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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JULY 31,
1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
_________TO___________
Commission File Number: 1-9135
ALFIN, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3032734
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
720 Fifth Avenue, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 333-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Common Stock, $.01 par on which registered
value per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES__X__ NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on November 5, 1997, was $2,615,090. As
of November 5, 1997, the Registrant had 11,787,983 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Alfin Inc., a New York corporation (the "Company"), is engaged through its
wholly-owned subsidiary, ADRIEN ARPEL, INC. ("ARPEL"), in distributing
cosmetics and other beauty products and providing facial and other beauty
services in department stores and in specialty stores throughout the United
States and Canada. From April 1994 through January 1997, ARPEL also distributed
specially packaged cosmetic products through television marketing on the Home
Shopping Network ("HSN").
PRODUCTS AND MAJOR DISTRIBUTION AGREEMENTS
CURRENT PRODUCTS
The Company develops, distributes and sells skin care and cosmetic products
under the trademark "ADRIEN ARPEL". ARPEL acts as an operator of
service-oriented skin care salons in department and specialty stores. From April
1994 through January 1997, ARPEL also distributed specially packaged cosmetic
products through television marketing on the HSN. The Company's relationship
with HSN ended as of January 27, 1997, following a contract dispute between the
Company and Ms. Adrienne Newman which led to the departure of Ms. Newman from
the Company. Ms. Newman served as the President of ARPEL and had been the
Company's selling host, under the name of Adrien Arpel, in its sales program on
HSN. For a detailed discussion of the legal action between the Company and Ms.
Newman as a result of this dispute see "Item 3. Legal Proceedings".
ARPEL'S product line consists of a line of high quality natural based skin care
products and a line of make up products. ARPEL products are positioned in the
better segment of the market and are competitively priced with other comparable
brands. In fiscal 1997, approximately 48.4% of ARPEL'S net sales were made to
HSN and approximately 51.6% were made to department stores.
DISCONTINUED PRODUCTS
The Company was originally engaged in the manufacturing, importation,
distribution, marketing and merchandising of fine imported fragrance products.
Beginning in 1993, the Company significantly reduced its distribution of
fragrance products and in July 1995, the Company ceased its distribution of
fragrance products.
During March 1996 the Company sold its exclusive worldwide manufacturing,
distribution and licensing rights for FRACAS and BANDIT and other fragrances by
Robert Piquet to Fashion Fragrances and Cosmetics Ltd. ("FF&C") for an aggregate
price of $1.2 million to be payable in installments. During the first quarter of
fiscal 1997 the Company and FF&C agreed to reduce the purchase price payable by
FF&C to the Company by $100,000. This adjustment was necessary because certain
molds included in the purchase price were damaged and unusable. The Company
received the remaining purchase price installment of $350,000 from this
transaction in July 1997.
SALES AND MARKETING
The Company's major domestic accounts include Boscov's, Burdines, Dayton/Hudson,
Dillards, Federated Department Stores, Foley's, Hechts, HSN, Kaufmanns, and
Mercantile. ARPEL also sells directly to the Canadian department store, the Bay.
Sales to department stores accounted for approximately 51.6% of sales for fiscal
1997. The arrangement with HSN represented approximately 48.4% of sales for
fiscal 1997. No
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other single domestic account, foreign distributor or independent sales agent
accounted for sales in an aggregate amount equal to 10% or more of the Company's
consolidated net sales.
As is common in the fragrance and cosmetic industry, the Company provides its
domestic customers with the limited right to return merchandise in order to
balance inventory and stock levels. The rate of return experienced by the
Company was approximately 4.7%, 6.1% and 3.0% for the fiscal years ended July
31, 1997, 1996 and 1995, respectively.
Sales to foreign accounts, expressed as a percentage of net sales, were 7.2%,
6.4% and 3.0% for the fiscal years ended July 31, 1997, 1996 and 1995,
respectively.
On August 6, 1997 the Company entered into an agreement with Target Mailing
Lists, Inc., ("Target"). Under the agreement the Company and Target will place
advertisements in publications for the sale of specialty packaged cosmetic and
skin care products. Target will advance all production costs for advertisements
approved by the Company and the Company will advance all creative costs
associated with such advertising. Expenses incurred by Target and the Company
shall be reimbursed pro rata from gross revenues received from the sale of
products. All revenues remaining after payment of expenses shall be allocated
49.5% to Target, 40.5% to the Company and 10% to other parties. The agreement
terminates on February 6, 1999 and renews automatically if the advertising
placed by Target and the Company generates more than $1.5 million in retail
sales within a one year period from the date the advertisement first appears in
the media.
The Company has developed a professionally designed Catalogue. The initial
edition was mailed during October and November 1997 to approximately 70,000
consumers and featured approximately 25 of Arpel's most popular products and
skin care kits. The Company plans to have subsequent editions featuring
approximately 50 products and to mail its catalogue four times each year during
the winter, spring, summer and fall, with an anticipated increase in volume from
mailing to mailing. This Catalogue was conceived primarily in response to
customer demands.
The Company is in the final stages of preparing to introduce its products in
Italy through Shopping America an Italian home shopping program. The format will
be similar to HSN and QVC in the United States and Teleshopping, the most
successful home shopping show in France. This shopping network will reach 40
million viewers which represents 81.7% total coverage in Italy. The Company
plans to launch a test market during November 1997 and is scheduled to be the
exclusive cosmetic line.
RESEARCH AND DEVELOPMENT
The Company did not spend a material amount on research and development during
the fiscal years ended July 31, 1997, 1996 and 1995. The Company introduces new
products and improves its packaging in response to changing consumer demands.
ADVERTISING
The Company advertises through cooperative advertising programs, and catalogues.
Advertising costs as a percentage of consolidated retail store sales for the
fiscal years ended July 31, 1997, 1996 and 1995 were 11.7%, 9.7%, and 9.4%,
respectively. The Company also promotes its products through the use of
promotional materials, special promotions and in-store displays.
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MANUFACTURING
The Company does not maintain any manufacturing facilities. It subcontracts to
manufacture its products, in accordance with the Company's specifications and
formulas. (Note: See Trademark and Regulations paragraph). The Company believes
that other manufacturing subcontractors are available if alternative production
sources need to be obtained. The Company believes that it is in compliance with
all applicable laws and regulations pertaining to its business and to any
federal, state or local laws and regulations designated to protect the
environment.
TRADEMARKS AND REGULATIONS
The Company owns the relevant trademarks of the products which are distributed
by the Company. The ADRIEN ARPEL and ARPEL names are registered as trademarks in
the United States and a number of foreign countries.
The Food and Drug Administration ("FDA") monitors certain aspects of the
cosmetic industry, particularly those that relate to advertising claims and
purported benefits with respect to cosmetic products and the physical
composition of cosmetics. The Company has not been notified by the FDA, nor, to
its knowledge, have any of its manufacturers been notified by the FDA, that any
of the products that the Company distributes are presently the subject of any
FDA investigation or that any claims or complaints have been made or are
threatened against the products that the Company distributes. Notwithstanding
the foregoing, the Company does not believe that any FDA approvals or consents
are required with respect to any of the products the Company distributes.
The Federal Trade Commission ("FTC") monitors certain other aspects of the
Company's business, particularly as they relate to product packaging and
advertising. The Company designs the packaging of all products it distributes,
and for which it owns the relevant trademark. The Company has not been notified
by the FTC that any of the Company's products or practices are presently the
subject of any FTC investigation or that any, claims or complaints have been
made or are threatened against the Company.
The Company believes that it is in compliance with all applicable laws and
regulations pertaining to its business.
PRODUCT LIABILITY
The Company believes that the manufacturers of its products carry product
liability insurance in an amount sufficient to cover any foreseeable product
liability claim and that the Company is protected thereunder. In addition, the
Company maintains product liability coverage in an amount which it believes is
adequate to cover any exposure it may have with respect to its products. The
Company has never been the subject of any material product liability litigation.
COMPETITION
The market for cosmetics is volatile, competitive and sensitive to changing
consumer preferences and demands. There are products which are better known than
the products distributed by the Company and there are many companies which are
substantially larger, more diversified and which have substantially greater
resources than the Company and which have the ability to develop and market
products which are similar to and competitive with those distributed by the
Company.
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GENERAL ECONOMIC CONDITIONS
Retail cosmetic purchases are discretionary and are frequently made by customers
using consumer credit. The Company believes that a decline in consumer credit
purchases could adversely affect the business and financial condition of
department stores and therefore, the Company.
EMPLOYEES
As of July 31, 1997, the Company had 84 employees. Of these, 59 were engaged in
sales and marketing activities, 18 in administrative functions and 7 in
distribution activities.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in New York City and occupies
approximately 7,400 rentable square feet under a lease expiring on November 30,
2001. The lease provides for annual payments of approximately $240,000.
During June 1997 the Company sold its Norwood, New Jersey distribution and
administration center for $1,416,000. From the proceeds of this sale the Company
satisfied the remaining balance of its term promissory note in the amount of
$450,000 which was due to PNC Bank. The Company occupies approximately 15,000
rentable square feet in the same facility under a lease expiring June 2000. The
lease provides for annual payments of $107,000.
ITEM 3. LEGAL PROCEEDINGS
On October 28, 1996 the Company received notice from Adrienne Newman purporting
to terminate her April 4, 1990 Employment Agreement with the Company (such
agreement as subsequently amended is the "Employment Agreement"), based on an
alleged breach of the Employment Agreement by the Company. Ms. Newman served as
the President of ARPEL, the Company's wholly-owned subsidiary, and had been
selling host, under the name of Adrien Arpel, in its sales program on HSN. The
Employment Agreement provided for salary, fringe benefits and commission
payments based upon 33% of the revenues, net of direct expenses attributable to
television shopping sales. Ms. Newman also had vested rights in 625,000
warrants, 500,000 of which were scheduled to expire in November 1998 and the
remaining 125,000 of which were scheduled to expire on July 31, 2001.
On November 8, 1996 the Company and Adrienne Newman reached an agreement (the
"Interim Agreement") whereby Ms. Newman agreed to appear as the selling host for
ARPEL on HSN shows scheduled for November and December 1996 and January 1997
(the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman acted as
an independent contractor and not as an employee of the Company. The Company and
Ms. Newman also agreed to refrain from initiating legal action against the other
in connection with their dispute over Ms. Newman's termination of the Employment
Agreement until after the expiration of the HSN Selling Period.
On January 28, 1997, after the expiration of the HSN Selling Period, the Company
was served by Adrienne Newman with a summons and complaint returnable in the
Supreme Court, New York County whereby Ms. Newman asserted claims for damages
against the Company based upon alleged breaches by the Company of Ms. Newman's
Employment Agreement and the Interim
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Agreement. Unspecified damages were claimed. A further claim requested a
judicial determination that the Employment Agreement was materially breached by
the Company resulting in its termination.
On March 19, 1997 the Company served an Answer and Counterclaim in response to
the action commenced by Ms. Newman. The Company's Counterclaim asserts various
claims against Ms. Newman, seeking damages and injunctive relief. Among other
things, it is the position of the Company that Ms. Newman was in material
breach of her Employment Agreement when she terminated the Employment Agreement
on October 28, 1996. As a consequence, it is the Company's belief that Ms.
Newman's refusal to provide services to the Company throughout the term of her
Employment Agreement which expires in April 1998, particularly her willful
refusal and failure to appear as the Company's selling host on HSN, will damage
the Company in the sum of at least eleven million dollars ($11,000,000). The
Company also asserted claims against Ms. Newman for breaches of her covenant
not to compete and her covenant not to disclose trade secrets and proprietary
data.
During May 1997, Ms. Newman started appearing on HSN as a representative of her
own company selling cosmetic products under the name "Signature Club A". Ms.
Newman has subsequently appeared on HSN on a monthly basis. The Company and its
attorneys are currently reviewing these appearances and may seek further legal
remedies and actions against Ms. Newman. During these appearances Ms. Newman was
not acting on behalf of the Company or its trademark protected Adrien Arpel
product line.
The case is currently in the discovery phase. Upon completion of discovery the
action will be ready for trial but no trial date has yet been fixed.
In addition to the above, the Company, in the normal course of business, is a
defendant in numerous actions/lawsuits. The Company does not believe the outcome
of these action/lawsuits will have a material impact on the Company's financial
position or results from operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
In July 1997 the Company, was advised by the American Stock Exchange (the
"ASE") that it wished to review with the Company its continued listing
eligibility on the ASE based upon the Company falling below certain ASE
continued listing guidelines. The Company met with representatives of the ASE
and made both oral and written presentations to the ASE. The Company was
advised by the ASE, by letter dated September 15, 1997, that the Company's
listing on the ASE would be continued subject to future review by the ASE of
the Company's favorable progress in satisfying the ASE's guidelines for
continued listing and to the ASE's routine periodic reviews of the Company's
SEC and other filings. The ASE has requested an updated report from the Company
to be submitted on or before December 17, 1997 which must address, among other
things, the Company's ability to satisfy its cash needs and to achieve its
projections of profitability. There can be no assurance that the ASE will
continue to permit the Company to be listed on the ASE.
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Since May 5, 1986, shares of the Company's $.01 par value Common Stock, have
traded on the American Stock Exchange (symbol "AFN"). The following table sets
forth, for the periods indicated and as reported by the American Stock Exchange,
the high and low sales prices for shares of the Company's Common Stock.
