<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 1997
----------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
------------ -------------
Commission File Number 0-11434
----------
ALFIN, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3032734
------------------------------ ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
720 Fifth Avenue, New York, N. Y. 10019
---------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 333-7700
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: 11,721,259 shares of common stock, $.01 par value per share, at March
11,1997.
<PAGE> 2
ALFIN, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 1997 and July 31, 1996 2-3
Condensed Consolidated Statements of Operations for the
three months and six months ended January 31, 1997 and 1996 4
Condensed Consolidated Statements of 5
Cash Flows for the six months ended
January 31, 1997 and 1996
Notes to Condensed Consolidated
Financial Statements 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results 11-15
of Operations
Exhibit 11 Schedule of Computation
of Earnings per share 16
Signatures 17
</TABLE>
1
<PAGE> 3
ALFIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS January 31, July 31,
1997 1996
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash & Cash Equivalents $ 1,744,648 $ 2,210,972
Accounts receivable, net of allowances for
doubtful accounts and chargebacks of $ 1,085,541 and $ 998,769 at January
31,1997 and July 31,1996, respectively and sales allowances of $ 256,264 at
January 31,1997 and July 31, 1996 642,906 680,370
Inventories 3,188,832 3,271,126
Prepaid expenses and other current assets 1,300,731 746,513
------------ ------------
Total current assets 6,877,117 6,908,981
------------ ------------
PROPERTY AND EQUIPMENT 5,218,155 4,998,954
Less-accumulated depreciation and
amortization (3,795,640) (3,537,025)
------------ ------------
Property and equipment, net 1,422,515 1,461,929
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $ 512,369 and $ 472,957 at January 31, 1997
and July 31, 1996, respectively 2,640,668 2,680,081
Other 91,557 177,195
------------ ------------
Total other assets 2,732,245 2,857,276
------------ ------------
Total assets $ 11,031,877 $ 11,228,186
============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated balance sheets.
2
<PAGE> 4
ALFIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY January 31, July 31,
1997 1996
------------ ------------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of mortgage, note
and other loans payable $ 333,499 $ 1,933,499
Due to related parties -- 4,826
Accounts payable 2,082,313 2,177,078
Accrued expenses-other 2,109,867 1,806,781
------------ ------------
Total current liabilities 4,525,679 5,922,184
NOTES PAYABLE 275,000 425,000
------------ ------------
Total liabilities 4,800,679 6,347,184
------------ ------------
REDEEMABLE PREFERRED STOCK 750,000 750,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value,
17,000,000 shares authorized;
11,721,259 and 11,662,926
shares issued and outstanding
at January 31, 1997 and July 31,1996,
respectively: 117,212 116,629
Additional paid-in capital 12,845,040 12,787,290
Accumulated deficit (7,481,054) (8,772,917)
------------ ------------
Total shareholders' equity 5,481,198 4,131,002
------------ ------------
Total liabilities and share-
holders' equity $ 11,031,877 $ 11,228,186
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE> 5
ALFIN, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $10,188,567 $ 9,110,445 $19,823,279 $16,784,343
Cost of goods sold 3,856,834 3,135,257 6,952,128 5,306,309
----------- ----------- ----------- -----------
Gross profit on sales 6,331,733 5,975,188 12,871,151 11,478,034
Selling, general and
administrative expenses 5,305,301 5,125,384 10,970,850 10,053,866
----------- ----------- ----------- -----------
Operating Profit (Loss) 1,026,432 849,804 1,900,301 1,424,168
Other income (expense)
Interest expense (21,027) (77,854) (39,438) (161,492)
Other 0 (499) 0 (16,121)
----------- ----------- ----------- -----------
Total other expense (21,027) (78,353) (39,438) (177,613)
----------- ----------- ----------- -----------
Income before Provision
for income taxes 1,005,405 771,451 1,860,863 1,246,555
Provision for
Income Taxes 304,000 30,000 569,000 70,000
----------- ----------- ----------- -----------
Net Income $ 701,405 $ 741,451 $ 1,291,863 $ 1,176,555
=========== =========== =========== ===========
Weighted average number
of common and common
equivalent shares 11,958,194 11,631,454 12,099,491 11,714,610
