-----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, JcJF/yXdEOTsdmd66Uvrs2QLCvalCT3CKWUMRCa1tNC7DW9AORd4pYXWn7H0axxy IK3faG5ZcZxSq/Icngzu1A== 0000950123-98-009893.txt : 19981116 0000950123-98-009893.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950123-98-009893 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADRIEN ARPEL 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-K SEC ACT: SEC FILE NUMBER: 001-09135 FILM NUMBER: 98747037 BUSINESS ADDRESS: STREET 1: P.O. BOX 110 STREET 2: 15 MAPLE STREET CITY: NORWOOD STATE: NJ ZIP: 07648 BUSINESS PHONE: 201-767-6880 MAIL ADDRESS: STREET 1: 720 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: ALFIN INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ALFIN FRAGRANCES INC DATE OF NAME CHANGE: 19870323 10-K 1 ADRIEN ARPEL, INC. (FORMERLY ALFIN, INC.) 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JULY 31, 1998 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 ADRIEN ARPEL, INC., (FORMERLY ALFIN, INC.) NEW YORK 13-3032734 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P.O. Box 110, Norwood, NJ 07648 - --------------------------------- --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 767-6880 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange - ---------------------- on which registered Common Stock, $.01 par ------------------- 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 { }. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price on November 4, 1998, was $7,410,297. As of November 4, 1998, the Registrant had 14,310,866 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Proxy Statement for its 1998 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 ADRIEN ARPEL, INC., (formerly ALFIN, INC.) a New York corporation (the "Company"), is engaged 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. The Company also markets and sells its products through catalogs and the Internet. From April 1994 through January 1997, the Company also distributed specially packaged cosmetic products through television marketing on the Home Shopping Network ("HSN"). In February 1998, the Company's then board of directors approved an agreement with an investment group headed by Barry W. Blank (the "Blank Group"). Under the agreement, the Blank Group advanced the Company working capital of $500,000 and committed to use its best efforts to raise no less than an additional $2 million in equity. The initial $500,000 investment was in the form of a 12% five year note convertible into the Company's common stock, commencing on August 1, 1998 and ending on the day before the note is paid but no later than January 30, 2003, at the rate of $0.25 per share. The board of directors also elected Mr. Blank as Chairman, President and Chief Executive Officer of the Company and accepted the resignation of Ms. Elisabeth Fayer, the Company's former Chairman and Chief Executive Officer, who owns a majority of the Company's common stock through an affiliated company, Fine Fragrances Distribution Inc., ("FFD"). Mr. Blank is an investment banker who, until October 1998, was employed as the manager of the Phoenix office of J. Robbins Securities LLC. Mr. Blank is currently employed as the manager of the Phoenix office of Dirks & Company, Inc. Mr. Blank personally owns seats on the New York and American Stock Exchanges. Under the agreement with the Blank Group, FFD issued an option to the Group to acquire all of its shares of the Company's common stock and has granted Mr. Blank a proxy to vote these shares. FFD owns 7,188,235 shares of the Company's common stock which represented approximately 61% of the outstanding shares of the Company's common stock on the date of transaction. The option to acquire FFD's shares is exercisable, in all or in part, from time to time, for a period of 12 months which commenced on August 1, 1998 at $0.25 per share. During February 1998, Jacques Desjardins, Steven Korda and Suzanne Langlois, all of whom had been members of the board of directors since November 1992, resigned. On March 13, 1998, Barry Blank, acting as the sole director of the Company, appointed Barry Feiner, Joseph Giamanco and John McConnaughy, Jr., as directors of the Company. On May 5, 1998, Charles R. Hoover was also appointed as a director. On August 18, 1998, the board of directors elected Mr. Hoover to the position of President and Chief Operating Officer of the Company. Mr. Blank remains as the Company's Chairman and Chief Executive officer. On March 27, 1998, the Company's board of directors approved an additional $250,000 loan to the Company by a group (the "Interim Loan Group") which includes Mr. Blank, Mr. McConnaughy, Janet M. Portelly, and an unaffiliated party. Ms. Portelly, who is the wife of Mr. Feiner, is also a member of the Blank Group. This advance was needed to help settle certain trade payables which were due to key inventory suppliers. This loan, which was received by the Company on April 20, 1998, bears interest at 12% and matures on May 31, 1999. The members of the Interim Loan Group also received one share of common stock for each dollar loaned. On June 23, 1998, the Company repaid $100,000, plus interest, to Mr. McConnaughy from the proceeds of the Company's Private Equity Financing described in the next paragraph. 1 3 During May 1998, the Company commenced a private placement offering (the "Offering")through J. Robbins Securities, LLC., (the "Placement Agent") as Placement Agent, designed to raise up to $3 million in equity financing. The Offering consisted of the issuance of up to 60 units (the "Units"), each in the amount of $50,000. Each Unit consisted of 50,000 shares of the Company's Common Stock and 50,000, Class A Warrants. Each Class A Warrant entitles the holder to purchase one share of the Company's Common Stock at $2.00 per share and one Class B Warrant. Two Class B Warrants entitle the holder to purchase one share of the Company's Common Stock at $4.00 per share. The Class A Warrants are exercisable at any time commencing upon issuance until May 31, 2001 and the Class B Warrants are exercisable at any time commencing upon issuance until May 31, 2003. This Offering was terminated on August 31, 1998 at which time 40.84 Units had been sold and gross proceeds of $2,042,000 had been raised. The net amount available to the Company was $1,756,120 after payment of $285,880 in placement fees and other Offering expenses. Mr. Blank participated in marketing this Offering and earned aggregate commissions of $112,310 from the Placement Agent. The Placement Agent was also to be granted Warrants, exercisable over a five year period, commencing on the last closing date of the Offering. The Warrants to be granted, were to purchase an amount of Units equal to 10% of the number of Units sold in the Offering, at an exercise price equal to 120% of the Unit Offering price. ($60,000 per Unit). Mr. Blank, as an employee of the Placement Agent, was to receive 25% of such Warrants. The Company is currently disputing the issuance of these Warrants to the Placement Agent. PRODUCTS AND MAJOR DISTRIBUTION AGREEMENTS CURRENT PRODUCTS The Company develops, distributes and sells skin care and cosmetic products under the trademarks ADRIEN ARPEL(R) and ARPEL(R). It also acts as an operator of service-oriented skin care salons in certain department and specialty stores. From April 1994 through January 1997, the Company also distributed specially packaged cosmetic products through television marketing on HSN. The Company's relationship with HSN ended as of January 27, 1997, following a contract dispute between the Company and Adrienne Newman which led to the departure of Ms. Newman from the Company. Ms. Newman served as the President of Adrien Arpel, Inc., (Delaware) ("ADRIEN ARPEL"), the Company's wholly owned subsidiary and had been the Company's selling host, under the name of ADRIEN ARPEL, in its sales program on HSN. For a discussion of the legal action between the Company and Ms. Newman as a result of this dispute. See "Item 3. Legal Proceedings." The Company's products consist of a line of high quality natural based skin care products and a line of make up products. The Company's products are positioned in the better segment of the market and are competitively priced with other comparable brands. DISCONTINUED PRODUCTS The Company, under its former name, ALFIN, INC., was originally engaged in the manufacturing, importation, distribution, marketing and merchandising of fine imported fragrance products. Beginning in 1993, ALFIN significantly reduced its distribution of fragrance products and, in July 1995, ceased its distribution of fragrance products. SALES AND MARKETING The Company's major domestic accounts include Bloomingdale's, Boscov's, Kaufmanns, Sears, Ulta 3 and the U.S. Military. The Company also sells directly to the Canadian department store, the Bay. The Company commenced shipping to approximately 160 Sears locations during August 1998. The Company and Sears plan to expand this distribution to approximately 270 additional locations commencing in the summer of 1999. 2 4 The Company's arrangement with Bloomingdale's and two Kaufmann's locations is structured as a Leased Main Floor arrangement. Under this arrangement, the Company's products are sold at retail by employee's of the Company, with Bloomingdale's and Kaufmann's receiving a lease payment equal to 25% of the Company's gross retail sales. For the fiscal year ended July 31, 1998, 32.5% of the Company's net sales were attributable to this type of arrangement. For the fiscal year ended July 31, 1998 net sales to the Bay accounted for 17.2% of total net sales revenues of the Company, No 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. During fiscal 1998 the Company began marketing and selling its products through its own professionally designed mail order catalog. The Company's catalog is updated seasonally and is mailed to customers in markets which have traditionally been strong markets for the Company's products. During December 1997, the Company entered into an agreement with Spiegel, Inc., ("Spiegel"). Under the terms of the agreement, the Company participated in Spiegel's Specialty Catalog Reverse Syndication Program. This program was designed to identify ADRIEN ARPEL mail order buyers and involved seasonal mailings of the Company's catalog featuring a selection of the Company's cosmetic and skin care products. The Company was responsible for all promotional expenses, including but not limited to printing and production costs. Spiegel was responsible for mailing costs and received a fee equal to 10% of net sales including shipping and handling charges. The agreement can be terminated upon ninety days written notice by either party. The Company and Spiegel are currently in the process of analyzing the results of this program and, while conducting this analysis, have temporarily suspended further catalog mailings. During May 1998, the Company entered into an agreement with a consultant related to services rendered with regards to certain of the Company's catalog and direct television marketing business. Under the agreement, the consultant is eligible to earn a commission of 10% of the Company's net sales attributable to the consultants activities up to $5 million and 15% of the Company's net sales attributable to the consultants activities in excess of $5 million during any consulting year. The consultant was also granted 100,000 options exercisable at $0.68 per share, of which 50,000 vested immediately, 25,000 vest when sales generated from eligible business exceeds $5 million during the first consulting year and 25,000 vest when sales from eligible business exceeds $10 million during the first consulting year. During June 1998, the Company began marketing and selling its products via the Internet (www.adrienarpel.com). The Company is utilizing Net Ventures, Inc.'s., Shopbuilder technology (TM) to maintain its online outlet. Sales through the Company's mail order catalog, its relationship with Spiegel and it's Internet site accounted for approximately 6.5% of the Company's fiscal 1998 sales. As is common in the fragrance and cosmetic industry, the Company provides its domestic department store 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 2.9%, 4.7% and 6.1% for the fiscal years ended July 31,1998, 1997, and 1996, respectively. Sales to foreign accounts, expressed as a percentage of net sales, were 17.3%, 7.2%, 6.4% for the fiscal years ended July 31, 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT The Company did not spend a material amount on research and development during the fiscal years ended July 31, 1998, 1997 and 1996. It introduces new products and changes its packaging in response to changing consumer demands. 3 5 ADVERTISING The Company advertises through cooperative advertising programs, catalogs and the Internet. Department store advertising costs as a percentage of consolidated department store sales for the fiscal years ended July 31, 1998, 1997 and 1996 were 10.9%, 11.7%, and 9.7%, respectively. The Company also promotes its products through the use of promotional materials, special promotions and in-store displays. MANUFACTURING The Company does not maintain any manufacturing facilities. It subcontracts to manufacture its products, in accordance with the Company's specifications and formulas. See "Trademarks and Regulations" below. 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 it. The ADRIEN ARPEL(R) and ARPEL(R) 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 currently 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 currently 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 material 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 the aggregate amount of $2 million 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 4 6 which are substantially larger, more diversified and which have substantially greater financial and other 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. The Company considers its major competitors to be "Clinique" and "Origins", both subsidiaries of "Estee Lauder", who offer similar "all natural" products. The Company's catalog offerings compete with, among others, "Avon", which also markets through catalog's. 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 October 26, 1998, the Company had seventy two direct employees. Of these, forty eight were engaged in sales and marketing activities, fifteen in administrative functions and nine 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 currently occupies approximately 19,000 rentable square feet in the same facility under a lease expiring in June 2001. The lease provides for annual payments of approximately $152,000. ITEM 3. LEGAL PROCEEDINGS On April 23, 1998, the Company and Adrienne Newman reached a settlement agreement related to their litigation which was initiated by Ms. Newman during October 1996. On October 28, 1996 the Company received notice from Ms. Newman purporting to terminate her April 4, 1990 Employment Agreement with the Company (such agreement as subsequently amended was the "Employment Agreement"), based on an alleged breach of the Employment Agreement by the Company. Ms. Newman served as the President of ADRIEN ARPEL, the Company's wholly-owned subsidiary, and had been the 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 Ms. Newman reached an agreement (the "Interim Agreement") whereby Ms. Newman agreed to appear as the selling host for ADRIEN 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. 5 7 On January 28, 1997, after the expiration of the HSN Selling Period, the Company was served by Ms. 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 asserted various claims against Ms. Newman, seeking damages and injunctive relief. Among other things, it was 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 was the Company's belief that Ms. Newman's refusal to provide services to the Company throughout the term of her Employment Agreement which was due to expire in April 1998, particularly her willful refusal and failure to appear as the Company's selling host on HSN, would 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. " She subsequently appeared on HSN on a regular basis. During these appearances Ms. Newman was not acting on behalf of the Company or its trademark protected ADRIEN ARPEL product line. Under the settlement agreement reached on April 23, 1998, Ms. Newman is paying the Company $1 million. The agreement specified that $150,000 would be paid upon execution of the settlement agreement and $25,000 per month until the Company raised $2 million under its equity finance offering. Upon raising $2 million in equity financing, Ms. Newman was required to pay an additional installment of $150,000 and $50,000 per month until the balance is paid in full. Upon raising $2 million in equity financing, monthly payments also bear interest at the prime rate. On August 6, 1998, the Company's equity finance offering surpassed the $2 million amount resulting in the additional payment of $150,000 from Ms. Newman and increased installment payments of $50,000 plus interest at the prime rate. 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 On July 16, 1998, at the Company's Annual Meeting of Shareholders (the "Meeting") Shareholders present or represented by proxy at the Meeting (i) elected Barry W. Blank, Barry Feiner, Joseph Giamanco, Charles R. Hoover and John E. McConnaughy, Jr. as directors of the Company for a term of one year or until their successors have been duly elected and qualified, (ii) approved the appointment of Goldstein Golub Kessler LLP as independent auditors of the accounts of the Company for the fiscal year beginning August 1, 1998, (iii) approved an amendment to the Company's Certificate of Incorporation to change the name of the Company from ALFIN, INC., to ADRIEN ARPEL, INC. and (iv) approved an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of the Common Stock from 17 million to 50 million shares. 6 8 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. On September 2, 1998 the Company was advised by the ASE that the ASE intended to proceed with the filing of an application with the Securities and Exchange Commission (the "SEC") to strike the Company's common stock from listing and registration on the Exchange. The Company has exercised its right to appeal this determination and filed a letter of appeal on September 4, 1998. The Company is currently scheduled to meet with the ASE on November 10, 1998 regarding its appeal. Since May 5, 1986, shares of the Company's $0.01 par value Common Stock, have traded on the ASE (symbol "AFN"). On August 6, 1998, the Company changed its symbol to RPL in connection with the Company name change from ALFIN, INC. to ADRIEN ARPEL, INC. The following table sets forth, for the periods indicated and as reported by the ASE, the high and low sales prices for shares of the Company's Common Stock.
QUARTER ENDED HIGH LOW ------------- ---- --- 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 OCTOBER 31, 1997 11/16 1/2 JANUARY 31, 1998 15/16 5/16 APRIL 30, 1998 1-1/8 3/8 JULY 31, 1998 1-7/16 13/16
The number of shareholders of record of the Common Stock on October 26, 1998 was 2,239. 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. 7 9 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.
