =========== =========== CASH PAID DURING THE YEAR FOR: INTEREST $ 114,994 $ 297,432 $ 398,774 INCOME TAXES 158,109 271,695 25,819
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. F-6 27 ALFIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS: Alfin, Inc. (the "Company") was engaged in the distribution, marketing and merchandising of imported fragrance brands worldwide pursuant to various distribution and licensing agreements. During the latter part of fiscal year 1995, the Company ceased its distribution of fragrance products. Adrien Arpel, Inc. ("ARPEL"), a wholly owned subsidiary, develops, distributes and sells treatment and cosmetic products. Additionally, the Company acts as an operator of service-oriented skin care salons in department stores. From April 1994 through January 1997 ARPEL also distributed specially packaged cosmetic products through television marketing on the Home Shopping Network ("HSN"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Alfin, Inc., and ADRIEN ARPEL, INC. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to prior year balances to conform with current year presentation. INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories at July 31, 1997 and 1996 were comprised of:
1997 1996 ---------- ---------- Finished Goods $ 790,079 $1,303,538 Raw Material and Components 1,437,470 1,967,588 ---------- ---------- $2,227,549 $3,271,126 ========== ==========
F-7 28 REVENUE RECOGNITION - The Company recognizes revenue upon shipment of its merchandise to the customer and provides a reserve for sales returns based upon historical experience. CASH AND CASH EQUIVALENTS- The Company maintains money market accounts with maturities of three months or less which are reflected as cash equivalents. TRADE RECEIVABLES - Trade Receivables are shown net of certain valuation allowances which consist of reserves for bad debts, reserves for returns and provisions for advertising and salary chargebacks. The provisions for advertising and salary chargebacks are based on agreements with department stores with which the Company does business. The Company is liable for certain advertising and salary charges which take place at the store level which will be deducted by the department store at the time payment is made to the Company. The Company believes that this presentation more accurately reflects the actual amount which will be collected as cash receipts. At July 31, 1997 and 1996 the Company's provision for advertising and salary deductions was $844,162 and $661,353 respectively. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from 4 to 15 years. Leasehold improvements are amortized on a straight-line basis over the remaining terms of the respective leases or estimated useful lives, whichever is shorter. Betterments and renewals that extend the life of the related asset are capitalized; other repairs and maintenance costs are expensed as incurred. Property and equipment were comprised of the following at July 31, 1997 and 1996:
1997 1996 ----------- ----------- Land $ -- $ 427,500 Building & Improvements -- 1,224,687 Furniture & Fixtures 1,450,653 1,393,462 Machinery & Equipment 882,375 1,710,590 Leasehold Improvements -- 242,715 ----------- ----------- Total Property & Equipment 2,333,028 4,998,954 Accumulated Depreciation (1,740,341) (3,537,025) ----------- ----------- Net Property & Equipment $ 592,687 $ 1,461,929 =========== ===========
During June, 1997 the Company sold its Norwood, New Jersey distribution and administration center for approximately $1,416,000 and recorded a gain of approximately $986,000. F-8 29 OTHER ASSETS - During March 1996, the Company sold its exclusive worldwide manufacturing, distribution and licensing rights for FRACAS and BANDIT and other fragrances by Robert Piquet to Fashion Fragrances and Cosmetics Ltd. ("FF&C") for $1.2 million which was payable in installments. During the first quarter of fiscal 1997 the Company and FF&C agreed to reduce the purchase price payable by FF&C to the Company by $100,000. This adjustment was necessary because certain molds included in the purchase price were damaged and unusable. The Company received the remaining purchase price installment of $350,000 in July, 1997. During November 1996, pursuant to an outstanding agreement, dated November 1, 1983, between Adrienne Newman and Seligman & Latz, Inc., Ms. Newman elected to purchase a diamond ring from the company for the amount of $96,195. Such amount was equal to the amount reflected as an asset on the Company's balance sheet. During December 1996 the Company made a deposit of $1 million towards the purchase of fragrance products from Laboratories Selecta in France ("Selecta"). This transaction was designed to provide additional product sales for the Company in markets other than those currently handled by the Company's retail cosmetic operations. During May 1997 the Company and Selecta agreed to cancel this purchase. Under the agreement to cancel Selecta has refunded the Company $260,125, $266,833 and $271,281 on May 21, August 7, and October 7, 1997, respectively with the remaining payment of $277,990 due to be made on December 31, 1997. Interest on the repayment was charged at 10.5%. Goodwill was being amortized using the straight-line method over 40 years. The Company evaluates the recoverability of goodwill based upon an analysis of operating results and consideration of other significant events or changes in the business in accordance with SFAS No. 121. If operating losses are experienced and based upon projections that they will continue, the Company evaluates whether impairment exists on the basis of undiscounted expected future cash flows from operations before interest. If impairment exists, the carrying value amount is reduced by the estimated shortfalls of cash flows. As a result of the Company's evaluation of its future cash flows from operations before interest a noncash write off of $2,620,081 was recorded in the fourth quarter of fiscal 1997. COST OF ADVERTISING - The Company expenses all advertising costs in the period in which the cost is incurred. INCOME TAXES- Income taxes consist of taxes on taxable income and deferred taxes for differences in the basis of assets and liabilities for financial statement and income tax reporting. The differences arise primarily because of the reserve method for bad debts, accrued expenses and the use of accelerated depreciation methods. FOREIGN SALES - Net sales to foreign accounts located in Canada were approximately $1,779,049, $2,214,243 and $949,188 for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. F-9 30 NET INCOME (LOSS) PER SHARE - Net income (loss) per share was computed for the fiscal years 1997, 1996 and 1995, using the weighted average number of common shares outstanding, as follows: 1997 - 11,884,471 1996 -12,200,730 1995 - 11,529,542 CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's major customers are department stores, in the United States and Canada and HSN which represented 48.4% of net sales during fiscal year 1997. RECENTLY ISSUED ACCOUNTING STANDARDS- During fiscal year 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement establishes financial accounting and reporting standards for the impairment of long lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this statement resulted in a non-cash charge of $2.6 million related to the write off of goodwill. During fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes a fair value based method of accounting for an employee stock option or similar equity instrument but allows companies to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has elected to remain with the accounting under APB opinion No. 25 and make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. (Note 10). In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share". This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for the Company beginning with the fiscal year ending July 31, 1999. SFAS No. 130 will require that total comprehensive income (the change in equity from transactions and other events except those resulting from investment by owners) be reported in the financial statements. The Company does not anticipate any significant modifications to its current financial statement presentation. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective beginning with fiscal year ending July 31, 1999. SFAS No. 131 will require that segment financial information be publicly reported on the basis that is used internally for evaluating segment performance. The Company is still assesing the impact of this statement on its Financial Statement disclosure. F-10 31 USE OF ESTIMATES- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF REVENUES- Approximately 79% of department store sales are derived from merchandise, 6% from salon services and 16% from seasonal promotional items. (3) GOING CONCERN: Significant losses from operations and cash used in operations were incurred as a result of the discontinuance of appearances on the Home Shopping Network ("HSN") resulting from the dispute with Adrienne Newman. The Company has been significantly dependent upon HSN during the fiscal years 1995 and 1996. The Company does not maintain any external financing arrangements and relies upon cash generated from operations. In addition, the Company has planned on implementing a number of new initiatives to improve upon its fiscal 1997 results. If the Company is not successful, they anticipate to continue to incur losses from operations. The combination of the above facts raises substantial doubt about the Company's ability to continue as a going concern and its ability to generate sufficient cash to support its operations during fiscal 1998. The Company implemented a restructuring plan designed to move its operations towards profitability and minimize the effect of the departure of Adrienne Newman. This plan included operating expense reductions which the Company implemented during January 1997. The Company is seeking further expense reductions beyond this amount. In addition to the expense reduction program the Company is attempting to improve its current retail business by capitalizing on its niche salon / service presence, it also has introduced a professionally designed direct mail catalogue, plans to introduce its products on a home shopping network in Italy, has an agreement for the distribution of its products through adfomercials and has plans to introduce its products through an agent to retailers in Saudi Arabia and the United Arab Emirates. Although there can be no assurance that management will successfully implement the initiatives discussed previously, they believe that its cost reduction programs combined with the new initiatives will enable the Company to improve upon its fiscal 1997 performance, minimize the impact of the end of the Company's relationship with HSN and provide satisfactory liquidity through fiscal 1998. F-11 32 (4) COMMON STOCK DIVIDENDS: The Company has paid no cash dividends with respect to its common stock since its inception. Dividends of common stock have been issued to holders of the Company's Senior Cumulative Redeemable Preferred Stock (Note 8). (5) WARRANTS: The following table lists the warrant transactions that have occurred for the period August 1, 1994 through July 31, 1997:
FISCAL YEARS ENDED J U L Y 3 1 1997 1996 1995 - -------------------------------------------------------------------------------- Warrants outstanding, beginning of period 875,000 1,000,000 1,110,000 Granted -- -- -- Exercised -- -- -- Forfeited 875,000 125,000 100,000 Warrants outstanding, end of period -0- 875,000 1,000,000 Exercise prices per share for shares under warrant, end of period N/A $ 1.25 $ 1.25
These warrants expired due to the termination of Ms. Newman's employment agreement with the Company (6) INCOME TAXES: The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" which requires using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences between financial statement and taxable income by applying statutory tax rates applicable to future years. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date of the change. If it is more likely than not that some portion or all of the deferred asset will not be realized, a valuation allowance is recognized. The Company has recorded a valuation allowance equal to the amount of deferred income tax asset for the fiscal years ended July 31, 1997 and 1996 due to: - The operating history of the Company. - The end of the Company's relationship with HSN during January 1997 as a result of the litigation with Adrienne Newman F-12 33 Significant components of the Company's deferred income tax assets and liabilities at July 31, 1997 and July 31, 1996, are as follows:
July 31 July 31 1997 1996 ----------- ----------- Deferred Income Tax Assets: Net operating loss carry forwards $ 2,140,000 $ 1,468,000 Alternate Minimum Tax Credit Carry forward 114,000 114,000 Bad debt reserve 106,000 202,000 Inventory reserve 549,000 672,000 Other 50,000 114,000 ----------- ----------- 2,959,000 2,570,000 Valuation allowance (2,959,000) (2,341,000) ----------- ----------- Net deferred tax asset 0 229,000 Deferred Income Tax Liabilities: Depreciation and Amortization 0 (229,000) ----------- ----------- Deferred tax liability $ 0 $ (229,000) Net deferred income tax 0 0 =========== ===========
At July 31, 1997, the amount of federal operating loss carry forwards was $5,412,000 with expiration dates from 2005 to 2009, however, the use of pre-acquisition operating loss carryforward is limited by the Internal Revenue Code. As a result the Company has $2,170,000 of the carry forwards available for use for the year ended July 31, 1998. The Provision for income taxes consists of the following:
For the Fiscal Year Ended July 31, 1997 1996 -------- -------- Current: Federal $ 0 $ 96,000 State 79,414 85,000 -------- -------- Total Current 79,414 181,000 -------- -------- Deferred Federal 0 0 State 0 0 -------- -------- Total Deferred 0 0 Total Provision $ 79,414 $181,000 ======== ========
F-13 34 (7) LONG TERM DEBT: Long term debt consists of the following:
1997 1996 ------------ ----------- Term Promissory Note $ -- $ 725,000 Lines of credit -- 1,600,000 Related party loans -- 4,826 Notes payable (construction) -- 33,499 ------------ ----------- -- 2,363,325 Less, current portion -- (1,938,325) ------------ ----------- Long-term notes payable $ -- $ 425,000 ============ ===========
TERM PROMISSORY NOTE: During June 1997 the Company paid the remaining balance of $450,000 which was due to PNC Bank on its term promissory note. The term promissory note was collateralized by a distribution and administration facility which was sold by the Company. The balance under this term promissory note was $725,000 at July 31, 1996. Principal payments under this note were $25,000 per month. LINES OF CREDIT: In addition to the above, ARPEL entered into a financing agreement with Credit Lyonnais for a revolving secured line of credit of up to $2,100,000, expiring on October 15, 1995, subject to renewals on a yearly basis under certain conditions. During January 1996, the Company amended its agreement with Credit Lyonnais to extend the expiration date of its line of credit to November 29, 1996. The loan is secured by domestic accounts receivable of ARPEL. On November 29, 1996, the Company paid the balance of $1.3 million which was due under this line of credit. Borrowings under this line of credit were $1,600,000 and $2,100,000 at July 31, 1996 and 1995, respectively. (8) REDEEMABLE PREFERRED STOCK: On July 6, 1993, the Company issued 30,000 shares of $25.00, 14.5% Preferred Stock, maturing 10 years after issuance. Dividends paid in Common stock are payable in advance. The value of the Common Stock payable as dividends is calculated based on the average closing price of the Company's Common Stock during the 40 trading days prior to October 22nd of each year, minus 20% of that average price. The Company declared a Common Stock dividend of 66,000 shares in November 1996. The Company's Board of Directors is expected to declare a Common Stock dividend of approximately 230,160 shares in November 1997. (9) EMPLOYEE BENEFIT PLANS: 401(k) PLAN During November 1995, the Board of Directors of the Company approved the adoption of a 401(k) Profit Sharing Plan. Under the plan eligible employees can contribute up to a maximum of 15% or $9,500 of their annual gross compensation. The Company has the option to make discretionary matching contributions. For the plan year ending December 31, 1997 no Company matching contribution is anticipated. F-14 35 (10) STOCK OPTION PLANS: During December 1992, the Board of Directors of the Company adopted the 1993 Stock Option Plan ("the 1993 Plan") pursuant to which up to 300,000 shares of Common Stock are authorized to be subject to options. During October 1994, the Board of Directors approved the grant of stock options totaling 500,000 shares of the Company's Common Stock to directors and to legal counsel, of the Company, of an exercise price of $1.00 per share. The options available under the plan are in the form of incentive options and non-qualified options. Incentive options are available to key employees of the Company and non-qualified options are available to key employees, non-employee directors and consultants of the Company at the fair market value of the Common Stock at the date of the grant. Options are exercisable as determined by the Board of Directors. The Company has adopted the disclosure only provision of SFAS No. 123 and is continuing to recognize compensation expense using the intrinsic value method under APB No. 25. Had compensation expense for the Company's stock options been determined based on the fair market value at the grant date for awards in fiscal years 1995, 1996 and 1997, consistent with the provision of SFAS No. 123, the Company's net (loss) income and (loss) income per share would have been as follows:
1997 1996 1995 ------------- ------------- ------------- Net (Loss) Income as reported $ (3,008,562) $ 2,692,692 $ 1,364,646 Net (Loss) Income proforma (3,008,888) 2,692,692 1,145,896 (Loss) Income per share as reported $ (0.25) $ 0.22 $ 0.12 (Loss) Income per share proforma $ (0.25) $ 0.22 $ 0.10
This proforma impact only takes into account options granted since January 1, 1995. The SFAS No. 123 fair value of each option granted was estimated on the date of the grant using a number of factors that resulted in a net value of approximately 50% of the stock price on the grant date. Changes in outstanding options and options available for grant pursuant to the 1993 Plan, expressed in numbers of shares, are as follows:
July 31, 1997 July 31, 1996 July 31, 1995 ------------- ------------- ------------- Options outstanding, beginning of period 500,000 550,000 75,000 Granted 50,000 -- 500,000 Exercised (58,333) (50,000) Forfeited (55,000) -- (25,000) Options outstanding, end of period 436,667 500,000 550,000 Options available for grant, end of period 250,000 -- -- Exercise price per share for shares under option, end of period $0.63-$1.00 $1.00-$1.75 $1.00-$1.75
F-15 36 (11) COMMITMENTS AND CONTINGENCIES: LEASES: The Company leases office space and other equipment under various non-cancelable operating lease agreements. Rental expense for the fiscal years ended 1997, 1996 and 1995 was approximately $1,129,765, $1,436,121 and $1,392,893 respectively. Minimum annual rental commitments under non-cancelable leases in effect at July 31, 1997, excluding escalations: Fiscal year ending July 31: 1998........................... 584,029 1999........................... 420,115 2000........................... 285,675 2001........................... 282,440 2002 and thereafter............ -0- LITIGATION: On October 28, 1996 the Company received notice from Adrienne Newman purporting to terminate her April 4, 1990 Employment Agreement with the Company (such agreement as subsequently amended is the "Employment Agreement"), based on an alleged breach of the Employment Agreement by the Company. Ms. Newman served as the President of the Company's wholly owned subsidiary, (Adrien Arpel, Inc. ("ARPEL")) and had been selling host, under the name of Adrien Arpel in its sales program on the Home Shopping Network, Inc. ("HSN"). The Employment Agreement provided for salary, fringe benefits and commission payments based upon 33% of the revenues, net of direct expenses attributable to television shopping sales. Ms. Newman also had vested rights in 625,000 warrants, 500,000 of which were scheduled to expire in November 1998 and the remaining 125,000 of which were scheduled to expire on July 31, 2001. On November 8, 1996 the Company and Adrienne Newman reached an agreement (the "Interim Agreement") whereby Ms. Newman agreed to appear as the selling host for ARPEL on HSN shows scheduled for November and December 1996 and January 1997 (the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman acted as an independent contractor and not as an employee of the Company. The Company and Ms. Newman also agreed to refrain from initiating legal action against the other in connection with their dispute over Ms. Newman's termination of the Employment Agreement until after the expiration of the HSN Selling Period. On January 28, 1997, after the expiration of the HSN Selling Period, the Company was served by Adrienne Newman with a summons and complaint returnable in the Supreme Court, New York County whereby Ms. Newman asserted claims for damages against the Company based upon alleged breaches by the Company of Ms. Newman's Employment Agreement and the Interim Agreement. Unspecified damages were claimed. A further claim requested a judicial determination that the Employment Agreement was materially breached by the Company resulting in its termination. On March 19, 1997, the Company served an Answer and Counterclaim in response to the action commenced by Ms. Newman. The Company's Counterclaim asserts various claims against Ms. Newman, seeking damages and injunctive relief. Among other things, it is the position of the Company that Ms. Newman was in material breach of her Employment Agreement when she terminated the Employment Agreement on October 28, 1996. As a consequence, it is the Company's belief that Ms. Newman's refusal to provide services to the Company throughout the term of her Employment Agreement which expires April 1998, particularly her willful refusal and failure to appear as the Company's selling host on HSN, will damage the Company in the sum of at least eleven million ($11,000,000). The Company also asserted claims against Ms. Newman for breaches of her covenant not to compete and her covenant not to disclose trade secrets and proprietary data. F-16 37 During May 1997, Ms. Newman started appearing on HSN as a representative of her own company selling cosmetic products under the name "Signature Club A". Ms. Newman has subsequently appeared on HSN on a monthly basis. The Company and its attorneys are currently reviewing these appearances and may seek further legal remedies and actions against Ms. Newman. During these appearances Ms. Newman was not acting on behalf of the Company or its trademark protected Adrien Arpel product line. The case is currently in the discovery phase. Upon completion of discovery the action will be ready for trial but no trial date has yet been fixed. The Company, in the normal course of business is a defendant in numerous actions/lawsuits. The Company does not believe that the outcome of these actions/lawsuits will have a material impact on the Company's financial position or results from operations. (12) SUPPLEMENTAL INCOME STATEMENT INFORMATION:
FOR THE FISCAL YEARS ENDED JULY 31, 1997 1996 1995 ----------- ------------------ ---------- Advertising Costs $ 1,469,569 $ 1,557,905 $1,543,927
F-17 38 (13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH FISCAL 1997 QUARTER QUARTER QUARTER QUARTER - ---------------------- ----------- ----------- ----------- ----------- Net Sales $ 9,634,712 $10,188,567 $ 3,130,544 $ 1,746,861 Gross Profit 6,539,418 6,331,733 2,339,636 1,306,221 Net Income (loss) 590,458 701,405 (1,126,135) (3,174,290) Net Income (loss), per Common and Common Equivalent Share: $ 0.05 $ 0.06 $ (0.09) $ (0.27) FISCAL 1996 Net Sales $ 7,673,898 $ 9,110,445 $ 8,582,452 $ 9,366,580 Gross Profit 5,502,846 5,975,188 5,712,894 6,162,358 Net Income (loss) 435,104 741,451 785,836 730,301 Net Income (loss), per Common and Common Equivalent Share: $ 0.04 $ 0.06 $ 0.07 $ 0.05 FISCAL 1995 Net Sales $ 7,261,587 $ 8,771,169 $ 8,266,118 $ 7,852,330 Gross Profit 5,215,467 5,984,667 6,229,797 5,429,240 Net Income(loss) 50,201 655,698 684,227 (25,480) Net Income (loss), per Common and Common Equivalent Share: $ 0.00 $ 0.06 $ 0.06 $ 0.00
F-18 39 ALFIN, INC. AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED JULY 31
A D D I T I O N S Balance at Charged to Charged Balance at Beginning Costs and to Other Deductions End of Description of Period Expenses Accounts (1) Period 1997 Allowance for Doubtful Accounts Receivable, Chargebacks and Sales Returns $ 1,255,033 $ 2,732,434 $ - $ 3,015,738 $ 971,729 1996 Allowance for Doubtful Accounts Receivable, Chargebacks, and Sales Sales Returns $ 1,040,857 $ 4,339,814 $ - $ 4,125,638 $ 1,255,033 1995 Allowance for Doubtful Accounts Receivable Chargebacks, and Sales Returns $ 1,833,123 $ 3,525,344 $ - $ 4,317,610 $ 1,040,857