Quarter Ended High Low
------------- ---- ---
JULY 31, 1995 2-1/8 11/16
October 31, 1995 1-3/4 1-1/16
January 31, 1996 1-9/16 15/16
April 30, 1996 2-1/8 1-1/8
JULY 31, 1996 3-1/16 1-1/4
October 31, 1996 2-3/8 1-1/2
January 31, 1997 1-11/16 1-1/8
April 30, 1997 1-9/16 13/16
JULY 31, 1997 1-1/4 1/2
The number of shareholders of record of the Common Stock on November 7, 1997 was
2,228. The Company believes that there are a significant number of beneficial
owners of its Common Stock whose shares are held in "Street Name".
The Company has paid no cash dividends with respect to its Common Stock since
its inception.
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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.
<TABLE>
<CAPTION>
(000's omitted, except Fiscal Years Ended July 31
per share amounts) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
0perating Data:
Net sales $ 24,701 $ 34,733 $ 32,151 $ 29,358 $ 34,764
Gross profit 16,517 23,353 22,859 21,707 21,729
Operating (loss)income (3,877) 2,820 1,960 (924) (7,555)
Other income (expense) 948 54 (460) (503) 832
(Loss) income before
provision for
income taxes (2,929) 2,874 1,500 (1,427) (6,723)
Net (Loss) income $ (3,009) $ 2,693 $ 1,365 $ (1,427) $ (6,723)
-------- -------- -------- -------- --------
Net (loss)income per
Common equivalent share: $ (0.25) $ 0.22 $ 0.12 $ (0.14) $ (0.85)
======== ======== ======== ======== ========
Balance Sheet Data:
Working Capital $ 1,254 $ 988 $ (2,629) $ (5,905) $ (6,835)
Total assets 4,611 11,228 10,756 12,362 14,615
Short-term debt 0 1,938 2,863 5,421 7,641
Long-term debt 0 425 725 149 149
Shareholders' equity $ 1,181 $ 4,131 $ 1,388 $ 24 $ 151
======== ======== ======== ======== ========
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -
Certain statements in this report under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, statements
regarding future cash requirements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance and achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, general economic and business conditions;
industry capacity; industry trends, competition, litigation, material costs and
availability; the loss of any significant management personnel; the loss of any
significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgement of personnel; availability of qualified personnel;
changes in, or the failure to comply with, government regulations; and other
factors referenced in this report.
The following table sets forth items in the Statements of Operations as a
percent of net sales:
<TABLE>
<CAPTION>
Relationship to Net Sales
for the Fiscal Years Ended July 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 33.1 32.8 28.9
Selling, general and
administrative expenses 71.7 59.1 65.0
Write off of goodwill 10.9 -- --
Operating (loss) income (15.7) 8.1 6.1
Other income (expense) , net 3.8 0.2 (1.4)
Net (loss) income before
provision for income tax (11.9) 8.3 4.7
------ ------ ------
Net (loss) income (12.2)% 7.8% 4.2%
====== ====== ======
</TABLE>
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FISCAL YEARS ENDED JULY 31, 1997 AND 1996
The Company recorded a net loss of $3,008,562 for the fiscal year ended
July 31, 1997, as compared to net income of $2,692,692 for the fiscal year
ended July 31, 1996. The net loss per common and common equivalent share was
$0.25 for the year ended July 31, 1997, as compared to income of $0.22 for the
year ended July 31, 1996. Included in the loss is the write off of goodwill in
the amount of $2,620,081 recorded during the fourth quarter of the current
fiscal year, as a result of the Company's assessment of future operating cash
flows in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Excluding the effect of the write off of goodwill
the net loss for the fiscal year ended July 31, 1997, was $407,307. Excluding
the effect of the write off of goodwill the net loss per common and common
equivalent shares was $0.03 for the fiscal year ended July 31, 1997.
Net sales for the fiscal year ended July 31, 1997, decreased to $24,700,684 from
$34,733,375 recorded in the prior fiscal year, a decrease of $10,032,691 or
28.9%. The sales decrease is primarily related to an end to the Company's
relationship with the Home Shopping Network ("HSN") combined with a decrease in
sales to department stores. Sales to HSN for the year ended July 31, 1997, were
$11,965,350 as compared to $17,858,631 for the year ended July 31, 1996, a
decrease of $5,893,281 or 33.0%. The Company's relationship with HSN ended
during January 1997 due to the Company's contract dispute with Adrienne Newman.
For a further discussion of the Company's relationship with Adrienne Newman and
HSN see Item 3, "Legal Proceedings".
Net Sales to department stores for the year ended July 31, 1997, decreased to
$12,735,334 from $16,570,070 for the year ended July 31, 1996, a decrease of
$3,834,736, or 23.1%. The Company was selling its Arpel product line in 243
locations throughout the United States and Canada at July 31, 1997, as compared
to 315 locations at July 31, 1996. The Company no longer distributes its
products through Federated Department Stores Macy's East and Macy's West
Divisions. Distribution through Macy's East and Macy's West ceased during
October 1996 and May 1997, respectively.
Cost of goods sold as a percentage of net sales was 33.1% for the fiscal year
ended July 31, 1997, as compared to 32.8% for the fiscal year ended July 31,
1996. The decrease is primarily related to product mix offset by the decrease in
HSN sales.
Selling, general and administrative expenses decreased to $17,774,382 for the
fiscal year ended July 31, 1997, from $20,532,894 for the fiscal year ended July
31, 1996, a 13.4% decrease. The decrease is primarily related to a decrease of
approximately $1,688,000 in compensation payments to Adrienne Newman. Ms.
Newman's employment agreement with the Company required that the Company
compensate Ms. Newman for 33.3% of the net revenues after direct expenses
attributable to sales of products on HSN. Contributing to the expense decrease
was the expense reduction program which has been implemented by the Company
during January 1997.
In accordance with SFAS No. 121, the Company recorded a noncash write off
of $2,620,081 in the fourth quarter of fiscal year 1997 as a result of its
evaluation of expected future cash flows from operations before interest.
The Company recorded net interest expense for the fiscal year ended July 31,
1997, in the amount of $38,013 as compared to interest expense for the fiscal
year ended July 31, 1996, in the amount of $313,100. This decrease is primarily
attributable to significantly lower debt levels. The Company has reduced bank
debt to $0 at July 31, 1997. During June 1997 the Company satisfied the
remaining balance due on its Term Promissory note with PNC Bank.
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The Company recorded other income of $986,320 for the fiscal year ended July 31,
1997, related to the sale of its Norwood, New Jersey distribution and
administration facility in June 1997. For the fiscal year ended July 31, 1996,
the Company recorded a gain of $394,392 related to the sale of its licensing and
distribution rights for certain fragrances by Robert Piguet to Fashion
Fragrances and Cosmetics Ltd. ("FF&C").
The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1997, is approximately $5.4 million. The Company has
$2.2 million of the NOL carryforward available for use for the fiscal year ended
July 31, 1998.
The Company has recorded a valuation allowance equal to the amount of deferred
assets for the fiscal year ended July 31, 1997. In making this determination the
Company considered the operating history of the Company and the end of the
Company's relationship with HSN during January 1997 following the departure of
Adrienne Newman from the Company.
FISCAL YEARS ENDED JULY 31, 1996 AND 1995
The Company recorded net income of $2,692,692 for the fiscal year ended July 31,
1996 as compared to $1,364,646 for the fiscal year ended July 31, 1995.
Net sales for the fiscal year ended July 31, 1996 increased to $34,733,375 from
$32,151,204 recorded in the prior fiscal year, an increase of $2,582,171 or
8.0%. Sales of cosmetic products increased to $34,428,701 from $31,073,515 as
compared to the prior year, a 10.8% increase. Sales of fragrance products
decreased to $304,674 from $1,077,689, as compared to the prior fiscal year, a
71.7% decrease attributable in large part to the Company's decision to suspend
its fragrance business during the latter part of fiscal 1995. The fiscal 1996
fragrance sales were related to the sale of the Company's remaining inventory of
fragrance products.
The cosmetic sales increase of $3,355,186 was primarily attributable to the
Company's continued success in selling cosmetic products through HSN. Sales to
HSN increased to $17,858,631 from $15,667,416 recorded in the prior fiscal year,
an increase of $2,191,215 or 14.0%. The Company commenced selling products
through HSN of Canada during January 1996 with $933,261 of sales to HSN of
Canada being recorded during the fiscal year ended July 31, 1996. Sales of
cosmetic products to department stores increased to $16,570,070 from $15,406,099
recorded in the prior fiscal year, an increase of $1,163,971 or 7.6%. This
increase was primarily due to increased awareness of the ARPEL brand name as a
result of the Company's appearances on HSN, as well as normalization of the
Company's inventory out of stock situation in the second half of fiscal 1996.
Cost of goods sold as a percentage of net sales was 32.8% for the fiscal year
ended July 31, 1996, as compared to 28.9% for the fiscal year ended July 31,
1995. Cost of goods sold for cosmetic products was 32.1% for the fiscal year
ended July 31, 1996, as compared to 28.5% for the fiscal year ended July 31,
1995. The increase in the cosmetic cost of goods sold percentage was primarily
related to sales of cosmetic products to HSN.
Selling, general and administrative expenses decreased to $20,532,894 for the
fiscal year ended July 31, 1996 from $20,898,893 for the fiscal year ended July
31, 1995, a 1.8% decrease. The decrease was primarily attributable to decreases
in advertising and promotional expenses related to the Company's decision to
cease its fragrance business.
Interest expenses decreased to $313,100 for the fiscal year ended July 31, 1996,
from $439,743 recorded during the prior fiscal year ended July 31, 1995, a 28.8%
decrease. This decrease is primarily attributable to lower debt levels. The
Company recorded a gain of $394,392 related to the sale of its licensing and
distribution rights for certain fragrances by Robert Piquet to FF&C during March
1996.
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Net income per common and common equivalent share for the fiscal year ended July
31, 1996 was $0.22 as compared to $0.12 for the fiscal year ended July 31, 1995.
The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1996 is approximately $4,300,000. The Company had $707,000
of the NOL carryforward available for use for the tax year ending July 31, 1997.
FISCAL YEARS ENDED JULY 31, 1995 AND 1994
The Company recorded net income of $1,364,646 for the fiscal year ended July 31,
1995 as compared to a net loss of ($1,427,148) for the fiscal year ended July
31, 1994. This marked the first year since fiscal 1989 that the Company has
recorded profits.
Net sales for the fiscal year ended July 31, 1995 increased to $32,151,204 from
$29,357,922 recorded in the prior fiscal year, an increase of $2,793,282 or
9.5%. Sales of cosmetic products increased to $31,073,515, from $24,771,150 or
24.5%, while sales of fragrance products decreased to $1,077,689 from $4,586,772
or 76.5%, as compared to the prior fiscal year.
The cosmetic sales increase of $6,302,365 was primarily attributable to the
success of selling cosmetic products through HSN. Sales to HSN amounted to
$15,667,416 for the fiscal year ended July 31, 1995. The Company commenced
marketing products through HSN during April 1994 with sales of $4,574,262 for
the final four months of the fiscal year ended July 31, 1994. Net sales of
cosmetic products through department stores decreased by $773,089 primarily due
to a net decrease of 38 unprofitable locations through which ARPEL products were
sold.
The fragrance sales decrease of $3,509,083 was primarily attributable to the
Company's decision to temporarily suspend its current fragrance business, during
the latter part of fiscal 1995.
The Company's fragrance sales have decreased during the last three fiscal years
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, Net Sales $ Decrease % Decrease
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $ 1,077,689 $ 3,509,083 76%
1994 4,586,772 6,184,468 57%
1993 10,771,240 6,242,760 36%
</TABLE>
Cost of goods sold as a percentage of net sales was 28.9% for the fiscal year
ended July 31 1995, as compared to 26.1% for the fiscal year ended July 31,
1994. Cost of goods sold for cosmetic products was 28.5% for the fiscal year
ended July 31, 1995, as compared to 22.4% for the fiscal year ended July 31,
1994. Cost of goods sold for fragrance products was 40.4% for the fiscal year
ended July 31, 1995 as compared to 46.1% for the fiscal year ended July 31,
1994. The improvement in the fragrance cost of goods sold percentage was
primarily attributable to lower margins earned during fiscal 1994 related to the
sale of discontinued product lines and inventory overstocks.
Selling, general and administrative expenses decreased 7.7% to $20,898,893 for
the fiscal year ended July 31, 1995 from $22,630,785 for the fiscal year ended
July 31, 1994. The decrease was primarily attributable to decreases in
advertising and promotional expenses related to the Company's reduction in its
fragrance business and the expenses related to
11
<PAGE> 13
ARPEL'S former relationship with Premier. The July 31, 1995 fiscal year selling,
general and administrative expenses included a charge of $500,000 related to
salon assets, which were determined to be outdated.
Net expenses from non-operating items were $460,632 for the fiscal year ended
July 31, 1995, as compared to $503,296 for the fiscal year ended July 31, 1994.
The decrease was primarily attributable to decreased interest expenses related
to lower debt levels.
Net income per common and common equivalent share for the fiscal year ended July
31, 1995 was $0.12 as compared to a net loss of ($0.14) for the fiscal year
ended July 31, 1994.
The remaining NOL available to the Company for federal income tax reporting
purposes at July 31, 1995 was approximately $4,300,000.
OTHER
Revenue is recognized upon shipment of merchandise to the customer with a
reserve for return recorded based upon historical experience.
The Company expenses all advertising costs in the period in which the cost is
incurred.
Trade Receivables are shown net of certain valuation allowances which consist of
reserves for bad debts, reserves for returns and provisions for advertising and
salary chargebacks. The provisions for advertising and salary chargebacks are
based on agreements with department stores with which the Company does business.