FISCAL YEARS ENDED JULY 31 (000'S OMITTED, EXCEPT PER SHARE 1998 1997 1996 1995 1994 AMOUNTS) - ----------------------------------------------------------------------------------------------------------------- OPERATING DATA: NET SALES $ 5,909 $ 24,701 $ 34,733 $ 32,151 $ 29,358 GROSS PROFIT 4,176 16,517 23,353 22,859 21,707 OPERATING (LOSS) INCOME (3,490) (3,877) 2,820 1,960 (924) OTHER (EXPENSE)INCOME (253) 948 54 (460) (503) (LOSS) INCOME BEFORE PROVISION FOR (3,742) (2,929) 2,874 1,500 (1,427) INCOME TAXES NET (LOSS) INCOME $ (3,748) $ (3,009) $ 2,693 $ 1,365 ($ 1,427) ======== ======== ======== ======== ======== BASIC (LOSS) INCOME PER COMMON & COMMON EQUIVALENT SHARE: $ (0.32) $ (0.26) $ 0.21 $ 0.12 $ (0.14) ======== ======== ======== ======== ======== BALANCE SHEET DATA: WORKING CAPITAL $ 1,335 $ 1,254 $ 988 $ (2,629) $ (5,905) TOTAL ASSETS 3,666 4,611 11,228 10,756 12,362 SHORT-TERM DEBT 63 - 1,938 2,863 5,421 LONG-TERM DEBT 500 - 425 725 149 SHAREHOLDER'S EQUITY $ 526 $ 1,181 $ 4,131 $ 1,388 $ 24 ======== ======== ======== ======== ========
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 Operation's" and elsewhere 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 judgment of personnel, 8 10 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 Operation as a percent of net sales:
RELATIONSHIP TO NET SALES FOR THE FISCAL YEARS ENDED JULY 31, 1998 1997 1996 ------ ------ ------ NET SALES 100.0% 100.0% 100.0% COST OF GOODS SOLD 29.3 33.1 32.8 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 129.7 71.7 59.1 WRITE OFF OF GOODWILL - 10.9 - OPERATING (LOSS) INCOME (59.0) (15.7) 8.1 OTHER (EXPENSE)INCOME, NET (4.2) 3.8 0.2 NET (LOSS) INCOME BEFORE PROVISION FOR INCOME TAX (63.3) (11.9) 8.3 ------ ------ ------ NET (LOSS) INCOME (63.4)% (12.2)% 7.8% ====== ====== ======
FISCAL YEARS ENDED JULY 31, 1998 AND 1997 The Company recorded a net loss of $3,748,446 for the fiscal year ended July 31, 1998, as compared to a net loss of $3,008,562 for the fiscal year ended July 31, 1997. The net loss per common and common equivalent share was $0.32 for the year ended July 31, 1998, as compared to a net loss of $0.26 per share for the year ended July 31, 1997. Included in the loss for the fiscal year ended July 31, 1998 is $1,250,000 of income related to the settlement of the Company's litigation with Adrienne Newman. The Company recorded the gross settlement of $1 million as part of "Other Income" and additionally, reversed a liability which it was carrying on its balance sheet related to commissions which were previously recorded as due Ms. Newman in the amount of $250,000. Also included in the loss for the fiscal year ended July 31, 1998, is $1,302,223 of non cash finance charges related to the financing agreements which the Company has with the Blank Group and an Interim Loan Group. The Issuance of 250,000 shares of stock to the Interim Loan Group, the beneficial conversion feature pertaining to the $500,000 note payable to the Blank Group and the Blank Group's option to acquire FFD's shares at $0.25 per share are deemed to be an additional cost of financing. Excluding the effect of the Newman settlement and the non cash financing charges, the Company would have recorded a net loss of $3,696,223 or $0.30 per share for the fiscal year ended July 31, 1998. Included in the loss for the fiscal year ended July 31, 1997, is the write off of goodwill in the amount of $2,620,081 recorded during the fourth quarter of fiscal 1997, as a result of the Company's prior assessment of future operating cash flows required 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." Also included in the loss for the fiscal year ended July 31, 1997 is a gain of $986,320 which was attributable to the Company's sale of its Norwood, New Jersey distribution and administration facility. Excluding the effect of the write off of goodwill and the gain related to the sale of the Company's distribution facility the Company would have recorded a loss of $1,374,801 or $0.12 per share for the fiscal year ended July 31, 1997. 9 11 Net sales for the fiscal year ended July 31, 1998, decreased to $5,908,754 from $24,700,684 recorded in the prior fiscal year, a decrease of $18,791,930 or 76.1%. The sales decrease is primarily attributable to an end of the Company's relationship with the Home Shopping Network ("HSN") combined with a decrease in sales to department stores. The Company's relationship with HSN ended during January 1997 due to the Company's contract dispute with Ms. Newman. Sales to HSN for the year ended July 31, 1997 were $11,965,350. For a detailed discussion of the Company's dispute with Ms. Newman see Item 3, "Legal Proceedings." Net sales to department stores for the fiscal year ended July 31, 1998 decreased to $5,493,254 from $12,659,346 for the fiscal year ended July 31, 1997, a decrease of $7,166,092 or 56.6%. The Company was distributing its products to 114 department store locations throughout the United states and Canada at July 31, 1998, as compared to 243 locations at July 31, 1997. During the fiscal year ended July 31, 1998, the Company ceased distribution of its product line through Bullocks, Burdines, Dayton/Hudson, Dillards, Foley's, Hechts, Macy's and Mercantile department store locations. The Company continues to distribute its product line through the Bay, in Canada, Bloomingdales, Boscov's, Kaufmanns, Ulta 3 and, during August 1998, launched its product line in approximately 160 Sears locations throughout the United States. Cost of goods sold as a percentage of net sales was 29.3% for the fiscal year ended July 31, 1998, as compared to 33.1% for the fiscal year ended July 31, 1997. The decrease is primarily due to product mix. Sales to HSN during the fiscal year ended July 31, 1997 consisted of 48.8% of fiscal 1997 sales and had a higher cost of goods rate than products sold through department stores. Additionally, 40.3% of the Company's fiscal 1998 sales were at retail as compared to 18.6% for fiscal 1997. Selling, general and administrative expenses decreased to $7,665,526 for the fiscal year ended July 31, 1998, from $17,774,382 for the fiscal year ended July 31, 1997, a decrease of $10,108,856 or 56.9%. This decrease is primarily attributable to the decreased cost of operating the Company's current downsized department store business combined with a decrease of $2,300,339 in compensation payments to Ms. Newman which were attributable to her appearance on HSN during the fiscal year ended July 31, 1997. 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. The Company also reversed a liability during Fiscal 1998 in the amount of $250,000, which was reflected as commissions which were previously recorded as due Ms. Newman, but which the Company will not pay. The Company has made dramatic expense cuts during the latter part of fiscal 1998 and seeks a further reduction of non-operating costs during fiscal 1999. For a discussion of the Company's current plans, see "Liquidity and Capital Resources." The Company recorded net other expenses of $252,656 during the fiscal year ended July 31, 1998 as compared to net other income of $948,307 during the fiscal year ended July 31, 1997. During fiscal 1998, the Company recorded a $1 million settlement pertaining to its litigation with Ms. Newman, $1,302,223 in non cash finance charges related to its financing agreements with the Blank Group and $24,280 of net interest income primarily related to the payments received from Selecta. During fiscal 1997, the Company recorded $986,320 of other income related to the gain on the sale of its Norwood, New Jersey distribution and administration facility along with $38,013 of net interest expense under its loan facility with PNC Bank. The remaining NOL available to the Company for federal income tax reporting purposes at July 31, 1998, is approximately $4.3 million with various expiration dates through 2013. In 1992 the Company had an ownership change and has had several recent sales of securities. Under Section 382 of the Internal Revenue Code (the "Code"), ownership changes may severely limit, on an annual basis, the Company's ability to utilize its net operating loss carryforwards. 10 12 The Company has recorded a valuation allowance equal to the amount of deferred income tax assets for the fiscal year ended July 31, 1998. In making this determination the Company considered its operating history and the end of its relationship with HSN during January 1997. 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 prior 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 was primarily related to an end to the Company's relationship with 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. 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. In fiscal 1997 the Company ceased distributing 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 was 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 was primarily related to a decrease of approximately $1,688,000 in compensation payments to Ms. 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 non-cash 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 was 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. 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, 11 13 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, was approximately $4.3 million with various expiration dates through 2013. The Company 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 its operating history and the end of its relationship with HSN during January 1997 following the departure of Ms. 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 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 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, and 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. 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. 12 14 The remaining NOL available to the Company for federal income tax reporting purposes at July 31, 1996 was approximately $4,300,000. The Company had $707,000 of the NOL carry-forward available for use for the tax year ending July 31, 1997. OTHER Revenue is recognized upon shipment of merchandise to the customer with a reserve for sales returns 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, 1998 and 1997, the Company's provision for advertising and salary deductions was $728,018 and $844,162 respectively. The Company utilizes financial and distribution software that was developed to be year 2000 compliant. Its software vendor has performed tests on each of the Company's software programs and has made revisions as needed. Final tests have not yet been performed and the Company's plans include a test which will simulate year 2000 conditions. This test is scheduled to be completed during the fiscal year ending July 31, 1999. The Company has 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 $1,335,089 at July 31, 1998, an increase of $80,941 from working capital of $1,254,148 at July 31, 1997. Beginning in the third quarter of fiscal 1997 the Company began suffering significant losses from operations as a result of the unanticipated discontinuance of appearances on HSN. The Company's relationship with HSN ended as a result of the Company's contract dispute with Adrienne Newman. The Company appeared on HSN from April 1995 through January 1997. Ms. Newman had been the Company's spokesperson on HSN under the name Adrien Arpel. During the period that the Company appeared on HSN it recorded profits and generated positive cash flows from operations. For the fiscal years ended July 31, 1995, 1996 and 1997, the Company's sales to HSN were $15,667,416, $17,858,631 and $11,965,350, which consisted of 48.7%, 51.4% and 48.4% of the Company's total revenues, respectively. As a result of the above factors, the Company's independent public accountants have issued a going concern opinion for the fiscal year ended July 31, 1998. In February 1998, the Company's then Board of Directors approved an agreement with an investment group headed by Barry W. Blank, (the "Blank Group"). Under the agreement the Blank Group advanced the Company working capital of $500,000. The initial $500,000 investment was in the form of a 12% five year note convertible into the Company's Common Stock, commencing August 1, 1998, and ending on the day before the note is paid but no later than January 30, 2003, at the rate of $0.25 per share. On February 9, 1998, the Company's Board of Directors elected Mr. Blank as President and Chief Executive Officer of the Company and accepted the resignation of Elisabeth Fayer, the Company's former Chairman and Chief Executive Officer, who owns a majority of the Company's Common Stock through an affiliated company, Fine Fragrance 13 15 Distribution, Inc.("FFD"). Mr. Blank is an investment banker who, until October 1998, was employed as the manager of the Phoenix office of J. Robbins Securities LLC. Mr. Blank is currently the manager of the Phoenix office of Dirks and Company, Inc., and personally owns seats on the New York and American Stock Exchanges. Under the agreement with the Blank Group, FFD also issued an option to the Group to acquire all of FFD's shares of the Company's Common Stock and granted Mr. Blank a proxy to vote these shares. FFD owns approximately 7.1 million shares of the Company's Common Stock which represented approximately 61% of the currently outstanding shares of such stock on the date of the transaction. The option is exercisable, in part or in whole, from time to time, for a period of 12 months which commenced on August 1, 1998, at $0.25 per share. The Company's former directors resigned their respective positions in conjunction with the above agreement and Mr. Blank appointed a new board consisting of Barry Feiner, an attorney who practices law in New York City, Joseph Giamanco, who is the principal owner of GHM, Inc., an American Stock Exchange specialist firm, John McConnaughy, Jr., a private investor, and Charles R. Hoover, an attorney practicing law in Phoenix, Arizona. On August 18, 1998, Mr. Hoover was also appointed President and Chief Operating Officer of the Company. On March 27, 1998, the Company's board of directors approved an additional $250,000 loan to the Company by a group (the "Interim Loan Group") which included Mr. Blank , Mr. McConnuaghy and Janet Portelly, the wife of Mr. Feiner. Ms. Portelly is also a member of the Blank Group. The advance was needed to help settle certain trade payables which were due to key inventory suppliers. This loan, which was received by the Company on April 20, 1998, bears interest at 12% and matures on May 31, 1999. The members of the Interim Loan Group also received one share of common stock for each dollar loaned. On June 23, 1998, the Company repaid $100,000, plus interest to Mr. McConnuaghy from the proceeds of the private financing discussed below. During May 1998, the Company commenced a private placement offering (the "Offering") through J. Robbins Securities, LLC., as placement agent, designed to raise up to $3 million in equity financing. The Offering consisted of the issuance of up to 60 units (the "Units"), each in the amount of $50,000. Each Unit consisted of 50,000 shares of the Company's Common Stock and 50,000 Class A Warrants. Each Class A Warrant entitles the holder to purchase one share of the Company's Stock at $2.00 per share and one Class B Warrant. Two Class B Warrants entitle the holder to purchase one share of Common Stock at $4.00 per share. The Class A Warrants are exercisable at any time commencing upon issuance until May 31, 2001 and the Class B Warrants are exercisable at any time commencing upon issuance until May 31, 2003. This Offering was terminated on August 31, 1998 at which time 40.84 Units had been sold and gross proceeds of $2,042,000 had been raised. The net proceeds received by the Company amounted to $1,756,120 after paying $285,880 of placement fees and other Offering expenses. The Company was dependent upon the receipt of the proceeds from the Blank Group, the Interim Loan Group and its Offering in order to reduce past due accounts payables and invest in the production of finished goods inventory; However, the Company received these proceeds later than anticipated which resulted in a delay of payments to key inventory suppliers during the last quarter of fiscal 1998. In addition, some of the Company's key suppliers have been hesitant about producing new orders without being fully paid on past due invoices. During the fourth quarter of fiscal 1998 the need for finished goods inventory became even more critical when the Company was successful in obtaining the commitment from Sears. The commitment resulted in the Company's launching its product line in approximately 160 Sears locations throughout the United States. The Company and Sears plan to increase distribution to an additional 270 locations commencing in the summer of 1999. The Company considers its Sears relationship as one of the major steps towards building a growing, long term, profitable business. Substantial inventory could not be ordered until additional funds were received by the Company. The Company's suppliers refused to extend additional 14 16 credit. Upon receipt of the initial equity financing in June, orders were immediately placed. These orders began to be filled during July. The inventory of finished goods was so small, until the end of July, that no customers could effectively be supplied. Packing for shipment started in late July as soon as inventory arrived. However, no substantial shipments were possible until after July 31, 1998, the end of the current fiscal year. These factors contributed to the Company's unprofitable results for the fourth quarter ended July 31, 1998. The Company's inventory levels continue to improve but they are not yet at levels satisfactory to meet immediate anticipated customer demand. The Company has effected significant expense reductions during the latter part of fiscal 1998 and seeks further non-operating expense reductions during fiscal 1999. In addition, the Company's plans are directed in the following areas: - Continued realignment of the Company's United States department store operations by concentrating on potentially profitable department store groups and markets. The Company has undertaken a program to close non performing and unprofitable locations and concentrate in markets and department stores where its products are potentially more profitable. As a result of this plan, during fiscal 1998, the Company reduced its distribution from 243 stores at July 31, 1997 to 114 stores at July 31, 1998. During August 1998, the Company began distribution of its products through approximately 160 Sears Roebuck & Company locations ("Sears")throughout the United States. The Company and Sears currently plan to expand this distribution to an approximately 270 additional locations commencing in the summer of 1999. - Development of other areas of distribution. The Company will commence distribution to the U.S. Military through an insert included in the Military's mailings. Separate mailings are currently scheduled to take place during the fall of 1998 and will reach a worldwide audience of approximately 1.5 million military personnel. - Further enhancement of the Company's Internet site. The Company began offering its products through its Internet site during June 1998, (www.adreinarpel.com). The Company is utilizing NETVENTURES, INC., SHOPBUILDER (TM) technology to maintain its online outlet. - Improvement of the Company's salon business. The Company currently operates 64 salons under various arrangements within select department stores throughout the United States and Canada. The Company plans to re-fixture and modernize many of these locations. The Company plans to rename its wholly owned subsidiary as ADRIEN ARPEL SPA & SALON, Inc., through which it intends to conduct its salon business. Management plans to introduce a line of products specifically designed for this new subsidiary. Management also plans to offer its products through independent salons. Management believes that its cost reduction programs combined with its new initiatives should enable the Company to improve upon its fiscal 1998 performance and provide satisfactory liquidity during fiscal 1999, although no assurance can be given that management will be successful. EFFECTS OF INFLATION The Company did not have any significant price increases for its products during the fiscal years ended July 31, 1998, 1997, 1996. Selected price increases are planned for January 1999 and will be announced during December 1998. 15 17 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 On April 30, 1998, Arthur Andersen LLP (the "Former Accountants") resigned as the Company's certified public accountants. In connection with the audits of the Company's financial statements for the fiscal years ended July 31, 1996 and 1997 and for the period from August 1, 1997 through April 30, 1998, there were no disagreements with the Former Accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the Former Accountants, would have caused them to make reference to the subject matter of the disagreement in their report. The Former Accountants' reports on the Company's financial statements for the fiscal years ended July 31, 1996 or 1997 do not contain an adverse opinion or disclaimer of opinion but does include an explanatory paragraph concerning the Company's ability to continue as a going concern. A letter from the Former Accountants addressed to the Securities and Exchange Commission stating that they agree with the Company's response to this Item is filed with the Securities Exchange Commission as an Exhibit to the Company's Form 8-K dated May 5, 1998. On May 7, 1998 the Company retained the services of Golub Goldstein Kessler LLP as its certified public accountants commencing with the fiscal year ending July 31, 1998. The Company's Audit Committee, Board of Directors and Shareholders have approved the change in auditors. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS The following table sets forth the names of each of the directors of the Company as of October 26, 1998, all of whom are expected to be nominated for reelection at the Company's next Annual Meeting of Shareholders.
NAME AGE DIRECTOR SINCE POSITION WITH COMPANY ---- --- -------------- --------------------- BARRY W. BLANK 57 February 1998 Chief Executive Officer, Director CHARLES R. HOOVER 68 May 1998 President, Chief Operating Officer and Director BARRY FEINER 64 March 1998 Director JOSEPH GIAMANCO 56 March 1998 Director JOHN E. MCCONNAUGHY, JR. 68 March 1998 Director
BARRY W. BLANK became Chief Executive Officer, President and Chairman of the Board of Directors on February 9, 1998. Mr. Blank is currently the manager of Dirk's & Company, Inc's., Phoenix branch office and from April 1997 until October 1998, was the manager of the Phoenix, Arizona branch office of J. Robbins Securities, LLC, a NASD securities brokerage firm. For more than ten years prior thereto Mr. Blank acted in a similar capacity with a number of other securities brokerage firms, including Coleman and Company Securities, Inc., from May 1995 to April 1997, RAS Securities, Inc., from April 1993 to May 1995, and Dickinson & Co., from July 1991 to April 1993. Mr. Blank owns a seat on the New York and American Stock Exchanges, and for approximately 30 years has served as an officer with the Phoenix Police Department. He is also a director of Action Industries, a publicly held company engaged through a partially owned subsidiary in the retail optical business, and Integrated Technologies USA, Inc., who's shares are listed on the American Stock Exchange. 16 18 CHARLES R. HOOVER, was elected as President and Chief Operating Officer of the Company during August 1998. For more than the past five years Mr. Hoover has been an attorney practicing in Phoenix, Arizona, from August 1997 as a partner of Piccoli, Lester & Hoover, LLP., and prior thereto under his own name. BARRY FEINER is and has been for more than the past five years an attorney practicing in New York City under his own name. Mr. Feiner is also a director of Fortune National Resources Corporation, and American Stock Exchange listed company engaged in the business of exploiting oil and natural gas resources. JOSEPH GIAMANCO is and has been for more than the past five years the President of GHM, Inc., a company which acts as a specialist on the American Stock Exchange. JOHN E. MCCONNAUGHY, JR. is and has been for more than the past five years the Chairman and Chief Executive Officer of JEMC Corporation, a private investment company located in Stamford, Connecticut. EXECUTIVE OFFICERS Set forth below is certain information as of October 26, 1998 regarding the executive officers of the Company: EXECUTIVE OFFICERS
EXECUTIVE OFFICER NAME AGE POSITION WITH COMPANY SINCE ---- --- --------------------- ----- BARRY W. BLANK 57 Chief Executive Officer February 1998 CHARLES R. HOOVER 68 President, Chief Operating Officer August 1998 MICHAEL D. FICKE 43 Vice President, Chief Financial Officer; November 1993 Secretary MARY PANVINI 51 Senior Vice President/General Manager June 1997
Information with respect to MESSRS. BLANK and HOOVER is set forth under "Directors" above. MARY PANVINI rejoined the Company as Senior Vice President/General Manager in June 1997 and has served in this capacity since that time. Prior to her rejoining the Company, from January 1996 to June 1997, Ms. Panvini acted as an independent marketing consultant based in Washington DC. For more than the five years prior thereto, she served as a Regional Sales Director with Christian Dior Perfumes. MICHAEL D. FICKE joined the Company in July 1989. Mr. Ficke served the Company as Corporate Controller until his promotion to Vice President and Chief Financial Officer in November 1993. He is a certified public accountant and prior to joining the Company in 1989 served as Assistant Controller of Chanel Inc., a manufacturer and distributor of fragrance and cosmetic products. 17 19 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information for the fiscal years ended July 31, 1998, 1997 and 1996 with respect to all compensation awarded to, earned by or paid to the Company's Chief Executive Officer and its other executive officers who earned in excess of $100,000 for fiscal 1998 (the "Named Executive Officers") in all capacities in which such officers served.
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ OTHER ANNUAL STOCK - --------------------------- ----- -------- ------- ------------- ----- COMPENSATION (3) OPTION/WARRANT/COMPENSATION ---------------- --------------------------- ELISABETH FAYER (1) 1998 $182,869 $-0- $-0- -0- -0- CHAIRMAN AND CHIEF 1997 $574,167 -0- -0- -0- -0- EXECUTIVE OFFICER 1996 $290,000 -0- -0- -0- -0- BARRY W. BLANK (2) 1998 $49,917 $-0- $-0- -0- 200,000 CHAIRMAN AND CHIEF 1997 -0- -0- -0- -0- -0- EXECUTIVE OFFICER 1996 -0- -0- -0- -0- -0- MICHAEL D. FICKE 1998 $125,000 -0- -0- -0- 100,000 VICE PRESIDENT, 1997 $123,533 -0- -0- -0- -0- CHIEF FINANCIAL OFFICER, 1996 $ 96,500 -0- -0- -0- -0- SECRETARY MARY PANVINI 1998 $115,000 -0- -0- -0- 100,000 SENIOR VICE PRESIDENT 1997 $ 12,197 -0- -0- -0- -0- AND GENERAL MANAGER 1996 -0- -0- -0- -0- -0-
(1) Named President of the Company in September 1996, became Chief Executive Officer on October 23, 1996 and resigned on February 9, 1998. (2) Named Chairman and Chief Executive Officer and President of the Company on February 9, 1998 (3) Excludes personal benefits which did not exceed the lesser of $50,000 or 10%, on an annual basis, of such officer's salary and bonus, STOCK OPTION GRANTS The following table sets forth information as of October 26, 1998, with respect to stock options granted to directors and executive officers of the Company.
NAME POSITION VESTED NON VESTED EXERCISE - ---- -------- ------ ---------- PRICE ----- BARRY W. BLANK Chairman 25,000 75,000 (1) $0.68 BARRY FEINER Director 25,000 75,000 (1) 0.68 JOSEPH GIAMANCO Director 25,000 75,000 (1) 0.68 JOHN E. MCCONNAUGHY JR. Director 25,000 75,000 (1) 0.68 MICHAEL D. FICKE Chief Financial Officer, 25,000 75,000 (1) 0.68 Secretary MARY PANVINI Senior Vice President, General 25,000 75,000 (1) 0.68 Manager Sales CHARLES R. HOOVER Chief Operating officer, 300,000(2) -0- 0.875-1.0625 President, Director
18 20 (1) On March 27, 1998 100,000, options were granted which are exercisable at $0.68 per share for a period of 10 years. 25,000 options vested immediately and 25,000 options vest each year thereafter for a period of three years. If the Company has earnings per share of at least $0.30 during any annual period all non vested options vest immediately. (2) On June 4, 1998, 100,000 options were granted which are exercisable at $0.875 per share for a period of 10 years. These options were issued for services, specifically, assistance provided in the negotiation of the terms and drafting of two substantial contracts for channels of sales and distribution of the Company's products, with one to be completed on or before July 31, 1998 and the other on or before August 28, 1998. These options become vested as to 50% upon the completion of the services for one contract and 100% upon the completion of both contracts, or in the recognition and acknowledgment by the Company that neither contract will be completed by August 28, 1998. On August 18, 1998, 200,000 options were granted which are exercisable at $1.0625 per share. These options were granted pursuant to Mr. Hoover's appointment as President and Chief Operating officer. These options are qualified stock options pursuant to a plan which has not yet been submitted to shareholders for approval. All of these options vested immediately. YEAR-END OPTION VALUES TABLE The following table sets forth information at July 31, 1998, respecting exercisable and non-exercisable options held by the Named Executive Officers. The table also includes the value of "in-the-money" options which represents the spread between the exercise price of the existing stock options and the year-end price of the Common Stock. None of the named Executive Officers exercised any options during fiscal 1998.
VALUE OF NUMBER OF OPTIONS IN-THE-MONEY HELD AT OPTIONS HELD AT JULY 31, 1998 JULY 31, 1998(1) NOT NOT NAME EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE BARRY W. BLANK (2) 25,000 75,000 $17,375 $52,125 MICHAEL D. FICKE (2) 25,000 75,000 $17,375 $52,125 CHARLES R. HOOVER (3) -0- 100,000 -0- $50,000 MARY PANVINI (2) 25,000 75,000 $17,375 $52,125
(1) Based on a July 31, 1998 closing price of $1.375. (2) 100,000 Options granted March 27, 1998 exercisable at $0.68 per share for a period of ten years. 25,000 options vest immediately and 25,000 options vest each year thereafter for a period of three years. If the Company records earnings per share of at least $0.30 per share at the close of any fiscal year period all non vested options vest immediately. (3) 100,000 Options granted June 4, 1998 exercisable at $0.875 per share for a period of ten years. These options were issued for services, specifically, assistance provided in the negotiation of the terms and drafting of two substantial contracts for channels of sales and distribution of the Company's products, with one to be completed on or before July 31, 1998 and the other on or before August 28, 1998. These options become vested as to 50% upon the completion of the service for one contract and 100% upon the completion of both contracts, or on the recognition and acknowledgment by the Company that neither contract will be completed. These options vested after the close of the fiscal year ended July 31, 1998. 19 21 COMPENSATION ARRANGEMENTS Mr. Blank is currently an executive officer of the Company earning $100,000 per annum. He does not have a written employment agreement with the Company and currently devotes approximately one third of his time to Company business. Mr. Hoover is currently an executive officer with the Company earning $60,000 per annum. Mr. Hoover currently devotes approximately one half of his time to Company business. Commencing January 1, 1999, Mr. Hoover's salary will be increased to 110% of the next highest officers compensation at which time Mr. Hoover will devote approximately 100% of his time to Company business. Mr. Hoover's salary is being deferred until January 1999. Mr. Hoover does not have a written employment agreement with the Company. See Item 11, note (2) "Stock Option Grants" for information related to options granted to Mr. Hoover. Mr. Ficke is currently an executive officer of the Company earning $125,000 per annum pursuant to an employment agreement dated March 27, 1998. This agreement initially terminates on March 27, 1999, but will renew for one year periods unless either party serves written notice 90 days prior to the expiration of the agreement of such parties intent not to renew. Mr. Ficke also receives certain benefits which do not exceed 10% of his annual compensation and is also eligible to earn a bonus of $25,000 if the Company records a pre tax profit during two consecutive quarters. See Item 11, note (1) "Stock Option Grants" for more information related to options granted to Mr. Ficke. Ms. Panvini is currently Senior Vice President/General Manager of retail sales of the Company earning $115,000 per annum pursuant to an employment agreement dated March 27, 1998, which will renew for one year periods unless either party serves written notice 90 days prior to the expiration of agreement of such party's intent not to renew. Ms. Panvini also receives certain benefits which do not exceed 10% of her annual compensation. Ms. Panvini is also eligible to earn a bonus of $23,000 if the Company earns a pre-tax profit at the end of any fiscal year. See Item 11, note (1) "Stock Option Grants" for information related to options granted to Ms. Panvini. COMPENSATION FOR SERVICE AS DIRECTOR Until February 1998 each Director who was not also an officer or employee of the Company (Messrs. Desjardins and Korda for fiscal 1997) received $650 for each Board of Directors or Committee meeting attended by such Director or $200 for each meeting in which such Director participated by telephone conference. The Company does not currently compensate directors for attendance at board meetings but reimburses directors for expenses incurred for attending such meetings COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Ms. Fayer, who until February 9, 1998 served as President and Chief Executive Officer of the Company, determined the compensation for the Officers and employees of the Company for the fiscal year ended July 31, 1997. Ms. Fayer was not involved in the determination of her compensation as the Chief Executive Officer. Ms. Fayer's compensation was determined by the Company's Board of Directors. The current Board of Directors determines the compensation for the officers and employees of the Company. Mr. Blank, who serves as the Company's current Chairman and Mr. Hoover, who serves as the Company's current President and Chief Operating Officer, were not involved in the determination of their respective compensation arrangements. 20 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of October 26, 1998, regarding, (i) the share ownership of the Company by each person who is known to the Company to be the beneficial owner of more than five percent (5%) of the Company's outstanding Common Stock, (ii) the share ownership of the Company of each director, (iii) the share ownership of the Company of the Chief Executive Officer and each of the other executive officers of the Company who earned in excess of $100,000 during the Company's last fiscal year, and (iv) the share ownership of the Company of all directors of the Company and named executive officers as a group.