(1) Charges to the accounts are for the purposes for which the reserves were created. F-19 40 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS ON FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1997 ALFIN, INC. EXHIBIT INDEX Exhibit No. Exhibit Title Page 10.32 Agreement dated May 13, 1997 between the Company and Selecta SA related to the cancellation of fragrance purchases and the refund of advances (Filed herewith). 10.33 Agreement dated June 13, 1997 between the Company and H. Galow related to the sale of the Company's Norwood, New Jersey distribution facility. (Filed herewith) 10.34 Agreement dated June 13, 1997 between the Company and H. Galow related to the leasing of 15,000 square feet of warehouse space. (Filed herewith) 10.35 Agreement dated August 6, 1997 between the Company and Target Mailing Lists, Inc. related to the advertising and sale of products. (Filed herewith) 10.36 Consulting agreement dated July 1, 1997, between the Company and Harold Lightman related to Direct Mail Sales. (Filed herewith). (b)Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. F-20 EX-10.32 2 AGREEMENT DATED 05-13-97 1 Exhibit 10.32 Alfin, Inc. 720 Fifth Avenue New York, NY 10019 (212) 333-7700 May 13, 1997 Mr. Alain Hivelin President Selecta SA 14 Rue du Ballon 93165 NOISY LE GRAND Cedex FRANCE Re: Termination of Purchase Dear Mr. Hivelin: Attached to this letter is a copy of an invoice reflecting the purchase by Alfin, Inc. ("Alfin") of $1,000,000 in value of products to be manufactured by Selecta SA ("Purchased Products"). Alfin has paid Selecta SA ("Selecta") the sum of $1,000,000 in advance for the Purchased Products on December 26, 1996. The agreement of Alfin to acquire the Purchased Products from Selecta was based upon the belief of Alfin and Selecta of the commercial acceptability of the Purchased Products. It has become apparent to both parties that this belief was incorrect and that there is in fact no commercial market for the Purchased Products. Based upon the foregoing, it has been agreed to cancel the purchase of the Purchased Products on the following basis: 1. All requirements on part of Selecta to manufacture and deliver the Purchased Products are hereby terminated. 2. Selecta will refund to Alfin the sum of $1,000,000 plus interest at the rate of 10.5% per annum. Such payments will be made as follows: a. The sum of $260,125 by wire transfer on the date hereof representing a principal payment of $250,000 and an interest payment of $10,125 (representing interest on said $250,000 of principal for the period from December 26, 1996 through the date hereof). b. The sum of $266,833.33 by wire transfer on July 31, 1997 representing a principal payment of $250,000 and an interest payment of $16,833.33 (representing interest on said $250,000 of principal for the period from December 26, 1996 through July 31, 1997). 2 Exhibit 10.32 c. The sum of $271.281.25 by wire transfer on September 30, 1997 representing a principal payment of $250,000 and an interest payment of $21,281.25 (representing interest on said $250,000 of principal for the period from December 26, 1996 through September 30, 1997). d. The sum of $277,989.58 by wire transfer on December 31, 1997 representing a principal payment of $250,000 and an interest payment of $27,989.58 (representing interest on said $250,000 of principal for the period from December 26, 1996 through December 31, 1997). The instructions for wiring funds are as follows: The Chase Manhattan Bank Funds Transfer Service 4, New York Plaza, 15th Floor New York, New York 10004 Attn: Operations Manager ABA No. 021-000-021 Account = 006-127 576 For the Account of Alfin, Inc. Will you please indicate the acceptance of Selecta of this agreement by signing a copy in the space below on behalf of Selecta and returning a copy of it to me on behalf of Alfin. Very truly yours, Alfin, Inc. By: S/Elisabeth Fayer ------------------------------- Elisabeth Fayer, President Accepted and Agreed On this 14 day of May, 1997 Selecta SA By: S/Alain Hivelin --------------- Alain Hivelin, President EX-10.33 3 AGREEMENT DATED 06-12-97 1 Exhibit 10.33 Christine Todd Whitman State of New Jersey Robert C. Shinn, Jr. Governor Department of Environmental Protection Commissioner June 10, 1997 Mr. R. Alan Karch Esquire 59 Jefferson Avenue Westwood, NJ 07675 Re: Alfin, Inc. 15 Maple Street Lot 3, Block 80 Norwood Boro, Bergen County N971840 Dear Mr. Karch: This is in response to your application received 06/06/1997, concerning the applicability of the Industrial Site Recovery Act (ISRA) to the sale of the above referenced premises. On the basis of the sworn statements set forth in the affidavit signed by Michael D. Ficke, the Department finds that this transaction is not subject to the provisions of ISRA. This decision is made in light of the absence of an industrial establishment as defined within the Standard Industrial Classification numbers covered by the Act. Any inaccuracies in the affidavit or subsequent changes in the facts as stated therein could alter the Department's determination. The inapplicability of the Industrial Site Recovery Act (ISRA) to this transaction does not relieve the above referenced of any responsibilities under any other environmental statutes, regulations or permits. In addition, this determination of ISRA nonapplicability does not constitute any finding by the New Jersey Department of Environmental Protection as to the current site condition or existence or nonexistence of any hazards to the environment at this location. Should you have any further questions regarding this matter, please contact Maurice Migliarino at (609) 777-0899. Sincerely, S/James J. Bono James J. Bono, Supervisor Applicability Unit 2 Exhibit 10.33 RESOLUTION I, Michael Ficke, Assistant Secretary of Alfin, Inc., a New York corporation, do hereby certify that at a meeting of the Board of Directors of said corporation which was held on April 7, 1997, at which a quorum was present and acting throughout, the following resolution was unanimously adopted and is now in full force and effect: RESOLVED, that the President, Chief Financial Officer, Secretary and other corporate officers be and they are hereby authorized and directed to execute any and all documents necessary to effect the transfer of 15 Maple Street, Norwood, New Jersey, to Hermann Galow, and further to undertake any and all further acts necessary in their judgment to conclude said transaction. By way of illustration, but without limitation, they are authorized to execute documents, make adjustments, disburse and receive funds on behalf of the corporation, and bind the corporation to any undertakings which, in their opinion, are necessary and proper. IN WITNESS WHEREOF, I have hereunto set my hand and seal of the said corporation this 13th day of June, 1997. S/Michael D. Ficke ------------------ Michael D. Ficke, Assistant Secretary Alfin, Inc. 3 Exhibit 10.33 AFFIDAVIT OF TITLE STATE OF NEW JERSEY COUNTY OF Bergen SS.: Elisabeth Fayer and Michael Ficke say under oath: 1. OFFICERS. We are officers of Alfin, Inc. a corporation of the State of New York. The Corporation will be called the "corporation" and sometimes simply "it" or "its". The President of the corporation is Elisabeth Fayer and resides at The Assistant Secretary is Michael Ficke and resides at We are fully familiar with the business of the corporation. We are citizens of the United States and at least 18 years old. 2. REPRESENTATIONS. The statements contained in this affidavit are true to the best of our knowledge, information and belief. 3. CORPORATE AUTHORITY. The corporation is the only owner of property located at 15 Maple Street, Norwood, New Jersey called "this property". This property is to be sold by the corporation to Hermann Galow. This action, and the making of this affidavit of title, have been duly authorized by a proper resolution of the Board of Directors of the corporation. A Copy of this resolution, bearing the seal of the corporation, is attached and made a part of this affidavit. The corporation is legally authorized to transact business in New Jersey. It has paid all state franchise taxes presently due. Its charter, franchise and corporate powers have never been suspended or revoked. It is not restrained from doing business nor has any legal action been taken for that purpose. It has never changed its name or used any other name. 4. APPROVAL BY SHAREHOLDERS. (check one only) x Shareholder approval is not required. [ ] This is a sale of all or substantially all of the assets of the corporation. The sale is not made in the regular course of the business of the corporation. A copy of the authorization and approval of the shareholders is attached. 