The Company is liable for certain advertising and salary charges which take
place at the store level which will be deducted by the department store at the
time payment is made to the Company. The Company believes that this presentation
more accurately reflects the actual amount which will be collected as cash
receipts. At July 31, 1997, and 1996 the Company's provision for advertising and
salary deductions was $844,162 and $661,353 respectively.
The Company has implemented financial and distribution software that is year
2000 compliant. The Company assessed the impact of the year 2000 on its
operations, including the development of cost estimates for and the extent of
programming changes required to address the issue and determined the costs
related thereto would not have a material impact on its ongoing results of
operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company had positive working capital of $1,254,149 at July 31, 1997, an
increase of $267,352 from working capital of $986,797 at July 31, 1996.
Total bank borrowings were reduced by $2,325,000 to $0 at July 31, 1997. On
November 29, 1996, the Company paid the remaining balance of its revolving
secured line of credit with Credit Lyonnais, New York. This loan was secured by
domestic accounts receivable of ARPEL. At July 31, 1996, borrowings under this
line of credit were $1.6 million. On June 23, 1997, the Company paid the
remaining balance of its term promissory note with PNC Bank (formerly Midlantic
National Bank). The term promissory note was collateralized by a distribution
and administration facility which was sold by the Company. The balance under
this term promissory note was $725,000 at July 31, 1996.
During fiscal year 1997, significant losses from operations and cash used in
operations were incurred as a result of the discontinuance of appearances on HSN
resulting from the dispute with Adrienne Newman. The Company has been
significantly dependent on HSN during
12
<PAGE> 14
the fiscal years 1995 and 1996. The Company does not maintain any external
financing arrangements and relies upon cash generated from operations. In
addition, the Company has planned on implementing a number of new initiatives
to improve upon its fiscal 1997 results. If the Company is not successful,
they anticipate to continue to incur losses from operations. The combination of
the above factors raises substantial doubt about the Company's ability to
continue as a going concern and its ability to generate sufficient cash to
support its operations during fiscal 1998.
The Company implemented a restructuring plan during January 1997 designed to
move its operations towards profitability and to reduce the adverse effect of
the departure of Adrienne Newman. This plan included $2.2 million in annualized
operating expense reductions implemented during January 1997. The Company
continues to seek additional expense reductions beyond this amount.
The Company is attempting to improve its current retail business by
capitalizing on its niche salon / service presence and has identified areas of
opportunity for fiscal 1998. Areas where the Company is focusing upon are as
follows:
- - The Company has developed a professionally designed Catalogue. The
initial edition was mailed during October and November 1997 to
approximately 70,000 consumers and featured approximately 25 of Arpel's
most popular products and skin care kits. The Company plans to have
subsequent editions featuring approximately 50 products and kits and to
mail its catalogue four times each year during the winter, spring,
summer and fall, with an increase in volume from mailing to mailing.
This Catalogue was conceived primarily in response to customer demands.
- - The Company is in the final stages of preparing to introduce its
products in Italy through Shopping America an Italian home shopping
network. The format will be similar to HSN and QVC in the United States
and Teleshopping, the most successful home shopping show in France.
This shopping network will reach 40 million viewers which represents
81.7% of the total population in Italy. The Company plans to launch a
test market during November 1997 and is scheduled to be the exclusive
cosmetic line on Shopping America.
- - On August 6, 1997, the Company entered into an agreement with Target.
Under the agreement the Company and Target will place advertisements in
publications for the sale of specialty packaged cosmetic skin care
products. Target will advance all production costs for advertisements
approved by the Company and the Company will advance all creative costs
associated with such advertising. Expenses incurred by Target and the
Company shall be reimbursed pro rata from gross revenues received from
the sale of products. All revenues remaining after payment of expenses
shall be allocated 49.5% to Target, 40.5% to the Company and 10% to
other parties. The agreement terminates on February 6, 1999 and renews
indefinitely if the advertising placed by Target and the Company
generates more than $1.5 million in retail sales within a one year
period from the date the advertisement first appears in the media.
- - The Company has appointed an agent the exclusive retail distribution
rights for the Company's products in Saudi Arabia and the United Arab
Emirates. The Company and the agent have until January 1, 1998 to agree
on the proposed terms of the agreement. There can be no assurance that
such an agreement will be reached.
13
<PAGE> 15
Although there can be no assurance that management will successfully implement
the initiatives discussed previously, they believe that its cost reduction
programs combined with the new initiatives will enable the Company to improve
upon its fiscal 1997 performance, minimize the impact of the end of the
Company's relationship with HSN and provide satisfactory liquidity through
fiscal 1998.
EFFECTS OF INFLATION-
The Company did not have any significant price increases for its products during
the fiscal years ended July 31, 1997, 1996, or 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements and supplementary financial information are
attached at the end of this report. For page of reference, see the Index to the
Consolidated Financial Statements appearing on page F-1 of this Annual Report on
Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to the directors and executive officers of the Company
will be included in the Company's Proxy Statement ("Proxy Statement") for its
annual meeting of shareholders which is expected to be filed within 120 days
from the end of the fiscal year and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the executive compensation is incorporated herein by
reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
incorporated herein by reference to the Proxy Statement.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The audited consolidated financial statements of the Company and its
subsidiaries and the Report of Independent Public Accountants thereon, as
required, are set forth in the Index to Consolidated Financial Statements on
page F-1 of this report.
(a) (2) Financial Statement Schedules
Except for Schedule VIII, which is included herein, all other schedules have
been omitted as not applicable or not required, or because information required
is shown in the consolidated financial statements or notes thereto.
(a) (3) Exhibits
The following items are filed herewith or incorporated by reference:
3.1 Certificate of Incorporation of the Company, as amended (1) (Exhibit
3.1)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company, as amended, as filed with the New York State Department of
State on September 11, 1991. (2)(Exhibit 3.2)
3.3 By-laws of the Company, as amended. (2) (Exhibit 3.3)
4.1 Form of specimen of the Company's Common Stock certificate. (3)
(Exhibit 4.1)
10.1 Stock Option Plan. (4) (Exhibit 10.1)
10.2 New Jersey EA. Bond Financing Agreement, dated July 20,1983 and Note of
Company thereunder.(5) (Exhibit 10.2)
10.3 Lease Agreement, dated November 30, 1983, for 720 Fifth Avenue, New
York, New York. (6) (Exhibit 10.3)
10.4 Form of Stock Option Agreement under the Stock Option Plan. (4)
(Exhibit 10.4)
10.5 Alfin, Inc. (f/k/a/ Alfin Fragrances, Inc.) Stock Option Plan, as
amended. (3) (Exhibit 10.5)
10.6 Stock Purchase Agreement, dated April 5, 1990, among the Company,
Adrien Arpel, Inc. and the Security holders of Adrien Arpel, Inc. (1)
(Exhibit 10.6)
15
<PAGE> 17
10.7 Employment Agreement, dated as of April 4, 1990, between the Company
and Adrienne Newman, amending the employment agreement dated as of
November 1, 1983, with Adrienne Newman and Seligman and Latz Inc. (2)
(Exhibit 10.7)
10.8 Warrant Agreement, dated as of April 4, 1990, between the Company and
Adrienne Newman. (2) (Exhibit 10.8)
10.9 Revolving Credit and Term Loan Agreement, dated as of July 31, 1990,
among the Company, Adrien Arpel, Inc. and Midlantic National Bank. (6)
(Exhibit 10.9)
10.10 Departmental License Agreement, dated as of July 10, 1991, between
Bullock's, Inc. and Adrien Arpel, Inc.(7) (Exhibit 10.10)
10.11 First Amendment, dated January 31, 1991, to Credit and Term Loan
Agreement dated as of July 31, 1990, among the Company, Adrien Arpel,
Inc. and Midlantic Bank. (7) (Exhibit 10.11)
10.12 Second Amendment, dated June 10, 1991, to Credit and Term Loan
Agreement dated July 31, 1990, as amended, among the Company, Adrien
Arpel, Inc. and Midlantic National Bank. (7) (Exhibit 10.12)
10.13 Form of Executive Incentive Compensation Plan Agreement, dated as of
September 1991, between the Company and Adrienne Newman. (7) (Exhibit
10.13)
10.14 Amended and Restated Revolving Credit and Term Loan Agreement, dated
June 30, 1992, between Midlantic National Bank and the Company and
Adrien Arpel, Inc. (8) (Exhibit 10.14)
10.15 Continuing Letter of Credit Agreement, dated May 13, 1993, between the
Company, Adrien Arpel, Inc. and Credit Lyonnais Bank. (8) (Exhibit
10.15)
10.16 Amended and Restated Loan Agreement, dated June 24, 1993, between the
Company and Midlantic National Bank.(8) (Exhibit 10.16)
10.17 Third Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated August between Midlantic National Bank and the Company
and Adrien Arpel, Inc. (9) (Exhibit 10.17)
10.18 Amendment No. 2, dated November 19, 1993, to Employment Agreement dated
April 4, 1990, between the Company and Adrienne Newman. (9) (Exhibit
10.18)
10.19 Amendment No.1 to the Continuing Letter of Credit Agreement, dated
February 28, 1994, between the Company, Adrien Arpel, Inc. and Credit
Lyonnais Bank. (9) (Exhibits 10.19)
10.20 Term Promissory Note dated February 1994, between Midlantic National
Bank and the Company. (9)(Exhibit 10.20)
16
<PAGE> 18
10.21 Second Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated February 1994, between Midlantic National Bank and the
Company and Adrien Arpel, Inc. (9),(Exhibit 10.21)
10.22 Warrant Agreement, dated November 19, 1993, between the Company and
Adrienne Newman. (9)(Exhibit 10.22)
10.23 The 1993 Stock Option Plan of Alfin, Inc. (9)(Exhibit 10.23)
10.24 Agreement dated August 1, 1995 between the Company and CECE SA (Exhibit
10.24)
10.25 Fourth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement dated July 31, 1995, between the Company and Midlantic
National Bank (Exhibit 10.25)
10.26 Agreement dated March 7,1996 between the Company and Fashion Fragrances
and Cosmetics, Ltd. related to the sale of the business known as Robert
Piquet (Exhibit 10.26).
10.27 Agreement dated April, 1996 between the Company and Fashion Fragrances
and Cosmetics Ltd. related to the licensing of Robert Piquet (Exhibit
10.27).
10.28 Agreement dated December 11, 1995, between the Company and Lauren
Greenwald (Exhibit 10.28)
10.29 Fifth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement dated December 11, 1995, between the Company and Midlantic
National Bank (Exhibit 10.29)
10.30 Amendment No. 5 dated as of January 31, 1996, between the Company,
Adrien Arpel, Inc. and Credit Lyonnais Bank (Exhibit 10.30)
10.31 Agreement dated November 8, 1996 between the Company and Adrienne
Newman with respect to the sale of Adrien Arpel cosmetic products and
kits on The Home Shopping Network. (Exhibit 10.31)
22 Subsidiaries of the Company - Adrien Arpel, Inc., a Delaware
corporation; Suisse Laboratories Ltd., a Delaware corporation.
(1) Incorporated by reference from the designated Exhibit of the Company's
Current Report on Form 8-K, reporting an event on April 5, 1990 (File
No. 1-9135).
(2) Incorporated by reference from the designated Exhibit to the Company's
Annual Report on Form 10-K for the year ended July 31, 1990. (File No.
1- 9135).
(3) Incorporated by reference from the designated Exhibit to the Company's
Annual Report on Form 10-K for the year ended July 31, 1989. (File
No.1-9135).
17
<PAGE> 19
(4) Incorporated by reference from the designated Exhibits to the Company's
Annual Report on Form 10-K for the year ended July 31, 1985. (File No.
1- 9135).
(5) Incorporated by reference from the designated Exhibit to the Company's
Registration Statement on Form S-1. (File No. 2-85600).
(6) Incorporated by reference from the designated Exhibits to the Company's
Annual Report on from 10-K for the year ended July 31, 1984. (File No.
1-9135).
(7) Incorporated by reference from the designated Exhibits to the Company's
Annual Report on Form 10-K for the year ended July 31, 1992. (File No.
1-9135)
(8) Incorporated by reference from the designated Exhibits to the Company's
Annual Report on Form 10-K for the year ended July 31, 1993. (File No.
1-9135)
(9) Incorporated by reference from the designated Exhibits to the Company's
Annual Report on Form 10-K for the year ended July 31, 1994. (File No.
1-9135).
(10) Incorporated by reference from the designated Exhibits to the Company's
Annual report in Form 10K for the year ended July 31, 1995. (file No.
1-9135).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the
period covered by this report.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 1997 ALFIN, INC.
By: /s/ Elisabeth Fayer
------------------------
Elisabeth Fayer
Chief Executive Officer/
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Elisabeth Fayer and his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on November 12, 1997 on behalf of the
Registrant and in the capacities indicated.