SHARES OF COMMON STOCK NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY APPROXIMATE OWNER OWNED (1) PERCENT OF CLASS (1) - ----- ----- -------------------- ELISABETH FAYER (2) 32 Belvedere -0- * Westmont, Quebec H34 IP4 BARRY W. BLANK (1) (2) (3) P.O Box 32056 8,213,935 51.7 Phoenix, Arizona 85064 BARRY FEINER (3) (5) 170 Falcon Court 25,000 * Manhassett, New York 11031 JOSEPH GIAMANCO (3) GHM, Inc. 25,000 * 74 Trinity Place New York, New York 10006 CHARLES HOOVER (4) (6) 2398 East Camelback Road 392,000 2.5 Phoenix, Arizona 85016 JOHN E. MCCONNAUGHY, JR. (1) (3) (6) JEMC Corp. 355,000 2.2 1011 High Ridge Road Stamford, Connecticut 06905 CAROL J. LUBIN (1) (2) 4079 Governor Drive, #231 900,000 5.7 San Diego, California 92122 JANET M. PORTELLY (1) (2) (5) (6) c/o Barry Feiner 237,500 1.5 170 Falcon Court Manhassett, New York 11031 MICHAEL D. FICKE (3) 75 Waters Edge 25,000 * Sparta, New Jersey 07871 MARY PANVINI (3) Watergate East 25,000 * 2510 Virginia Avenue Washington, DC 20037 OFFICER AND DIRECTORS as a group (7 persons) 10,198,435 64.2 *Less than 1%
21 23 (1) Ownership is of record and beneficial except as otherwise noted. This Stock includes 2 million shares issuable after July 31, 1998 upon conversion of the Notes as follows: 900,000 to Barry W, Blank; 900,000 to Carol J. Lubin; and 200,000 to Janet M. Portelly and 250,000 shares in connection with the Interim Loan as follows; 100,000 to Barry W. Blank; 100,000 to John McConnaughy; 25,000 to Ms. Portelly and 25,000 to a non Affiliated third party. (2) These shares are held by Barry Feiner, Esq., as escrow agent, in accordance with the option agreement between Ms. Fayer and Mr. Blank and others, as hereinafter described. They were transferred by Fine Fragrances Distribution, Inc. ("FFD"), a wholly-owned subsidiary of 3143040 Canada, Inc. which is controlled by Ms. Fayer. Ms. Fayer has caused FFD to grant an irrevocable proxy to Mr. Blank with respect to these shares. She has also caused FFD to grant Options to purchase these shares at $0.25 per share for a period of 12 months commencing August 1, 1998 as follows: 3,235,021 to Mr. Blank; 3,235,021 to Ms. Lubin; and 718,893 to Ms. Portelly. Mr. Blank has sole investment and voting discretion with respect to these shares and, accordingly, is deemed to be the beneficial owner of them. (3) On March 27, 1998, 100,000 options were granted, which are exercisable at $0.68 per share for a period of ten years. 25,000 vest immediately and 25,000 options vest each year thereafter for a period of three years. If the Company has earnings per share of $0.30 during any annual period all non vested options vest immediately. (4) On June 4, 1998 100,000 options were granted, which are exercisable at $0.875 per share for a period of 10 years. These options were issued for services and vest based on the occurrence of certain events, specifically the consummation of two substantial contracts for channels of distribution of the Company's products, with one to be completed before July 31, 1998 and the other on or before August 28, 1998. These options become vested as to 50% upon the completion of the services for one contact and 100% upon the completion of both contracts, or on the recognition and acknowledgment by the Company that neither contract will be completed. On August 18, 1998 200,000 options were granted at $1.0625 per share for a period of ten years. These options are qualified stock options pursuant to a plan which has not yet been submitted to shareholders for approval. All of these options vested immediately. (5) Mr. Feiner is Ms. Portelly's husband. Mr. Feiner disclaims beneficial ownership in these securities. These shares exclude 718,893 shares issuable upon exercise of the option granted by FFD to Ms. Portelly and other members of the Blank Group. (6) Includes 12,500, 92,000 and 230,000 shares, issued to Janet M. Portelly, Mr. Hoover and Mr. McConnaughy respectively, as participants in the Company's private placement offering to raise up to $3 million in equity financing. Excludes an aggregate of 33,000 shares purchased by Mr. Hoover's adult children in the Private Placement Offering as to which Mr. Hoover disclaims beneficial ownership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In February 1998, an investment group headed by Barry W. Blank which includes Janet M. Portelly, Mr. Feiner's wife, advanced the Company $500,000 in the form of convertible subordinated notes (the "Notes"). The Notes bear interest at the rate of 12% annum and are convertible commencing August 1, 1998 and ending on the day before the note is paid but no later than January 30, 2003, into Common Stock at a price of $0.25 per share. Interest is payable quarterly and principal is due January 31, 2003. 22 24 On February 9, 1998, Elizabeth Fayer, through Fine Fragrances Distribution, Inc. ("FFD"), a wholly owned subsidiary of 3143040 Canada, Inc., which is controlled by Ms. Fayer, granted an option to Mr. Blank, Ms. Portelly and Carol Lubin, the members of the Blank Group, to purchase 3,235,021, 3,235,021 and 718,893, shares respectively of the Company's Common Stock at $0.25 per share, exercisable in whole or in part, from time to time, for a period of 12 months commencing August 1, 1998 On March 27, 1998 the Board of Directors approved an additional advance of $250,000 to the Company. This loan was made by Mr. Blank, Mr. McConnaughy, Ms. Portelly and an unaffiliated third party, as follows: $100,000 by Mr. Blank, $100,000 by Mr. McConnaughy, $25,000 by Ms. Portelly and $25,000 by an unaffiliated third party. This loan bears interest at 12% and matures May 31, 1999. Participants also received one share of Common Stock for each dollar loaned. On June 23, 1998 the Company repaid $100,000, plus interest to Mr. McConnaughy from the proceeds of its Private Placement Offering. Mr. Blank, as an employee of the Placement Agent participated in marketing the Company's Offering and earned aggregate commissions of $112,310. The Placement Agent was also to be granted Warrants, exercisable over a five year period, commencing on the last closing date of the Offering. The Warrants to be granted, were to purchase an amount of Units equal to 10% of the number of Units sold in the Offering at an exercise price equal to 120% of the Unit Offering price. ($60,000 per unit). Mr. Blank, as an employee of the Placement Agent, was to receive 25% of such Warrants. The Company is disputing the issuance of these Warrants to the Placement Agent. Mr. Feiner, who is a current director of the Company, performs various legal services on behalf of the Company. Mr. Feiner specializes in Securities law and earned $20,420 which represented, an agreed upon amount of 1% of the gross proceeds raised under the Company's equity offering. Mr. Feiner has also earned approximately $50,200 for additional services performed on behalf of the Company for the Fiscal year ended July 31, 1998. 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) 23 25 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 The 1993 Stock Option Plan of ALFIN, INC. (7) (Exhibit 10.6) 10.7 Agreement dated June 13, 1997 between the Company and H. Galow related to the sale of the Company's Norwood, New Jersey distribution facility. (8) (Exhibit 10.7) (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). (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, 1994. (File No. 1-9135) (8) Incorporated by reference from the designated Exhibits to the Company's Annual report in Form 10K for the year ended July 31, 1997. (File No. 1-9135). (9) Incorporated by reference from the designated Exhibits to the Company's report on Form 8-K reporting on an event on May 5, 1998 including a letter from Arthur Andersen LLP (File No. 1-9135) (10) Incorporated by reference from the designated Exhibit of the Company's report on 8-K reporting on an event on May 9, 1998 (File No. 1-9135) 24 26 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 11, 1998 ADRIEN ARPEL, INC. By: /s/ Barry W. Blank ----------------------------- Barry W. Blank Chief Executive Officer/ Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael D. Ficke 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 due 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 9, 1998 on behalf of the Registrant and in the capacities indicated. Signature Title /s/Barry W. Blank Chief Executive Officer/ Barry W. Blank Director /s/Charles R. Hoover President/Chief Operating Officer Charles R. Hoover Director /s/Michael D. Ficke Vice President Michael D. Ficke Chief Financial Officer /s/Barry Feiner Director Barry Feiner /s/Joseph Giamanco Director Joseph Giamanco /s/John E. McConnaughy, Jr. Director John E. McConnaughy, Jr. 25 27 ADRIEN ARPEL, INC., (FORMERLY ALFIN, INC.) AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE INDEPENDENT AUDITOR'S REPORTS F- 2, F-3 CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1998 AND 1997 F-4 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED JULY 31, 1998 F-5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED F-6 JULY 31, 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED JULY 31, 1998 F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-20 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE FISCAL YEARS ENDED JULY 31, 1998 F-21
F-1 28 GOLDSTEIN GOLUB KESSLER LLP INDEPENDENT AUDITOR'S REPORT To the Board of Directors Adrien Arpel, Inc. We have audited the accompanying consolidated balance sheet of Adrien Arpel, Inc., (formerly Alfin, Inc.) and Subsidiaries as of July 31, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is no express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit provides 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 Adrien Arpel, Inc. and Subsidiaries as of July 31, 1998 and the results of their operations and their cash flows for the year then ended 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, the Company has suffered significant losses from operations and has had negative cash flow 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 audit was 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 the purpose 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 audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the fiscal 1998 financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. GOLDSTEIN GOLUB KESSLER LLP New York, New York October 12, 1998 F-2 29 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Adrien Arpel, Inc.: We have audited the accompanying consolidated balance sheet of Adrien Arpel, Inc., (formerly known as Alfin, Inc.) and Subsidiaries (the "Company") as of July 31, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended July 31, 1997 and July 31, 1996. 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 statements 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 the Company as of July 31, 1997, and the results of their operations and their cash flows for the years ended July 31, 1997 and 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 had 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 for 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. ARTHUR ANDERSEN LLP New York New York November 11, 1997 F-3 30 ADRIEN ARPEL, INC., (FORMERLY ALFIN, INC.) CONSOLIDATED BALANCE SHEETS JULY 31, 1998 AND 1997
ASSETS 1998 1997 - ------ ------------ ------------ CURRENT ASSETS: Cash & Cash Equivalents $ 433,943 $ 658,378 Accounts receivable, net of allowance for doubtful accounts and chargebacks of $868,116 and $891,532 at July 31, 1998 and 1997, respectively and sales allowances of $83,957 and $81,597 at July 31, 1998 and 1997, respectively 171,529 167,021 Inventories 1,743,684 2,227,549 Prepaid expenses & other current assets 876,248 880,938 ------------ ------------ Total Current Assets 3,225,404 3,933,886 ------------ ------------ Property & Equipment, Net 256,864 592,687 ------------ ------------ Other Assets 183,597 83,938 ------------ ------------ Total Assets $ 3,665,865 $ 4,610,511 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY 1998 1997 - ----------------------------------- ------------ ------------ CURRENT LIABILITIES: Due to related parties $ 62,517 $ 0 Accounts Payable 818,699 1,365,767 Accrued expenses - other 1,009,099 1,313,971 ------------ ------------ Total Current liabilities 1,890,315 2,679,738 CONVERTIBLE NOTE - RELATED PARTIES 500,000 - ------------ ------------ Total Liabilities 2,390,315 2,679,738 ------------ ------------ REDEEMABLE PREFERRED STOCK $ 750,000 $ 750,000 ------------ ------------ SHAREHOLDERS' EQUITY: Common Stock, $.01 par value 50,000,000 shares authorized; 14,146,366 & 11,787,983 shares issued & outstanding at July 31, 1998 & 1997, respectively 141,463 117,879 Additional paid-in capital 16,131,512 12,953,123 Accumulated deficit (15,747,425) (11,890,229) ------------ ------------ Shareholders' equity 525,550 1,180,773 ------------ ------------ Total Liabilities & Shareholders' Equity $ 3,665,865 $ 4,610,511 ============ ============
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-4 31 ADRIEN ARPEL, INC., (FORMERLY, ALFIN, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED JULY 31
1998 1997 1996 ------------ ------------ ------------ NET SALES $ 5,908,754 $ 24,700,684 $ 34,733,375 COST OF GOODS SOLD 1,732,805 8,183,676 11,380,089 ------------ ------------ ------------ GROSS PROFIT 4,175,949 16,517,008 23,353,286 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,665,526 17,774,382 20,532,894 WRITE-OFF OF GOODWILL - 2,620,081 - ------------ ------------ ------------ OPERATING (LOSS) INCOME $ (3,489,577) $ (3,877,455) $ 2,820,392 ------------ ------------ ------------ OTHER INCOME (EXPENSE), NET INTEREST INCOME (EXPENSE), NET 24,280 (38,013) (313,100) NON CASH FINANCING CHARGES (1,302,223) - - LEGAL SETTLEMENT 1,000,000 - - GAIN ON SALES OF ASSETS - 986,320 394,392 OTHER INCOME (EXPENSE) 25,287 - (27,992) ------------ ------------ ------------ TOTAL OTHER (EXPENSE) INCOME (252,656) 948,307 53,300 ------------ ------------ ------------ (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (3,742,233) (2,929,148) 2,873,692 PROVISION FOR INCOME TAXES 6,213 79,414 181,000 ------------ ------------ ------------ NET (LOSS) INCOME (3,748,446) (3,008,562) 2,692,692 PREFERRED STOCK DIVIDENDS 108,750 108,750 108,750 ------------ ------------ ------------ INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (3,857,196) $ (3,117,312) $ 2,583,942 ============ ============ ============ BASIC (LOSS) INCOME PER SHARE AVAILABLE TO COMMON SHAREHOLDERS $ (0.32) $ (0.26) $ 0.21 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES 12,127,908 11,894,471 12,200,730
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-5 32 ADRIEN ARPEL, INC., (FORMERLY, ALFIN, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED JULY 31, 1998
================================================================================================================ NUMBER OF ADDITIONAL SHAREHOLDERS COMMON COMMON PAID-IN ACCUMULATED EQUITY SHARES STOCK CAPITAL DEFICIT TOTAL ================================================================================================================= BALANCE, JULY 31, 1995 11,519,311 $ 115,193 $12,629,976 $(11,356,859) $ 1,388,310 STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 93,615 936 107,814 (108,750) - STOCK ISSUED FOR OPTIONS 50,000 500 49,500 - 50,000 NET INCOME 2,692,692 2,692,692 ----------- ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1996 11,662,926 116,629 12,787,290 (8,772,917) 4,131,002 STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 66,724 667 108,083 (108,750) _ STOCK ISSUED FOR OPTIONS 58,333 583 57,750 - 58,333 NET LOSS (3,008,562) (3,008,562) ----------- ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1997 11,787,983 117,879 12,953,123 (11,890,229) 1,180,773 STOCK DIVIDENDS ON REDEEMABLE PREFERRED STOCK 230,883 2,309 106,441 (108,750) - BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT SECURITIES 625,000 625,000 STOCK ISSUED PRIVATE PLACEMENT OFFERING 1,877,500 18,775 1,614,650 1,633,425 COMMON STOCK ISSUED IN CONNECTION WITH RELATED PARTY NOTE PAYABLE 250,000 2,500 200,625 203,125 FINANCING COSTS RELATED TO ISSUANCE OF BENEFICIAL OPTION 561,581 561,581 DEFERRED OFFERING COSTS RELATED TO THE ISSUANCE OF BENEFICIAL OPTIONS 70,092 70,092 NET LOSS (3,748,446) (3,748,446) ----------- ----------- ----------- ------------ ----------- BALANCE, JULY 31, 1998 14,146,366 $ 141,463 $16,131,512 $(15,747,425) $ 525,550 =========== =========== =========== ============ ===========
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-6 33 ADRIEN ARPEL, INC. (FORMERLY, ALFIN, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED JULY 31
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 1996 - ------------------------------------ ---- ---- ---- Net (Loss) Income $(3,748,446) ($3,008,562) $ 2,692,692 Adjustments to Reconcile Net (Loss) Income to Net Cash (Used in) Provided by Operating Activities: Depreciation and Amortization 314,658 461,485 749,887 Non Cash Financing Cost 1,302,223 - - Loss on Write-off of Fixed Assets 122,134 270,188 3,750 Gain on Sales of Assets - (986,320) (394,392) Write-off of Goodwill - 2,620,081 - Changes in Assets and Liabilities: (Increase) Decrease in Accounts Receivable (4,508) 513,349 711,945 Decrease in Inventory 483,865 1,043,577 55,441 Increase in Prepaid Expenses and Other (24,876) (41,168) (56,726) Decrease in Accounts Payable & Accrued Expenses (851,940) (1,304,121) (1,046,256) ----------- ----------- ----------- Total Adjustments 1,341,556 2,577,071 23,649 ----------- ----------- ----------- Net Cash (Used in) Provided by Operating Activities (2,406,890) (431,491) 2,716,341 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Capital Expenditures (100,970) (231,786) (346,485) Sale of License Agreement - - 500,000 Sale of Building - 1,415,675 - ----------- ----------- ----------- Net Cash (Used in) Provided by Investing Activities (100,970) 1,183,889 153,515 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Payment of Lines of Credit - (1,600,000) (822,520) Borrowings from Line of Credit - - 328,000 Loans from (Payments to) Related Parties 650,000 (4,826) (30,000) Payment of Debt Obligations - (33,499) (300,000) Payment of Term Promissory Note - (725,000) (400,000) Proceeds from Sale of Stock 1,633,425 58,333 50,000 ----------- ----------- ----------- Cash Provided by (Used in) Financing Activities 2,283,425 (2,304,992) (1,174,520) ----------- ----------- ----------- Net (Decrease) Increase in Cash (224,435) (1,552,594) 1,695,336 Cash & Cash Equivalents at Beginning of Year 658,378 2,210,972 515,636 ----------- ----------- ----------- Cash & Cash Equivalents at End of Year $ 433,943 $ 658,378 $ 2,210,972 =========== =========== =========== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $ 21,014 $ 114,994 $ 297,432 Income Taxes 11,165 158,109 271,695 Supplemental Disclosure of Non Cash Financing Activities; $ 108,750 $ 108,750 $ 108,750 Stock Dividends
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements. F-7 34 ADRIEN ARPEL, INC. (FORMERLY, ALFIN, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS: Until July 1998, the Company was comprised of ALFIN, Inc., a New York corporation and its wholly owned subsidiary ADRIEN ARPEL, INC., a Delaware corporation. During the Company's annual meeting, shareholders' approved an amendment to Alfin, Inc's., Certificate of Incorporation to change the name of Alfin, Inc., to Adrien Arpel, Inc. (the "Company"). In conjunction with the change of the New York Corporation name, the name of the Delaware corporation was changed from Adrien Arpel, Inc. to Arpel Cosmetics, Inc. The Company, develops, distributes and sells treatment and cosmetic products. Additionally, the Company acts as an operator of service-oriented skin care salons in certain select department stores. From April 1994 through January 1997 the Company also distributed specially packaged cosmetic products through television marketing on the Home Shopping Network ("HSN"). During fiscal 1998 the Company also began marketing and selling products through catalogs and the Internet. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company's wholly owned subsidiary, ADRIEN ARPEL, INC.(Delaware), and its wholly owned subsidiary, Arpel Cosmetics Inc. All significant intercompany transactions and accounts have been eliminated in consolidation. 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, 1998 and 1997 were comprised of:
1998 1997 ---------- ---------- FINISHED GOODS $1,049,002 $ 790,079 RAW MATERIAL AND COMPONENTS 694,682 1,437,470 ---------- ---------- $1,743,684 $2,227,549 ========== ==========
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. F-8 35 CASH AND CASH EQUIVALENTS - Cash equivalents consist of money market accounts and liquid investments with maturities of three months or less. 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, 1998 and 1997 the Company's provision for advertising and salary deductions was $728,018 and $844,162 respectively. PROPERTY AND EQUIPMENT - Property and equipment are stated cost and depreciated using the straight-line method over their estimated useful lives ranging from 4 to 7 years. 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, 1998 and 1997:
1998 1997 FURNITURE & FIXTURES $ 1,243,105 $ 1,450,653 MACHINERY & EQUIPMENT 340,572 882,375 ----------- ----------- TOTAL PROPERTY & EQUIPMENT 1,583,677 2,333,028 ACCUMULATED DEPRECIATION (1,326,813) (1,740,341) ----------- ----------- NET PROPERTY & EQUIPMENT $ 256,864 $ 592,687 =========== ===========
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. OTHER ASSETS - On April 23, 1998, the Company and Adrienne Newman reached a settlement agreement related to their litigation which was initiated by Ms. Newman on October 28, 1996. Under the settlement agreement, Ms. Newman is paying the Company $1 million dollars in installments. The Company had received $225,000 as of July 31, 1998. Under the settlement agreement, Ms. Newman is required to pay the Company $725,000 during fiscal 1999 with the final installment of $50,000 due on August 1, 1999. Commencing October 1998 installment payments will bear interest at the prime rate. The Company recorded the gross settlement of $1 million during the fiscal year ended July 31, 1998. This settlement is reflected as "Other Income" on the Company's statement of operations. The current portion of $715,000 and the long-term portion of $50,000 which remain due are reflected as part of Prepaid Expenses & Other Current Assets and, Other Assets, respectively on the accompanying balance sheet. 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. F-9 36 During December 1996 the Company made a deposit of $1 million ostensibly towards the purchase of fragrance products from Laboratories Selecta in France ("Selecta"). During May 1997 the Company and Selecta agreed to cancel this purchase. Under the agreement to cancel Selecta has refunded to the Company $1 million dollars plus interest of $76,229. The final installment payment was made during January 1998. Interest on the repayment was charged at 10.5%. The Company's current management does not understand the commercial viability for this transaction or the reason for it being undertaken. Goodwill was being amortized using the straight-line method over 40 years. The Company's prior management evaluated 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. Since operating losses were experienced and projections indicated that they would continue, the Company's prior management determined that impairment existed on the basis of undiscounted expected future cash flows from operations before interest. Since impairment existed, the carrying value amount was reduced by the estimated shortfalls of cash flows. As a result of the Company's prior management's evaluation of its future cash flows from operations before interest a non-cash write off of $2,620,081 was recorded in the fourth quarter of fiscal 1997. BALANCE SHEET DETAIL: Prepaid expenses & other current assets at July 31, consist of the following:
1998 1997 ---------- ---------- CURRENT PORTION OF LEGAL SETTLEMENT $ 725,000 $ - DUE FROM LABORATORIES SELECTA - 750,000 PREPAID INSURANCE 64,353 76,806 OTHER 86,895 54,132 ---------- ---------- PREPAID EXPENSES & OTHER CURRENT ASSETS $ 876,248 $ 880,938 ========== ========== Other assets at July 31, consist of the following: 1998 1997 ---------- ---------- SECURITY DEPOSITS $ 63,505 $ 83,938 LONG TERM PORTION OF LEGAL SETTLEMENT 50,000 - DEFERRED FINANCE CHARGES 70,092 - ---------- ---------- OTHER ASSETS $ 183,597 $ 83,938 ========== ========== Accrued expenses - other at July 31, consist of the following: 1998 1997 ---------- ---------- COMMISSIONS DUE ADRIENNE NEWMAN $ - $ 328,693 ACCRUED SALARIES & WAGES 160,662 199,114 ACCRUED GENERAL OBLIGATIONS 829,477 767,204 OTHER 18,960 18,960 ---------- ---------- ACCRUED EXPENSES $1,009,099 $1,313,971 ========== ==========