5. OWNERSHIP AND POSSESSION. It has owned this property since July 20, 1983. Since then no one has questioned its right to possession or ownership. The corporation has sole possession of this property. There are no tenants or other occupants of this property. Except for its agreement with the Buyers (if this is a sale) it has not signed any contracts to sell this property. It has not given anyone else any rights concerning the purchase or lease of this property. It has never owned any property which is next to this property. 6. IMPROVEMENTS. No additions, alterations or improvements are now in progress or have been made to this property since four months past, 19__. It has always obtained all necessary permits and certificates of occupancy. All charges for municipal improvements such as sewers, sidewalks, curbs or similar improvements benefiting this property have been paid in full. No building, addition, extension or alteration on this property has been made or worked on within the past four months. The corporation is not aware that anyone has filed or intends to file a mechanic's lien or building contract relating to this property. No one has notified it that money is due and owing for construction or repair work on this property. 7. LIENS OR ENCUMBRANCES. It has not allowed any interests (legal rights) to be created which affects its ownership or use of this property. No other persons have legal rights in this property, except the rights of utility companies to use this property along the road or for the purpose of serving this property. The corporation does not have any pending lawsuits or judgments against it or other legal obligations which may be enforced against this property. It does not owe any disability, unemployment, corporate franchise, social security, municipal or alcoholic beverage tax payments. No bankruptcy or insolvency proceedings have been started by or against it, nor has it ever been declared bankrupt. No one has any security interest in any personal property or fixtures on this property. All liens (legal claims, such as judgments) listed on the attached judgment or lien search are not against the corporation, but against others with similar names. 8. EXCEPTIONS. The following is a complete list of exceptions to any of the above statements. This includes all liens or mortgages which are not being paid as a result of this transaction. NONE 8 (a) Seller states that the attached non-applicability letter from the N.J. D.E.P. dated 6/10/97 was issued on facts which are true to the best of Seller's knowledge. 9. RELIANCE. The corporation makes this affidavit in order to induce the Buyer(s) or the Lender to accept its deed or mortgage. It is aware that the Buyer(s) or the Lender will rely on the statements made in this affidavit and on its truthfulness. Signed and sworn to before me on S/Elisabeth Fayer June 13, 1997 Elisabeth Fayer S/R. Alan Karch S/Michael D. Ficke R. Alan Karch Michael D. Ficke Attorney at Law N.J. EX-10.34 4 AGREEMENT DATED 06-13-97 1 Exhibit 10.34 LEASE AGREEMENT Section I Parties This lease if made between Hermann Galow of 97 Oak Street, Norwood, New Jersey, as landlord, and Alfin, Inc., of 15 Maple Street, Norwood, New Jersey, as tenant. Section II Description of Leased Premises Landlord leases to tenant the space as presently constituted known as a portion of 15 Maple Street, Norwood, New Jersey, consisting of approximately 15,000 square feet within the structure at that address, referred to below as the warehouse/office. Section III Term The space is leased for a term to commence on the transfer of title of the premises at 15 Maple Street, Norwood, New Jersey, from the tenant herein to the landlord herein, and continuing thereafter for a period of two years or on such earlier date as the parties may agree. Section IV Rent The total annual rent is the sum of $107,250.00, which sum is payable in equal monthly installments of $8,937.50, in advance, on the first day of each calendar month during the term. This rent is a gross rent. Section V Security Deposit Landlord acknowledges receipt of $8,937.50, which he is to retain as a security deposit for tenant's faithful performance of this lease. Landlord is not obliged to apply the deposit on rents or other charges in arrears or on damages for tenant's failure to perform the lease. However, landlord may so apply the security at his option and his right to possession of the premises for nonpayment of rent or for any other reason shall not in any event be affected by reason of the fact that landlord holds this security. The security deposit, if not applied toward payment of arrearages or damages, is to be returned to the tenant when this lease is terminated, after tenant has vacated the premises and delivered possession to landlord. 1 2 Exhibit 10.34 If landlord repossesses the premises because of tenant's default or breach, landlord may apply the deposit on all damages suffered to the date of the repossession and may retain the remainder to apply on such damages as may be suffered thereafter by reason of the default or breach. Section VI Use and Occupancy Tenant shall use and occupy the premises as a warehouse/office and for no other purpose. Landlord represents that, to the bet of landlord's knowledge, the premises may lawfully be used for such a purpose. The tenant shall not be permitted to store toxic, hazardous or flammable material on or in the premises. Section VII Place for Payment of Rent Tenant shall pay rent, and any additional rent as provided below, to landlord at landlord's above-stated address, or at such other place as landlord may designate in writing, without demand and without counterclaim, deduction, or setoff. Section VIII Care and Repair of Premises Tenant shall commit no act of waste and shall take good care of the premises and the fixtures and appurtenances on the premises, and shall, in the use and occupancy of the premises, conform to all laws, orders, and regulations of the federal, state, and municipal governments or any of their departments, including all environmental laws and regulations applicable to the leased property. Landlord shall make all necessary repairs to the premises, except where the repair has been made necessary by misuse or neglect by tenant or tenant's agents, servants, visitors or licensees. All improvements made by tenant to the premises which are so attached to the premises that they cannot be removed without material injury to the premises, shall become the property of landlord upon installation. Not later than the last day of the term tenant shall, at tenant's expense, remove all of tenant's personal property and those improvements made by tenant which have not become the property of landlord, including trade fixtures, cabinet work, movable paneling, partitions and the like; repair all injury done by or in connection with the installation or removal of the property and improvements; and surrender the premises in as good condition as they were at the beginning of the term, reasonable wear, and damage by fire, the elements, casualty, or other cause not due to the misuse or neglect by tenant or tenant's agents, servants, visitors or licensees, excepted. All property of tenant remaining on the premises after the last day of the term of this lease shall be conclusively deemed abandoned and may be removed by landlord, and tenant shall reimburse landlord for the cost of such removal. Landlord may have any such property stored at tenant's risk and expense. 