Signature Title
S/Elisabeth Fayer Chief Executive Officer and
Elisabeth Fayer Director
S/Michael D. Ficke Vice President and
Michael D. Ficke Chief Financial Officer
S/Jacques Desjardins Director
Jacques Desjardins
S/Steven Korda Director
Steven Korda
S/Suzanne Langlois Director
Suzanne Langlois
<PAGE> 21
ALFIN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of July 31,
1997 and 1996 F-3
Consolidated Statements of Operations for
the Three Fiscal Years Ended July 31, 1997. F-4
Consolidated Statements of Shareholders' Equity
for the Three Fiscal Years Ended July 31, 1997. F-5
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended July 31, 1997. F-6
Notes to Consolidated Financial Statements F-7
Schedule VIII - Valuation and Qualifying Accounts
for the Three Fiscal Years Ended July 31, 1997 F-19
F-1
<PAGE> 22
Report of Independent Public Accountants
To Alfin, Inc.:
We have audited the accompanying consolidated balance sheets of Alfin, Inc. (a
New York corporation) and subsidiaries as of July 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial state ments and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alfin, Inc. and
subsidiaries as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, during fiscal year ended July 31, 1997 significant losses
from operations and cash used in operations were incurred as a result of the
discontinuance of appearances on the Home Shopping Network ("HSN") resulting
from the dispute with Adrienne Newman. The Company has been significantly
dependent upon HSN during the fiscal years 1995 and 1996. The Company does not
maintain any financing arrangements and relies upon cash generated from
operations. The above factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
New York, New York
November 11, 1997 ARTHUR ANDERSEN LLP
F-2
<PAGE> 23
ALFIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
CASH & CASH EQUIVALENTS
$ 658,378 $ 2,210,972
ACCOUNTS RECEIVABLE, NET OF ALLOWANCES
FOR DOUBTFUL ACCOUNTS AND CHARGEBACKS
OF $891,532 AND $998,769 AT JULY 31,
1997 AND 1996, RESPECTIVELY AND SALES
ALLOWANCES OF $80,197 AND $256,264 AT
JULY 31, 1997 AND 1996, RESPECTIVELY 167,021 680,370
INVENTORIES 2,227,549 3,271,126
PREPAID EXPENSES & OTHER CURRENT ASSETS 880,938 746,513
------------ ------------
TOTAL CURRENT ASSETS 3,933,886 6,908,981
------------ ------------
PROPERTY & EQUIPMENT 2,333,028 4,998,954
LESS-ACCUMULATED DEPRECIATION &
AMORTIZATION (1,740,341) (3,537,025)
------------ ------------
PROPERTY & EQUIPMENT, NET 592,687 1,461,929
OTHER ASSETS:
GOODWILL, NET OF ACCUMULATED AMORTIZATION
OF $0 AND $472,957 AT JULY 31,1997
AND 1996, RESPECTIVELY -- 2,680,081
OTHER 83,938 177,195
------------ ------------
TOTAL OTHER ASSETS 83,938 2,857,276
------------ ------------
TOTAL ASSETS $ 4,610,511 $ 11,228,186
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES &
SHAREHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
CURRENT PORTION OF MORTGAGE,
NOTE & OTHER LOANS PAYABLE $ -- $ 1,933,499
DUE TO RELATED PARTIES -- 4,826
ACCOUNTS PAYABLE 1,365,767 2,177,078
ACCRUED EXPENSES-OTHER 1,313,971 1,806,781
------------ ------------
TOTAL CURRENT LIABILITIES 2,679,738 5,922,184
NOTE PAYABLE -- 425,000
------------ ------------
TOTAL LIABILITIES 2,679,738 6,347,184
------------ ------------
REDEEMABLE PREFERRED STOCK 750,000 750,000
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE
17,000,000 SHARES AUTHOR-
IZED; 11,787,983 & 11,662,926
SHARES ISSUED & OUTSTANDING AT
JULY 31,1997 & 1996, RESPECTIVELY 117,879 116,629
ADDITIONAL PAID-IN CAPITAL 12,953,123 12,787,290
ACCUMULATED DEFICIT (11,890,229) (8,772,917)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,180,773 4,131,002
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 4,610,511 $ 11,228,186
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
F-3
<PAGE> 24
ALFIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED JULY 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 24,700,684 $ 34,733,375 $ 32,151,204
COST OF GOODS SOLD 8,183,676 11,380,089 9,292,033
------------ ------------ ------------
GROSS PROFIT ON SALES 16,517,008 23,353,286 22,859,171
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,774,382 20,532,894 20,898,893
WRITE OFF OF GOODWILL 2,620,081 -- --
------------ ------------ ------------
OPERATING (LOSS) INCOME (3,877,455) 2,820,392 1,960,278
------------ ------------ ------------
OTHER INCOME (EXPENSE)
INTEREST EXPENSE,NET $ (38,013) $ (313,100) $ (439,743)
GAINS ON SALES OF
ASSETS 986,320 394,392 --
OTHER EXPENSE -- (27,992) (20,889)
------------ ------------ ------------
TOTAL OTHER INCOME 948,307 53,300 (460,632)
------------ ------------ ------------
(EXPENSE)
(LOSS) INCOME BEFORE
PROVISION FOR INCOME TAXES (2,929,148) 2,873,692 1,499,646
PROVISION FOR INCOME TAXES 79,414 181,000 135,000
------------ ------------ ------------
NET (LOSS) INCOME $ (3,008,562) $ 2,692,692 $ 1,364,646
PREFERRED STOCK DIVIDENDS 108,750 108,750 108,750
------------ ------------ ------------
INCOME AVAILABLE TO COMMON
SHAREHOLDERS (3,117,312) 2,583,942 1,255,896
============ ============ ============
NET (LOSS) INCOME PER
COMMON & COMMON
EQUIVALENT SHARE $ (0.25) $ 0.22 $ 0.12
============ ============ ============
NET (LOSS) INCOME PER
SHARE AVAILABLE TO
COMMON SHAREHOLDERS $ (0.26) $ 0.21 $ 0.11
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
F-4
<PAGE> 25
ALFIN, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
======================================================================================================
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT
======================================================================================================
<S> <C> <C> <C> <C>
BALANCE, JULY 31, 1994 11,402,904 114,029 12,522,390 (12,612,755)
STOCK DIVIDENDS ON
REDEEMABLE PREFERRED STOCK 116,407 1,164 107,586 (108,750)
NET INCOME 1,364,646
----------- ----------- ----------- -----------
BALANCE, JULY 31, 1995 11,519,311 $ 115,193 12,629,976 (11,356,859)
STOCK DIVIDENDS ON REDEEMABLE
PREFERRED STOCK 93,615 936 107,814 (108,750)
STOCK ISSUED FOR OPTIONS 50,000 500 49,500 --
NET INCOME 2,692,692
----------- ----------- ----------- -----------
BALANCE, JULY 31, 1996 11,662,926 116,629 12,787,290 (8,772,917)
STOCK DIVIDENDS ON REDEEMABLE
PREFERRED STOCK 66,724 667 108,083 (108,750)
STOCK ISSUED FOR OPTIONS 58,333 583 57,750 --
NET LOSS (3,008,562)
----------- ----------- ----------- -----------
BALANCE, JULY 31, 1997 11,787,983 117,879 12,953,123 (11,890,229)
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-5
<PAGE> 26
ALFIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
- ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
NET (LOSS) INCOME $(3,008,562) $ 2,692,692 $ 1,364,646
ADJUSTMENTS TO RECONCILE NET
(LOSS) INCOME TO NET CASH
(USED IN) PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 461,485 749,887 1,491,472
LOSS ON DISPOSAL OF FIXED ASSETS 270,188 3,750 192,605
GAINS ON SALES OF ASSETS (986,320) (394,392) --
WRITE OFF OF GOODWILL 2,620,081 -- --
CHANGE IN ASSETS AND LIABILITIES:
DECREASE ACCOUNTS RECEIVABLE 513,349 711,945 1,296,533
DECREASE (INCREASE) INVENTORY 1,043,577 55,441 (773,234)
(INCREASE) DECREASE PREPAID EXPENSES
AND OTHER (41,168) (56,726) 291,344
DECREASE ACCOUNTS PAYABLE &
ACCRUED EXPENSES (1,304,121) (1,046,256) (989,177)
----------- ----------- -----------
TOTAL ADJUSTMENTS 2,577,071 23,649 1,509,543
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (431,491) 2,716,341 2,874,189
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES (231,786) (346,485) (387,616)
SALE OF LICENSE AGREEMENT -- 500,000 --
SALE OF BUILDING 1,415,675 -- --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,183,889 153,515 (387,616)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
PAYMENT OF LINES OF CREDIT (1,600,000) (822,520) (1,371,408)
BORROWINGS FROM LINE OF CREDIT -- 328,000 730,175
PAYMENTS TO RELATED PARTIES (4,826) (30,000) (265,174)
PAYMENT OF DEBT OBLIGATIONS (33,499) (300,000) (1,074,974)
PAYMENT OF TERM PROMISSORY NOTE (725,000) (400,000) --
PROCEEDS FROM SALE OF STOCK 58,333 50,000 --
----------- ----------- -----------
CASH (USED IN),
FINANCING ACTIVITIES (2,304,992) (1,174,520) (1,981,381)
----------- ----------- -----------
NET(DECREASE) INCREASE IN CASH (1,552,594) 1,695,336 505,192
CASH & CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,210,972 515,636 10,444
----------- ----------- -----------
CASH & CASH EQUIVALENTS AT
END OF YEAR $ 658,378 $ 2,210,972 $ 515,636
=========== =========== ===========
CASH PAID DURING THE YEAR FOR:
INTEREST $ 114,994 $ 297,432 $ 398,774
INCOME TAXES
158,109 271,695 25,819
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
F-6
<PAGE> 27
ALFIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS:
Alfin, Inc. (the "Company") was engaged in the distribution, marketing and
merchandising of imported fragrance brands worldwide pursuant to various
distribution and licensing agreements. During the latter part of fiscal
year 1995, the Company ceased its distribution of fragrance products.
Adrien Arpel, Inc. ("ARPEL"), a wholly owned subsidiary, develops,
distributes and sells treatment and cosmetic products. Additionally, the
Company acts as an operator of service-oriented skin care salons in
department stores. From April 1994 through January 1997 ARPEL also
distributed specially packaged cosmetic products through television
marketing on the Home Shopping Network ("HSN").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements include the accounts of
Alfin, Inc., and ADRIEN ARPEL, INC.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Certain reclassifications have been made to prior year balances to conform
with current year presentation.
INVENTORIES -
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Inventories at July 31, 1997 and 1996 were comprised of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Finished Goods $ 790,079 $1,303,538
Raw Material and
Components 1,437,470 1,967,588
---------- ----------
$2,227,549 $3,271,126
========== ==========
</TABLE>
F-7
<PAGE> 28
REVENUE RECOGNITION -
The Company recognizes revenue upon shipment of its merchandise to the
customer and provides a reserve for sales returns based upon historical
experience.
CASH AND CASH EQUIVALENTS-
The Company maintains money market accounts with maturities of three
months or less which are reflected as cash equivalents.
TRADE RECEIVABLES -
Trade Receivables are shown net of certain valuation allowances which
consist of reserves for bad debts, reserves for returns and provisions for
advertising and salary chargebacks. The provisions for advertising and
salary chargebacks are based on agreements with department stores with
which the Company does business. The Company is liable for certain
advertising and salary charges which take place at the store level which
will be deducted by the department store at the time payment is made to
the Company. The Company believes that this presentation more accurately
reflects the actual amount which will be collected as cash receipts. At
July 31, 1997 and 1996 the Company's provision for advertising and salary
deductions was $844,162 and $661,353 respectively.
PROPERTY AND EQUIPMENT -
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives ranging from 4 to
15 years. Leasehold improvements are amortized on a straight-line basis
over the remaining terms of the respective leases or estimated useful
lives, whichever is shorter. Betterments and renewals that extend the life
of the related asset are capitalized; other repairs and maintenance costs
are expensed as incurred.
Property and equipment were comprised of the following at July 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ -- $ 427,500
Building & Improvements -- 1,224,687
Furniture & Fixtures 1,450,653 1,393,462
Machinery & Equipment 882,375 1,710,590
Leasehold Improvements -- 242,715
----------- -----------
Total Property & Equipment 2,333,028 4,998,954
Accumulated Depreciation (1,740,341) (3,537,025)
----------- -----------
Net Property & Equipment $ 592,687 $ 1,461,929
=========== ===========
</TABLE>
During June, 1997 the Company sold its Norwood, New Jersey distribution
and administration center for approximately $1,416,000 and recorded a gain
of approximately $986,000.
F-8
<PAGE> 29
OTHER ASSETS -
During March 1996, the Company sold its exclusive worldwide manufacturing,
distribution and licensing rights for FRACAS and BANDIT and other
fragrances by Robert Piquet to Fashion Fragrances and Cosmetics Ltd.
("FF&C") for $1.2 million which was payable in installments. During the
first quarter of fiscal 1997 the Company and FF&C agreed to reduce the
purchase price payable by FF&C to the Company by $100,000. This adjustment
was necessary because certain molds included in the purchase price were
damaged and unusable. The Company received the remaining purchase price
installment of $350,000 in July, 1997.
During November 1996, pursuant to an outstanding agreement, dated November
1, 1983, between Adrienne Newman and Seligman & Latz, Inc., Ms. Newman
elected to purchase a diamond ring from the company for the amount of
$96,195. Such amount was equal to the amount reflected as an asset on the
Company's balance sheet.
During December 1996 the Company made a deposit of $1 million towards the
purchase of fragrance products from Laboratories Selecta in France
("Selecta"). This transaction was designed to provide additional product
sales for the Company in markets other than those currently handled by the
Company's retail cosmetic operations. During May 1997 the Company and
Selecta agreed to cancel this purchase. Under the agreement to cancel
Selecta has refunded the Company $260,125, $266,833 and $271,281 on May
21, August 7, and October 7, 1997, respectively with the remaining payment
of $277,990 due to be made on December 31, 1997. Interest on the repayment
was charged at 10.5%.
Goodwill was being amortized using the straight-line method over 40 years.
The Company evaluates the recoverability of goodwill based upon an
analysis of operating results and consideration of other significant
events or changes in the business in accordance with SFAS No. 121. If
operating losses are experienced and based upon projections that they will
continue, the Company evaluates whether impairment exists on the basis of
undiscounted expected future cash flows from operations before interest.