NON CASH FINANCING CHARGES: In February 1998, the Company's then board of directors approved an agreement with an investment group headed by Barry W. Blank (the "Blank Group"). Under the agreement, the Blank Group advanced the Company working capital of $500,000 and committed to use its best efforts to raise no less than an additional $2 million in equity. The initial $500,000 investment was in the form of a 12% five year note convertible into the Company's Common Stock, commencing on August 1, 1998 and ending on the day before the note is paid but no later than January 30, 2003, at the rate of $0.25 per share. The board of directors also elected Mr. Blank as Chairman, President and Chief Executive Officer of the Company and accepted the resignation of Ms. Elisabeth Fayer, the Company's former Chairman and Chief Executive Officer, who owns a majority of the Company's common stock through an affiliated company, Fine Fragrances, Inc. ("FFD"). The Blank Group was also issued an option from the Company's majority shareholder to acquire 7,188,235 shares of the F-10 37 Company's Common Stock which represented approximately 61% of the outstanding shares of the Company's Common Stock on the date of the transaction. The option to acquire there shares is exercisable, in whole or in part, for a period of 12 months commencing in August 1, 1998 at $0.25 per share. During April 1998 an Interim Loan Group advanced the Company $250,000. The Interim Loan Group includes Mr. Blank, Mr. McConnaughy, Janet M. Portelly, and an unaffiliated party. Ms. Portelly, who is the wife of Mr. Feiner, is also a member of the Blank Group. In connection therewith, the group also received one share of Common Stock for each dollar loaned constituting an aggregate of 250,000 shares. This loan bears interest at 12% and matures on May 31, 1999. The Company is accounting for the issuance of these convertible debt securities in accordance with "Emerging Issues Task Force Topic No. D-60." This topic addresses the issuance of convertible securities that have a beneficial conversion feature. The beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to paid-in capital. The amount is calculated as the difference between the conversion price and the fair market value of the Company's Common Stock at the date of the loan. Any discount resulting from the allocation of proceeds to the beneficial conversion feature increases the effective interest rate of the security and is reflected as a charge to non cash financing charges. As it relates to the initial $500,000 in financing, received from the Blank Group during February 1998, the Company has allocated $625,000 to the beneficial conversion feature which has been reflected as non cash financing charges, at August 1, 1998, which is when the debt first becomes convertible. As it relates to the $250,000 advance to the Company during April 1998 the Company has recorded $115,642 of non cash finance charges which reflects the value of the common stock on the date of the loan. The Company recorded $561,581 of non cash financing charges related to the Blank Group's option to purchase 7,188,235 shares of common stock from FFD at $0.25 per share commencing August 1, 1998. This amount was recorded as non cash financing charges for the portion which was allocated to the $500,000 Related Party Note and as an offset to Additional Paid in Capital, for the portion based on equity (due to the Company's private placement) and was calculated as the difference between the exercise price and the fair market value of the Company's Common Stock at the date the Blank Group received the option to purchase the FFD shares. COST OF ADVERTISING - The Company expenses all advertising costs in the period in which the cost is incurred. During December 1997, the Company entered into an agreement with Spiegel Inc. ("Spiegel"). Under the terms of the agreement, the Company participates in Spiegel's Specialty Catalog Reverse Syndication Program. This program currently involves seasonal mailings of the Company's catalog featuring a selection of the Company's cosmetic and skin care products. The Company is responsible for all promotional expenses, including but not limited to printing and production costs. Spiegel is responsible for mailing costs and receives a fee equal to 10% of net sales including shipping and handling charges. 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 - Sales to foreign accounts, expressed as a percentage of net sales, were 17.3%, 7.2% and 6.4% for the fiscal years ended July 31, 1998, 1997 and 1996, respectively. F-11 38 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. The Company's relationship with HSN ended during January 1997. RECENTLY ISSUED ACCOUNTING STANDARDS - 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 for the fiscal year ended July 31, 1998 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 February 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 128, Earnings per Share. SFAS No. 128 requires dual presentation of basic earnings per share ("EPS") and diluted EPS on the face of all statements of earnings issued for periods ending after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants and other convertible securities. The adoption of SFAS No.128 had no effect on the restatement of the net income or loss per common share for the years ended July 31, 1997 and 1996. 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 believes the adoption of SFAS No. 131 will not have a material effect on the financial statements. USE 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 94% of the Company's fiscal 1998 sales were made with department stores, of which approximately 79.0% were derived from merchandise, 7.6% from salon services and 13.4% from seasonal promotional items. One department store arrangement accounted for approximately 32.5% of the Company's net sales for the year ended July 31, 1998, and one department store customer accounted for approximately 17.2% of the Company's net sales for the year ended July 31, 1998. (3) GOING CONCERN: The Company has incurred significant losses from operations since January 1997 as a result of the unanticipated discontinuance of appearances on the Home Shopping Network resulting from a dispute with Adrienne Newman. The Company does not maintain any debt financing arrangements and has been dependent upon cash provided by an investment group, an interim loan group and a private equity finance offering. The Company has implemented certain initiatives and management's plans include a number of new F-12 39 initiatives to improve upon its fiscal 1998 results. If the Company is not successful, it is anticipated that losses from operations will continue to occur. This uncertainty raises doubt about the Company's ability to continue as a going concern and its ability to generate sufficient cash to support its operations. The Company has made dramatic expense cuts during the latter part of fiscal 1998 and seeks a further reduction of non-operating costs during fiscal 1999. The Company's fiscal 1998 operating results suffered from a shortage of readily available and regularly produced finished goods inventory. The Company has been successful in improving the level and flow of inventory and has recently introduced its products through approximately 160 Sears locations with the prospect of expanding this relationship to up to an approximately additional 270 locations. The Company's other plans include development of additional avenues of distribution, further enhancement of the Company's Internet capabilities and improvement and expansion of its salon business. Management believes that its cost reduction programs combined with its new initiatives should enable the Company to improve upon its fiscal 1998 performance and provide satisfactory liquidity during fiscal 1999 although no assurance can be given that management will be successful. (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, 1995 through July 31, 1998:
FISCAL YEARS ENDED J U L Y 3 1 1998 1997 1996 ----------------------------------------------------------------------------------------------------------- WARRANTS OUTSTANDING, BEGINNING OF PERIOD 625,000 750,000 875,000 GRANTED 1,877,500 - - EXERCISED - - - FORFEITED 625,000 125,000 125,000 WARRANTS OUTSTANDING, END OF PERIOD 1,877,500 625,000 750,000 EXERCISE PRICES PER SHARE FOR SHARES UNDER WARRANT, END OF PERIOD $2.00 $1.25 $1.25
The warrants granted during 1998 were granted as part of the Company's private placement offering (the "Offering") designed to raise equity financing. Under the Offering, participants received 50,000 shares of the Company's common stock and 50,000 Class A Warrants. Each Class A Warrant entitles the holder to purchase one share of the Company's common stock at $2.00 per share and one Class B Warrant. Two Class B Warrants entitle the holder to purchase one share of the Company's common stock at $4.00 per share. The Class A Warrants, which are reflected above, are exercisable at any time upon issuance until May 31, 2001 and the Class B Warrants are exercisable at any time commencing upon issuance until May 31, 2003. F-13 40 (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, 1998 and 1997 due to, the operating history of the Company and the end of the Company's relationship with HSN during January 1997 as a result of the litigation with Adrienne Newman. Significant components of the Company's deferred income tax assets and liabilities at July 31, 1998 and July 31, 1997, are as follows:
JULY 31, JULY 31, 1998 1997 ----------- ----------- (TAX EFFECTED) DEFERRED INCOME TAX ASSETS: NET OPERATING LOSS CARRY FORWARDS $ 645,000 $ 2,140,000 ALTERNATIVE MINIMUM TAX CREDIT CARRY FORWARD 114,000 114,000 BAD DEBT RESERVE 11,000 106,000 INVENTORY RESERVE 83,000 549,000 OTHER - 50,000 ----------- ----------- 853,000 2,959,000 VALUATION ALLOWANCE (853,000) (2,959,000) ----------- ----------- NET DEFERRED TAX ASSET $ - $ - ----------- -----------
The reconciliation of income tax attributable to continuing operations compared to the U.S. federal statutory rates tax expense is as follows:
JULY 31, 1998 ------------- FEDERAL STATUTORY RATE (34%) VALUATION ALLOWANCE 34% ----------- EFFECTIVE TAX RATE -0%- -----------
In 1992 the Company had an ownership change and has had several recent sales of securities. Under Section 382 of the Internal Revenue Code (the "Code"), ownership changes may severely limit, on an annual basis, the Company's ability to utilize its net operating loss carryforwards. At July 31, 1998, the amount of federal operating loss carry forwards was $4,300,000 with expirations at various dates through 2013, however; the use of pre-acquisition operating loss carryforwards is limited by the Code. F-14 41 The provision for income taxes consists of the following:
FOR THE FISCAL YEAR ENDED JULY 31 --------------------------------- 1998 1997 ------- ------- CURRENT: STATE $ 6,213 $79,414 ------- ------- TOTAL CURRENT $ 6,213 $79,414 ------- ------- DEFERRED: ------- ------- TOTAL PROVISION $ 6,213 $79,414 ======= =======
RELATED PARTY LOANS: During February 1998, the Company received $500,000 in financing, pursuant to an agreement with the Blank Group. This Financing is in the form of a 12% five year note convertible into the Company's Common Stock, commencing on August 1, 1998, and ending on the day before the note is paid but no later than January 30, 2003, at the rate of $0.25 per share. During April 1998 an Interim Loan Group advanced the Company $250,000. In connection therewith, the group will also received one share of Common Stock for each dollar loaned constituting an aggregate of 250,000 shares. This loan bears interest at 12% and matures on May 31, 1999. The issuance of the 250,000 shares is deemed to be an additional financing cost which is valued at the fair market value of the Company's Common Stock at the date of the loan. The Related Party Loan Payable is stated net of $89,483 of deferred financing charges expense at July 31, 1998. During June, the Company repaid $100,000 toward this loan from the proceeds of its Private Placement Offering. RELATED PARTY TRANSACTIONS: Mr. Blank participated in marketing the Company's Private Placement Offering and earned aggregate commissions of $112,310, as an employee of the Placement Agent. The Placement Agent was also to be granted Warrants, exercisable over a five year period, commencing on the last closing date of the Offering. The Warrants to be granted, were to purchase an amount of Units equal to 10% of the number of Units sold in the Offering, at an exercise price equal to 120% of the Unit Offering price ($60,000 per Unit). Mr. Blank, was to receive 25% of such Warrants from the Placement Agent. The Company is currently disputing the issuance of these Warrants to the Placement Agent. Mr. Feiner, who is a current director of the Company, performs various legal services on behalf of the Company. Mr. Feiner specializes in Securities law and earned $20,420 which represented, an agreed upon amount of 1% of the gross proceeds raised under the Company's equity offering. Mr. Feiner has also earned approximately $50,200 for additional services performed on behalf of the Company for the Fiscal year ended July 31, 1998. (7) EQUITY During May 1998, the Company commenced a Private Placement Offering (the "Offering") designed to raise up to $3 million in equity financing. The Offering consisted of the issuance of up to 60 units (the "Units"), each in the amount of $50,000. Each Unit offered consisted of 50,000 shares of the Company's Common Stock, 50,000 Class A Warrants and 50,000 Class B Warrants. Each Class A Warrant entitles the holder to purchase one share of the Company's Stock at $2.00 per share and one Class B Warrant. F-15 42 Two Class B Warrants entitle the holder to purchase one share of the Company's Common Stock at $4.00 per share. The Class A Warrants are exercisable at anytime up until May 31, 2001 and the Class B Warrants are exercisable at any time upon issuance until May 31, 2003. No valve has been allocated to the Warrants due to immateriality. As of July 31, 1998, the Company has received $1,877,500 in gross proceeds under the Offering. The net proceeds available to the Company was $1,614,650 after paying $262,850 in placement expenses and Offering fees. Subsequent to the Company's fiscal year ended July 31, 1998, the Company received as additional $164,500 of gross proceeds under the Offering and net proceeds of $141,470. This Offering was terminated on August 31, 1998, at which time 40.84 Units had been sold. (8) REDEEMABLE PREFERRED STOCK: On July 6, 1993, the Company issued 30,000 shares of $25.00, 14.5% Preferred Stock, which is required to be redeemed 10 years after issuance. The Company has the option to pay dividends in common stock or cash. 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 for each year, minus 20% of that average price. The Company declared a Common Stock dividend of 230,883 shares which was issued in April 1998. The Company's Board of Directors is expected to declare a Common Stock dividend of approximately 163,000 shares during November 1998. (9) EMPLOYEE BENEFIT 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 $10,000 of their annual gross compensation. The Company has the option to make discretionary matching contributions and has not contributed to the plan for the years ended December 31, 1996 and 1997. For the plan year ending December 31, 1998, no Company matching contribution is presently planned, but such a contribution will be considered by the board of directors. (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. 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. During the year ended July 31, 1998, the Company has issued certain stock options pursuant to a qualified stock option plan which has not yet been submitted to shareholder's for approval. 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 1996, 1997 and 1998, consistent with provision of SFAS No. 123, the Company's net (loss) income and (loss) income per share would have been as follows:
1998 1997 1996 ---- ---- ---- NET (LOSS) INCOME AS REPORTED $(3,748,446) ($3,008,562) $2,692,692 NET (LOSS) INCOME AS PROFORMA (3,886,771) (3,008,888) 2,692,692 (LOSS) INCOME PER SHARE AS REPORTED ($0.32) ($0.25) $0.22 (LOSS) INCOME PER SHARE PROFORMA ($0.32) ($0.26) $0.21
F-16 43 Changes in outstanding options and options available for grant pursuant to the 1993 Plan and other option grants, expressed in numbers of shares, are as follows:
JULY 31, 1997 JULY 31, 1996 ------------- ------------- OPTIONS OUTSTANDING, BEGINNING OF PERIOD 500,000 550,000 GRANTED 50,000 - EXERCISED (58,333) (50,000) FORFEITED (55,000) - OPTIONS AVAILABLE FOR GRANT, END OF PERIOD 436,667 500,000 OPTIONS OUTSTANDING, END OF PERIOD 250,000 - EXERCISE PRICE PER SHARE FOR SHARES UNDER OPTION, END OF PERIOD $0.63-$1.00 $1.00-$1.75
Presented below is a summary of other option activity for the periods shown:
WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISABLE EXERCISE PRICE ------- -------------- ------------------- -------------- BALANCE AT JULY 31, 1997 436,667 396,667 -------- ---------------- GRANTED 800,000 EXERCISED FORFEITED (366,667) -------- ------------ --------------- ---------------- BALANCE AT JULY 31, 1998 870,000 $0.75 340,000 $.75
The following table summarizes information for options currently outstanding and exercisable at July 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE RANGE NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE -------------------- ------ ---------------- ---------------- ------ ---------------- $0.68 700,000 9.5 years $0.68 250,000 $0.68 0.875 100,000 10 years 0.875 50,000 0.875 1.00 70,000 3 years 1.00 40,000 1.00 ---------------- ------------ -------------- ------------- -------------- -------------- $0.68-$1.00 870,000 9 years $0.73 340,000 $0.75 ================ ============ ============== ============= ============== ==============
This proforma impact only takes into account options granted since January 1, 1995. The SFAS No. 123 fair value of each option granted in 1996 and 1997 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. The fair value of options granted during the year ended July 31, 1998 (which is amortized to expense over the option vesting period in determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: EXPECTED LIFE OF OPTIONS 7 years RISK-FREE INTEREST RATE 5.6% - 5.7% EXPECTED VOLATILITY OF ADRIEN ARPEL, INC. 86% EXPECTED DIVIDEND YIELD ON ADRIEN ARPEL,INC. -
F-17 44 (11) COMMITMENTS AND CONTINGENCIES: The Company has entered into employment and consulting agreements with various individuals. The aggregate yearly amounts under the agreements are $240,000 plus commissions and bonuses. The agreements are for a one year term and renew automatically for successive one year periods unless terminated by either party. Additionally, 300,000 options to purchase shares of common stock were issued in connection with these agreements. LEASES: The Company leases office space and other equipment under various non-cancelable operating lease agreements. Rental expense for the fiscal years ended 1998, 1997 and 1996 was $493,930, $1,129,765 and $1,436,121 respectively. Minimum annual rental commitments under non-cancelable leases in effect at July 31, 1998, excluding escalation's are as follows: FISCAL YEAR ENDING JULY 31: 1999 ................... $ 556,187 2000 ................... 543,963 2001 ................... 472,350 2002 ................... 98,891 ---------- TOTAL .................. 1,671,391 ----------
The Company is required to pay certain rental expenses based on a percentage of sales under an agreement with certain department stores. LITIGATION: On April 23, 1998, the Company and Adrienne Newman reached a settlement agreement related to their litigation which was initiated by Ms. Newman during October 1996. On October 28, 1996 the Company received notice from Ms. Newman purporting to terminate her April 4, 1990 Employment Agreement with the Company due to an alleged breach of the Employment agreement by the Company. Ms. Newman served as the President of ADRIEN ARPEL, the Company's, then wholly owned subsidiary, and had been the selling host, under the name of ADRIEN ARPEL, in its sales program on the 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 Ms. 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 asserted various claims against Ms. Newman, seeking damages and injunctive relief. Among other things, it was the position of the Company that Ms. Newman was in material breach of her Employment F-18 45 Agreement when she terminated the Employment Agreement on October 28, 1996. As a consequence, it was the Company's belief that Ms. Newman's refusal to provide services to the Company throughout the term of her Employment Agreement which was due to expire in April 1998, particularly her willful refusal and failure to appear as the Company selling host on HSN, would 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." She has subsequently appeared on HSN on a regular basis. During these appearances Ms. Newman was not acting on behalf of the Company or its trademark protected ADRIEN ARPEL product line. Under the settlement agreement reached on April 23, 1998, Ms. Newman is paying the Company $1 million. Additionally, the Company reversed a liability which it was carrying on its balance sheet related to commissions which were previously recorded as due Ms. Newman in the amount of $250,000. The agreement specified that $150,000 would be paid upon execution of the settlement agreement and $25,000 per month until the Company raised $2 million under its equity finance offering. Upon receiving $2 million in equity financing, Ms. Newman agreed to pay an additional installment of $150,000 and $50,000 per month until the balance is paid in full. Upon raising $2 million in equity financing, monthly payments will also bear interest at the prime rate. On August 6, 1998, the Company's equity offering surpassed the $2 million amount resulting in the additional payment of $150,000 from Ms. Newman and increased installment payments of $50,000 plus interest at the prime rate beginning in October 1998. 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, 1998 1997 1996 -------- ---------- ---------- Advertising Costs $770,235 $1,469,569 $1,557,905
F-19 46 (13)QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH FISCAL 1998 QUARTER QUARTER QUARTER QUARTER - ----------- ------------ ------------ ------------ ------------ Net Sales $ 2,396,339 $ 1,379,724 $ 1,471,572 $ 661,119 Gross Profit 1,624,948 997,017 1,189,417 364,567 Net (loss) Income (757,892) (1,407,020) 761,031 (2,344,565) Basic and Diluted (loss) Income, Per Common Share: $ (0.06) $ (0.12) $ 0.06 $ (0.20) 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) (3,174,294) Net Income (loss), Per Common and Common Equivalent Share: $ 0.05 $ 0.06 $ (0.09) $ (0.27) FIRST SECOND THIRD FOURTH FISCAL 1996 QUARTER QUARTER QUARTER QUARTER - ----------- ------------ ------------ ------------ ------------ 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
F-20 47 ADRIEN ARPEL, INC., (FORMERLY, ALFIN, INC.) SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNT 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 OF COSTS AND TO OTHER DEDUCTIONS END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS (1) PERIOD ----------- ------ -------- -------- ---- ------ 1998 Allowance for doubtful Accounts Receivable Chargebacks and Sales Returns $971,729 $1,438,611 $ - $1,458,267 $952,073 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 Returns $1,040,857 $4,339,814 $ - $4,125,638 $1,255,033
(1) Charges to the accounts are for the purposes for which the reserves were created. F-21 48 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 EXHIBITS ON FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1998 ADRIEN ARPEL, INC., (FORMERLY, ALFIN, INC.) EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE PAGE 10.8 Agreement dated December 1, 1997 between the Company and Spiegel Inc. Related to Participation in Spiegel's Reverse Syndication Program. (Filed herewith) 1-9 10.9 Agreement dated February 19, 1998 between the Company and Newmark & Company Real Estate Inc. related to Newmark's appointment as the Company's agent for the possible sublet of the Company's New York offices. (Filed herewith) 10-14 10.10 Consulting Agreement dated March 1, 1998 between the Company and Ben White. Related to direct and electronic marketing of the Company's products. (Filed herewith) 15-22 10.11 Employment Agreement dated March 27, 1998 between the Company and Mary Panvini. (Filed herewith) 23-24 10.12 Employment Agreement dated March 27, 1998 between the Company and Michael D. Ficke. (Filed herewith) 25-26 10.13 Settlement agreement dated April 23, 1998 between the Company, Adrienne Newman, AAN Services Inc., and Signature Club A related to the settlement of a litigation. (Filed herewith) 27-42 10.14 Agreement dated July 1, 1998 between the Company and RPR Marketing. (Filed herewith) 42-45 10.15 Agreement dated February 3, 1998 to provide financing to the Company and to purchase shares of the Company's Common Stock owned by Fine Fragrances distribution (Incorporated by reference) 10.16 Promissory Note dated February 4, 1998 between the Company and Barry W. Blank related to $225,000, 12% convertible subordinated financing. (Incorporated by reference) 10.17 Promissory Note dated February 4, 1998 between the Company and Carol J. Lubin related to $225,000, 12% convertible subordinated financing. (Incorporated by reference) 10.18 Promissory Note dated February 4, 1998 between the Company and Janet M. Portelly related to $50,000, 12% convertible subordinated financing. (Incorporated by reference) 10.19 Irrevocable proxy dated February 6, 1998 between Barry W. Blank and Fine Fragrance Distribution. (Incorporated by reference)
