As filed with the Securities and Exchange Commission on June 13 , 1997
Registration No. 333-15127
------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
AZUREL LTD.
(Name of small business issuer in its charter)
-----------------------
Delaware 2844 13-3842844
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Identification Number)
Incorporation or Number)
Organization)
----------------------------
509 Madison Avenue
New York, New York 10022
(212) 317-0712
(Address and telephone number of principal executive
offices and principal place of business)
----------------------------
Gerard Semhon, Chief Executive Officer
AZUREL LTD.
509 Madison Avenue
New York, New York 10022
(212) 317-0712
(Name, address and telephone number of agent for service)
------------------------------
Copies to:
Jay M. Kaplowitz, Esq. Jack Becker, Esq.
Gersten, Savage, Kaplowitz, Fredericks Snow Becker Krauss P.C.
& Curtin, LLP 605 Third Avenue
101 East 52nd Street New York, New York 10158-0125
New York, New York 10022 (212) 687-3860
(212) 752-9700 (212) 949-7052 (FAX)
(212) 752-9713 (FAX)
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act") check the following
box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Proposed
Title of Each Maximum Proposed
Class of Offering Price Maximum Aggregate Amount of
Securities to Amount To Be Per Offering Registration
Be Registered Registered(1) Security(2) Price(2) Fee
Units (3) (4) 1,380,000 $5.10 $7,038,000 $2,132.73
Common Stock, $.001
par value 1,380,000 (5) (5) -
Redeemable Common
Stock Purchase
Warrants 1,380,000 (5) (5) -
Common Stock (6) 1,380,000 $6.00 $8,280,000 $2,509.09
Underwriter's
Warrants (7) 120,000 $.001 $ 120 -- (8)
Common Stock (9) 120,000 $7.50 $900,000 $272.73
Redeemable Common
Stock Purchase
Warrants (9) 120,000 $.15 $1,800 $.55
Common Stock (10) 120,000 $6.00 $720,000 $218.18
Redeemable Common
Stock Purchase
Warrants (11) 905,500 $.10 $90,550 $27.44
Common Stock (12) 905,500 $5.00 $ 4,527,500 $1,371.97
TOTAL
REGISTRATION FEE $6,532.69 (13)
<FN>
(1) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of Common Stock issuable upon
the exercise of Redeemable Warrants pursuant to anti-dilution provisions
contained therein, which shares of Common Stock are registered hereunder.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(3) Each Unit offered hereby consists of one Common Share and one Redeemable
Common Stock Purchase Warrant.
(4) Includes 180,000 Units subject to the Underwriter's over-allotment option.
(5) Pursuant to Rule 457(i), no additional registration fee is required for
these shares and warrants being registered as part of the Units offered
hereby, since no additional consideration is being paid for them.
(6) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants.
Includes shares of Common Stock issuable upon exercise of the Underwriter's
over-allotment option.
(7) To be issued to the Underwriter, entitling the Underwriter to purchase up
to 120,000 Shares of Common Stock and/or 120,000 Redeemable Common Stock
Purchase Warrants.
(8) No fee due pursuant to Rule 457(g).
(9) Issuable upon exercise of the Underwriter's Warrants.
(10) Issuable upon the exercise of the Redeemable Common Stock Purchase Warrants
included in the Underwriter's Warrants.
(11) Consists of Redeemable Common Stock Purchase Warrants registered on behalf
of Selling Securityholders.
(12) 905,500 shares of Common Stock underlying Redeemable Common Stock Purchase
Warrants owned by Selling Securityholders.
(13) No filing fee accompanies this Amendment No.3 to the Registration
Statement because $7,042.05 was paid upon filing of the original
Registration Statement and $258.50 was paid upon the filing of Amendment
No.1 to the Registration Statement for an aggregate of $7,300.55, which is
in excess of of the required registration fee.
</FN>
</TABLE>
ii
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one
to be used in connection with an offering by the Company of shares of Common
Stock and Redeemable Common Stock Purchase Warrants (the "Prospectus") and (ii)
one to be used in connection with the sale of Redeemable Common Stock Purchase
Warrants and the exercise of such warrants by certain selling securityholders
(the "Selling Securityholder Prospectus"). The Prospectus and the Selling
Securityholder Prospectus will be identical in all respects except for the
alternate pages for the Selling Securityholder Prospectus included herein which
are each labeled "Alternate Page for Selling Securityholder Prospectus."
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED JUNE ____, 1997
SUBJECT TO COMPLETION
AZUREL LTD.