If impairment exists, the carrying value amount is reduced by the
estimated shortfalls of cash flows. As a result of the Company's
evaluation of its future cash flows from operations before interest a
noncash write off of $2,620,081 was recorded in the fourth quarter
of fiscal 1997.
COST OF ADVERTISING -
The Company expenses all advertising costs in the period in which the
cost is incurred.
INCOME TAXES-
Income taxes consist of taxes on taxable income and deferred taxes for
differences in the basis of assets and liabilities for financial statement
and income tax reporting. The differences arise primarily because of the
reserve method for bad debts, accrued expenses and the use of accelerated
depreciation methods.
FOREIGN SALES -
Net sales to foreign accounts located in Canada were approximately
$1,779,049, $2,214,243 and $949,188 for the fiscal years ended July 31,
1997, 1996 and 1995, respectively.
F-9
<PAGE> 30
NET INCOME (LOSS) PER SHARE -
Net income (loss) per share was computed for the fiscal years 1997, 1996
and 1995, using the weighted average number of common shares outstanding,
as follows:
1997 - 11,884,471 1996 -12,200,730 1995 - 11,529,542
CONCENTRATION OF CREDIT RISK -
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
The Company's major customers are department stores, in the United States
and Canada and HSN which represented 48.4% of net sales during fiscal year
1997.
RECENTLY ISSUED ACCOUNTING STANDARDS-
During fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement establishes financial accounting and reporting standards for the
impairment of long lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. The
adoption of this statement resulted in a non-cash charge of $2.6 million
related to the write off of goodwill.
During fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes a fair value based
method of accounting for an employee stock option or similar equity
instrument but allows companies to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company has elected to remain with the accounting under
APB opinion No. 25 and make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined
in SFAS No. 123 had been applied. (Note 10).
In December 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". This statement establishes standards
for computing and presenting earnings per share ("EPS"), replacing the
presentation of currently required primary EPS with a presentation of
Basic EPS. For entities with complex capital structures, the statement
requires the dual presentation of both Basic EPS and Diluted EPS on the
face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other
contracts to issue common stock and is similar to the currently required
fully diluted EPS. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, and
earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all prior periods presented. The
Company does not expect the impact of the adoption of this statement to be
material to previously reported EPS amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the Company beginning with the fiscal year
ending July 31, 1999. SFAS No. 130 will require that total comprehensive
income (the change in equity from transactions and other events except
those resulting from investment by owners) be reported in the financial
statements. The Company does not anticipate any significant modifications
to its current financial statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which is effective beginning with
fiscal year ending July 31, 1999. SFAS No. 131 will require that segment
financial information be publicly reported on the basis that is used
internally for evaluating segment performance. The Company is still
assesing the impact of this statement on its Financial Statement
disclosure.
F-10
<PAGE> 31
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF REVENUES-
Approximately 79% of department store sales are derived from merchandise,
6% from salon services and 16% from seasonal promotional items.
(3) GOING CONCERN:
Significant losses from operations and cash used in operations were
incurred as a result of the discontinuance of appearances on the Home
Shopping Network ("HSN") resulting from the dispute with Adrienne Newman.
The Company has been significantly dependent upon HSN during the fiscal
years 1995 and 1996. The Company does not maintain any external financing
arrangements and relies upon cash generated from operations. In addition,
the Company has planned on implementing a number of new initiatives to
improve upon its fiscal 1997 results. If the Company is not successful,
they anticipate to continue to incur losses from operations. The
combination of the above facts raises substantial doubt about the
Company's ability to continue as a going concern and its ability to
generate sufficient cash to support its operations during fiscal 1998.
The Company implemented a restructuring plan designed to move its
operations towards profitability and minimize the effect of the departure
of Adrienne Newman. This plan included operating expense reductions which
the Company implemented during January 1997. The Company is seeking
further expense reductions beyond this amount. In addition to the expense
reduction program the Company is attempting to improve its current retail
business by capitalizing on its niche salon / service presence, it also
has introduced a professionally designed direct mail catalogue, plans to
introduce its products on a home shopping network in Italy, has an
agreement for the distribution of its products through adfomercials and
has plans to introduce its products through an agent to retailers
in Saudi Arabia and the United Arab Emirates.
Although there can be no assurance that management will successfully
implement the initiatives discussed previously, they believe that its
cost reduction programs combined with the new initiatives will enable the
Company to improve upon its fiscal 1997 performance, minimize the impact
of the end of the Company's relationship with HSN and provide
satisfactory liquidity through fiscal 1998.
F-11
<PAGE> 32
(4) COMMON STOCK DIVIDENDS:
The Company has paid no cash dividends with respect to its common stock
since its inception. Dividends of common stock have been issued to holders
of the Company's Senior Cumulative Redeemable Preferred Stock (Note 8).
(5) WARRANTS:
The following table lists the warrant transactions that have occurred for
the period August 1, 1994 through July 31, 1997:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
J U L Y 3 1
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants outstanding,
beginning of period 875,000 1,000,000 1,110,000
Granted -- -- --
Exercised -- -- --
Forfeited 875,000 125,000 100,000
Warrants outstanding,
end of period -0- 875,000 1,000,000
Exercise prices per share
for shares under warrant,
end of period N/A $ 1.25 $ 1.25
</TABLE>
These warrants expired due to the termination of Ms. Newman's employment
agreement with the Company
(6) INCOME TAXES:
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes" which requires
using the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for
the tax consequences of temporary differences between financial statement
and taxable income by applying statutory tax rates applicable to future
years. Under SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized as income in the period that includes the enactment
date of the change. If it is more likely than not that some portion or all
of the deferred asset will not be realized, a valuation allowance is
recognized. The Company has recorded a valuation allowance equal to the
amount of deferred income tax asset for the fiscal years ended July 31,
1997 and 1996 due to:
- The operating history of the Company.
- The end of the Company's relationship with HSN
during January 1997 as a result of the litigation
with Adrienne Newman
F-12
<PAGE> 33
Significant components of the Company's deferred income tax assets and
liabilities at July 31, 1997 and July 31, 1996, are as follows:
<TABLE>
<CAPTION>
July 31 July 31
1997 1996
----------- -----------
<S> <C> <C>
Deferred Income Tax Assets:
Net operating loss
carry forwards $ 2,140,000 $ 1,468,000
Alternate Minimum Tax Credit
Carry forward 114,000 114,000
Bad debt reserve 106,000 202,000
Inventory reserve 549,000 672,000
Other 50,000 114,000
----------- -----------
2,959,000 2,570,000
Valuation allowance (2,959,000) (2,341,000)
----------- -----------
Net deferred tax asset 0 229,000
Deferred Income Tax Liabilities:
Depreciation and Amortization 0 (229,000)
----------- -----------
Deferred tax liability $ 0 $ (229,000)
Net deferred income tax 0 0
=========== ===========
</TABLE>
At July 31, 1997, the amount of federal operating loss carry forwards was
$5,412,000 with expiration dates from 2005 to 2009, however, the use of
pre-acquisition operating loss carryforward is limited by the Internal Revenue
Code. As a result the Company has $2,170,000 of the carry forwards available
for use for the year ended July 31, 1998.
The Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Fiscal Year Ended July 31,
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $ 0 $ 96,000
State 79,414 85,000
-------- --------
Total Current 79,414 181,000
-------- --------
Deferred
Federal 0 0
State 0 0
-------- --------
Total Deferred 0 0
Total Provision $ 79,414 $181,000
======== ========
</TABLE>
F-13
<PAGE> 34
(7) LONG TERM DEBT:
Long term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Term Promissory Note $ -- $ 725,000
Lines of credit -- 1,600,000
Related party loans -- 4,826
Notes payable (construction) -- 33,499
------------ -----------
-- 2,363,325
Less, current portion -- (1,938,325)
------------ -----------
Long-term notes payable $ -- $ 425,000
============ ===========
</TABLE>
TERM PROMISSORY NOTE:
During June 1997 the Company paid the remaining balance of $450,000 which was
due to PNC Bank on its term promissory note. The term promissory note was
collateralized by a distribution and administration facility which was sold by
the Company. The balance under this term promissory note was $725,000 at July
31, 1996. Principal payments under this note were $25,000 per month.
LINES OF CREDIT:
In addition to the above, ARPEL entered into a financing agreement with Credit
Lyonnais for a revolving secured line of credit of up to $2,100,000, expiring
on October 15, 1995, subject to renewals on a yearly basis under certain
conditions. During January 1996, the Company amended its agreement with Credit
Lyonnais to extend the expiration date of its line of credit to November 29,
1996. The loan is secured by domestic accounts receivable of ARPEL. On November
29, 1996, the Company paid the balance of $1.3 million which was due under this
line of credit. Borrowings under this line of credit were $1,600,000 and
$2,100,000 at July 31, 1996 and 1995, respectively.
(8) REDEEMABLE PREFERRED STOCK:
On July 6, 1993, the Company issued 30,000 shares of $25.00, 14.5% Preferred
Stock, maturing 10 years after issuance. Dividends paid in Common stock are
payable in advance. The value of the Common Stock payable as dividends is
calculated based on the average closing price of the Company's Common Stock
during the 40 trading days prior to October 22nd of each year, minus 20% of
that average price.
The Company declared a Common Stock dividend of 66,000 shares in November 1996.
The Company's Board of Directors is expected to declare a Common Stock dividend
of approximately 230,160 shares in November 1997.
(9) EMPLOYEE BENEFIT PLANS:
401(k) PLAN
During November 1995, the Board of Directors of the Company approved the
adoption of a 401(k) Profit Sharing Plan. Under the plan eligible employees can
contribute up to a maximum of 15% or $9,500 of their annual gross compensation.
The Company has the option to make discretionary matching contributions. For
the plan year ending December 31, 1997 no Company matching contribution is
anticipated.
F-14
<PAGE> 35
(10) STOCK OPTION PLANS:
During December 1992, the Board of Directors of the Company adopted the 1993
Stock Option Plan ("the 1993 Plan") pursuant to which up to 300,000 shares of
Common Stock are authorized to be subject to options.
During October 1994, the Board of Directors approved the grant of stock options
totaling 500,000 shares of the Company's Common Stock to directors and to legal
counsel, of the Company, of an exercise price of $1.00 per share.
The options available under the plan are in the form of incentive options and
non-qualified options. Incentive options are available to key employees of the
Company and non-qualified options are available to key employees, non-employee
directors and consultants of the Company at the fair market value of the Common
Stock at the date of the grant. Options are exercisable as determined by the
Board of Directors.
The Company has adopted the disclosure only provision of SFAS No. 123 and is
continuing to recognize compensation expense using the intrinsic value method
under APB No. 25. Had compensation expense for the Company's stock options been
determined based on the fair market value at the grant date for awards in
fiscal years 1995, 1996 and 1997, consistent with the provision of SFAS No.
123, the Company's net (loss) income and (loss) income per share would have
been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net (Loss) Income as reported $ (3,008,562) $ 2,692,692 $ 1,364,646
Net (Loss) Income proforma (3,008,888) 2,692,692 1,145,896
(Loss) Income per share as reported $ (0.25) $ 0.22 $ 0.12
(Loss) Income per share proforma $ (0.25) $ 0.22 $ 0.10
</TABLE>
This proforma impact only takes into account options granted since January 1,
1995. The SFAS No. 123 fair value of each option granted was estimated on the
date of the grant using a number of factors that resulted in a net value of
approximately 50% of the stock price on the grant date.
Changes in outstanding options and options available for grant pursuant to the
1993 Plan, expressed in numbers of shares, are as follows:
<TABLE>
<CAPTION>
July 31, 1997 July 31, 1996 July 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Options outstanding,
beginning of period 500,000 550,000 75,000
Granted 50,000 -- 500,000
Exercised (58,333) (50,000)
Forfeited (55,000) -- (25,000)
Options outstanding,
end of period 436,667 500,000 550,000
Options available for grant,
end of period 250,000 -- --
Exercise price per share for
shares under option, end of
period $0.63-$1.00 $1.00-$1.75 $1.00-$1.75
</TABLE>
F-15
<PAGE> 36
(11) COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases office space and other equipment under various
non-cancelable operating lease agreements. Rental expense for the fiscal years
ended 1997, 1996 and 1995 was approximately $1,129,765, $1,436,121 and
$1,392,893 respectively.
Minimum annual rental commitments under non-cancelable leases in effect at July
31, 1997, excluding escalations:
Fiscal year ending July 31:
1998........................... 584,029
1999........................... 420,115
2000........................... 285,675
2001........................... 282,440
2002 and thereafter............ -0-
LITIGATION:
On October 28, 1996 the Company received notice from Adrienne Newman purporting
to terminate her April 4, 1990 Employment Agreement with the Company (such
agreement as subsequently amended is the "Employment Agreement"), based on an
alleged breach of the Employment Agreement by the Company. Ms. Newman served as
the President of the Company's wholly owned subsidiary, (Adrien Arpel, Inc.
("ARPEL")) and had been selling host, under the name of Adrien Arpel in its
sales program on the Home Shopping Network, Inc. ("HSN"). The Employment
Agreement provided for salary, fringe benefits and commission payments based
upon 33% of the revenues, net of direct expenses attributable to television
shopping sales. Ms. Newman also had vested rights in 625,000 warrants, 500,000
of which were scheduled to expire in November 1998 and the remaining 125,000 of
which were scheduled to expire on July 31, 2001.
On November 8, 1996 the Company and Adrienne Newman reached an agreement (the
"Interim Agreement") whereby Ms. Newman agreed to appear as the selling host
for ARPEL on HSN shows scheduled for November and December 1996 and January
1997 (the "HSN Selling Period"). During the HSN Selling Period, Ms. Newman
acted as an independent contractor and not as an employee of the Company. The
Company and Ms. Newman also agreed to refrain from initiating legal action
against the other in connection with their dispute over Ms. Newman's
termination of the Employment Agreement until after the expiration of the HSN
Selling Period.