----------- ----------- ----------- -----------
Net Income per
common and common
equivalent shares $ 0.06 $ 0.06 $ 0.11 $ 0.10
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE> 6
ALFIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
1997 1996
----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income $ 1,291,863 $ 1,176,555
----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation & Amortization 298,028 327,083
Decrease (Increase) Accounts Receivable 37,464 (674,347)
Decrease Inventory 82,294 674,610
(Increase) Prepaid Expenses & Other Assets (468,600) (712)
Increase (Decrease) Accounts Payable & Accrued Expenses 208,321 (782,650)
----------- -----------
Total Adjustments 157,507 (456,016)
----------- -----------
Net Cash Provided by
Operating Activities 1,449,370 720,539
----------- -----------
Cash Flows from Investing Activities
Capital Expenditures (219,201) (182,986)
----------- -----------
Cash Flows from Financing Activities
(Payment) Proceeds of Lines of Credit, net (1,600,000) 170,230
Payment of Debt Obligations (150,000) (450,000)
Payments to Related Parties (4,826) --
Proceeds From Sale of Stock 58,333 --
----------- -----------
Net Cash Used in Financing Activities (1,696,493) (279,770)
Net(Decrease)Increase in Cash (466,324) 257,783
Cash at Beginning of Period 2,210,972 515,636
----------- -----------
Cash at End of Period $ 1,744,648 $ 773,419
=========== ===========
Cash Paid during the quarter ended
Interest $ 90,066 $ 168,930
Income Taxes 95,969 109,362
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
5
<PAGE> 7
ALFIN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
January 31, 1997
----------------
(Unaudited)
-----------
(1) Summary of significant accounting policies:
-------------------------------------------
In the opinion of management, the accompanying condensed consolidated
financial statements contain all of the adjustments necessary to present
fairly the Company's financial position at January 31,1997 and July 31,
1996, the results of its operations for the three and six months ended
January 31, 1997 and 1996 and the cash flows for the six month period ended
January 31, 1997 and 1996. All adjustments are of a normal recurring nature.
The condensed consolidated balance sheet at July 31, 1996 was taken from
audited consolidated financial statements previously filed with the
Securities and Exchange Commission on the Company's Form 10K.
All significant intercompany transactions and accounts have been eliminated
in consolidation. Interim period results are not necessarily indicative of
the results of operations for a full year.
These quarterly financial statements should be read in conjunction with the
Company's audited financial statements contained in the Annual Report on
Form 10-K for the fiscal year ended July 31, 1996, filed with the Securities
and Exchange Commission.
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 and a television shopping network.
Concentration of credit risk with respect to trade receivables is
significant due to the Company's dependence on certain customers in the
Company's customer base. At January 31 , 1997, a television shopping network
accounted for 62% of sales and 18.0% of accounts receivable.
Recently Issued Accounting Standards
------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This statement establishes financial accounting and reporting standards
for the impairment of long lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. The adoption
of this statement will not have a material impact in the Company's financial
position or results of operation.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
FASB Statement 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 ABP Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company has elected to
remain with the accounting under APB Opinion No. 25 and make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting defined in SFAS No. 123 had been applied.
Subsequent to December 31, 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. This statement establishes standards for computing
and presenting earnings per share (EPS), replacing the presentation of
currently required primary EPS with a presentation of Basic EPS. For
entities with complex capital structures, the statement requires that dual
presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Under this new statement, Basic EPS is computed
based on weighted average shares outstanding and excludes any potential
dilution. Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS.