2 3 Exhibit 10.34 Section IX Alterations, Additions or Improvements Tenant shall not, without first obtaining the written consent of landlord, make any alterations, additions or improvements in, to or about the premises. As a condition of the payment of the rent hereunder, landlord shall undertake the following at landlord's cost and expense: (1) install one loading dock and one entrance door into the premises; (2) erect and sheetrock a dividing wall to separate the rented premises from the balance of the building; and (3) provide access doors to the bathrooms. Section X Accumulation of Waste or Refuse Matter Tenant shall not permit the accumulation of waste or refuse matter on the leased premises or anywhere in or near the building. Section XI Heat Landlord agrees to furnish tenant heat on business days adequate and reasonable for the leased premises, or when and as required by law. Section XII Water Landlord agrees to furnish hot and cold water for lavatory purposes without charge. If a further supply or water is required by tenant, tenant shall, at tenant's expense, install, and subsequently shall maintain at tenant's expense, a water meter to register tenant's consumption of water, and tenant shall pay as additional rent, when and as bills are rendered, for water consumed, at the cost to landlord, and for sewer rents and all other rents and charges based upon the consumption of water. XIII Air Conditioning Landlord agrees to furnish air cooling during the appropriate season. Section XIV Electricity Landlord agrees to furnish electricity for usual office and warehouse requirements; however, tenant shall not use any electrical equipment which in landlord's reasonable opinion will overload the wiring installations or interfere with reasonable use of such installations by landlord or other tenants in the building. 3 4 Exhibit 10.34 Section XV Damages to Building If the building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by landlord, will equal or exceed fifty percent of the replacement value of the building (exclusive of foundations) just prior to the occurrence of the damage, then landlord may, no later than the tenth day following the damage, give tenant a notice of election to terminate this lease, or if the premises shall not be reasonably usable for the purposes for which they are leased under this agreement, then tenant may, no later than the tenth day following the damage, give landlord a notice of election to terminate this lease. In event of either election this lease shall be deemed to terminate on the fifth day after the giving of notice, and tenant shall surrender possession of the premises within a reasonable time thereafter, and the rent, and any additional rent, shall be apportioned as of the date of the surrender and any rent paid for any period beyond the date shall be repaid to tenant. If the cost of restoration as estimated by landlord shall amount to less than fifty percent of the replacement value of the building, or if, despite the cost, landlord does not elect to terminate this lease, and provided tenant does not elect to terminate this lease, landlord shall restore the building and the premises with reasonable promptness, subject to delays beyond landlord's control and delays in the making of insurance adjustments between landlord and his insurance carrier, and tenant shall have no right to terminate this lease except as provided in this agreement. Landlord need not restore fixtures and improvements owned by tenant. In any case in which use of the premises is affected by any damage to the building, there shall be either an abatement or an equitable reduction in rent depending on the period for which and the extent to which the premises are not reasonably usable for the purpose for which they are leased under this agreement. The words "restoration" and "restore" as used in this Section shall include repairs. If the damage results from the fault of the tenant, or tenant's agents, servants, visitors, or licensees, tenant shall not be entitled to any abatement or reduction of rent, except to the extent, if any, that landlord receives the proceeds of rent insurance in lieu of such rent. Section XVI Insurance; Waivers of Subrogation Tenant shall maintain insurance against personal injury to any person or persons in a limit of not less than $1,000,000.00, and for loss or damage to property in a limit of not less than $50,000.00. A copy of the insurance policy shall be delivered to the landlord prior to the commencement of occupancy by the tenant. In any event of loss or damage to the building, the premises and/or any contents, each party shall look first to any insurance in its favor before making any claim against the other party; and, to the extent possible without additional cost, each party shall obtain, for each policy of such insurance, provisions permitting waiver of any claim against the other party for loss or damage within the scope of the insurance, and each party, to the extent permitted, for itself and its insurers waives all such insured claims against the other party. Section XVII Eminent Domain If the premises or any part of the premises or any estate in the premises, or any other part of the building materially affecting tenant's use of the premises, be taken by eminent domain, this lease shall terminate on the date when title vests pursuant to such a taking. The rent, and any additional rent, shall be apportioned as of the termination date and any rent paid for any period beyond such date shall be repaid to tenant. Tenant shall not be entitled to any part of the award for such a taking or any payment in lieu of the award, but tenant may file a claim for any taking of fixtures and improvements owned by tenant, and for moving expenses. 4 5 Exhibit 10.34 Section XVIII Landlord's Remedies on Default If tenant defaults in the payment of rent, or any additional rent, or defaults in the performance of any of the other covenants or conditions of this agreement, landlord may give tenant notice of such a default, and if tenant does not cure any rent, or additional rent, default within ten days, or other default within thirty days, after the giving of notice (or if another default is of such a nature that it cannot be completely cured within that period, if tenant does not commence the curing within thirty days and thereafter proceed with reasonable diligence and in good faith to cure the default), then landlord may terminate this lease on not less than ten days' notice to tenant. On the date specified in the notice the term of this lease shall terminate and tenant shall then quit and surrender the premises to landlord, but tenant shall remain liable as provided in Section XIX. If this lease shall have been so terminated by landlord, landlord may at any subsequent time resume possession of the premises by any lawful means and remove tenant or other occupants and their effects. Section XIX Deficiency In any case where landlord has recovered possession of the premises by reason of tenant's default, landlord may, at landlord's option, occupy the premises or cause the premises to be redecorated, altered, divided, consolidated with other adjoining premises, or other wise changed or prepared for reletting, and may relet the premises or any part of the premises as agent of tenant or otherwise, for a term or terms to expire prior to, at the same time as, or subsequent to, the original expiration date of this lease, at landlord's option, and receive the rent. Rent so received shall be applied first to the payment of expenses as landlord may have incurred in connection with the recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises, or otherwise changing or preparing for reletting, and the reletting, including brokerage and reasonable attorneys' expenses of performance of the other covenants or tenant as provided in this agreement. Tenant agrees, in any such case, whether or not landlord has relet, to pay to landlord damages equal to the rent and other sums agreed to be paid by tenant, less the net proceeds of the reletting, if any, and the damages shall be payable by tenant on the several rent days above specified. In reletting the premises, landlord may grant rent concessions, and tenant shall not be credited with such concessions. No such reletting shall constitute a surrender and acceptance or be deemed evidence of a surrender and acceptance. If landlord elects, pursuant to this agreement, actually to occupy and use the premises or any part of the premises during any part of the balance of the term as originally fixed or since extended, there shall be allowed against tenant's obligation for rent or damages as defined in this agreement, during the period of landlord's occupancy, the reasonable value of such occupancy, not to exceed in any event the rent reserved and such occupancy shall not be construed as a relief of tenant's liability under this agreement. Tenant waives all right of redemption to which tenant or any person claiming under tenant might be entitled by any law now or hereafter in force. Landlord's remedies under this agreement are in addition to any remedy allowed by law. Section XX Effect of Failure To Insist on Strict Compliance With Conditions The failure of either party on insist on strict performance of any covenant or condition of this agreement, or to exercise any option contained, shall not be construed as a waiver of such covenant, condition, or option in any other instance. This lease cannot be changed or terminated orally. 