49 10.20 Agreement dated February 6, 1998 related Barry W. Blank's option to purchase shares of Fine fragrances Distribution Inc. (Incorporated by reference) 10.21 Agreement dated February 6, 1998 related Carol J. Lubin's option to purchase shares of Fine Fragrances Distribution Inc. (Incorporated by reference) 10.22 Agreement dated February 6, 1998 related Janet M. Portelly's option to purchase shares of Fine fragrances Distribution Inc. (Incorporated by reference) 10.23 Promissory Note dated April 2, 1998 related to $100,000 of financing provided to the Company by Barry W. Blank. (Incorporated by reference) 10.24 Promissory Note dated April 2, 1998 related to $100,000 of financing provided to the Company by John E. McConnaughy Jr. (Incorporated by reference) 10.25 Promissory Note dated April 2, 1998 related to $25,000 of financing provided to the Company by Michael Hosey. (Incorporated by reference) 10.26 Promissory Note dated April 2, 1998 related to $25,000 of financing provided to the Company by Janet M. Portelly. (Incorporated by reference) 10.27 Disclosure statement dated February 18, 1998 pursuant to Section 14(F) of the securities Exchange Act of 1934 and Rule 14F-1 thereunder. (Incorporated by reference) 10.28 Form of Subscription agreement in connection with the Company's Private Placement Offering of up to 60 unites at $50,000 per unit, related investment letter and risk factors. (Incorporated by reference) 10.29 The company's Form of Class A Warrant to purchase Common Stock and Class B Warrants. (Incorporated by reference) 10.30 The company's Form of Class B Warrant to purchase Common Stock (Incorporated by reference) EX-10.8 2 AGREEMENT BETWEEN THE COMPANY AND SPIEGEL INC. 1 EXHIBIT 10-8 PAGE 1 SPIEGEL. INC. 3500 LACEY ROAD DOWNERS GROVE. ILLINOIS 60515-5432 (630) 986-8800 EXECUTIVE OFFICE December 1, 1997 Ms. Mary Panvini Adrien Arpel 720 Fifth Avenue New York, New York 10019 Dear Mary: This letter sets forth the terms of your company's participation in the Spiegel Specialty Catalog Reverse Syndication Marketing Program. The use of the words "you" and "your" in this Contract/Letter of Agreement ("the Agreement") shall mean your company as listed above and any division or other subsidiary or affiliate operating pursuant to the terms and conditions of this Agreement. 1. SUBMISSION OF SAMPLE AND FINAL MEDIA You agree to timely submit samples of promotional media and/or telemarketing program (together "Media") in advance of any printing or telemarketing for Spiegel's review and written approval. No changes may be made in the Media after such approval by Spiegel. You will furnish 75 pieces of the approved Media to Spiegel. 2. ORDER ACCEPTANCE AND PROCESSING You will accept and fill all orders for the purchase of the goods and services, if any, described in the Media (such purchase is herein referred to as a "Sale") by persons in whose name an FCNB Preferred(R) Charge Account has been opened, and any other authorized users thereof, or by persons using any other methods of payment, for example, other bankcards, debit cards, checks, etc. (for purposes in the Agreement all foregoing persons making a purchase or order shall be defined as "Accountholders"), subject to the following conditions: a. For mail orders, you must receive from the Accountholder the order form from the Media or a memorandum (such order form or memorandum is herein referred to as an "Order Form") indicating the Accountholder's desire to purchase the goods and accompanying service, if any, described in the Media and containing the Accountholder's name, account number, and signature; 2 2 b. For phone orders, you must maintain a record or memorandum indicating the Accountholder's request to purchase the goods and accompanying services, such record or memorandum to contain the Accountholder's name and account number only; and c. All orders charged to a FCNB Preferred(R) Charge account require authorization from the Spiegel FCNB Preferred(R) Charge Credit Department, except for those orders from Accountholders who have already been identified by Spiegel for you as being in a credit-approved status. For such orders, you have authorization to provide merchandise to the Accountholders for up to $75 for a period not to exceed 90 days from the date of the Selection Letter you receive from Spiegel which is the date of the selection of names for your promotion. 3. SALES MEMORANDUM/BILLING REGISTER Upon shipment of goods or materials evidencing any services, you agree to complete the form of sales memorandum (approved by Spiegel at the inception of the program) evidencing a Sale (such a sales listing sheet or other approved sales memorandum is referred to herein as a "Billing Register") for all Sales, including all check, direct debit and other charge card sales, at the time the goods are shipped to the Accountholders. Each sales memorandum will include: Accountholder's FCNB Preferred(R) Charge account number; the 8 or 12-digit order number; full Accountholder's name and address; total charge for goods or services; delivery charge; total of all charges (or sale, if a direct debit or check transaction); and commission due to Spiegel. You will retain a copy of the Billing Register and remit a copy to Spiegel, once weekly as determined by Spiegel, along with an invoice, after shipment of the goods or materials evidencing any services to the Accountholder. 4 Warranties and Representations You warrant, represent, and agree that: a. Accuracy All representations and information made in the Media will be accurate and correct and none will be misleading or deceptive, nor will there be any material omissions. All goods delivered will be as described in the Media. b. Legal Compliance You will comply with all applicable federal and state laws and regulations, including, but not limited to, the Truth-in-Lending Act, the Federal Trade Commission ("FTC") Telemarketing Sales Rules and the FTC Mail or Telephone Order Merchandise Rule, and all other FTC rules regulating merchandise, warranties, and mail/phone order 3 3 transactions. In addition, adherence to the Direct Marketing Association's Fair Information Practices Manual should also be observed. c. Delivery Deadlines All goods and services described in the Media will be delivered within thirty (30) days after receipt of an order from an FCNB Preferred(R) Charge Customer within such time as specified in the Media, as communicated to the Accountholder, or as otherwise required by law. d. Insurance/No Infringements/Indemnification Prior to mailing of promotional material to or prior to any telemarketing or other promotional activity with Accountholders, you shall name Spiegel, Inc., 3500 Lacy Road, Downers Grove, Illinois 60515 as an additional insured on your comprehensive general liability insurance policy in the minimum amount of Two Million Dollars. You shall furnish Spiegel with a current Certificate of Insurance evidencing such insurance upon execution of this Agreement and then once annually upon the anniversary date of this Agreement. You agree to defend and indemnify Spiegel against all cost, loss, damage, fine, penalty or expense, including reasonable attorney fees, arising from any product liability or intellectual property claim or from any alleged or actual violation of a state or federal law, rule or regulation related to the products or services under the Program/Media or the marketing, distribution or solicitation of sales under the Program/Media including without limitation, the Federal Trade Commission's Telemarketing Sales Rule and the Federal Trade Commission's Mail or Telephone Order Merchandise Rule. All goods and services described in the Media and the Media itself do not violate any right or property interest therein of any third party, or Spiegel, including, without limitation, such right or property interest based upon patent, trademark, copyright, or trade secret. You agree to defend and indemnify and hold Spiegel, its subsidiaries, parent, and affiliates and all of their respective directors, officers, employees and agents ("Indemnities") harmless from and against any and all liabilities, losses, claims, lawsuits, judgments, damages, fines, penalties and expenses, including, without limitation, costs and expenses of litigation and reasonable counsel fees ("Claim Obligations"), whatsoever arising from any (i) defense, dispute, offset, claim, or counterclaim made by any third party, or Spiegel, that any of the material in the Media and/or the sale by you to any Accountholder of the goods and/or accompanying services, if any, described in the Media or delivered to any person, violates any right and/or property interest of a third party, including, without limitation, any such right or property interest based upon copyright, patent, trademark, trade secret or any other intellectual property right under any state or federal law; (ii) product liability claim; product recall, retrofit or safety notice; or claim of unfitness or impurity of any goods or services sold pursuant to the transactions contemplated by this Agreement; (iii) alleged 4 4 or actual violation of a state or federal law, rule or regulation related to the products or services marketed under the Media or the marketing, distribution or solicitation of sales under the Media including without limitation, the Federal Trade Commission's Telemarketing Sales Rule and the Federal Trade Commission's Mail or Telephone Order Merchandise Rule; (iv) and all claims arising out of this Agreement, except to the extent that the same are caused by Spiegel's agents or employees. Spiegel agrees (i) to give you prompt notice of any claims, demands, suits, proceedings or actions for which we intend to seek indemnification hereunder, (ii) not to compromise or settle any claim against Spiegel for which indemnification is sought without your prior written consent, and (iii) that you shall have the right to select counsel to defend any claim for which indemnification is to be sought, such selection being subject to our approval, which approval shall not be unreasonably withheld. e. Taxes You are the actual seller or vendor of the merchandise. You agree to collect and pay any and all sales, use, or similar taxes levied on the transactions contemplated by this Agreement. The warranties and representations stated above are cumulative and are to be considered as reaffirmed and restated each time you execute a new Addendum/Schedule. 5. SUBMISSION OF BILLING REGISTERS No Billing Registers for FCNB Preferred(R) Charge transactions will be presented to Spiegel for credit or payment until after an order has been shipped to the Accountholder or their designated shipping address. Billing Registers for all other direct debit, check or other bankcard transactions shall be sent to Spiegel on a weekly basis. 6. RECORD RETENTION AND AUDIT You hereby agree that Spiegel may, at any reasonable time, and upon at least three (3) business days' notice, examine any of your records relating to the transactions covered or contemplated by this Agreement. You will retain original order information and proof of shipment for three (3) years and a microfilm copy of those records for an additional two years. You will furnish copies of such documents to Spiegel within two (2) working days after a request is received. You agree that if you cannot provide such copies and the customer disputes the sale, you will authorize a credit to the customer's FCNB Preferred(R) Charge Account and agree to a chargeback by Spiegel to you for such disputed sales without any credit for any adjusting commission due or paid to Spiegel. In addition, you will retain your Purchase Order Agreements with your supplier or manufacturer of the goods and services described in the Media pursuant to the same document retaining guidelines stated above. You shall make available to Spiegel upon three business days notice, all books and records in connection with or related to any and/or all transactions contemplated by this Agreement and any Addenda/Schedules or 5 5 related to any sale made pursuant to any Media. 7. MEDIA APPROVAL You acknowledge and agree that Spiegel has an absolute right to refuse to allow you to mail any promotional material or telemarket any program to Accountholders. In the event of such refusal and provided that you have met all the terms and conditions of this Agreement, Spiegel will reimburse you for the reasonable, actual cost of the Media directly associated with that promotion which you are unable to use for a future promotion. IN NO EVENT SHALL SPIEGEL BE LIABLE FOR SPECIAL OR CONSEQUENTIAL DAMAGES ARISING IN CONNECTION WITH THIS AGREEMENT OR ANY ADDENDUM/SCHEDULE OR THE CONDUCT OF BUSINESS CONTEMPLATED HEREIN, EVEN IF PRIOR NOTICE FROM YOU OF ANY POSSIBLE DAMAGES HAS BEEN GIVEN TO SPIEGEL. 8. CUSTOMER SERVICE You agree to resolve all complaints that Spiegel regards as reasonable to the customer 5 satisfaction without cost to Spiegel. You also agree to respond in writing or by telephone to all Spiegel customer correspondence within five (5) working days of receipt of such correspondence. If an Accountholder advises in writing the reasons that the Account-holder refuses to pay for a purchase, Spiegel will promptly notify you thereof; you must then resolve the Accountholder's claim or complaint within thirty (30) days from the date you receive such notification. If you do not resolve the Accountholder's claim or complaint within thirty (30) days, you will, in Spiegel's sole discretion, authorize a credit for this customer. 9. MERCHANDISE RETURNS/CREDIT REGISTERS In the event the customer returns the merchandise or cancels a membership or subscription for whatever reason, you will credit the customer 5 account for the complete cost of the returned merchandise, and/or canceled membership or subscription, if applicable, and any applicable taxes. Upon request by a customer, you will also refund shipping and handling charges for returning merchandise. You will not make any refunds or adjustments with respect to FCNB Preferred(R) Charge Sales in cash or by check. Instead, when the goods are returned to you or an adjustment is made, you will complete a Credit Register or other credit memorandum approved by Spiegel at the inception of the program (such approved credit memorandum is referred to herein as a "Credit Register"). Such Credit Register will include the following information: - Accountholder's FCNB Preferred(R) account number; - the eight or twelve-digit order number; - full Accountholder's name and address; U total merchandise charge; 6 6 - delivery charge; - total of all charges; - commission previously paid to Spiegel; - Bankcard account number, or other payment method, if not Spiegel FCNB Preferred(R) Charge. You will remit a copy of the Credit Register to Spiegel within five (5) business days of the date the goods are returned to you or the adjustment is made, whichever is earlier. You will adhere to all other bankcard charge agreements with respect to returns for credit for Sales made with other charge cards. 10. ACCOUNTHOLDER LIST Spiegel will furnish to you a list of FCNB Preferred(R) Charge Accountholders ("Spiegel List") for your use in performing your rights and obligations under this Agreement. We understand that you may perform various "merges and purges" of such list in accordance with normal industry practice. Such merges and purges shall be made subject, however, to the following: a. List Return You will return to Spiegel the original tape furnished to you and any copies made by you after any such merge/purge has been completed; b. Merge/Purge Reports You will send to Spiegel, upon its generation or upon Spiegel's request, any report or documentation which summarizes the result of any such merge and purge by you regarding the Spiegel List; c. Name Exclusions Any names merged and purged because they are already on your primary customer file when the list was furnished to you will not be considered part of this Agreement for any purpose; d. Name List Conflicts Spiegel must agree in writing to a merge and purge of Spiegel List names furnished to you against any outside rented list or any other syndication participant list procured for the same solicitation. Spiegel requires that the Spiegel List names will have priority over any outside rented names and any other syndication participant list; that is, the name is credited to our list and dropped from the outside list or syndication participant list; 7 7 e. Use and Non-Disclosure You agree not to disclose any name and address from the Spiegel List, authorized users, and any "ship to" names and addresses provided to you by Spiegel or obtained as a result of any list furnished hereunder. You will use such names and/or addresses only in connection with Sales made in response to the Media, and you will not make and/or maintain such list or part thereof for any other purpose, including for any subsequent solicitations. You will not make any names or addresses supplied to you a part of your database. You also agree not to sell, rent, lend or lease or otherwise give, directly or indirectly, and such names and/or addresses to any other person or organizations for any purpose, and you will not allow any other person or organization to obtain or use any such names and/or addresses. You will not offer to open an account for or offer your own or another credit card to any person by using such names and/or addresses developed from Accountholder orders for the goods and accompanying service, if any, described in the Media. 11. NO ALTERNATE PAYMENT SOLICITATION You agree that you will not directly or indirectly by any means solicit payment for any potential or actual sales other than by payment to be charged to a customer's FCNB Preferred(R) Charge account for the goods and/or services described in the Media. 12. INCLUSION OF PAYMENT ALTERNATIVES If you should receive an order from an Accountholder or a non-Accountholder in connection with or as a result of the Media, in the form of cash, check, debit card, or acceptable charge card other than the FCNB Preferred(R) Charge, such order shall be subject to the terms and conditions of this Agreement. 13. CONTRACT ADDENDUM/SCHEDULE GUIDEBOOK EXHIBITS A Schedule to this Agreement, in the form as provided in Section XI of the Spiegel Re-verse Syndication Program Guidebook, shall be completed and executed for each promotional program or Media offered by you and Spiegel pursuant to this Agreement. Such Schedule(s) shall be serially numbered. This Agreement, together with the Schedule(s) which may be entered into from time to time, and the Operations Guidelines and Exhibits and Tables, copies of which have been furnished to you in the Spiegel Reverse Syndication Program Guidebook, shall constitute the entire Agreement between you and Spiegel. 14. PAYMENT SCHEDULE Any payments owed to you pursuant to this Agreement shall be made in accordance with the Spiegel Payment Schedule, a copy of which is within the Spiegel Reverse Syndication Program Guidebook in Section VI. 8 8 15. TERMINATION This Agreement will remain in effect until terminated by either of us on ninety (90) days written notice to the other, except that any such promotional program or Media may be terminated by Spiegel at any time as provided in Paragraph 7 herein above. Any termination of the Agreement shall not affect the rights and obligations of the parties hereto (including the duty to pay Spiegel amounts due to it regardless of this Agreement's termination) with respect to any promotional program or Media entered into by execution of a Schedule prior to the termination date. Nothing in this Agreement shall be construed to obligate you to undertake any mailings whatsoever to the Spiegel List, or to grant us any rights with respect to the Media except as provided above in Paragraph 1. 16. PROPRIETARY INFORMATION Spiegel acknowledges that the contents of the Media is proprietary to you and agrees not to make any use of it or any other name or mark proprietary to you without your prior written approval. You hereby acknowledge that the Spiegel List information is proprietary and confidential to Spiegel and such information shall not be disclosed in any form to any third party or used by you except as specifically authorized in this Agreement. 17. NO ASSIGNMENT You may not assign this Agreement or any Schedule without Spiegel's prior written consent. Any attempt to assign or transfer this Agreement or any Schedule by you without Spiegel's prior written consent shall be null and void and have no effect whatsoever. 18 NO AGENCY This Agreement shall in no way constitute or give rise to a partnership, joint venture, or agency between the parties, including any manufacturer or supplier of any goods or services. All operations and Sales made by you pursuant to any Media are made for and on your behalf only and not as an independent contractor nor agent of Spiegel. 19. ENTIRE AGREEMENT This letter, together with the documents specified in Paragraph 13, shall constitute our entire agreement, and supersedes and replaces all other agreements, written or oral, between the parties with regard to the subject matter covered by this Agreement. Spiegel reserves the right to amend this Agreement from time to time on ninety (90) days written notice to you. If any such amendment is unacceptable to you, you may terminate this Agreement as provided in Paragraph 15. 9 9 20 ENFORCEABILITY If any phrase, sentence, or paragraph of this Agreement, the Reverse Syndication Guidebook, or any Schedule shall to any extent be held invalid, the remainder of such instrument or the application of such provisions to persons or circumstances other than those as to which it is held invalid shall not be affected hereby, and all other phrases, sentences, and paragraphs of this Agreement, the Reverse Syndication Guidebook, or any Schedule shall be valid and enforced to the fullest extent permitted by law. 21. CHOICE OF LAW/INJUNCTION This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. It is specifically agreed that, should you breach the terms of this Agreement (especially Paragraphs 10 and 11), the actual damages of Spiegel may be difficult to ascertain and you waive any procedural objection you have or may have in the future to the entry of a permanent injunction against any telemarketing program or any mailings to Accountholders or to names and/or addresses on the Spiegel List, or against any use of the name "Spiegel, Inc.," "FCNB," or "FCNB Preferred(R) Charge," in addition to any other remedy Spiegel may seek or obtain. If this Agreement is acceptable to you, please execute two copies of this Agreement. Retain one copy for you file and return the other to Spiegel. This Agreement is effective as of the date of this letter, or upon the date of any mailing of any Media, whichever is earlier. Very truly yours, SPIEGEL, INC. By: /S/ - ----------------------------------------- Title: Divisional Vice President, Customer Development Accepted and agreed to: By: /S/ Mary Panvini - ----------------------------------------- Title: Senior Vice President, General Manager EX-10.9 3 AGREEMENT BETWEEN THE COMPANY AND NEWMARK & CO. 1 EXHIBIT 10.9 PAGE 10 EXCLUSIVE RIGHT AGREEMENT AGREEMENT made the 19 day of FEBRUARY, 1998 by and between ALFIN FRAGRANCES, INC. (hereinafter referred to as the "Principal"), with its principal office located at 720 FIFTH AVENUE, NEW YORK, NEW YORK 10019 and Newmark & Company Real Estate, Inc., (hereinafter referred to AS the "Agent") WITH ITS principal office located at 125 Park Avenue, New York, New York, 10017. WITNESSETH WHEREAS, Principal is the tenant under a certain lease agreement dated NOVEMBER 30, 1983, which was subsequently amended as per Extension Agreement dated March 4, 1993 between Principal and 720 FIFTH AVENUE ASSOCIATES, as landlord ("Landlord") (hereinafter the lease and extension agreement shall collectively be referred to as the "Lease") for THE ENTIRE EIGHTH (8TH) FLOOR AT 720 FIFTH AVENUE (hereinafter referred to as the "Sublet Premises") and is vested with the authority to enter into this Agreement and perform the terms and conditions hereunder; and WHEREAS, Principal desires to appoint Agent as its sole and exclusive leasing agent with respect to the disposition of the Sublet Premises and Agent desires to accept such appointment subject to and conditioned upon the terms and conditions hereunder; and NOW, THEREFORE, for Ten ($10.00) Dollars and other good and valuable consideration, each to the other in hand paid, the receipt and sufficiency of which is hereby, the parties hereof acknowledged, as follows: 1. APPOINTMENT OF AGENT: Principal hereby appoints Agent and Agent hereby agrees to act as agent with the sole and exclusive right to dispose of all or a portion of the Sublet Premises by sublease, assignment, release, cancellation surrender, license or sale of the Lease or in any other manner whatsoever (hereinafter individually and collectively referred to as the "Sublease") on the terms and conditions as may be agreed upon by the Principal and the proposed sublessee, assignee, or other occupant, (hereinafter collectively referred to as the "Proposed Subtenant") or Landlord. 