On January 28, 1997, after the expiration of the HSN Selling Period, the
Company was served by Adrienne Newman with a summons and complaint
returnable in the Supreme Court, New York County whereby Ms. Newman asserted
claims for damages against the Company based upon alleged breaches by the
Company of Ms. Newman's Employment Agreement and the Interim Agreement.
Unspecified damages were claimed. A further claim requested a judicial
determination that the Employment Agreement was materially breached by the
Company resulting in its termination.
On March 19, 1997, the Company served an Answer and Counterclaim in response to
the action commenced by Ms. Newman. The Company's Counterclaim asserts various
claims against Ms. Newman, seeking damages and injunctive relief. Among other
things, it is the position of the Company that Ms. Newman was in material
breach of her Employment Agreement when she terminated the Employment Agreement
on October 28, 1996. As a consequence, it is the Company's belief that Ms.
Newman's refusal to provide services to the Company throughout the term of her
Employment Agreement which expires April 1998, particularly her willful refusal
and failure to appear as the Company's selling host on HSN, will damage the
Company in the sum of at least eleven million ($11,000,000). The Company also
asserted claims against Ms. Newman for breaches of her covenant not to compete
and her covenant not to disclose trade secrets and proprietary data.
F-16
<PAGE> 37
During May 1997, Ms. Newman started appearing on HSN as a representative of her
own company selling cosmetic products under the name "Signature Club A". Ms.
Newman has subsequently appeared on HSN on a monthly basis. The Company and
its attorneys are currently reviewing these appearances and may seek further
legal remedies and actions against Ms. Newman. During these appearances
Ms. Newman was not acting on behalf of the Company or its trademark protected
Adrien Arpel product line.
The case is currently in the discovery phase. Upon completion of discovery the
action will be ready for trial but no trial date has yet been fixed.
The Company, in the normal course of business is a defendant in numerous
actions/lawsuits. The Company does not believe that the outcome of these
actions/lawsuits will have a material impact on the Company's financial
position or results from operations.
(12) SUPPLEMENTAL INCOME STATEMENT INFORMATION:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
JULY 31,
1997 1996 1995
----------- ------------------ ----------
<S> <C> <C> <C>
Advertising Costs $ 1,469,569 $ 1,557,905 $1,543,927
</TABLE>
F-17
<PAGE> 38
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 9,634,712 $10,188,567 $ 3,130,544 $ 1,746,861
Gross Profit 6,539,418 6,331,733 2,339,636 1,306,221
Net Income (loss) 590,458 701,405 (1,126,135) (3,174,290)
Net Income (loss),
per Common and Common
Equivalent Share: $ 0.05 $ 0.06 $ (0.09) $ (0.27)
FISCAL 1996
Net Sales $ 7,673,898 $ 9,110,445 $ 8,582,452 $ 9,366,580
Gross Profit 5,502,846 5,975,188 5,712,894 6,162,358
Net Income (loss) 435,104 741,451 785,836 730,301
Net Income (loss),
per Common and Common
Equivalent Share: $ 0.04 $ 0.06 $ 0.07 $ 0.05
FISCAL 1995
Net Sales $ 7,261,587 $ 8,771,169 $ 8,266,118 $ 7,852,330
Gross Profit 5,215,467 5,984,667 6,229,797 5,429,240
Net Income(loss) 50,201 655,698 684,227 (25,480)
Net Income (loss),
per Common and Common
Equivalent Share: $ 0.00 $ 0.06 $ 0.06 $ 0.00
</TABLE>
F-18
<PAGE> 39
ALFIN, INC. AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE FISCAL YEARS ENDED JULY 31
<TABLE>
<CAPTION>
A D D I T I O N S
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deductions End of
Description of Period Expenses Accounts (1) Period
<S> <C> <C> <C> <C> <C>
1997 Allowance for Doubtful
Accounts Receivable,
Chargebacks and Sales
Returns $ 1,255,033 $ 2,732,434 $ - $ 3,015,738 $ 971,729
1996 Allowance for Doubtful
Accounts Receivable,
Chargebacks, and Sales
Sales Returns $ 1,040,857 $ 4,339,814 $ - $ 4,125,638 $ 1,255,033
1995 Allowance for Doubtful
Accounts Receivable
Chargebacks, and Sales
Returns $ 1,833,123 $ 3,525,344 $ - $ 4,317,610 $ 1,040,857
</TABLE>
(1) Charges to the accounts are for the purposes for which the reserves were
created.
F-19
<PAGE> 40
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
ALFIN, INC.
EXHIBIT INDEX
Exhibit
No. Exhibit Title Page
10.32 Agreement dated May 13, 1997 between the Company and Selecta SA related
to the cancellation of fragrance purchases and the refund of advances
(Filed herewith).
10.33 Agreement dated June 13, 1997 between the Company and H. Galow related
to the sale of the Company's Norwood, New Jersey distribution facility.
(Filed herewith)
10.34 Agreement dated June 13, 1997 between the Company and H. Galow related
to the leasing of 15,000 square feet of warehouse space. (Filed
herewith)
10.35 Agreement dated August 6, 1997 between the Company and Target Mailing
Lists, Inc. related to the advertising and sale of products. (Filed
herewith)
10.36 Consulting agreement dated July 1, 1997, between the Company and Harold
Lightman related to Direct Mail Sales. (Filed herewith).
(b)Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the
period covered by this report.
F-20
<PAGE> 1
Exhibit 10.32
Alfin, Inc.
720 Fifth Avenue
New York, NY 10019
(212) 333-7700
May 13, 1997
Mr. Alain Hivelin
President Selecta SA
14 Rue du Ballon
93165 NOISY LE GRAND Cedex
FRANCE
Re: Termination of Purchase
Dear Mr. Hivelin:
Attached to this letter is a copy of an invoice reflecting the purchase by
Alfin, Inc. ("Alfin") of $1,000,000 in value of products to be manufactured by
Selecta SA ("Purchased Products"). Alfin has paid Selecta SA ("Selecta") the sum
of $1,000,000 in advance for the Purchased Products on December 26, 1996.
The agreement of Alfin to acquire the Purchased Products from Selecta was based
upon the belief of Alfin and Selecta of the commercial acceptability of the
Purchased Products. It has become apparent to both parties that this belief was
incorrect and that there is in fact no commercial market for the Purchased
Products.
Based upon the foregoing, it has been agreed to cancel the purchase of the
Purchased Products on the following basis:
1. All requirements on part of Selecta to manufacture and deliver the
Purchased Products are hereby terminated.
2. Selecta will refund to Alfin the sum of $1,000,000 plus interest at the
rate of 10.5% per annum. Such payments will be made as follows:
a. The sum of $260,125 by wire transfer on the date hereof
representing a principal payment of $250,000 and an interest
payment of $10,125 (representing interest on said $250,000 of
principal for the period from December 26, 1996 through the
date hereof).
b. The sum of $266,833.33 by wire transfer on July 31, 1997
representing a principal payment of $250,000 and an interest
payment of $16,833.33 (representing interest on said $250,000
of principal for the period from December 26, 1996 through
July 31, 1997).
<PAGE> 2
Exhibit 10.32
c. The sum of $271.281.25 by wire transfer on September 30, 1997
representing a principal payment of $250,000 and an interest
payment of $21,281.25 (representing interest on said $250,000
of principal for the period from December 26, 1996 through
September 30, 1997).
d. The sum of $277,989.58 by wire transfer on December 31, 1997
representing a principal payment of $250,000 and an interest
payment of $27,989.58 (representing interest on said $250,000
of principal for the period from December 26, 1996 through
December 31, 1997).
The instructions for wiring funds are as follows:
The Chase Manhattan Bank
Funds Transfer Service
4, New York Plaza, 15th Floor
New York, New York 10004
Attn: Operations Manager
ABA No. 021-000-021
Account = 006-127 576
For the Account of Alfin, Inc.
Will you please indicate the acceptance of Selecta of this agreement by signing
a copy in the space below on behalf of Selecta and returning a copy of it to me
on behalf of Alfin.
Very truly yours,
Alfin, Inc.
By: S/Elisabeth Fayer
-------------------------------
Elisabeth Fayer, President
Accepted and Agreed
On this 14 day of May, 1997
Selecta SA
By: S/Alain Hivelin
---------------
Alain Hivelin, President
<PAGE> 1
Exhibit 10.33
Christine Todd Whitman State of New Jersey Robert C. Shinn, Jr.
Governor Department of Environmental Protection Commissioner
June 10, 1997
Mr. R. Alan Karch
Esquire
59 Jefferson Avenue
Westwood, NJ 07675
Re: Alfin, Inc.
15 Maple Street
Lot 3, Block 80
Norwood Boro, Bergen County
N971840
Dear Mr. Karch:
This is in response to your application received 06/06/1997, concerning the
applicability of the Industrial Site Recovery Act (ISRA) to the sale of the
above referenced premises. On the basis of the sworn statements set forth in the
affidavit signed by Michael D. Ficke, the Department finds that this transaction
is not subject to the provisions of ISRA.
This decision is made in light of the absence of an industrial establishment as
defined within the Standard Industrial Classification numbers covered by the
Act. Any inaccuracies in the affidavit or subsequent changes in the facts as
stated therein could alter the Department's determination.
The inapplicability of the Industrial Site Recovery Act (ISRA) to this
transaction does not relieve the above referenced of any responsibilities under
any other environmental statutes, regulations or permits. In addition, this
determination of ISRA nonapplicability does not constitute any finding by the
New Jersey Department of Environmental Protection as to the current site
condition or existence or nonexistence of any hazards to the environment at this
location.
Should you have any further questions regarding this matter, please contact
Maurice Migliarino at (609) 777-0899.
Sincerely,
S/James J. Bono
James J. Bono, Supervisor
Applicability Unit
<PAGE> 2
Exhibit 10.33
RESOLUTION
I, Michael Ficke, Assistant Secretary of Alfin, Inc., a New York
corporation, do hereby certify that at a meeting of the Board of Directors of
said corporation which was held on April 7, 1997, at which a quorum was present
and acting throughout, the following resolution was unanimously adopted and is
now in full force and effect:
RESOLVED, that the President, Chief Financial Officer, Secretary and
other corporate officers be and they are hereby authorized and directed to
execute any and all documents necessary to effect the transfer of 15 Maple
Street, Norwood, New Jersey, to Hermann Galow, and further to undertake any and
all further acts necessary in their judgment to conclude said transaction. By
way of illustration, but without limitation, they are authorized to execute
documents, make adjustments, disburse and receive funds on behalf of the
corporation, and bind the corporation to any undertakings which, in their
opinion, are necessary and proper.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of the said
corporation this 13th day of June, 1997.
S/Michael D. Ficke
------------------
Michael D. Ficke, Assistant Secretary
Alfin, Inc.
<PAGE> 3
Exhibit 10.33
AFFIDAVIT OF TITLE
STATE OF NEW JERSEY
COUNTY OF Bergen SS.:
Elisabeth Fayer and Michael Ficke say under oath:
1. OFFICERS. We are officers of Alfin, Inc.
a corporation of the State of New York. The Corporation will be called the
"corporation" and sometimes simply "it" or "its". The President of the
corporation is Elisabeth Fayer and resides at The Assistant Secretary is Michael
Ficke and resides at
We are fully familiar with the business of the corporation. We are citizens of
the United States and at least 18 years old.
2. REPRESENTATIONS. The statements contained in this affidavit are true
to the best of our knowledge, information and belief.
3. CORPORATE AUTHORITY. The corporation is the only owner of property
located at 15 Maple Street, Norwood, New Jersey called "this property". This
property is to be sold by the corporation to Hermann Galow.
This action, and the making of this affidavit of title, have been duly
authorized by a proper resolution of the Board of Directors of the corporation.
A Copy of this resolution, bearing the seal of the corporation, is attached and
made a part of this affidavit. The corporation is legally authorized to transact
business in New Jersey. It has paid all state franchise taxes presently due. Its
charter, franchise and corporate powers have never been suspended or revoked. It
is not restrained from doing business nor has any legal action been taken for
that purpose. It has never changed its name or used any other name.
4. APPROVAL BY SHAREHOLDERS. (check one only)
x Shareholder approval is not required.
[ ] This is a sale of all or substantially all of the assets of
the corporation. The sale is not made in the regular course of
the business of the corporation. A copy of the authorization
and approval of the shareholders is attached.
5. OWNERSHIP AND POSSESSION. It has owned this property since July 20,
1983. Since then no one has questioned its right to possession or ownership. The
corporation has sole possession of this property. There are no tenants or other
occupants of this property. Except for its agreement with the Buyers (if this is
a sale) it has not signed any contracts to sell this property. It has not given
anyone else any rights concerning the purchase or lease of this property. It has
never owned any property which is next to this property.
6. IMPROVEMENTS. No additions, alterations or improvements are now in
progress or have been made to this property since four months past, 19__. It has
always obtained all necessary permits and certificates of occupancy. All charges
for municipal improvements such as sewers, sidewalks, curbs or similar
improvements benefiting this property have been paid in full. No building,
addition, extension or alteration on this property has been made or worked on
within the past four months. The corporation is not aware that anyone has filed
or intends to file a mechanic's lien or building contract relating to this
property. No one has notified it that money is due and owing for construction or
repair work on this property.