SFAS 128 is effective for financial statements issued for earlier periods
ending after December 15, 1997, including interim periods, and earlier
application is not permitted. When adopted, the Company will be required
to restate its EPS data for all prior periods presented. The Company does
not expect the impact of the adoption of this statement to be
material to previously reported EPS amounts.
6
<PAGE> 8
ALFIN, INC. AND SUBSIDIARIES
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
January 31, 1997
----------------
(Unaudited)
-----------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Revenues
-------------------------
For the quarter ended January 31, 1997, approximately 77% of department
store sales are derived from merchandise, 6% from services and 17% from
seasonal, promotional items.
(2) Inventory:
---------
Inventory at January 31, 1997 and July 31, 1996 was comprised of finished
goods amounting to $699,197 and $1,303,538, respectively, and components of
$2,489,635 and $1,967,588, respectively.
(3) Other Assets:
------------
Goodwill related to the acquisition of Arpel is being amortized using the
straight line method over 40 years.
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. During the first quarter of the current fiscal year 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 has thus far
received $750,000 with the remaining payment of $350,000 due to be paid in
July 1997.
On November 11, 1996, pursuant to an outstanding agreement, dated November
1, 1983, between Adrienne Newman and Seligman & Latz, Inc., Ms. Newman
elected to purchase a diamond ring from the Company for the amount of
$96,195. Such amount was equal to the amount reflected as an asset on the
Company's balance sheet.
During December 1996 the Company made a payment of $1 million towards the
purchase of fragrance products from Laboratories Selecta in France. This
transaction was designed to provide additional product sales for the Company
in markets, other than those currently handled by the Company's retail
cosmetic operations. The Company has an opportunity to realize revenues and
profits from this transaction during fiscal 1997 and is currently
negotiating with several possible distributors for the sale of these
products. This amount is classified as a prepaid expense on the accompanying
Balance Sheet. See "Liquidity and Capital Resources" for a further
discussion of this transaction.
7
<PAGE> 9
ALFIN, INC. ANDSUBSIDIARIES
---------------------------
NOTES TO CONDENSED January 31, 1997
-----------------------------------
(Unaudited)
-----------
(4) Debt:
-----
Term Promissory Note:
---------------------
At January 31, 1997, the Company had a term promissory note due to PNC Bank
(formerly Midlantic National Bank) in the amount of $575,000. The term
promissory note is collateralized by a distribution and administration
facility and bears interest at a rate of 2% above PNC's prime lending rate.
The balance under this term promissory note was $725,000 and $875,000 at
July 31, 1996 and January 31, 1996 respectively. Principal payments under
this note are $25,000 per month.
Lines of Credit:
----------------
On November 29, 1996 the Company paid the balance of its revolving secured
line of credit of $1.3 million with Credit Lyonnais, New York.
(5) Computation of net income per common
------------------------------------
and common equivalent share:
---------------------------
Net income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the periods. Common stock
equivalents include the number of shares issuable on exercise of the
outstanding options and warrants less the number of shares that could have
been purchased with the proceeds from the exercise of the options and
warrants based on the average price of common stock during the period.
(6) Income Taxes
------------
The Company maintains approximately $8.5 million of Federal operating loss
carry forwards with expiration dates from 2005 to 2009; however, the annual
use of pre-acquisition loss carry forwards is limited by the Internal
Revenue Code. As such, the Company has reflected a tax provision of $569,000
in its condensed consolidated statement of operations for the six months
ended January 31, 1997 which primarily relates to Federal and State income
taxes.
(7) Other
-----
On October 28, 1996 the Company received notice from Adrienne Newman
terminating her April 4, 1990 Employment Agreement with the Company (such
agreement as subsequently amended is the "Employment Agreement"), based on
an alleged breach of the Employment Agreement by the Company. Ms. Newman
served as the President of ARPEL and has been the Company's selling host,
under the name of Adrien Arpel in its sales program on the Home Shopping
Network, Inc. ("HSN"). The Employment Agreement provided for salary, fringe
benefits and commission payments based upon 33% of the net profits
attributable to television shopping sales. Ms. Newman also had vested rights
in 625,000 warrants which were scheduled to expire in November 1998.