2. TERM: Agreement shall become effective on the FEBRUARY 12, 1998 and may be terminated after this Agreement has been in effect for SIX (6) months by either party upon thirty (30) days prior written notice to the other parry, sent by certified mall return receipt requested (the date that this Agreement is to terminate shall hereinafter be referred to as the "Termination Date"). 3. PRINCIPAL'S AND AGENT'S DUTIES: Principal agrees during the term of this Agreement to refer to Agent all offers and inquiries with respect to the Sublet Premises and Agent agrees to make diligent investigations and develop such offers or inquiries, and to canvas, solicit and otherwise employ its services to sublet or otherwise dispose of the Sublet Premises. 4. OUTSIDE BROKER As the sole and exclusive agent for the Sublet Premises,Agent is hereby authorized by Principal to utilize the services of real estate brokers licensed by the State of New York who are not in the employ of the Agent (hereinafter referred to as the Outside Broker). 5. ADVERTISING. Principal agrees that, subject to Principal's authorization, it shall pay the cost of any and all advertising, promotional material, messenger and mailing costs and other reasonable expenses incurred 2 PAGE 11 by Agent in connection with Agent's appointment hereunder. 6. COMPENSATION: a. In the event that a Sublease for the Sublet Premises is fully executed by the parties thereto, and if required, approved by Landlord and, whether or not Agent is the procuring cause thereof, then, and in such event, Agent does hereby agree to accept as compensation in fall, a commission computed in accordance with the terms and rates as set forth in Exhibit "A" annexed hereto and made part hereof. The commissions payable to Agent hereunder shall be paid to Agent one hundred (100%) percent on the date the Sublease is fully executed by the parties thereto and Landlord's consent is provided, if required. b. If a Sublease is effected whereby an Outside Broker is the procuring cause, then and in such event, Principal agrees to pay Agent a commission in an amount equal to fifty (30%) percent of the fall commission calculated in accordance with the terms and rates as set forth in Exhibit A. The commission hereunder shall be paid as set forth in paragraph 6 (a). Principal shall pay the Outside Broker pursuant to a separate brokerage agreement entered into between the parties. d. If there is a release, surrender, buyout or recapture of the Lease by the Landlord or its designee or assignee, Agent shall be paid a fall commission in accordance with the schedule of commission rates set forth hereinabove, calculated upon the remaining rentals for the inexpired term of the Lease and upon any consideration for such release, surrender, sale or other disposition. 7. PENDING TRANSACTIONS: Within thirty (30) days of the Termination Date, Agent shall deliver to Principal a complete list of pending, proposed and incomplete transactions in connection with the disposition of the Sublet Premises then under negotiation (the "Pending List"). The Pending List shall contain sufficient information to identify the transactions. In the event any pending or incomplete transaction on the Pending List is closed after the Termination Date, Principal shall recognize Agent as the exclusive broker and shall pay Agent a commission in accordance with the terms set forth in Article 6. 8. DEFAULT BY PRINCIPAL: In the event that any payment provided for herein is not paid within thirty (30) days after notice of non-payment, the entire commission or any remaining unpaid portion thereof shall become immediately due and payable and Principal agrees to pay all costs of collection, including reasonable attorneys attorney's. In addition, any amounts owed pursuant to this Agreement and not paid when due shall accrue interest at the rate of one and one-half (1-1/2%) percent per month, commencing from the due date until paid in fall. 9. MISCELLANEOUS. a. Principal represents and warrants to Agent that it has the fall authority to enter into this Agreement and that the individual(s) executing the Agreement is authorized to act on behalf of Principal. b. In the event any provision of the Agreement is found to be void or unenforceable by a court of 3 PAGE 12 competent jurisdiction, the remaining provisions of the agreement shall nevertheless be binding upon the parties with the same effect as though the void or unenforceable part had been severed and deleted. Principal acknowledges that Agent may represent both potential tenants and Principal simultaneously with respect to the same transaction and Principal consents to such du~ I representation. a. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applicable to agreements made and to be performed entirely within New York. e. This Agreement shall be construed without regard to any rule of construction to the effect that an agreement shall be construed against the party who drafted such agreement. f. In the event of a dispute between the parties arising under the terms and conditions of this agreement is not settled by the parties thereto, such dispute shall be submitted to arbitration in accordance with the Commercial Rules and Regulations of the American Arbitration Association or the Real Estate Board of New York. However, each party shall be permitted disclosure pursuant to Article 31 of the Civil Practice Law and Rules. g. The parties acknowledge that Agent is not responsible to determine whether toxic or hazardous wastes or substances or other undesirable materials are present at the Sublet Premises. h. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. This Agreement may not be changed or modified orally but only by written instrument signed by the parties thereto. This agreement shall be binding upon and inure to the benefit of the successors and assigns of the respective parties. IN WITNESS WHEREOF- the parties have executed and delivered this Agreement as of the date first above Written. Dated --------- NEWMARK & COMPANY REAL ESTATE, INC. Dated: 2/20/98 BY: /S/ Elaine Goldberg ------- ------------------------- NAME: /S/ Elaine Goldberg ------------------------- TITLE: ------------------------- ALFIN FRAGRANCES INC. Dated: 2/19/98 BY: /S/ Michael D. Ficke ------- ------------------------- NAME: Michael D. Ficke ------------------------- TITLE: Secretary ------------------------- 4 PAGE 13 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 23rd day of February 1998, before me personally came Elaine Goldberg to me known, who being by me duly sworn, did depose and say that he resides at New York County, NY that he is the General Counsel of Nemark & Company Real Estate, Inc. the corporation described in and which executed the foregoing instrument by order of the board of directors of said corporation. Notary Public /s/ Rolla S. Eisner OF NEW YORK ) ss.: COUNTY OF NEW YORK On the 19th day of February 1998, before me personally came Michael D. Ficke, to me known, who being by me duly sworn, did depose and say that he resides 720 Fifth Avenue, Ny, NY 10017, of Alfin Frangrances, Inc. the corporation described in and which executed the foregoing instrument by order of the board of directors of said corporation. STATE OF NEW YORK COUNTY OF NEW YORK On the day of ____________, 199 , before me came ______________ a Partner of a New York General Partnership, to me known and known to me to be the individual described in and who executed the foregoing instrument; and he thereupon acknowledged to me that he executed the same for and on behalf of said Partnership as a General Partner thereof. LEASES The first, second years 5% The third year 4% The fourth, fifth, sixth and seventh years 3% The eighth year and beyond 2% For selling furniture, fixtures and/or goodwill 10% SALES For selling or exchange real estate on the selling price, up to and including $l,000,000.00 6% On the excess above $1,000,000.00 3% 5 PAGE 14 SPECIAL CONDITIONS 1. The commission will be 10% of the aggregate rental for leases with a term of two years or less. 2. On leases where there is an allowance in the form OF a rental concession (as ciistin"'~aished from an allowance for repairs and decoration, etc.) the commission shall be figured on the net rental for the term, ',with the concession ratably spread over the entire term of the Sublease. 3. All commissions payable hereunder shall be payable only on the base or fixed annual rental due under the Sublease or other agreement evidencing the disposition of the Sublet Premises for the term thereunder, and (a) percentage or overage rent, or (b) payments made by the Proposed Subtenant allocable to increases in real estate taxes, flael, operating expenses or labor, shall not be subject to the commission paid to Agent. 4. 1f the Sublease gives Principal the right of cancellation, a full commission for the entire term called for in the Sublease shall be paid by Principal. If a Sublease gives the Proposed Subtenant the rictht or option of cancellation, provided that such tight or option is not conditioned upon the Principal's act or omission to act, a full commission shall be paid on the aggregate rentals up to the date on which said Sublease may, under its terms, be canceled by the Proposed Subtenant. In addition, Principal shall, if such Proposed Subtenants cancellation tight or option is not exercised, pay the balance of the full commission for the remainder of the term of the Sublease not surrendered or canceled by the Proposed Subtenant, less the amount of commission solely arcributable to such consideration previously paid by the Principal to Agent. Notwithstanding the foregoing) in the event that there is a cancellation penalty which includes Agent's (or Outside Broker's) unauthorized commissions, then Agent shall be paid for the entire term of the Sublease, regardless of such cancelable portion of the Sublease, as if such option to cancel did not exist. EX-10.10 4 CONSULTING AGREE. BETWEEN THE COMPANY AND B. WHITE 1 EXHIBIT 10.10 PAGE 15 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement") is made and entered into this 15th day of May 1998, by and between ALFIN, INC., a New York corporation, (hereinafter referred to as "Alfin'"), Alfin's wholly-owned subsidiary, ADRIEN ARPEL, INC., a New York corporation, and STAR SHOPPE DIRECT, INC., a Florida corporation, (hereinafter referred to as "Consultant"). WHEREAS, Alfin, by itself and through Arpel, develops, distributes and sells cosmetics and beauty services and products: and WHEREAS, Alfin desires to engage Consultant, and Consultant desires to be engaged, to advise and consult with Alfin on direct and electronic retail marketing of Alfin's products and services. NOW, THEREFORE, Alfin and Consultant do hereby covenant and agree as follows: 1. Engagement. During the of this Agreement, Consultant will render advice to, and otherwise consult with, Alfin and its subsidiaries regarding direct marketing through means such as catalogue sales and television direct marketing. During the term of this Agreement, Consultant will devote as much time as is determined reasonably necessary by Consultant to enable Consultant to render such services, including whatever time is necessary to attend meetings reasonably requested by Alfin (including meetings with representatives of Alfin), but Consultant will not be required to expend more than 15 hours in any week nor more than 50 hours in any month rendering services under this Agreement. Subject to the foregoing, Consultant shall use its best efforts to perform its services herein. Benedict V. White ("White"), Consultant's President shall provide substantially all of the non-administrative, services of Consultant hereunder. 2. Term. (a) Initial Term. The term of this Agreement is effective as of March 1, 1998 ("Effective Date") and, unless earlier terminated under Section 6 herein, will end on and include February 28, 1998. (b) Extensions. Thereafter, this Agreement shall renew for successive one year periods, each year being a Consulting Year (as defined herein), unless either party gives written notice of termination at least ninety (90) days before the end of the Consulting Year. 3. Compensation. (a) Definitions. As used in this Agreement (a) the term "Consulting Year(s)" shall mean each twelve month period commencing on the Effective Date and each additional consecutive twelve month period as renewed under Section 2(b); (b) the term "Consulting Net Sales" shall mean the consolidated gross revenues less returns of Alfin and all of its direct and indirect subsidiaries, including, but not limited to, Arpel, now existing or hereafter acquired or created, arising out of or in connection with the efforts of Consulting (whether before the Effective Date or at any time during a Consulting Year) including, but not limited to, revenues derived from (i) Spiegel's Reverse Syndication Marketing Program and any other agreements other relationships with Spiegel, (ii) media placement (ads), (iii) direct marketing and catalog, (iv) electronic marketing; and (v) licensing agreements to mass marketers. (a) Amount of Compensation. (i) For each Consulting Year, Consultant shall be entitled to ten percent (10%) of Alfin's Consolidated Net Sales to the extend that Alfin's Consolidated Net Sales are less than or equal to five million dollars ($5,000,000). 2 PAGE 16 (ii) For each Consulting year, Consultant shall be entitled to fifteen percent (15%) of Alfin's Consolidated Net Sales to the extent that Alfin's Consolidated Net Sales are less than or equal to five million dollars ($5,000,000). (iii) If (A) Consultant terminates this Agreement under Section 2(b) or other wise than for Cause under Section 6(b) or (B) Alfin properly terminates Consultant for Cause under Section 6(a), then Consultant's fees under this Section 3(b) shall cease as of the date of such termination. (iv) If (A) Alfin terminates this Agreement other than pursuant to Section 2(b) or for Cause under Section 2(b) for Cause under Section 6(a) or (B) Consultant terminates this Agreement for Cause under Section 6(b), then Consultant shall be entitled to its compensation under Section 3(b) (A) through the end of the Consulting Year of such termination, plus (B) compensation for the next succeeding twelve month period following the Consulting Year of termination arising out of services performed by Consultant during the Consulting Year of termination, and, if any contract is renewed during that twelve month period, the compensation applicable to such renewal period, plus (C) compensation during the term of any legally binding agreement which Alfin or any of its subsidiaries has entered as a result of Consultant's services performed herein. (v) If Alfin terminates this Agreement under Section 2(b), then Consultant shall be entitled to its compensation under Section 3(b)(A) through the end of the Consulting Year of such termination, plus (B) compensation during the term of any legally binding agreement which Alfin or any of its subsidiaries has entered as a result of Consultant's services performed herein. (vi) Notwithstanding the foregoing, Consultant shall be entitled to compensation earned but yet unpaid under Section 3(c), unreimbursed expenses under Section 3(d), and stock options and back fees under Sections 18 and 19, respectively. (c) Method of Compensation. Payments for compensation earned under Section 3(b) shall be made to Consultant no less frequently than monthly within the later of fifteen (15) calendar days of the end of such month or when Alfin or its subsidiaries receives payment for which Consultant's compensation relates. Alfin agrees that Consultant may enter into agreements with third parties to assist Consultant in its duties hereunder solely at Consultant's expense and not otherwise inconsistent with this Agreement. Alfin agrees to cooperate as reasonably request by Consultant to assist Consultant in performing its duties hereunder. Consultant may, upon reasonable notice to Alfin and during normal business hours, have the right to inspect Alfin's books and records to the extent reasonably necessary ensure compliance with this Agreement; provided, however, if the right is tot exercised within sixty (60) days after the end of each calendar quarter, the amount received by Consultant during such calendar quarter shall be deemed to be accepted as accepted by Consultant. (d) Expenses. Alfin will reimburse Consultant for the reasonable expense, with receipts, incurred by Consultant in performing its duties under this Agreement, including (i) traveling expenses incurred in attending meetings outside the New York City Metropolitan area at the request of Alfin, and (ii) if Consultant informs Alfin in advance that travel is required from outside the New York City Metropolitan area in order to attend a meeting in the New York City Metropolitan area at the request of Alfin and Alfin continues to request that Consultant attend that meeting, the costs of traveling to the New York City Metropolitan area in order to attend that meeting, provided, however, expenses incurred during calendar month which exceeds $1,500 must be preapproved in writing by Alfin. 3 PAGE 17 4. Confidentiality. (a) By Consultant. Consultant will keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for Consultant's own benefit, or on behalf of Consultant's directors, officers, employees, or agents, or any entity which controls, is controlled by, or under common control with, Consultant, any and all trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of Alfin or any subsidiary which derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from Its disclosure or use and which is subject to effort by Alfin that are reasonable under the circumstances to maintain its secrecy, but excluding information which (i) is or becomes generally available to the public or the trade other than as a result of a disclosure by Consultant or any of its agents or representatives, or (ii) was with Consultant's possession prior to its being furnished to Alfin; provided that the source of such information in the case of either clause (i) or (ii) was not bound by a confidentiality agreement or other obligation of confidentiality with respect to such information. Hamilton (b) By Alfin. Alfin, on behalf of itself and its subsidiaries and affiliates, will keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for Alfin's own benefit, or on behalf of Alfin's directors, officers, employees, or agents, or any entity which controls, is controlled by, or under common control with, Consultant, any and all trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of Consultant or any subsidiary which derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and which is subject to efforts by Consultant that are reasonable under the circumstances to maintain to its secrecy, but excluding information which (i) is or becomes generally available to the public or the trade other than an a result of a disclosure by Alfin or any of its agents or representatives, or (ii) was within Alfin's possession prior to its being furnished to Consultant; provided that the source of such information in the case of either clause (i) or (ii) was not bound by a confidentiality agreement or other obligation of confidentiality with respect to such information. 5. Restrictions on Competitive Activities. (a) By Consultant. Except in connection with Natural Hairs, neither Consultant nor Benedict V. White thereof ("White") shall (as stockholder, principal, agent, employee, consultant or otherwise), anywhere in the United States, directly or indirectly, without the prior written approval of Alfin, (i) invest in any person, firm, corporation or other business which is or intends to become engaged in the retail cosmetics business which is in direct competition with Alfin or Arpel ("Competitive Business"), or (ii) engage in activities for, or render services to, any person, firm, corporation or other business in connection with such person's, firm's, corporation's or business' line of business which is a Competitive Business. Competitive businesses shall include businesses Alfin or its subsidiaries conduct in the future provided (i) Consultant does not, at that time, invest in, engage in activities for, or render services to, another entity which competes with such business, and (ii) this Agreement or similar agreement is extended and accepted by Consultant as to such new business. Notwithstanding the foregoing, White may have an interest consisting of publicly traded securities constituting less than 5% percent of any class of publicly traded securities in any public company engaged in Competitive Businesses so long as neither Consultant or White is employed by and does not consult with, or become a director of or otherwise engaged in any activities for, such company. (b) By Alfin. During the term of this Agreement, neither Alfin or any of its subsidiaries shall engage a consultant or employee for the purpose of advising or rendering services to Alfin or Alfin's subsidiaries which is in direct competition with Consultant, including, but not limited to, direct marketing, electronic marketing, and mass marketing licensing, without the prior written approval of Consultant. 4 PAGE 18 (c) Solicitation of Employees. During the term of this Agreement, neither Consultant nor its controlling persons shall solicit or intentionally induce any employee of Alfin or its subsidiaries to terminate his or her employment with Alfin or its subsidiaries. For six (6) months after termination of this Agreement, neither Consultant or its Affiliates shall hire any Alfin's employee without Alfin's consent. 6 Termination. (a) Termination by Alfin for Cause. This Agreement may be terminated at any time by Alfin (i) if any material breach by Consultant of any agreement or covenant in this Agreement is not cured within 30 days of notice of such breach, or (ii) if any representation or warranty in Section 10 is materially false as of the date of this Agreement. (b) Termination by Consultant for Cause. Agreement may be terminated at any time by Consultant (i) if any material breach by Alfin or Arpel of any agreement or covenant in this Agreement is not cured within 30 days of notice of such breach, or (ii) if any representation or warranty in Section 9 is materially false as of the date of this Agreement. (c) Survival. Upon termination of this Agreement, whether by termination after the end of the term of this Agreement, termination by Alfin under Section 6(a) or by Consultant under Section 6(b), each provision shall be of no further effect, except that Section 3 (to the extent as provided in Section 3(b)(iii)-(v), inclusive), Section 4, Section 5(c), Section 7, Section 8, Section 11, Section 12, Section 13, Section 14, Section 15, Section 16, Section 17, Section 18, Section 19, and Section 20 shall survive. 7. Notices. Any notices or other communications under or with regard to this Agreement must be in writing, and will be deemed given when delivered in person, when given by facsimile transmission (promptly confirmed in writing sent by mail) or on the third business day after the date on which mailed, to the following addresses: If to Consultant or White: If to Alfin or Arpel; Star 3001 Executive Drive, Suite 120 Adrien Arpel, Inc. Clearwater, FL 34622 720 Fifth Avenue Attn: Benedict V. White New York, NY 10019 Attn: Michael Ficke with a copy to: with a copy to: Gersten, Savage, Kaplowitz &Fredericks, LLP Barry Feiner, Esq. 101 East 52nd Street. 9th Floor 1345 Avenue of the Americas, New York, NY 10022 Suite 2200 Attn: James G. Smith, Esq. New York, NY 10105 8. Work Made For Hire. Any and all works produced by Consultant exclusively for Alfin shall be deemed work specifically ordered or commissioned by Alfin and each such work shall be considered a "work made for hired" within the meaning of 17 U.S.C. Section 101 of the United States Copyright Act, as amended, and all rights to such work shall belong entirely to Alfin or any nominee selected by Alfin. All other works produced by Consultant shall be deemed the exclusive owner of such work. 5 PAGE 19 9. A1fin Representations and Warranties. (a) Corporate Existence. Each of Alfin and each of Alfin's subsidiaries is a corporation duly organization, validly existing and in good standing under its jurisdiction of organization and has full corporate power and authority to conduct its business as presently conducted by it and to perform this Agreement and to carry out the transactions contemplated by this Agreement. Each of Alfin and Arpel is duly qualified to do business as a foreign corporation doing business in the states where it does business requiring such qualification. (b) Authority. The execution, delivery, and performance of this Agreement by Alfin has been duly authorized by all necessary corporate action, and this Agreement constitutes a valid and binding obligation of Alfin enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy or other similar laws now or hereafter in effect relating to creditors' rights, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defense and to the discretion of the court before which any proceeding therefor may be brought. (c) No Conflicts. The execution, delivery and performance of this Agreement by Alfin, will not violate any provisions of law, any order of any court or other agency of government, conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any agreement to which Alfin is bound. (d) Intellectual Property. Alfin reasonably believes that it and/or its subsidiaries has good title to all material copyrights, patents, trademarks, trade names and trade secrets, or adequate licenses and rights to use patents, trademarks, copyrights, trade names and trade secrets of others necessary for the conduct of its business as conducted or as proposed to be conducted. The business of Alfin and its subsidiaries is being presently conducted and as proposed to be conducted without known conflicts with patents, licenses, trademarks, copyrights, trade names and trade secrets of others and to the best of Alfin's knowledge, no other persons are conducting their businesses in conflict with patents, licenses, trademarks, copyrights, trade names and trade secrets used by Alfin and/or its subsidiaries. Notwithstanding the foregoing, no representations are made herein in connection with the pending litigation Adrienne Newman v. Alfin, Inc. New York Supreme Court No. 600405. 