5 6 Exhibit 10.34 Section XXI Assignment Tenant shall not assign this lease, or any interest in this lease, or sublet the leased premises, or any part of the premises, or any right or privilege appurtenant to it, or allow any person other than tenant and tenant's agents and employees to occupy or use the premises or any part of them, without first obtaining landlord's written consent. Landlord expressly covenants that such consent shall not be unreasonably or arbitrarily refuse. Landlord's consent to one assignment, sublease, or use shall not be a consent to any subsequent assignment or sublease, or occupancy or use by another person. Any unauthorized assignment or sublease shall be void, and shall terminate this lease at the landlord's option. Tenant's interest in this lease is not assignable by operation of law without landlord's written consent. Section XXII Collection of Rent from Any Occupant If the premises are sublet or occupied by anyone other than tenant and tenant is in default under this agreement, or if this lease is assigned by tenant, landlord may collect rent from the assignee, subtenant, or occupant, and apply the net amount collected to the rent reserved. No such collection shall be deemed a waiver of the covenant against assignment and subletting, or the acceptance of such assignee, subtenant, or occupant as tenant, or a release of tenant from further performance of the covenants contained in this agreement. Section XXIII Subordination of Lease This lease shall be subject and subordinate to all underlying leases and to mortgages and trust deeds which may now or subsequently affect such leases or the real property of which the premises form a part, and also to renewals, modifications, consolidations, and replacements of the underlying leases and the mortgages and trust deeds. Although no instrument or act on the part of tenant shall be necessary to effectuate such a subordination, tenant will, nevertheless, execute and deliver further instruments confirming the subordination of this lease as may be desired by the holders of the mortgages and trust deeds or by any of the landlords under such underlying leases. Tenant appoints landlord attorney in fact, irrevocably, to execute and deliver any such instrument for tenant. If any underlying lease to which this lease is subject terminates, tenant shall, on timely request, attorn to the owner of the reversion. Section XXIV Landlord's Right To Cure Tenant's Breach If tenant breaches any covenant or condition of this lease, landlord may, on reasonable notice to tenant (except that no notice need be given in case of emergency), cure such a breach at the expense of tenant and the reasonable amount of all expenses, including attorneys' fees, incurred by landlord in so doing, whether paid by landlord or not, shall be deemed additional rent payable on demand. Section XXV Mechanics' Liens Tenant shall within thirty days after notice from landlord discharge any mechanics' liens for materials or labor claimed to have been furnished to the premises on tenant's behalf. 6 7 Exhibit 10.34 Section XXVI Notices Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if delivered personally or sent by registered or certified mail in an addressed postpaid envelope; if to tenant, at the above-described building; if to landlord, at landlord's address as set forth above; or, to either, at such other address as tenant or landlord, respectively, may designate in writing. Notice shall be deemed to have been duly given, if delivered personally, upon delivery, and if mailed, upon the third day after the mailing of such notice. Section XXVII Landlord's Right to Inspection, Repair, and Maintenance Landlord may enter the premises at any reasonable time, upon adequate notice to tenant (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacements, or additions in, to, on and about the premises or the building, as landlord deems necessary or desirable. Section XXVIII Interruption of Services or Use Interruption or curtailment of any service maintained in the building, if caused by strikes, mechanical difficulties, or any causes beyond landlord's control whether similar or dissimilar to those enumerated, shall not entitle tenant to any claim against landlord or to nay abatement in rent, and shall not constitute constructive or partial eviction, unless landlord fails to take such measures as may be reasonable in the circumstance to restore the service without undue delay. If the premises are rendered untenantable in whole or in part, for a period of five business days, by the making of repairs, replacements, or additions, other than those made with tenant's consent or caused by misuse or neglect by tenant or tenant's agents, servants, visitors, or licensees, there shall be a proportionate abatement of rent during the period of such untenantability. Section XXIX Conditions of Landlord's Liability Tenant shall not be entitled to claim a constructive eviction from the premises unless tenant shall have first notified landlord in writing of the condition or conditions giving rise to such an eviction, and, if the complaints be justified, unless landlord shall have failed within a reasonable time after receipt of such notice to remedy such conditions. Section XXX Landlord's Right To Show Premises Landlord may show the premises to prospective purchasers and mortgagees and, during the three months prior to termination of this lease, to prospective tenants, during business hours upon reasonable notice to tenant. 7 8 Exhibit 10.34 Section XXXI Effect of Other Representations No representations or promises shall be binding on the parties to this agreement except those representations and promises contained in this agreement or in some future writing signed by the party making such representations or promises. Section XXXII Quiet Enjoyment Landlord covenants that if, and so long as, tenant pays the rent, and any additional rent as provided in this agreement, and performs the covenants of this lease, tenant shall peaceably and quietly have, hold, and enjoy the premises for the term mentioned, subject to the provisions of this lease. Section XXXIII Section Headings The section headings in this lease are intended for convenience only and shall not be taken into consideration in any construction or interpretation of this lease or any of its provisions. Section XXXIV Binding Effect on Successors and Assigns The provisions of this lease shall apply to, bind, and insure to the benefit of landlord and tenant, and their respective heirs, successors, legal representatives, and assigns. It is understood that the term "landlord" as used in this lease means only the owner, a mortgagee in possession, or a term tenant of the building, so that in the event of any sale of the building or of any lease of the building, or if a mortgagee shall take possession of the premises, the landlord named in this agreement, shall be entirely freed and relieved of all covenants and obligations of landlord subsequently accruing under this agreement. It shall be deemed without further agreement that the purchase, the term tenant of the building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of the landlord under this agreement. Dated June 13, 1997 Witness S/Patricia Leidedit S/Hermann Galow Hermann Galow, Landlord Attest: Alfin, Inc., by: S/Michael D. Ficke S/Elisabeth Fayer Michael D. Ficke, Assistant Secretary Elisabeth Fayer, President Alfin, Inc. Alfin, Inc. 8 EX-10.35 5 AGREEMENT DATED 08-06-97 1 Exhibit 10.35 AGREEMENT made this 6th day of August 1997 by and between Target Mailing Lists Inc., a New York Corporation with offices at 275 Madison Avenue, New York, N.Y. 10016 (hereinafter "Target"), and Adrien Arpel, Inc., with offices at 720 Fifth Avenue, New York, N.Y. 10019 (hereinafter "AAI"). WHEREAS Target is in the business of acting as an agent, broker and media representative in connection with advertising placement, the sale of advertising space in various publications, and WHEREAS AAI desires to engage the services of Target to place advertisements in publications for a kit containing products selected by AAI (the "Kit") in accordance with the terms of this Agreement. The initial Kit shall be specially selected by AAI for marketing under this Agreement. NOW, THEREFORE, the parties agree as follows: 1. AAI and Target will jointly approve the content of advertisements as well as the scheduling of the advertisements in connection with the sale of the Kit, it being understood that AAI may object to any advertisement for any reason. AAI and Target shall jointly agree on the schedule for such advertising. The publications and dates shall be selected from publications and dates which Target advises AAI available. 