8
<PAGE> 10
ALFIN, INC. AND SUBSIDIARIES
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
January 31, 1997
----------------
(Unaudited)
-----------
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, if any, against the other in connection with their dispute
over Ms. Newman's termination as an employee of the Company 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 with a summons and complaint returnable in the Supreme
Court, New York County, by Adrienne Newman. Ms. Newman has 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 are claimed. A further claim requests a judicial determination that
the employment agreement was materially breached by the Company resulting in
its termination.
This week the Company intends to serve an Answer and Counterclaim in
response to the action commenced by Ms. Newman. The Company's Counterclaim
asserts various claims against Ms. Newman, seeking damages and injunctive
relief. Among other things, it is the position of the Company that Ms.
Newman was in material breach of her Employment Agreement when she quit the
Company's employment on October 25, 1995. As a consequence, it is the
Company's belief that Ms. Newman's refusal to perform throughout the term
of her Employment Agreement until April 1998, particularly her willful
refusal and failure to appear as selling host on HSN, will damage the
Company at least in the sum of eleven million ($11,000,000). The Company
will also assert claims against Ms. Newman for breaches of her covenant not
to complete and her covenant not to disclose trade secrets and proprietary
data, and for attempting to disparge the Company. In the view of
management and counsel to the Company, Ms. Newman's Complaint lacks
substantial merit and the Company should prevail on its Counterclaims.
(8) Subsequent Events
-----------------
Office Consolidation
--------------------
The Company has announced that it will consolidate its administrative staff
offices and customer service center into a single location during the spring
of 1997. This move is designed to reduce the overhead costs associated with
operating two administrative locations. Management believes that the
consolidation will result in the Company reducing operating costs while
increasing efficiency and customer service.
9
<PAGE> 11
Sale of the Company's Distribution Center
- -----------------------------------------
The Company has received an offer for the purchase of its Norwood, New Jersey
distribution, warehousing and administration facility. If this offer results in
the sale of this facility at the current offer price, without downward
adjustments which could result from engineering inspections and environmental
requirements, the Company would realize approximately $880,000 in net cash
proceeds, after payment of the Term Promissory note which is currently due on
the facility. The sale of this facility would coincide with the Company's plans
to consolidate offices and utilize outside distribution.
10
<PAGE> 12
ALFIN, INC. AND SUBSIDIARIES
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
JANUARY 31, 1997
----------------
RESULTS OF OPERATIONS:
- ----------------------
SIX MONTHS ENDED JANUARY 31, 1997
- ---------------------------------
Certain statements in this report under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" within the meaning of the Private Securities
Liigation 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; availability of qualified
personnel; changes in, or the failure to comply with government regulations;
and other factors referenced in this report.
The Company recorded net income of $1,291,863 for the six months ended January
31, 1997 as compared to $1,176,555 for the six months ended January 31, 1996.
Net income per common and common equivalent share was $0.11 for the six months
ended January 31, 1997 as compared to $0.10 for the six months ended January 31,
1996.
Net sales for the six months ended January 31, 1997 increased to $19,823,279
from $16,784,343 for the six months ended January 31, 1996, an increase of
$3,038,936 or 18.1%. The increase in sales is due to an increase of sales to the
Home Shopping Network ("HSN"). Sales to HSN for the six months ended January 31,
1997 were $12,169,253 as compared to $8,405,663 for the six months ended January
31, 1996. The increased sales to HSN are primarily attributable to the
scheduling of the Company's appearances on HSN which dictated that the Company
ship products for the August 1996 appearance during the first quarter of the
current fiscal year, whereas the Company shipped the August 1995 appearance
during the fiscal year ended July 31, 1995. Contributing to the increase of
sales to HSN were shipments to HSN of Canada in the amount of $522,639 for the
six months ended January 31, 1997 as compared to $276,755 for the six months
ended January 31, 1996. For a further discussion of the Company's relationship
with HSN see footnote 7 - "Other".