10. Consultant's Representations and Warranties. (a) Corporate Existence. Consultant is a corporation duly organized, validly existing and in good standing under its jurisdiction of organization and has full corporate power and authority to conduct its business as presently conducted by it and to perform this Agreement and to carry out the transaction contemplated by this Agreement. (b) Authority. The execution, delivery, and performance of this Agreement by Consultant has been duly authorized by all necessary corporate action, and this Agreement constitutes a valid and binding obligation of Consultant enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy or other similar laws now or hereafter in effect relating to creditors' rights, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) No Conflicts. The execution, delivery and performance of this Agreement by Consultant will not violate any provisions of law, any order of any court or other agency of government, conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, any agreement to which Consultant is bound. 6 PAGE 20 11. Indemnification (a) Obligation to Indemnify. Any party to this Agreement (the "Indemnitor") shall indemnify, defend and hold harmless the other party to this Agreement (the "Indemnitee") and its assigns from and against any losses, liabilities, damages or deficiencies, including interest, penalties and reasonable attorneys' fees, but net of any related benefits, ("Losses") arising out of or due to a breach of any representation, warranty, covenant or agreement of the Indemnitor contained herein. (b) Notice to Indemnitor. If any Indemnitee receives of any claim or the commencement of any action or proceeding with respect to which the Indemnitor is obligated to provide indemnification under this Section, the Indemnitee shall promptly give the Indemnitor notice thereof. Such notice shall be a condition precedent to any of the Indemnitor under the provisions for indemnification contained in this Agreement provided that such Indemnitor shall be relieved of its obligation hereunder only to the extent of the detriment suffered by the Indemnitor as a result of of Indemnitee's failure to give prompt notice. If such event involves a claim by a third party, the Indemnitor shall have the right at its sole expense to control and assume the defense of the matter giving rise to such indemnification with counsel reasonably satisfactory to the Indemnitee and to compromise or settle any such matter, provided that such compromise or settlement entirely and unconditionally releases the Indemnitee from all liability with respect thereto. If the Indemnitor shall assume the defense of the Indemnitee, the Indemnitee shall have the right to participate in such defense but only at its own expense and the Indemnitor shall not be obligated to pay the fees of counsel to the Indemnitee incurred after such assumption. If the Indemnitor does not assume the defense of such matter within a reasonable time after notice thereof, the Indemnitee may defend, settle and/or compromise such matter for the account and the expense of the Indemnitor. 12. No Agency. Nothing contained in this agreement shall be construed as creating an agency relationship between Alfin or any of its subsidiaries or affiliates and Consultant or any of its affiliates and, without Alfin's prior written consent. Consultant shall have no authority hereunder to bind Alfin or any of its subsidiaries or affiliates or make any commitments on Alfin's or any of its subsidiaries or affiliate's behalf. Consultant shall be deemed to be an independent contractor for all purposes hereunder and shall be responsible for all of its applicable faxes. 13. Further Assurances. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 14 . Entire Agreement. This Agreement contains the entire agreement among the parties with respect to the transactions contemplated hereby and supersedes all prior agreement, written or oral, with respect thereto. 15. Waivers and Amendments. This Agreement may be amended, Modified, superseded, canceled, renewed or extended, and terms and conditions hereof may be waived, by the only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 7 PAGE 21 17. Assignment. This Agreement is not assignable by either Alfin or Consultant, whether by operation of law or otherwise, without the prior written consent of the other. For purposes of this Section 17, an assignment, as to Alfin or Arpel or Consultant, shall include, but not be limited to, (i) the change in control of more than fifty percent (50%) of the voting securities of Alfin or Arpel or Consultant, respectively, or (ii) the sale of all or substantially all of the assets of Alfin or Arpel or Consultant, respectively. Consultant consents to (i) the change in control of more than fifty percent of the voting securities of Alfin or Arpel, or (ii) sale of all or substantially all of the assets of Alfin or Arpel provided that the entity acquiring control of the assets shall expressly assume in writing the obligations of this Agreement. Alfin and Arpel consent to the change in control of more than fifty percent (50%) of the voting securities of Consultant, or (ii) sale of all or substantially all of the assets of Consultant provided that White shall continue to provide substantially all of the non-clerical, non-administrative services of Consultant as provided in Section 1. 18. Stock Options. As soon as practicable but in no event later than thirty (30) days after the date this Agreement is executed, Alfin shall, in the form of a stock option agreement ("Option Agreement"), (i) grant White the Option to acquire 50,000 shares of Alfin common stock exercisable at $0.68 per share, (ii) for the first Consulting Year only, grant White the option to acquire 25,000 shares exercisable upon Consolidated Net sales for such Consulting Year equaling or exceeding $5,0000,000, at $0.68 per share, and (iii) for the first Consulting Year only, grant White the option to acquire 25,000 shares exercisable upon Consolidated Net Sales for such Consulting Year equaling or exceeding $10,000,000, at $0.68 per share. The Option Agreement shall provide that the options are exercisable for five years from the date of grant, shall provide for antidilution protection including stock splits, stock dividends, recapitalizations, and stock issuances below the lesser of market or exercise price, shall be registered as soon as practicable upon grant, and shall contain such other terms and conditions mutually acceptable to Alfin and Consultant. 19. Back Fees. Alfin agrees to pay Consultant for services rendered prior to the Effective Date in the following amounts (i) $5,000 by February 17,1998, receipt of which is acknowledged by Consultant, (ii) $5,000 by March 17, 1998, receipt of which is acknowledged by consultant, (iii) $10,000 by April 17, 1998 receipt of which is acknowledged by Consultant, (iv) $10,000 by June 1, 1998, (v) $10,000 by June 17, 1998, (vi) $10,000 by July 17, 1998, and (viii) $7,019,34 by August 17, 1998, plus 5% of the gross receipts derived by Alfin or Arpel from Spiegel for the month of February 1998 by August 17, 1998. 20. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (Signatures on following page) 8 PAGE 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. STAR SHOPPE DIRECT, INC. By: /s/______________________________ Benedict V. White President ALFIN, INC. By: /s/______________________________ Name: Michael D. Ficke Title: Chief Financial Officer ADRIEN ARPEL, INC. By: /s/______________________________ Name: Michael D. Ficke Title: Chief Financial Officer Solely as to obligations of White specified herein under Section 1,5 and 18: By: /s/______________________________ Benedict V. White President EX-10.11 5 EMPLOYEEMENT AGREEMENT: M. PANVINI 1 EXHIBIT 10.11 PAGE 23 EMPLOYMENT AGREEMENT PARTIES Alfin, Inc., a New York Corporation and its wholly owned subsidiary, Adrien Arpel, Inc., a Delaware Corporation with offices currently located at 720 Fifth Avenue, New York, New York, 10019, (the "Company") and Mary Panvini ("employee"), currently residing at Watergate East, 2510 Virginia Avenue, Washington D.C. 20037. The employee is currently the Senior Vice President/General Manager of Sales and has been employed by the Company since June, 1997. PURPOSE The parties desire to enter into an employment agreement ("agreement"), as follows; TERM The term of the agreement will be for a period of one year commencing on March 27, 1998 and ending on March 26, 1999. The agreement will renew automatically for successive 1 year periods unless either party notifies the other party, 90 days prior to the March 26th of each year, of their intent not to renew the agreement. Any notification must be in writing. This agreement shall survive a change in control, or ownership of the Company. COMPENSATION The employee will continue to earn her current level of gross annual earnings of $115,000 payable on the 15th and 30th falls of each month. If the 15th or 30th falls on a weekend or holiday, then on the next business day. BENEFITS The employee will be given a commuting allowance. The employee's primary residence is in Washington, D.C. and the employee will be reimbursed for reasonable commuting expenses between the Company's offices and employee's primary residence. The employee will also be given reasonable living accommodations in New York City consisting of either an apartment or hotel room. If the Company does not keep a New York presence and does house the employee in an apartment or hotel, then the employee will be entitled to a $1,000, per month allowance, for an office in her home. The employee will also be reimbursed for business telephone charges incurred from a home office. STOCK OPTIONS The employee will be granted stock options ("Options"), to purchase 100,000 shares of the Company's Common Stock at $0.68 per share. Of the 100,000 options, 25,000 shall vest 2 PAGE 24 immediately, 25,000 on March 27, 1999, 25,000 on March 27, 2000 and 25,000 on March 27, 2001. If the Company records earnings per share of $.30 or greater at the end of any fiscal year, then all non vested options shall vest immediately. The options shall expire 10 years after granted. The Option is not transferable by the Employee, except if the Employee dies or becomes physically disabled during the term of this agreement. If the employee dies or becomes physically disabled, during the term of this agreement, then the employee's daughter (Ms. Joelle Martini) may exercise such options for a period of 90 days from the date of death or physical disability. In the event that, prior to the delivery by the Company of all shares of Common Stock in respect of which the Option is granted, the number of outstanding shares of Common Stock of the Company shall be changed through the declaration of stock dividends, stock splits, recapitalization or other change affecting the outstanding Common Stock, the remaining number of shares of Common Stock still subject to the Option and the purchase price thereof shall be appropriately adjusted by the Company. The Options granted by the Company, to the employee, will be exercisable by the employee for a period of 90 days beyond the date of this agreement, or the termination of the employee by the Company, for any reason. BONUS The employee shall earn a bonus of 20% of gross annual compensation during the term of this agreement, if the Company earns a pre tax profit at the end of its fiscal year, and an additional 5% of gross annual compensation if the Company records a 5% increase in profitability over its forecasted profit at the end of its fiscal year. Agreed to Date: March 27, 1998 ----------------------- On behalf of Alfin, Inc. /S/ Barry W. Blank ---------------------------------- Barry W. Blank/Chairman On behalf of Employee: /S/ Mary Panvini ---------------------------------- Mary Panvini EX-10.12 6 EMPLOYMENT AGREEMENT: M.D. FICKE 1 EXHIBIT 10.12 PAGE 25 EMPLOYMENT AGREEMENT PARTIES Alfin, Inc., a New York Corporation and its wholly owned subsidiary, Adrien Arpel, Inc., a Delaware Corporation with offices currently located at 720 Fifth Avenue, New York, New York, 10019, (the "Company") and Michael D. Ficke ("employee"), currently residing at 75 Waters Edge Road, Sparta, New Jersey, 07871. The employee is currently the Chief Financial Officer of the Company and has been employed by the Company since July 17, 1989. PURPOSE The parties desire to enter into an employment agreement ("agreement"), as follows; TERM The term of the agreement will be for a period of one year commencing on March 27, 1998 and ending on March 26, 1999. The agreement will renew automatically for successive 1 year periods unless either party notifies the other party, 90 days prior to the March 26th of each year, of their intent not to renew the agreement. Any notification must be in writing. This agreement shall survive a change in control, or ownership of the Company. COMPENSATION The employee will continue to earn his current level of gross annual earnings of $125,000 payable on the 15th and 30th falls of each month. If the 15th or 30th falls on a weekend or holiday, then on the next business day. BENEFITS The employee will have continued usage of a Company leased vehicle, which will be billed directly to the Company by the leasing agency. STOCK OPTIONS The employee will be granted stock options ("Options"), to purchase 100,000 shares of the Company's Common Stock at $0.68 per share. Of the 100,000 options, 25,000 shall vest immediately, 25,000 on March 27, 1999, 25,000 on March 27, 2000 and 25,000 on March 27, 2001. If the Company records earnings per share of $.30 or greater at the end of any fiscal year, then all non vested options shall vest immediately. The options shall expire 10 years after granted. The Option is not transferable by the Employee, except if the Employee dies or becomes physically disabled during the term of this agreement. If the employee dies or becomes 2 PAGE 26 physically disabled, during the term of this agreement, then the employee's spouse may exercise such options for a period of 90 days from the date of death or physical disability. In the event that, prior to the delivery by the Company of all shares of Common Stock in respect of which the Option is granted, the number of outstanding shares of Common Stock of the Company shall be changed through the declaration of stock dividends, stock splits, recapitalization or other change affecting the outstanding Common Stock, the remaining number of shares of Common Stock still subject to the Option and the purchase price thereof shall be appropriately adjusted by the Company. The Options granted by the Company, to the employee, will be exercisable by the employee for a period of 90 days beyond the date of this agreement, or the termination of the employee by the Company, for any reason. BONUS The employee shall earn a bonus of 25,00 if the Company records a pre tax profit for two consecutive quarters. The Company's quarter ending periods are October 31, January 31, April 30, and July 31. Agreed to Date: March 27, 1998 ------------------------ On behalf of Alfin, Inc. /S/ Barry W. Blank ----------------------------------- Barry W. Blank/Chairman On behalf of Employee: /S/ Michael D. Ficke ----------------------------------- Michael D. Ficke EX-10.13 7 SETTLEMENT AGREEMENT 1 EXHIBIT 10.13 PAGE 27 SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement"), is entered into as of this 23rd of April, 1998, by and among Alfin, Inc.("Arpel") and Adrien Arpel, Inc. ("Arpel") (collectively, the "Alfin Parties"), and Adrienne Newman ("Newman"), A.A.N. Services Inc. ("A. A. N. ") and Signature Club A, Ltd. ("SCA") (collectively, the "Newman Parties"). Alfin, Arpel, Newman, A. A. N. and SCA shall be collectively referred to herein as the "Parties". WHEREAS, in January of 1997, Newman commenced an action in the Supreme Court of the State of New York against Alfin, captioned Adrienne Newman v. Alfin. Inc., Index No.600405/97 (the "Action"); WHEREAS, in March of 1997, Alfin filed an answer and asserted counterclaims against Newman in the Action; WHEREAS, in April of 1997, Alfin filed an amended answer and amended counterclaims against Newman in the Action; WHEREAS, in June of 1997, the Court dismissed Alfin's counterclaims for counterclaims interference with contract, for tortious interference with prospective economic advantage and for defamation; and WHEREAS, the Parties hereto desire to settle all claims and causes of actions which were or could have been asserted against any of them in the Action without the need for further protracted litigation and the accompanying costs and risks thereof, on the terms and conditions set forth herein: NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, promises and representations set forth herein, and intending to be legally bound, it is hereby agreed by and among the Parties hereto as follows: 1. The Parties will execute general releases in the form of the releases annexed hereto as Exhibits A, B, C, D and E, respectively. 2. Newman and Alfin hereby consent to the entry of the Stipulation of Dismissal in the form annexed hereto as Exhibit F. 2 PAGE 28 3. Simultaneously with the execution of this Agreement, the Parties shall exchange the general releases referred to in paragraph 1 herein. Within five (5) business days of the date of the execution of this Agreement, the Stipulation of Dismissal referred to in paragraph 2 herein shall be filed with the Supreme Court of the State of New York, County of New York. 4. In consideration of this Agreement, SCA agrees to pay to Alfin the principal sum of One Million Dollars ($1,000,000) (the "Principal") payable as follows: a. Simultaneously with the execution of this Agreement, SCA shall pay to Alfin $150,000 (the "Pre-Certification Lump Sum Payment"). b. On the first business day of the month immediately following the date of the execution of this Agreement, and on the first business day of every subsequent month, SCA shall pay $25,000 to Alfin (the "Pre-Certification Monthly Payments") until (1) the Principal has been paid in full, or (2) Alfin has received the sum of $2 Million Dollars ($2,000,000) in cash as an equity investment in Alfin and has certified that fact to the Newman parties (the "Alfin Certificate"). c. If at any time before SCA has made twenty-eight (28) Pre-Certification Monthly Payments, as described in paragraph 4(b), Alfin delivers the Alfin Certificate to the Newman Parties, then SCA shall cease making the Pre-Certification Monthly Payments and shall act as follows: 1. SCA shall pay $150,000 to Alfin within five business days after the date on which the Newman Parties receive the Alfin Certificate. The $150,000 payment described in this subparagraph shall be referred to herein as the "Post-Certification Lump Sum Payment"; ii. On the first business day of the month immediately following the date on which the Newman Parties receive the Alfin Certificate, and on the first business day of every subsequent month, SCA shall pay $50,000 to Alfin (the "Post-Certification Monthly Payments") until the sum of (a) the Pre-Certification Lump Sum Payment; (b) the product of the Pre-Certification Monthly Payments multiplied by the 3 PAGE 29 number of those payments; (c) the Post-Certification Lump Sum Payment; and (d) the product of the Post-Certification Monthly Payments multiplied by the number of those payments equal the Principal. If, while making payments pursuant to paragraph 4(c)(ii), the amount of unpaid Principal falls below $50,000 then SCA shall pay, on the first business day of the next month, the full amount of the unpaid Principal; and iii. SCA shall pay simple interest on the unpaid Principal which shall begin accruing on the first business day of the month immediately following the date on which the Newman Parties receive the Alfin Certificate. SCA shall pay the simple interest, accrued on the unpaid Principal during the prior month, on the first business day of each month, until the entire Principal is paid. Interest on the unpaid Principal shall be calculated using the prime rate in effect at Citibank N.A. on the first business day of each month. d. If SCA has made exactly twenty-eight (28) Pre-Certification Monthly Payments when Alfin delivers the Alfin Certificate to the Newman parties, SCA shall cease making the Pre-Certification Monthly Payments described in paragraph 4(b), and shall, within five (5) business days, pay the lump sum of $150,000 to Alfin which shall constitute the final payment by SCA to Alfin under this Agreement. e. If SCA has made twenty-nine (29) to thirty-three (33) Pre-Certification Monthly Payments when Alfin delivers the Alfin Certificate to the Newman Parties, then SCA shall cease making the Pre-Certification Monthly Payments described in paragraph 4(b), and shall, within five (5) business days, pay a lump sum in the amount equal to the Principal less the sum of (a) the Pre-Certification Lump Sum Payment and (b) the product of the Pre-Certification Monthly Payments multiplied by the number of those payments. This payment shall constitute the final payment by SCA to Alfin under this Agreement. f. If SCA defaults in the making of any payment due hereunder and such default continues for 15 days after notice of default is given to the Newman Parties, the whole of the principal sum shall become due, together with any interest described in paragraph 4(c)(iii). g. Newman guarantees the full performance of SCA's payment obligations pursuant to this paragraph 4. This guarantee is intended to be a guarantee by Newman of payment of all of SCA's payment obligations hereunder. 4 PAGE 30 5. In no event shall the payments to Alfin total more than $1,000,000, plus the interest generated on the unpaid Principal described in paragraph 4(c)(iii). 6. SCA may prepay all or a portion of the Principal at any time without penalty. 7. Neither the making of this Agreement nor any of the provisions herein shall constitute an admission of, and the Parties do not admit, any of the substantive allegations asserted by either Newman or Alfin in the Action or any liability on account thereof. 8. This Agreement constitutes the entire understanding among the Parties hereto concerning the subject matter hereof and supersedes any prior or contemporaneous representations or agreements not contained herein concerning the subject matter of this Agreement. 9. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which taken together shall constitute one agreement. 10. This Agreement shall be deemed to have been mutually prepared by the Parties hereto and shall not be construed against any of them solely by reason of authorship. 11. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned Parties. All notices hereunder, including the Alfin Certificate, shall be in writing and be delivered by hand or by registered mail, return receipt requested. All notices to the Newman Parties shall be addressed separately to Adrienne Newman, A.A.N. Services Inc., 660 Madison Avenue, New York, New York 10021 with copy to Henry P. Wasserstein, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10017. All notices to the Alfin Parties shall be addressed to Alfin, Inc., P.O. Box 110, Norwood, N.J. 07648, attention Michael Ficke, CFO with copy to Paul M. Brown, Esq., Parson & Brown, 666 Third Avenue, New York, New York 10017. 