2. Target shall advance all production costs for all advertisements placed by Target on behalf of AAI and AAI shall advance all creative costs. Such advances shall be recouped as provided in paragraph 4 of this Agreement. All creative and 2 Exhibit 10.35 production costs for advertisements placed by Target on behalf of AAI pursuant to the Agreement shall require approval of AAI before such costs are incurred. 3. Target shall place all approved AAI advertising material and shall advance all media charges for such advertising material. 4. Expenses incurred by Target and AAI hereunder as well as third party costs incurred by them shall be reimbursed pro rata from gross revenues received from the sale of the Kit. For purposes of this Agreement the term gross revenues shall mean all revenue received from purchases of the Kit generated in direct response to the advertising material placed by Target. It shall not include further sales generated from customers initially obtained from such advertising material. The expenses to be reimbursed shall include: a. sales and use taxes; b. actual amounts paid to third parties for advertising, creative and production costs without any mark-up or profit to Target or AAI; c. AAI's direct cost for the Kit including in addition to all material costs the cost of fulfillment, refunds, postage, handling of refunds and direct talent costs; and d. AAI's administrative cost which the parties have agreed shall be an amount equal to 75% of AAI's direct cost for the Kit, unless otherwise agreed upon. 5. All amounts remaining after payment of reimbursed expenses out of gross revenues shall be allocated as follows: 3 Exhibit 10.35 49.5% to Target; 40.5% to AAI, and 10% to Ben White. 6. The calculation of amounts distributable to Target, AAI and Ben White shall be made and paid monthly during the term of this Agreement and shall be calculated on a continuing, cumulative basis. Accompanying each payment to Target shall be a detailed report setting forth the basis of the calculation. This report will list the cumulative gross revenue to date, the cumulative expenses incurred and the amount due to each party. The amount due will be less any monies already paid pursuant to the terms of this Agreement. 7. AAI shall have complete responsibility for handling or arranging for handling fulfillment, customer service, refunds and compliance with the FTC Mail Order Trade Regulations Rule and all other applicable federal, state and local laws relating to the sale of AAI Kits and/or services. 8. AAI acknowledges that Target is acting only as its agent in the placement of advertisements and that Target has no responsibility for the content of the advertisements or for the production or sale of the Kit being advertised. Accordingly, if any claim is made or litigation or proceeding is instituted against Target in connection with consumer use of the Kit being advertised or AAI's failure to furnish the Kit advertised, or copyright violation, or for nay act of omission on AAI's Kit and/or service advertised, or arising out of the content of the advertisements. AAI shall indemnify Target against all liability and expenses incurred by Target in connection therewith. 9. This Agreement shall be in effect for eighteen months from the date of this Agreement. If the advertising that Target places for AAI sells more than $1,500,000, in retail sales of the Kit within a one year period, from the date that the 4 advertisement first appears in the media, then this Agreement shall be automatically renewed indefinitely until terminated pursuant to paragraph 12. 10. AAI may designate further products to be designated as Kits under this Agreement for which Target shall act in the same capacity. However, it is understood and agreed that AAI has no obligation to add other products hereunder. Target shall have a right of first negotiation on any new Kits to be offered in this manner. Any additional Kit designated hereunder shall be subject to the same terms as provided under this Agreement. 11. Target will not be responsible for any delays or failures by any publication to print or distribute the advertising it is placing on behalf of AAI because of fire, flood, war, riot, accident, interruption of or delay in transportation, strikes, changes in laws or regulations or some other causes beyond Target's control. In no event will Target be responsible for any direct indirect, or consequential damages arising from any cause. 12. In the event that David Palgon ceases to be the principal stockholder and chief executive officer of Target, AAI shall have the right to terminate this Agreement. Such termination shall not affect all accrued rights of Target through the date of termination. Target shall not have the right to assign this Agreement without the prior written consent of AAI. 13. Any and all controversies arising under this agreement or in connection with the existence, execution or validity thereof shall be settled by arbitration in New York, New York, under the rules of the American Arbitration Association, and 5 Exhibit 10.35 any decision or judgment resulting there from may be entered in any court of competent jurisdictions. 14. This Agreement represents the entire understanding between the parties hereto and may only be amended in writing by a document executed by both parties. Agreed to: Agreed to: S/David Palgon S/Elisabeth Fayer David Palgon Elisabeth Fayer President Chairman & CEO Target Mailing Lists, Inc. Adrien Arpel, Inc. EX-10.36 6 AGREEMENT DATED 07-01-97 1 Exhibit 10.36 ADRIEN ARPEL Mr. Harold Lightman 75 East End Avenue, Suite #11E New York, NY 10028 Re: Harold Lightman/Consulting Agreement Adrien Arpel, Inc. Dear Harold: When countersigned by you where indicated below the following will constitute our agreement: 1. We have agreed to hire you as a consultant in Marketing, Merchandising, Advertising, and Sales for our new Direct Mail sales operation for a term of one year commencing on July 1, 1997 and ending on July 1, 1998. 2. After the initial one year period, is it hereby agreed that by mutual agreement, we can negotiate an extension. 3. We guarantee you the sum of $3500 per month. In addition, we will reimburse to you within thirty days preapproved expenses as per company guidelines. 4. In further consideration for your work and services, Adrien Arpel, Inc. hereby agrees on July 1, 1997 or commencement date if earlier, to grant to Harold Lightman the option to purchase 50,000 shares, of common stock of Alfin, Inc., pursuant to the Alfin, Inc. Long Term Incentive Plan ("LTIP"). 2 Exhibit 10.36 The exercise price of the shares shall be fixed at the closing price per share for Alfin, Inc. on the American Exchange on July 1, 1997, or commencement date if earlier. The vesting schedule for stock options under this grant is as per Alfin, Inc's. 1993 Stock Option Plan. 5. It is understood that you will work in the offices of Adrien Arpel, Inc. a minimum of three days per week. 6. You warrant and represent that you have full authority to enter into this agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. Sincerely, By: S/Elisabeth Fayer CONSULTANT: By: S/H. Allen Lightman Harold Allen Lightman SS####-##-#### EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALFIN INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K 1 YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 658,378 0 167,021 844,162 2,227,549 3,933,886 2,333,028 1,740,341 4,610,511 2,679,738 0 750,000 0 117,879 1,180,773 4,610,511 24,700,684 24,700,684 8,183,676 20,394,463 986,320 0 38,013 (2,929,148) 79,414 (3,008,562) 0 0 0 (3,008,562) (0.25) 0
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