Net sales to department stores for the six months ended January 31, 1997
decreased to $7,654,026 from $8,134,620, a decrease of $480,594 or 6.0%. This
decrease is primarily attributable to the Company's decision to stop selling
the Adrien Arpel product line in twelve Macy's East locations. The Company
stopped shipping this account during October 1996. Management believes that the
impact of these stores no longer carrying the Adrien Arpel product line will
not have a material impact on profitability. The Company is currently
negotiating with several department and specialty store groups to open
additional locations during the spring of 1997.
Cost of goods sold as a percentage of net sales was 35.1% for the six months
ended January 31, 1997, as compared to 31.6% for the six months ended January
31, 1996. The increase is primarily related to product mix since products sold
to HSN had have a higher cost of goods rate and consisted of 62% of total sales
for the six months ended January 31, 1997, as compared to 51% of total sales for
the six months ended January 31, 1996.
Selling, general and administrative expenses increased to $10,970,850 for the
six months ended January 31, 1997 from $10,053,866 for the six months ended
January 31, 1996, a 9.1% increase. This increase is primarily attributable to
increased commissions due to Adrienne Newman related to Mrs. Newman's employment
agreement with the company. Mrs. Newman has been the company's selling host,
under the
11
<PAGE> 13
name of Adrien Arpel in its sales program on HSN and her employment agreement
provides for commission payments based upon 33% of the net profits attributable
to television shopping sales. Increased sales to HSN during fiscal 1997, as
compared to fiscal 1996 resulted in increased comparable commission payments.
Interest expenses decreased to $39,438 for the six months ended January 31, 1997
from $161,492 recorded during the prior fiscal year, a 75.6% decrease. This
decrease is primarily attributable to lower debt levels.
THREE MONTHS ENDED JANUARY 31, 1997
- -----------------------------------
The company recorded net income of $701,405 for the three months ended January
31, 1997 as compared to $741,451 for the three months ended January 31, 1996.
Net income per common and common equivalent share was $0.06 for the three months
ended January 31, 1997 and the three months ended January 31, 1996.
Net sales for the three months ended January 31, 1997 increased to $10,188,567
from $9,110,445 recorded in the three months ended January 31, 1996, an increase
of $1,078,122 or 11.8%. The increase in sales is due to increased sales to HSN.
Sales to HSN for the three months ended January 31, 1997 were $6,441,671 as
compared to $4,960,089 for the three months ended January 31, 1996.
Cost of goods sold as a percentage of net sales was 37.9% for the three months
ended January 31, 1997 as compared to 34.4% for the three months ended January
31, 1996.
Selling, general and administrative expenses for the three months ended January
31, 1997 increased to $5,305,301 from $5,125,384 for the three months ended
January 31, 1996, a 3.5% increase.
Interest expenses decreased to $21,027 for the three months ended January 31,
1997 from $77,854 recorded during the same quarter of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had positive working capital of $2,351,438 at January 31, 1997, an
increase of $1,364,641 from working capital of $986,797 at July 31, 1996.
Total bank borrowings were reduced by $1,750,000 from $2,325,000 at July 31,
1996 to $575,000 at January 31, 1997. On November 29, 1996 the Company paid the
remaining amount of $1.3 million due under its revolving line of credit with
Credit Lyonnais, New York. At July 31, 1996 borrowings under this line of credit
were $1.6 million.
The Company has a Term Promissory Note due to PNC Bank in the amount of
$575,000. The Term Promissory Note with PNC Bank bears interest at a rate of 2%
above PNC Bank's prime lending rate and is collateralized by the Company's
distribution and administration facility. Principal installments under the Term
Promissory Note are due on the first day of each month at $25,000 per month.