5 PAGE 31 IN WITNESS WHEREOF, the Parties hereto now execute and deliver this Agreement as of April 23, 1998. ADRIENNE NEWMAN By: /s/ ------------------------------------ Adrienne Newman SIGNATURE CLUB A, LTD. By: /s/ ------------------------------------ Jeffrey Glassman Chief Financial Officer of Signature Club A, Ltd. A.A.N. SERVICES, INC. By: /s/ ------------------------------------ Jeffrey Glassman Chief Financial Officer Of A.A.N. Services ALFIN, INC. By: /s/ Michael D. Ficke ------------------------------------ Name: Title: ADRIEN ARPEL, INC. By: /s/ Michael D. Ficke ------------------------------------ Name: Title: 6 PAGE 32 RELEASE FROM ALFIN, INC TO ADRIENNE NEWMAN, A.A.N. SERVICES INC. AND SIGNATURE CLUB A. LTD. ALFIN, INC. ("ALFIN"), intending to be legally bound and in exchange for good and valuable consideration, receipt of which is hereby acknowledged, hereby releases and discharges Adrienne Newman, A.A.N. Services Inc. and Signature Club A, Ltd. and each of their predecessors, officers, board members, parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, heirs, executors, administrators, successors, past and present shareholders, partners, indemnities and assigns, and their respective heirs, executors, administrators, successors and assigns (all of whom shall be hereinafter referred to as "RELEASEES"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, whether known or unknown, in law, in admiralty or equity, in any jurisdiction in the world, which against the RELEASEES or any of them, ALFIN, ALFIN's parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, officers, board members, partners, indemnities, and their respective heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, including but not limited to, any claims ALFIN may have against the RELEASEES arising out of or relating in any way to (i) Adrienne Newman's employment, affiliation or association with ALFIN or Adrien Arpel, Inc.; (ii) any claims asserted or that could have been asserted by Alfin against Newman in the action entitled Adrienne Newman v. Alfin. Inc., Index Number 600405/97; or (iii) any claim that the RELEASEES have infringed or otherwise violated ALFIN's trademark, copyright or patent rights. This RELEASE shall be governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned. This release may not be changed orally. 7 PAGE 33 ALFIN has carefully read the foregoing RELEASE and understands the contents thereof ALFIN represents, declares and decrees that it relies solely on the judgment of its officers and agents in entering into the settlement and in executing this RELEASE. This RELEASE is not intended to, and does not, release the RELEASEES from the obligations set forth in the SETTLEMENT AGREEMENT dated as of April 23, 1998, to which this RELEASE is an exhibit. Whenever the text hereof requires, the use of the singular shall include the appropriate plural. IN WITNESS WHEREOF, ALFIN has caused this RELEASE to be signed by its duly authorized officer and agent on the ___ day of April, 1998. IN WITNESS WHEREOF, ALFIN has duly executed this RELEASE. ALFIN, INC. By: /s/ Adrienne Newman _____________________________ Name: Title: STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the ________ day of April, 1998, before me personally came ____________________ to me known, who, being by me duly sworn, did depose and say that he reside at ___________________________ that he is the duly appointed __________________________ of Alfin, Inc., the corporation described in the foregoing Release, and that he has been given full authority to prosecute or dispose of the claims of Alfin, Inc. and to execute the foregoing release. /s/ Rita Marlowe _____________________________ Notary Public 8 PAGE 34 RELEASE FROM ADRIEN ARPEL, INC TO ADRIENNE NEWMAN, A.A.N. SERVICES INC AND SIGNATURE CLUB A LTD ADRIEN ARPEL, INC. ("ARPEL"), intending to be legally bound and in exchange for good and valuable consideration, receipt of which is hereby acknowledged, hereby releases and discharges Adrienne Newman, A.A.N. Services Inc. and Signature Club A, Ltd. and each of their predecessors, officers, board members, parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, heirs, executors, administrators, successors, past and present shareholders, partners, indemnities and assigns, and their respective heirs, executors, administrators, successors and assigns (all of whom shall be hereinafter referred to as ("RELEASEES"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, whether known or unknown, in law, in admiralty or equity, in any jurisdiction in the world, which against the RELEASEES or any of them, ARPEL, ARPEL's parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, officers, board members, partners, indemnities, and their respective heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, including but not limited to, any claims ARPEL may have against the RELEASEES arising out of or relating in any way to (i) Adrienne Newman's employment, affiliation or association with ARPEL or Alfin, Inc.; (ii) any claims asserted or that could have been asserted by ARPEL against Newman in the action entitled Adrienne Newman v. Alfin Inc., Index Number 600405/97; or (iii) any claim that the RELEASEES have infringed or otherwise violated ARPEL's trademark, copyright or patent rights. This RELEASE shall be governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned. This release may not be changed orally. 9 PAGE 35 ARPEL has carefully read the foregoing RELEASE and understands the contents thereof ARPEL represents, declares and decrees that it relies solely on the judgment of its officers and agents in entering into the settlement and in executing this RELEASE. This RELEASE is not intended to, and does not, release the RELEASEES from the obligations set forth in the SETTLEMENT AGREEMENT dated as of April 23, 1998, to which this RELEASE is an exhibit. Whenever the text hereof requires, the use of the singular shall include the appropriate plural. IN WITNESS WHEREOF, ARPEL has caused this RELEASE to be signed by its duly authorized officer and agent on the ___ day of April, 1998. IN WITNESS WHEREOF, ARPEL has duly executed this RELEASE. ADRIEN ARPEL, INC ADRIEN ARPEL, INC By: /s/ Michael D. Ficke _____________________________ Name: Title: STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the ________ day of April, 1998, before me personally came ____________________ to me known, who, being by me duly sworn, did depose and say that he reside at ___________________________ that he is the duly appointed __________________________ of Adrien Arpel, Inc., the corporation described in the foregoing Release, and that he has been given full authority to prosecute or dispose of the claims of Adrien Arpel, Inc. and to execute the foregoing release. /s/ Rita Marlowe _____________________________ Notary Public 10 PAGE 36 RELEASE FROM ADRIENNE NEWMAN TO ALFIN, INC AND ADRIEN ARPEL INC ADRIENNE NEWMAN ("NEWMAN"), intending to be legally bound and in exchange for good and valuable consideration, receipt of which is hereby acknowledged, hereby releases and discharges Alfin, Inc. and Adrien Arpel, Inc. and each of their predecessors, officers, board members, parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, heirs, executors, administrators, successors, past and present shareholders, partners, indemnities and assigns, and their respective heirs, executors, administrators, successors and assigns (all of whom shall be hereinafter referred to as "RELEASEES"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, whether known or unknown, in law, in admiralty or equity, in any jurisdiction in the world, which against the RELEASEES or any of them, NEWMAN, NEWMAN's companies, divisions, affiliates, predecessors, agents, attorneys, employees, officers, partners, indemnities, and their respective heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, including but not limited to, any claims NEWMAN may have against the RELEASEES arising out of or relating in any way to (i) her employment, affiliation or association with Adrien Arpel, Inc. or Alfin, Inc.; (ii) any claims asserted or that could have been asserted by NEWMAN against Adrien Arpel, Inc. or Alfin, Inc. in the action entitled Adrienne Newman v. Alfin Inc., Index Number 600405/97; (iii) any claim that the RELEASEES have infringed or otherwise violated NEWMAN's trademark, copyright or patent rights; or (iv) warrants issued to NEWMAN by Alfin, Inc. pursuant to a warrant agreement, dated as of November 19, 1993. This RELEASE shall be governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned. This release may not be changed 11 PAGE 37 orally. NEWMAN has carefully read the foregoing RELEASE and understands the contents thereof NEWMAN represents, declares and decrees that it relies solely on the judgment of its officers and agents in entering into the settlement and in executing this RELEASE. This RELEASE is not intended to, and does not, release the RELEASEES from the obligations set forth in the SETTLEMENT AGREEMENT dated as of April 23, 1998, to which this release is an exhibit. Whenever the text hereof requires, the use of the singular shall include the appropriate plural. IN WITNESS WHEREOF, NEWMAN has duly executed this RELEASE on this 28, day of April, 1998. By: /s/ Mike Ficke ----------------------------- Name: Title: STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 28th day of April, 1998, before me personally came Adrienne Newman to me known, who, being by me duly sworn, did depose and say that she reside at 660 Madison Avenue, NYC and that deponent to execute the foregoing release. /s/ Rita Marlowe - ----------------------------- Notary Public ss.: 12 PAGE 38 RELEASE FROM A.A.N. SERVICES INC. TO ALFIN, INC. AND ADRIEN ARPEL, INC. A.A.N. SERVICES INC. ("A.A.N."), intending to be legally bound and in exchange for good and valuable consideration, receipt of which is hereby acknowledged, hereby releases and discharges Alfin, Inc. and Adrien Arpel, Inc. and each of their predecessors, officers, board members, parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, heirs, executors, administrators, successors, past and present shareholders, partners, indemnities and assigns, and their respective heirs, executors, administrators, successors and assigns (all of whom shall be hereinafter referred to as "RELEASEES"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, whether known or unknown, in law, in admiralty or equity, in any jurisdiction in the world, which against the RELEASEES or any of them, A.A.N., A.A.N.'s parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, officers, board members, partners, indemnities, and their respective heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, including but not limited to, any claims A.A.N. may have against the RELEASEES arising out of or relating in any way to (i) Adrienne Newman's employment, affiliation or association with Adrien Arpel, Inc. or Alfin, Inc.; (ii) any claims asserted or that could have been asserted by A.A.N. against the RELEASEES in the action entitled Adrienne Newman v. Alfin Inc., Index Number 600405/97; or (iii) any claim that the RELEASEES have infringed or otherwise violated A.A.N.'s trademark, copyright or patent rights. This RELEASE shall be governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned. This release may not be changed orally. 13 PAGE 39 A.A.N. has carefully read the foregoing RELEASE and understands the contents thereof A.A.N. represents, declares and decrees that it relies solely on the judgment of its officers and agents in entering into the settlement and in executing this RELEASE. This RELEASE is not intended to, and does not, release the RELEASEES from the obligations set forth in the SETTLEMENT AGREEMENT dated as of April 23, 1998, to which this RELEASE is an exhibit. Whenever the text hereof requires, the use of the singular shall include the appropriate plural. IN WITNESS WHEREOF, ANN. has caused this RELEASE to be signed by its duly authorized officer and agent on the 28 day of April, 1998. IN WITNESS WHEREOF, A.A.N. has duly executed this RELEASE. A.A.N. SERVICES INC. By: /s/ Jeffrey Glassman Jeffrey Glassman Chief Financial Officer of A.A.N. Services Inc. STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 28 day of April, 1998, before me personally came Jeffrey Glassman to me known, who, being by me duly sworn, did depose and say that he reside at 660 Madison Avenue, NYC that he is the duly appointed Chief Financial Officer of A.A.N. Services Inc., the corporation described in the foregoing Release, and that he has been given full authority to prosecute or dispose of the claims of Alfin, Inc. and to execute the foregoing release. /S/ Rite Marlowe Notary Public 14 PAGE 40 RELEASE FROM SIGNATURE CLUE A, LTD. TO ALFIN INC AND ADRIEN ARPEL, INC. SIGNATURE CLUB A, LTD. ("SCA"), intending to be legally bound and in exchange for good and valuable consideration, receipt of which is hereby acknowledged, hereby releases and discharges Alfin, Inc. and Adrien Arpel, Inc. and each of their predecessors, officers, board members, parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, heirs, executors, administrators, successors, past and present shareholders, partners, indemnities and assigns, and their respective heirs, executors, administrators, successors and assigns (all of whom shall be hereinafter referred to as "RELEASEES"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, whether known or unknown, in law, in admiralty or equity, in any jurisdiction in the world, which against the RELEASEES or any of them, SCA, SCA's parents, subsidiaries, companies, divisions, affiliates, predecessors, agents, attorneys, employees, officers, board members, partners, indemnities, and their respective heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, including but not limited to, any claims SCA may have against the RELEASEES arising out of or relating in any way to (i) Adrienne Newman's employment, affiliation or association with Adrien Arpel, Inc. or Alfin, Inc.; (ii) any claims asserted or that could have been asserted by SCA against the RELEASEES in the action entitled Adrienne Newman v. Alfin, Inc., Index Number 600405/97; or (iii) any claim that the RELEASEES have infringed or otherwise violated SCA's trademark, copyright or patent rights. This RELEASE shall be governed by the laws of the State of New York and may only be modified or amended by a written instrument signed by each of the undersigned. This release may not be changed orally. 15 PAGE 41 SCA has carefully read the foregoing RELEASE and understands the contents thereof SCA represents, declares and decrees that it relies solely on the judgment of its officers and agents in entering into the settlement and in executing this RELEASE. This RELEASE is not intended to, and does not, release the RELEASEES from the obligations set forth in the SETTLEMENT AGREEMENT dated as of April 23, 1998, to which this RELEASE is an exhibit. Whenever the text hereof requires, the use of the singular shall include the appropriate plural. IN WITNESS WHEREOF, SCA has caused this RELEASE to be signed by its duly authorized officer and agent on the 28 day of April, 1998. IN WITNESS WHEREOF, SCA has duly executed this RELEASE. SIGNATURE CLUB A, LTD By: /s/ Jeffrey Glassman ----------------------------- Jeffrey Glassman of Signature Club A, Ltd. STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 28 of April, 1998, before me personally came Jeffrey Glassman by me duly sworn, did depose and say that he reside at 660 Madison Avenue, NYC, that he is Chief Financial Officer of Signature Club A, Ltd., the corporation described in the foregoing Release, and that he has been given full authority to prosecute or dispose of the claims of Signature Club A,. and to execute the foregoing release. - ---------------------------- Notary Public 16 PAGE 42 SUPREME COURT OF NEW YORK COUNTY OF NEW YORK ADRIENNE NEWMAN, Index No. 600405/97 Plaintiff, -against- STIPULATION OF ALFIN, INC. DISCONTINUANCE Defendant. No party hereto is an infant or incompetent person for whom a committee has been appointed or a conservate and no person not a party has an interest in the subject matter of this action, it is hereby stipulated and agreed, by and between the undersigned attorneys for the respective parties that the above-entitled action, including the counterclaims asserted therein, be, and the same hereby is discontinued with prejudice without costs to either party as against the other. Dated: New York, New York April , 1998 SKADDEN, ARPS, SLATE, PARSON & BROWN MEAGHER & FLOM LLP Attorneys for Defendant Attorneys for Plaintiff Alfin, Inc. Adrienne Newman By: Paul M. Brown By: Henry P. Wasserstein EX-10.14 8 AGREEMENT BETWEEN THE COMPANY AND RPR MARKETING 1 EXHIBIT 10.14 PAGE 43 PUBLIC RELATIONS AGENCY AGREEMENT This Agency Agreement, dated the 1st day of July 1, 1998, is by and between Regina Public Relations, Inc., (the "Agent" hereinafter referred to as "RPR"). located at 545 Madison Avenue, Suite 800, New York NY 10022, and Alfin, Inc., whose company name will officially change to Adrien Arpel, Inc. on August 4, 1998, (the "client" hereinafter referred to as Adrien Arpel"), currently located at 720 Fifth Avenue, 8th Fl,. The following constitutes the mutual agreement of the parties with respect to the retention of RPR as Public Relations Agency of record (handling all national product and corporate publicity for Adrien Arpel, Inc.) A. SERVICES: As public relations counsel. RPR will use its best efforts to: - Generate maximum publicity regarding the following corporate priorities: General PR representation announcement to national media outlets: Sears announcement press collateral and press distribution; company name change press collateral and press distribution: development and distribution of QVC announcement and National Spokesperson press kit; development and distribution of "classic" product mailing and press collateral (focus on product heritage etc.); PR presentations to company executives on a designated basis: and daily servicing of editor requests and media follow-up (emphasis on Business, Beauty and Trade press). - RPR will create and streamline Adrien Arpel press collateral; create and distribute targeted press mailings that will be supported by daily phone contact with the media, daily servicing of edit or product requests, and scheduling of one-on-one-one editor presentations/meetings. As appropriate, RPR also will develop and organize special events. RPR and the "Client" acknowledge that there will be additional public relations projects that will call for project fees in excess of the current three month project fee. All projects and fee scales will be agreed upon between both parties prior to billing. B. RPR WILL PERFORM THESE SERVICES IN ACCORDANCE WITH THE FOLLOWING TERMS: 1) INDEPENDENT CONTRACTOR STATUS: RPR shall provide these services AS an independent contractor, not as the "Client's employee." 2) AGENCY FEE AND PAYMENT SCHEDULE: RPR will bill its services to Adrien Arpel on a three month project basis beginning June 1, 1998 through August 31, 1998 at the project fee of twenty thousand dollars ($20,000) payable upon the execution of this agreement and receipt of invoice. 3) OUT-OF-POCKET EXPENSES AND PRODUCTION COSTS: Adrien Arpel will reimburse RPR for out-of-pocket expenses including production fees incurred in connection with the performance of the services. The expense fee of one thousand five hundred dollars ($1,500) payable to RPR is due upon the execution of this Agreement (June 1, 1998). All Production fees are subject to Adrien Arpel's written approval. 2 PAGE 44 4) CONFIDENTIALITY (a) RPR acknowledges and agrees that RPR will have access to, or become acquainted with, confidential information of Adrien Arpel. For the purposes of this agreement, confidential information shall mean any information of Adrien Arpel, whether or not developed by RPR. including but not limited to information which relates to all ideas, designs, methods, discoveries, improvements, products, documents or other results of the professional services, trade secrets, product data and specifications, proprietary rights, business affairs, product developments, customer information or employee information. Confidential information does not include any information that: i.) was known to RPR prior to the date of this agreement and any other agreement between the parties hereto, without obligation to keep it confidential; ii.) was lawfully obtained by RPR from a third party without any obligation of confidentiality; or iii.) is or becomes part of the public domain through no act or violation of any obligation of RPR. (b) RPR acknowledges and agrees that the confidential information constitutes valuable trade secrets of Adrien Arpel. RPR shall keep all confidential information in confidence and shall not, at any time during or after the term of this agreement, without Adrien Arpel's prior written consent, disclose or otherwise make available, directly or indirectly, any item of confidential information to anyone other than RPR employees who need to know the same in performance of their professional services. RPR shall use confidential information only in connection with the performance of professional services hereunder and for no other 5) INDEMNIFICATION CLAUSE: (a) Adrien Arpel will indemnify and hold RPR harmless with respect to any claims or actions instituted by any third party which result from the use by RPR of information or material furnished to RPR by Adrien Arpel, or where information or material created by RPR is substantially changed by Adrien Arpel. Information or data obtained by RPR from Adrien Arpel substantiate claims or statements released by RPR on Adrien Arpel's behalf shall be deemed to be "information or materials furnished to RPR by Adrien Arpel." However, under no circumstances shall Adrien Arpel indemnify FPR where RPR was negligent or engaged in willful misconduct. (b) In the event of any proceeding against Adrien Arpel by any regulatory agency, or in the event of any court action or self regulatory action questioning any materials prepared by RPR on behalf of Adrien Arpel, at Adrien Arpel's request, RPR shall assist in the preparation of the defense of such action or proceeding and cooperate with Adrien Arpel and its attorneys. Adrien Arpel will pay RPR an hourly rate, the rate of which shall be agreed upon at a later date, for time expended by it on such assistance and Adrien Arpel will reimburse RPR any out-of-pocket costs RPR incurs in connection with any such action or proceeding. 6) EFFECTIVE DATE AND TERMINATION: This agreement shall be effective as of June 1, 1998, and shall continue through August 31, 1998. Either party has the right to terminate this agreement by giving sixty (60) days advance notice in writing. This agreement will be reviewed for renewal on September 1, 1998 for an additional one (1) year term (through 3 PAGE 45 September 1, 1999. RPR will bill at the rate of six thousand five hundred dollars ($6,500) per month beginning September 1, 1998. 7) GOVERNING LAWS: This agreement shall be governed and interpreted in accordance with the laws of the State of New York 8) ARBITRATION: Any controversy or claim arising out of or relating to this Agreement, or the parties' decision to enter into this Agreement, or the breach thereof shall be settled by arbitration by a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association., and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in New York and, as provided in paragraph 7, shall apply the substantive law of New York, except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. The arbitrator shall not award either party punitive damages and the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. The arbitrator shall not award either party punitive damages and the parties shall be deemed to have waived any right to such damages. Further, the arbitrator shall be bound by the express terms of this Agreement. 9) OWNERSHIP All slogans and publicity materials submitted or developed by RPR for Adrien Arpel during the term of this Agreement, and which Adrien Arpel uses at least once prior to the termination hereof, or which Adrien Arpel indicates in writing to RPR during the term hereof as being specifically within the designated plans for adoption and exploitation by Adrien Arpel, shall be, as between RPR and Adrien Arpel, Adrien Arpel's property exclusively. All slogans, ideas or plans submitted, created or developed by RPR for Adrien Arpel during the term of this Agreement, and not used by Adrien Arpel during the term hereof, or designated by Adrien Arpel in writing as being specifically within designated plans for exploitation and adoption of Adrien Arpel thereafter are RPR's property, and shall be dealt with by Adrien Arpel as such. ACCEPTED AND AGREED REGINA PUBLIC RELATIONS, INC. By: /s/ Date: 8/4/98 --------------------------- -------- Regina C. Kulik President ADRIEN ARPEL, INC. By: /s/ Date: 8/4/98 --------------------------- -------- Mary Panvini Senior Vice President - General Manager EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADRIEN ARPEL INC. (FORMERLY ALFIN, INC) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1 U.S. DOLLARS YEAR JUL-31-1998 AUG-01-1997 JUL-31-1998 1 433,943 0 171,529 952,073 1,743,684 3,225,404 1,583,677 1,326,813 3,665,865 1,890,315 562,517 750,000 0 161,643 525,550 3,665,865 5,908,754 5,908,754 1,732,805 7,665,526 252,656 0 24,280 (3,742,223) 6,213 (3,748,446) 0 0 0 (3,748,446) (0.31) (0.32)
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