1,200,000 Shares of Common Stock, $.001 par value
1,200,000 Redeemable Common Stock Purchase Warrants
Azurel Ltd. (the "Company") hereby offers 1,200,000 shares of common
stock, par value $.001 per share (the "Common Stock"), and 1,200,000 redeemable
common stock purchase warrants (the "Redeemable Warrants" and together with the
Common Stock, the "Securities") to the general public (hereinafter referred to
as the "Offering"). The Securities must be purchased on the basis of one
Redeemable Warrant for each share of Common Stock purchased and will be
separately transferable immediately upon issuance. Each Redeemable Warrant
expires on ________, 2001, five years after the date of this Prospectus (the
"Expiration Date") and entitles the holder thereof, commencing one year from the
date of this Prospectus, to purchase one share of Common Stock at an exercise
price of $______ [120% of initial public offering price of Common Stock] (the
"Exercise Price"), subject to adjustment in certain events. The Redeemable
Warrants are redeemable by the Company, at a price of $.10 per Redeemable
Warrant, at any time commencing one year after the date of this Prospectus and
prior to the Expiration Date, on 30 days prior written notice to the registered
holders of the Redeemable Warrants (the "Warrantholders"), provided that the
closing bid price per share of the Common Stock exceeds 150% of the Exercise
Price for a period not less than 20 trading days in any 30 day trading period
ending not more than 15 days prior to the date of any redemption notice. The
Redeemable Warrants shall be exercisable until the close of the business day
preceding the date fixed for redemption. See "Underwriting" and "Description of
Securities- Redeemable Warrants."
Prior to this Offering, no public market for the Securities has
existed, and no assurance can be given that any market for such Securities will
develop on completion of the Offering, or if developed, be sustained. The
offering price for the shares of Common Stock and Redeemable Warrants, and the
terms of the Redeemable Warrants, have been determined by negotiations between
the Company and Network 1 Financial Securities, Inc., the underwriter of this
Offering (the "Underwriter"), and are not necessarily related to the Company's
asset value, earnings, net worth or other established criteria of value. The
anticipated offering price of the Common Stock and Redeemable Warrants is
expected to be between $4.00 and $5.00 and $.10, respectively. The Company has
applied to The Nasdaq Stock Market, Inc. for inclusion of the Securities for
trading on the NasdaqSmall Cap Market ("NASDAQ"). The proposed trading symbols
for the Common Stock and Redeemable Warrants are AZUR and AZURW, respectively.
No assurances can be given that listing of these Securities will be approved by
NASDAQ, or if approved, that the Company will continue to qualify for listing.
See "Underwriting."
Concurrently with the Offering, the Company is registering 905,500
Warrants (the "Selling Securityholders' Warrants") and 905,500 shares underlying
the Selling Securityholders' Warrants (the "Selling Securityholders' Warrant
Shares"), at its expense, on behalf of certain of its securityholders (the
"Selling Securityholders"). The Selling Securityholders' Warrants and the
Selling Securityholders' Warrant Shares (the "Concurrent Offering") are not part
of this underwritten Offering and are the subject of "lock-up" agreements for a
period of three months following the completion of the Offering. The Company
will not receive any of the proceeds from the sale of the Selling
Securityholders' Warrants, or the Selling Securityholders' Warrant Shares, but
will receive proceeds from the exercise, if any, of the Selling Securityholders'
Warrants. See "Concurrent Registration of Securities" and "Underwriting."
THESE SECURITIES ARE SPECULATIVE SECURITIES INVOLVING A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS
WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. PURCHASERS SHOULD
CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" AND "DILUTION"
COMMENCING ON PAGES 9 AND 19, RESPECTIVELY, OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<S> <C> <C> <C>
Underwriting
Discounts and
Commissions Proceeds to Company
Price to Public (1) and (3) (2) and (3)
--------------- ----------- -----------
Per Share... ----- ----- -----
Per Redeemable Warrant ----- ----- -----
Total (3) ----- ----- -----
- ----------------
<FN>
(1) Does not include additional compensation to the Underwriter
consisting of (i) a non-accountable expense allowance of 3%, or $______
($______ if the Over Allotment Option (as hereinafter defined) is
exercised in full); (ii) a 24-month financial advisory and investment
banking agreement providing for an aggregate payment of $48,000,
payable in full at the closing of the Offering ("Closing"); and (iii)
warrants (the "Underwriter's Warrants") exercisable for a period of
four years commencing one year from the date of this Prospectus to
purchase an aggregate of 120,000 shares of Common Stock and/or 120,000
Redeemable Warrants at a price of $____ per share and $___ per
Redeemable Warrant [150% of initial public offering price,
respectively, of Common Stock and Redeemable Warrants]. In addition,
the Company has agreed to pay to the Underwriter a warrant solicitation
fee of 5% of the exercise price of the Redeemable Warrants exercised
under certain circumstances and to indemnify the Underwriter against
certain liabilities, including those arising under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) After deducting discounts and commissions payable to the
Underwriter, but before payment of the Underwriter's non-accountable
expense allowance, the financial advisory fee or other expenses of this
Offering (estimated at $360,000) payable by the Company. See
"Underwriting."