The Company is currently implementing a restructuring plan designed to move its
retail operations towards profitability and minimize the effect of the departure
of Adrienne Newman, as a representative of the Company, which occurred effective
January 28, 1997. (For a detailed discussion of the current dispute with Ms.
Newman see Note 7 "Other"). The Company recognizes that Ms. Newman's role as
the spokesperson for the sales of the Company's Adrien Arpel products on the
Home Shopping Network ("HSN"), which commenced in April 1994, produced steadily
increasing revenues and profits for the Company. Although the Company has, and
12
<PAGE> 14
continues to seek, a relationship under which Ms. Newman would remain as the
Company's spokesperson on HSN, there can be no assurance that the Company and
Ms. Newman will reach an agreement regarding her future relationship with the
Company. Failure to reach such an agreement whereby Ms. Newman remains
affiliated with and provides services to the Company with respect to HSN would
have an unfavorable impact on the Company's financial position and results of
operations. The Company and Ms. Newman are currently involved in a legal action.
The Company is confident it will prevail in its counterclaims or Ms. Newman and
the Company will reach a settlement. In response to Ms. Newman's departure, the
Company has begun implementing a restructuring plan which includes the
following:
Expense Reductions
- ------------------
The Company has implemented a plan which will result in the reduction of
operating expenses of approximately $2 million on an annualized basis. These
expense reductions are scheduled to take place over the remaining part of fiscal
1997. The Company continues to seek additional cost reductions above this
amount.
Back Room Salon Services
- ------------------------
The Company is conducting a detailed analysis designed to evaluate the operation
of its "back room" salon services at certain retailers, where these services are
not profitable for the Company and/or the retail department store with which the
Company does business. Makeovers, which in the past consisted of full hour long
European facials are being updated and, in many cases, could be substituted or
performed at the selling counter, as is done by most of the Company's major
competitors. The Company has found that in many instances product sales were
sacrificed for "back room" salon services due to the fact that trained
cosmeticians were performing hour long facials and could not service customers
who desire to purchase products at the sales counters.
New Store Openings
- ------------------
The Company has met with various retailers who are interested in expanding the
Adrien Arpel product line into additional stores with which the Company
currently does business and also retailers who are interested in introducing the
Adrien Arpel product line within their stores.
Unprofitable Sales Locations
- ----------------------------
The Company is negotiating with certain retailers to cease the sale of its
product line at stores which are not in profitable markets and locations. During
the second quarter ended January 31, 1997 the Company decided to stop offering
the Adrien Arpel product line at twelve Macy's East locations.
Advertising and Promotional Items
- ---------------------------------
The Company is shifting its promotional emphasis from seasonal product
promotions which were linked to a complimentary hour long European facial to the
more traditional "Gift With Purchase" and "Purchase With Purchase" product
promotions. This shift in emphasis is consistent with the Company's strategy to
cease the operation of its back room salon services, in markets, and at
retailers where these types of services were not profitable for the Company or
the retailer.
13
<PAGE> 15
New Products
- ------------
The Company plans to introduce several new products during the spring selling
season and also plans to introduce several products which were previously
exclusive to its business with HSN. The Company plans to launch its "Four Cremes
in One" product, at retail, for Mother's Day. This product was the Company's
most successful and consistent seller on HSN. Customers who have purchased
Adrien Arpel products through HSN have been contacting the Company regarding the
availability of these products at retail department stores.
Office Consolidation
- --------------------
The Company plans to consolidate its administrative staff offices and customer
service center into a single location during the spring of 1997. This move is
designed to reduce the overhead costs associated with operating two
administrative locations. Management believes that this plan will result in the
Company reducing operating costs while increasing efficiency and customer
service.
Outside Distribution
- --------------------
The Company is investigating the possibility of subcontracting its distribution
function to a facility which specializes in the distribution of cosmetic and
fragrance products to department stores. Management believes that additional
savings may be realized by utilizing the services of a distribution specialist.