7. LIENS OR ENCUMBRANCES. It has not allowed any interests (legal
rights) to be created which affects its ownership or use of this property. No
other persons have legal rights in this property, except the rights of utility
companies to use this property along the road or for the purpose of serving this
property. The corporation does not have any pending lawsuits or judgments
against it or other legal obligations which may be enforced against this
property. It does not owe any disability, unemployment, corporate franchise,
social security, municipal or alcoholic beverage tax payments. No bankruptcy or
insolvency proceedings have been started by or against it, nor has it ever been
declared bankrupt. No one has any security interest in any personal property or
fixtures on this property. All liens (legal claims, such as judgments) listed on
the attached judgment or lien search are not against the corporation, but
against others with similar names.
8. EXCEPTIONS. The following is a complete list of exceptions to any of
the above statements. This includes all liens or mortgages which are not being
paid as a result of this transaction.
NONE
8 (a) Seller states that the attached non-applicability letter from the N.J.
D.E.P. dated 6/10/97 was issued on facts which are true to the best of Seller's
knowledge.
9. RELIANCE. The corporation makes this affidavit in order to induce
the Buyer(s) or the Lender to accept its deed or mortgage. It is aware that the
Buyer(s) or the Lender will rely on the statements made in this affidavit and on
its truthfulness.
Signed and sworn to before me on S/Elisabeth Fayer
June 13, 1997 Elisabeth Fayer
S/R. Alan Karch S/Michael D. Ficke
R. Alan Karch Michael D. Ficke
Attorney at Law N.J.
<PAGE> 1
Exhibit 10.34
LEASE AGREEMENT
Section I
Parties
This lease if made between Hermann Galow of 97 Oak Street, Norwood, New
Jersey, as landlord, and Alfin, Inc., of 15 Maple Street, Norwood, New Jersey,
as tenant.
Section II
Description of Leased Premises
Landlord leases to tenant the space as presently constituted known as a
portion of 15 Maple Street, Norwood, New Jersey, consisting of approximately
15,000 square feet within the structure at that address, referred to below as
the warehouse/office.
Section III
Term
The space is leased for a term to commence on the transfer of title of
the premises at 15 Maple Street, Norwood, New Jersey, from the tenant herein to
the landlord herein, and continuing thereafter for a period of two years or on
such earlier date as the parties may agree.
Section IV
Rent
The total annual rent is the sum of $107,250.00, which sum is payable
in equal monthly installments of $8,937.50, in advance, on the first day of each
calendar month during the term. This rent is a gross rent.
Section V
Security Deposit
Landlord acknowledges receipt of $8,937.50, which he is to retain as a
security deposit for tenant's faithful performance of this lease. Landlord is
not obliged to apply the deposit on rents or other charges in arrears or on
damages for tenant's failure to perform the lease. However, landlord may so
apply the security at his option and his right to possession of the premises for
nonpayment of rent or for any other reason shall not in any event be affected by
reason of the fact that landlord holds this security. The security deposit, if
not applied toward payment of arrearages or damages, is to be returned to the
tenant when this lease is terminated, after tenant has vacated the premises and
delivered possession to landlord.
1
<PAGE> 2
Exhibit 10.34
If landlord repossesses the premises because of tenant's default or
breach, landlord may apply the deposit on all damages suffered to the date of
the repossession and may retain the remainder to apply on such damages as may be
suffered thereafter by reason of the default or breach.
Section VI
Use and Occupancy
Tenant shall use and occupy the premises as a warehouse/office and for
no other purpose. Landlord represents that, to the bet of landlord's knowledge,
the premises may lawfully be used for such a purpose. The tenant shall not be
permitted to store toxic, hazardous or flammable material on or in the premises.
Section VII
Place for Payment of Rent
Tenant shall pay rent, and any additional rent as provided below, to landlord at
landlord's above-stated address, or at such other place as landlord may
designate in writing, without demand and without counterclaim, deduction, or
setoff.
Section VIII
Care and Repair of Premises
Tenant shall commit no act of waste and shall take good care of the
premises and the fixtures and appurtenances on the premises, and shall, in the
use and occupancy of the premises, conform to all laws, orders, and regulations
of the federal, state, and municipal governments or any of their departments,
including all environmental laws and regulations applicable to the leased
property. Landlord shall make all necessary repairs to the premises, except
where the repair has been made necessary by misuse or neglect by tenant or
tenant's agents, servants, visitors or licensees. All improvements made by
tenant to the premises which are so attached to the premises that they cannot be
removed without material injury to the premises, shall become the property of
landlord upon installation.
Not later than the last day of the term tenant shall, at tenant's
expense, remove all of tenant's personal property and those improvements made by
tenant which have not become the property of landlord, including trade fixtures,
cabinet work, movable paneling, partitions and the like; repair all injury done
by or in connection with the installation or removal of the property and
improvements; and surrender the premises in as good condition as they were at
the beginning of the term, reasonable wear, and damage by fire, the elements,
casualty, or other cause not due to the misuse or neglect by tenant or tenant's
agents, servants, visitors or licensees, excepted. All property of tenant
remaining on the premises after the last day of the term of this lease shall be
conclusively deemed abandoned and may be removed by landlord, and tenant shall
reimburse landlord for the cost of such removal. Landlord may have any such
property stored at tenant's risk and expense.
2
<PAGE> 3
Exhibit 10.34
Section IX
Alterations, Additions or Improvements
Tenant shall not, without first obtaining the written consent of
landlord, make any alterations, additions or improvements in, to or about the
premises.
As a condition of the payment of the rent hereunder, landlord shall
undertake the following at landlord's cost and expense: (1) install one loading
dock and one entrance door into the premises; (2) erect and sheetrock a dividing
wall to separate the rented premises from the balance of the building; and (3)
provide access doors to the bathrooms.
Section X
Accumulation of Waste or Refuse Matter
Tenant shall not permit the accumulation of waste or refuse matter on
the leased premises or anywhere in or near the building.
Section XI
Heat
Landlord agrees to furnish tenant heat on business days adequate and
reasonable for the leased premises, or when and as required by law.
Section XII
Water
Landlord agrees to furnish hot and cold water for lavatory purposes
without charge. If a further supply or water is required by tenant, tenant
shall, at tenant's expense, install, and subsequently shall maintain at tenant's
expense, a water meter to register tenant's consumption of water, and tenant
shall pay as additional rent, when and as bills are rendered, for water
consumed, at the cost to landlord, and for sewer rents and all other rents and
charges based upon the consumption of water.
XIII
Air Conditioning
Landlord agrees to furnish air cooling during the appropriate season.
Section XIV
Electricity
Landlord agrees to furnish electricity for usual office and warehouse
requirements; however, tenant shall not use any electrical equipment which in
landlord's reasonable opinion will overload the wiring installations or
interfere with reasonable use of such installations by landlord or other tenants
in the building.
3
<PAGE> 4
Exhibit 10.34
Section XV
Damages to Building
If the building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by landlord, will equal or
exceed fifty percent of the replacement value of the building (exclusive of
foundations) just prior to the occurrence of the damage, then landlord may, no
later than the tenth day following the damage, give tenant a notice of election
to terminate this lease, or if the premises shall not be reasonably usable for
the purposes for which they are leased under this agreement, then tenant may, no
later than the tenth day following the damage, give landlord a notice of
election to terminate this lease. In event of either election this lease shall
be deemed to terminate on the fifth day after the giving of notice, and tenant
shall surrender possession of the premises within a reasonable time thereafter,
and the rent, and any additional rent, shall be apportioned as of the date of
the surrender and any rent paid for any period beyond the date shall be repaid
to tenant. If the cost of restoration as estimated by landlord shall amount to
less than fifty percent of the replacement value of the building, or if, despite
the cost, landlord does not elect to terminate this lease, and provided tenant
does not elect to terminate this lease, landlord shall restore the building and
the premises with reasonable promptness, subject to delays beyond landlord's
control and delays in the making of insurance adjustments between landlord and
his insurance carrier, and tenant shall have no right to terminate this lease
except as provided in this agreement. Landlord need not restore fixtures and
improvements owned by tenant.
In any case in which use of the premises is affected by any damage to
the building, there shall be either an abatement or an equitable reduction in
rent depending on the period for which and the extent to which the premises are
not reasonably usable for the purpose for which they are leased under this
agreement. The words "restoration" and "restore" as used in this Section shall
include repairs. If the damage results from the fault of the tenant, or tenant's
agents, servants, visitors, or licensees, tenant shall not be entitled to any
abatement or reduction of rent, except to the extent, if any, that landlord
receives the proceeds of rent insurance in lieu of such rent.
Section XVI
Insurance; Waivers of Subrogation
Tenant shall maintain insurance against personal injury to any person
or persons in a limit of not less than $1,000,000.00, and for loss or damage to
property in a limit of not less than $50,000.00. A copy of the insurance policy
shall be delivered to the landlord prior to the commencement of occupancy by the
tenant. In any event of loss or damage to the building, the premises and/or any
contents, each party shall look first to any insurance in its favor before
making any claim against the other party; and, to the extent possible without
additional cost, each party shall obtain, for each policy of such insurance,
provisions permitting waiver of any claim against the other party for loss or
damage within the scope of the insurance, and each party, to the extent
permitted, for itself and its insurers waives all such insured claims against
the other party.
Section XVII
Eminent Domain
If the premises or any part of the premises or any estate in the
premises, or any other part of the building materially affecting tenant's use of
the premises, be taken by eminent domain, this lease shall terminate on the date
when title vests pursuant to such a taking. The rent, and any additional rent,
shall be apportioned as of the termination date and any rent paid for any period
beyond such date shall be repaid to tenant. Tenant shall not be entitled to any
part of the award for such a taking or any payment in lieu of the award, but
tenant may file a claim for any taking of fixtures and improvements owned by
tenant, and for moving expenses.
4
<PAGE> 5
Exhibit 10.34
Section XVIII
Landlord's Remedies on Default
If tenant defaults in the payment of rent, or any additional rent, or
defaults in the performance of any of the other covenants or conditions of this
agreement, landlord may give tenant notice of such a default, and if tenant does
not cure any rent, or additional rent, default within ten days, or other default
within thirty days, after the giving of notice (or if another default is of such
a nature that it cannot be completely cured within that period, if tenant does
not commence the curing within thirty days and thereafter proceed with
reasonable diligence and in good faith to cure the default), then landlord may
terminate this lease on not less than ten days' notice to tenant. On the date
specified in the notice the term of this lease shall terminate and tenant shall
then quit and surrender the premises to landlord, but tenant shall remain liable
as provided in Section XIX. If this lease shall have been so terminated by
landlord, landlord may at any subsequent time resume possession of the premises
by any lawful means and remove tenant or other occupants and their effects.
Section XIX
Deficiency
In any case where landlord has recovered possession of the premises by
reason of tenant's default, landlord may, at landlord's option, occupy the
premises or cause the premises to be redecorated, altered, divided, consolidated
with other adjoining premises, or other wise changed or prepared for reletting,
and may relet the premises or any part of the premises as agent of tenant or
otherwise, for a term or terms to expire prior to, at the same time as, or
subsequent to, the original expiration date of this lease, at landlord's option,
and receive the rent. Rent so received shall be applied first to the payment of
expenses as landlord may have incurred in connection with the recovery of
possession, redecorating, altering, dividing, consolidating with other adjoining
premises, or otherwise changing or preparing for reletting, and the reletting,
including brokerage and reasonable attorneys' expenses of performance of the
other covenants or tenant as provided in this agreement. Tenant agrees, in any
such case, whether or not landlord has relet, to pay to landlord damages equal
to the rent and other sums agreed to be paid by tenant, less the net proceeds of
the reletting, if any, and the damages shall be payable by tenant on the several
rent days above specified. In reletting the premises, landlord may grant rent
concessions, and tenant shall not be credited with such concessions. No such
reletting shall constitute a surrender and acceptance or be deemed evidence of a
surrender and acceptance. If landlord elects, pursuant to this agreement,
actually to occupy and use the premises or any part of the premises during any
part of the balance of the term as originally fixed or since extended, there
shall be allowed against tenant's obligation for rent or damages as defined in
this agreement, during the period of landlord's occupancy, the reasonable value
of such occupancy, not to exceed in any event the rent reserved and such
occupancy shall not be construed as a relief of tenant's liability under this
agreement.
Tenant waives all right of redemption to which tenant or any person
claiming under tenant might be entitled by any law now or hereafter in force.
Landlord's remedies under this agreement are in addition to any remedy allowed
by law.
Section XX
Effect of Failure To Insist on Strict Compliance
With Conditions
The failure of either party on insist on strict performance of any
covenant or condition of this agreement, or to exercise any option contained,
shall not be construed as a waiver of such covenant, condition, or option in any
other instance. This lease cannot be changed or terminated orally.
5
<PAGE> 6
Exhibit 10.34
Section XXI
Assignment
Tenant shall not assign this lease, or any interest in this lease, or
sublet the leased premises, or any part of the premises, or any right or
privilege appurtenant to it, or allow any person other than tenant and tenant's
agents and employees to occupy or use the premises or any part of them, without
first obtaining landlord's written consent. Landlord expressly covenants that
such consent shall not be unreasonably or arbitrarily refuse. Landlord's consent
to one assignment, sublease, or use shall not be a consent to any subsequent
assignment or sublease, or occupancy or use by another person. Any unauthorized
assignment or sublease shall be void, and shall terminate this lease at the
landlord's option. Tenant's interest in this lease is not assignable by
operation of law without landlord's written consent.
Section XXII
Collection of Rent from Any Occupant
If the premises are sublet or occupied by anyone other than tenant and
tenant is in default under this agreement, or if this lease is assigned by
tenant, landlord may collect rent from the assignee, subtenant, or occupant, and
apply the net amount collected to the rent reserved. No such collection shall be
deemed a waiver of the covenant against assignment and subletting, or the
acceptance of such assignee, subtenant, or occupant as tenant, or a release of
tenant from further performance of the covenants contained in this agreement.