In recent years the cost of distributing products has increased dramatically for
the Company primarily due to the investment required for computerized technology
related to Electronic Data Interface, Advanced Shipping Notices and inventory
control costs. Utilizing an outside distribution specialist will also allow the
Company to concentrate its efforts on marketing and sales.
Sale of The Company's Distribution Center
- -----------------------------------------
The Company has received an offer on the sale of its Norwood, New Jersey
distribution, warehousing and administration facility. On January 31, 1997 the
Company had a Term Promissory Note due to PNC Bank in the amount of $575,000
related to the mortgage on this facility. The Term Promissory Note bears
interest at a rate of 2% above the prime lending rate with principal payments of
$25,000 per month. If this offer results in the sale of this facility the
Company would realize approximately $880,000 in net cash proceeds. The potential
sale of this facility coupled with the Company's plans to consolidate two office
locations and the utilization of an outside distribution specialist will assist
in providing short and intermediate term working capital required by the Company
during its restructuring.
Fragrance Distribution
- ----------------------
During December 1996 the Company made a deposit of $1 million towards the
purchase of fragrance products from Laboratories Selecta, in France. This
transaction is designed to provide additional product sales for the Company in
markets, other than those currently handled by the Company's retail cosmetic
operations. The Company has an opportunity to realize additional revenues and
profits from this transaction during fiscal 1997 and is currently negotiating
with several possible distributors for the sale of these products.
14
<PAGE> 16
Summary
- -------
The Company is committed to building a profitable and growing retail business.
Management is confident that the above noted cost reduction programs, marketing
and promotional changes and operational reorganization will minimize the impact
of the Company's current dispute with Adrienne Newman and the related
discontinuance of the Company's relationship with HSN.
15
<PAGE> 17
ALFIN, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ALFIN, INC.
-----------
(Registrant)
/s/ Elisabeth Fayer
-------------------
Elisabeth Fayer
Chairman of the Board
Dated: March 17, 1997 /s/ Michael D. Ficke
--------------------
Michael D. Ficke
Chief Financial Officer
17
<PAGE> 1
EXHIBIT 11
ALFIN, INC. AND SUBSIDIARIES
----------------------------
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
---------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 701,405 $ 741,451 $ 1,291,863 $ 1,176,555
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding 11,721,259 11,519,311 11,721,259 11,519,311
Add:
Common Stock
Equivalents under 1983 option plan 1,503 1,032 1,970 1,269
Common Stock
Equivalents under 1993 option plan 125,292 103,175 164,142 126,866
Common Stock
Equivalents represented by Warrants 110,140 7,936 212,120 67,164
----------- ----------- ----------- -----------
Weighted average number of
Shares used in earnings per share 11,958,194 11,631,454 12,099,491 11,714,610
Earnings per share $ 0.06 $ 0.06 $ 0.11 $ 0.10
=========== =========== =========== ===========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALFIN INC.
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR
THE SIX MONTHS ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,744,648
<SECURITIES> 0
<RECEIVABLES> 642,906
<ALLOWANCES> 1,341,805
<INVENTORY> 3,188,832
<CURRENT-ASSETS> 6,877,117
<PP&E> 5,218,155
<DEPRECIATION> 3,795,640
<TOTAL-ASSETS> 11,031,877
<CURRENT-LIABILITIES> 4,525,679
<BONDS> 333,499
0
750,000
<COMMON> 117,212
<OTHER-SE> 5,363,986
<TOTAL-LIABILITY-AND-EQUITY> 11,031,877
<SALES> 19,823,279
<TOTAL-REVENUES> 19,823,279
<CGS> 6,952,128
<TOTAL-COSTS> 10,970,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,438
<INCOME-PRETAX> 1,860,863
<INCOME-TAX> 569,000
<INCOME-CONTINUING> 1,291,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,291,863
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