Section XXIII
Subordination of Lease
This lease shall be subject and subordinate to all underlying leases
and to mortgages and trust deeds which may now or subsequently affect such
leases or the real property of which the premises form a part, and also to
renewals, modifications, consolidations, and replacements of the underlying
leases and the mortgages and trust deeds. Although no instrument or act on the
part of tenant shall be necessary to effectuate such a subordination, tenant
will, nevertheless, execute and deliver further instruments confirming the
subordination of this lease as may be desired by the holders of the mortgages
and trust deeds or by any of the landlords under such underlying leases. Tenant
appoints landlord attorney in fact, irrevocably, to execute and deliver any such
instrument for tenant. If any underlying lease to which this lease is subject
terminates, tenant shall, on timely request, attorn to the owner of the
reversion.
Section XXIV
Landlord's Right To Cure Tenant's Breach
If tenant breaches any covenant or condition of this lease, landlord
may, on reasonable notice to tenant (except that no notice need be given in case
of emergency), cure such a breach at the expense of tenant and the reasonable
amount of all expenses, including attorneys' fees, incurred by landlord in so
doing, whether paid by landlord or not, shall be deemed additional rent payable
on demand.
Section XXV
Mechanics' Liens
Tenant shall within thirty days after notice from landlord discharge
any mechanics' liens for materials or labor claimed to have been furnished to
the premises on tenant's behalf.
6
<PAGE> 7
Exhibit 10.34
Section XXVI
Notices
Any notice by either party to the other shall be in writing and shall
be deemed to have been duly given only if delivered personally or sent by
registered or certified mail in an addressed postpaid envelope; if to tenant, at
the above-described building; if to landlord, at landlord's address as set forth
above; or, to either, at such other address as tenant or landlord, respectively,
may designate in writing. Notice shall be deemed to have been duly given, if
delivered personally, upon delivery, and if mailed, upon the third day after the
mailing of such notice.
Section XXVII
Landlord's Right to Inspection, Repair, and Maintenance
Landlord may enter the premises at any reasonable time, upon adequate
notice to tenant (except that no notice need be given in case of emergency) for
the purpose of inspection or the making of such repairs, replacements, or
additions in, to, on and about the premises or the building, as landlord deems
necessary or desirable.
Section XXVIII
Interruption of Services or Use
Interruption or curtailment of any service maintained in the building,
if caused by strikes, mechanical difficulties, or any causes beyond landlord's
control whether similar or dissimilar to those enumerated, shall not entitle
tenant to any claim against landlord or to nay abatement in rent, and shall not
constitute constructive or partial eviction, unless landlord fails to take such
measures as may be reasonable in the circumstance to restore the service without
undue delay. If the premises are rendered untenantable in whole or in part, for
a period of five business days, by the making of repairs, replacements, or
additions, other than those made with tenant's consent or caused by misuse or
neglect by tenant or tenant's agents, servants, visitors, or licensees, there
shall be a proportionate abatement of rent during the period of such
untenantability.
Section XXIX
Conditions of Landlord's Liability
Tenant shall not be entitled to claim a constructive eviction from the
premises unless tenant shall have first notified landlord in writing of the
condition or conditions giving rise to such an eviction, and, if the complaints
be justified, unless landlord shall have failed within a reasonable time after
receipt of such notice to remedy such conditions.
Section XXX
Landlord's Right To Show Premises
Landlord may show the premises to prospective purchasers and mortgagees
and, during the three months prior to termination of this lease, to prospective
tenants, during business hours upon reasonable notice to tenant.
7
<PAGE> 8
Exhibit 10.34
Section XXXI
Effect of Other Representations
No representations or promises shall be binding on the parties to this
agreement except those representations and promises contained in this agreement
or in some future writing signed by the party making such representations or
promises.
Section XXXII
Quiet Enjoyment
Landlord covenants that if, and so long as, tenant pays the rent, and
any additional rent as provided in this agreement, and performs the covenants of
this lease, tenant shall peaceably and quietly have, hold, and enjoy the
premises for the term mentioned, subject to the provisions of this lease.
Section XXXIII
Section Headings
The section headings in this lease are intended for convenience only
and shall not be taken into consideration in any construction or interpretation
of this lease or any of its provisions.
Section XXXIV
Binding Effect on Successors and Assigns
The provisions of this lease shall apply to, bind, and insure to the
benefit of landlord and tenant, and their respective heirs, successors, legal
representatives, and assigns. It is understood that the term "landlord" as used
in this lease means only the owner, a mortgagee in possession, or a term tenant
of the building, so that in the event of any sale of the building or of any
lease of the building, or if a mortgagee shall take possession of the premises,
the landlord named in this agreement, shall be entirely freed and relieved of
all covenants and obligations of landlord subsequently accruing under this
agreement. It shall be deemed without further agreement that the purchase, the
term tenant of the building, or the mortgagee in possession has assumed and
agreed to carry out any and all covenants and obligations of the landlord under
this agreement.
Dated June 13, 1997
Witness
S/Patricia Leidedit S/Hermann Galow
Hermann Galow, Landlord
Attest: Alfin, Inc., by:
S/Michael D. Ficke S/Elisabeth Fayer
Michael D. Ficke, Assistant Secretary Elisabeth Fayer, President
Alfin, Inc. Alfin, Inc.
8
<PAGE> 1
Exhibit 10.35
AGREEMENT made this 6th day of August 1997 by and between Target
Mailing Lists Inc., a New York Corporation with offices at 275 Madison Avenue,
New York, N.Y. 10016 (hereinafter "Target"), and Adrien Arpel, Inc., with
offices at 720 Fifth Avenue, New York, N.Y. 10019 (hereinafter "AAI").
WHEREAS Target is in the business of acting as an agent, broker and
media representative in connection with advertising placement, the sale of
advertising space in various publications, and
WHEREAS AAI desires to engage the services of Target to place
advertisements in publications for a kit containing products selected by AAI
(the "Kit") in accordance with the terms of this Agreement. The initial Kit
shall be specially selected by AAI for marketing under this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. AAI and Target will jointly approve the content of
advertisements as well as the scheduling of the advertisements in connection
with the sale of the Kit, it being understood that AAI may object to any
advertisement for any reason. AAI and Target shall jointly agree on the schedule
for such advertising. The publications and dates shall be selected from
publications and dates which Target advises AAI available.
2. Target shall advance all production costs for all
advertisements placed by Target on behalf of AAI and AAI shall advance all
creative costs. Such advances shall be recouped as provided in paragraph 4 of
this Agreement. All creative and
<PAGE> 2
Exhibit 10.35
production costs for advertisements placed by Target on behalf of AAI pursuant
to the Agreement shall require approval of AAI before such costs are incurred.
3. Target shall place all approved AAI advertising material
and shall advance all media charges for such advertising material.
4. Expenses incurred by Target and AAI hereunder as well as
third party costs incurred by them shall be reimbursed pro rata from gross
revenues received from the sale of the Kit. For purposes of this Agreement the
term gross revenues shall mean all revenue received from purchases of the Kit
generated in direct response to the advertising material placed by Target. It
shall not include further sales generated from customers initially obtained from
such advertising material. The expenses to be reimbursed shall include:
a. sales and use taxes;
b. actual amounts paid to third parties for
advertising, creative and production costs
without any mark-up or profit to Target or
AAI;
c. AAI's direct cost for the Kit including in
addition to all material costs the cost of
fulfillment, refunds, postage, handling of
refunds and direct talent costs; and
d. AAI's administrative cost which the parties
have agreed shall be an amount equal to 75%
of AAI's direct cost for the Kit, unless
otherwise agreed upon.
5. All amounts remaining after payment of reimbursed expenses
out of gross revenues shall be allocated as follows:
<PAGE> 3
Exhibit 10.35
49.5% to Target; 40.5% to AAI, and 10% to Ben White.
6. The calculation of amounts distributable to Target, AAI and
Ben White shall be made and paid monthly during the term of this Agreement and
shall be calculated on a continuing, cumulative basis. Accompanying each payment
to Target shall be a detailed report setting forth the basis of the calculation.
This report will list the cumulative gross revenue to date, the cumulative
expenses incurred and the amount due to each party. The amount due will be less
any monies already paid pursuant to the terms of this Agreement.
7. AAI shall have complete responsibility for handling or
arranging for handling fulfillment, customer service, refunds and compliance
with the FTC Mail Order Trade Regulations Rule and all other applicable federal,
state and local laws relating to the sale of AAI Kits and/or services.
8. AAI acknowledges that Target is acting only as its agent in
the placement of advertisements and that Target has no responsibility for the
content of the advertisements or for the production or sale of the Kit being
advertised. Accordingly, if any claim is made or litigation or proceeding is
instituted against Target in connection with consumer use of the Kit being
advertised or AAI's failure to furnish the Kit advertised, or copyright
violation, or for nay act of omission on AAI's Kit and/or service advertised, or
arising out of the content of the advertisements. AAI shall indemnify Target
against all liability and expenses incurred by Target in connection therewith.
9. This Agreement shall be in effect for eighteen months from
the date of this Agreement. If the advertising that Target places for AAI sells
more than $1,500,000, in retail sales of the Kit within a one year period, from
the date that the
<PAGE> 4
advertisement first appears in the media, then this Agreement shall be
automatically renewed indefinitely until terminated pursuant to paragraph 12.
10. AAI may designate further products to be designated as
Kits under this Agreement for which Target shall act in the same capacity.
However, it is understood and agreed that AAI has no obligation to add other
products hereunder. Target shall have a right of first negotiation on any new
Kits to be offered in this manner. Any additional Kit designated hereunder shall
be subject to the same terms as provided under this Agreement.
11. Target will not be responsible for any delays or failures
by any publication to print or distribute the advertising it is placing on
behalf of AAI because of fire, flood, war, riot, accident, interruption of or
delay in transportation, strikes, changes in laws or regulations or some other
causes beyond Target's control. In no event will Target be responsible for any
direct indirect, or consequential damages arising from any cause.
12. In the event that David Palgon ceases to be the principal
stockholder and chief executive officer of Target, AAI shall have the right to
terminate this Agreement. Such termination shall not affect all accrued rights
of Target through the date of termination. Target shall not have the right to
assign this Agreement without the prior written consent of AAI.
13. Any and all controversies arising under this agreement or
in connection with the existence, execution or validity thereof shall be settled
by arbitration in New York, New York, under the rules of the American
Arbitration Association, and
<PAGE> 5
Exhibit 10.35
any decision or judgment resulting there from may be entered in any court of
competent jurisdictions.
14. This Agreement represents the entire understanding between
the parties hereto and may only be amended in writing by a document executed by
both parties.
Agreed to: Agreed to:
S/David Palgon S/Elisabeth Fayer
David Palgon Elisabeth Fayer
President Chairman & CEO
Target Mailing Lists, Inc. Adrien Arpel, Inc.
<PAGE> 1
Exhibit 10.36
ADRIEN ARPEL
Mr. Harold Lightman
75 East End Avenue, Suite #11E
New York, NY 10028
Re: Harold Lightman/Consulting Agreement
Adrien Arpel, Inc.
Dear Harold:
When countersigned by you where indicated below the following will
constitute our agreement:
1. We have agreed to hire you as a consultant in Marketing,
Merchandising, Advertising, and Sales for our new Direct Mail sales operation
for a term of one year commencing on July 1, 1997 and ending on July 1, 1998.
2. After the initial one year period, is it hereby agreed that
by mutual agreement, we can negotiate an extension.
3. We guarantee you the sum of $3500 per month. In addition,
we will reimburse to you within thirty days preapproved expenses as per company
guidelines.
4. In further consideration for your work and services, Adrien
Arpel, Inc. hereby agrees on July 1, 1997 or commencement date if earlier, to
grant to Harold Lightman the option to purchase 50,000 shares, of common stock
of Alfin, Inc., pursuant to the Alfin, Inc. Long Term Incentive Plan ("LTIP").
<PAGE> 2
Exhibit 10.36
The exercise price of the shares shall be fixed at the closing price per share
for Alfin, Inc. on the American Exchange on July 1, 1997, or commencement date
if earlier. The vesting schedule for stock options under this grant is as per
Alfin, Inc's. 1993 Stock Option Plan.
5. It is understood that you will work in the offices of
Adrien Arpel, Inc. a minimum of three days per week.
6. You warrant and represent that you have full authority to
enter into this agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day, month and year first above written.
Sincerely,
By: S/Elisabeth Fayer
CONSULTANT:
By: S/H. Allen Lightman
Harold Allen Lightman
SS####-##-####
<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 YEAR ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10K
</LEGEND>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 658,378
<SECURITIES> 0
<RECEIVABLES> 167,021
<ALLOWANCES> 844,162
<INVENTORY> 2,227,549
<CURRENT-ASSETS> 3,933,886
<PP&E> 2,333,028
<DEPRECIATION> 1,740,341
<TOTAL-ASSETS> 4,610,511
<CURRENT-LIABILITIES> 2,679,738
<BONDS> 0
750,000
0
<COMMON> 117,879
<OTHER-SE> 1,180,773
<TOTAL-LIABILITY-AND-EQUITY> 4,610,511
<SALES> 24,700,684
<TOTAL-REVENUES> 24,700,684
<CGS> 8,183,676
<TOTAL-COSTS> 20,394,463
<OTHER-EXPENSES> 986,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,013
<INCOME-PRETAX> (2,929,148)
<INCOME-TAX> 79,414
<INCOME-CONTINUING> (3,008,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,008,562)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> 0
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