(3) The Company has granted the Underwriter an option, exercisable within
30 calendar days after the Closing, to purchase up to 180,000
additional shares of Common Stock and/or 180,000 Redeemable Warrants
upon the same terms and conditions set forth above, solely for the
purpose of covering over-allotments, if any (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company would be $_________, $________ and $_________, respectively.
See "Underwriting."
</FN>
</TABLE>
1
<PAGE>
The Securities are being offered by the Underwriter on a "firm
commitment" basis, subject to prior receipt and acceptance, the approval of
certain legal matters by counsel and prior sale, if and when issued. The
Underwriter reserves the right to withdraw, cancel or modify the Offering and to
reject any order in whole or in part. Delivery of the certificates representing
the Securities is expected to be made against payment therefor at the offices of
the Underwriter, The Galleria, Building 2, 2 Bridge Avenue, Red Bank, New Jersey
07701 on or about ___________, 1997.
NETWORK 1 FINANCIAL SECURITIES, INC.
The date of this Prospectus is , 1997
[MARKETING DISPLAY]
[PICTURE TO BE INSERTED]
Members Only (R) is a registered trademark of Europe Craft Imports, Inc.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON
STOCK OR WARRANTS TO STABILIZE THEIR MARKET PRICE. PURCHASES OF THE COMMON STOCK
OR WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR
WARRANTS MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
A SIGNIFICANT AMOUNT OF THE SECURITIES IN THIS OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE
A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN BE NO ASSURANCE. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE SECURITIES THROUGH AND/OR WITH THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE SECURITIES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - NO ASSURANCE OF PUBLIC MARKET; VOLATILITY
OF STOCK PRICE."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by, and should be read in conjunction with, the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, except as otherwise
indicated or the context otherwise requires, the "Company" or "Azurel" refers to
Azurel Ltd., a Delaware corporation, and its wholly-owned subsidiaries, Private
Label Cosmetics, Inc., a New Jersey corporation ("Private Label"), P.L.C.
Specialties Inc., a New Jersey corporation ("PLC"), Fashion Laboratories, Inc.,
a Delaware corporation ("Fashion Labs"), International Cosmetic Group, Inc., a
New Jersey corporation ("International"), and Scent 123, Inc., a Delaware
corporation ("Scent 123"). This discussion contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include those discussed in "Risk
Factors."
THE COMPANY
Azurel Ltd. (the "Company" or "Azurel"), directly and through
wholly-owned subsidiaries, manufactures, markets and sells cosmetics, fragrances
and skin care products. Through four wholly-owned subsidiaries comprising its
Private Label Group, acquired by the Company in August 1996, the Company
operates a manufacturing and filling facility which sells cosmetics principally
to major cosmetic companies for sale by each customer under the customer's own
brand name (commonly known as "Private Label" sales). In addition, in order to
take advantage of the Company's manufacturing capabilities and product
development expertise, the Company currently is developing cosmetic, skin care
and fragrance lines which it intends to market under brand names created
internally or owned by others and licensed to the Company. These products are
sometimes referred to as "Branded Products." To date the Company has developed
only one line of Branded Products internally and has obtained only one license
to sell a product line using a brand name owned by a third party. In addition,
the Company intends, through its Scent 123 subsidiary, which acquired the assets
of Scent Overnight, Inc. ("Scent Overnight") in October 1996, to sell
well-recognized men's cologne and women's fragrances directly to the consumer by
overnight delivery through toll-free telephone numbers. These products are
sometimes referred to as "Distributed Fragrances." The Company, however, has not
yet secured any sources of supply for the Distributed Fragrances.
Virtually all of the Company's present business is conducted through
the Private Label Group which manufactures, fills and packages a broad range of
cosmetics, including lipsticks, powders, eye shadows and eye liners. Although
the Private Label Group was acquired in August 1996 by the Company, the Private
Label Group has been in business for more than 49 years, and the Private Label
Group's management is remaining with the Company. See "Management," "Certain
Transactions" and "Business - Products and Services."
The Company's manufacturing plant (the "Facility") includes a
laboratory which develops cosmetic products formulae for customers according to
their specific requirements. The laboratory also develops and maintains a
library of cosmetic products formulae for use by customers who have not
developed their own formulae for a specific product. See "Business - Products
and Services."
Development of the Company's first Branded Product line, an original
unisex fragrance line and related grooming products to be sold under the Sports
Extreme USA(TM) trade name, commenced in January 1996 and was completed in
September 1996, at which time marketing of the line commenced. Presently, the
Sports Extreme USA(TM) line consists of a unisex fragrance, bath and shower gel,
muscle and body relaxer and face moisturizer containing sunscreen and
alphahydroxy fruit acids. The marketing of the Sports Extreme USA(TM) line will
feature "extreme" sports such as ice climbing, bungee jumping, sky surfing and
mountain biking. Retail sales of this line commenced in the second quarter of
1997. See "Business - Products and Services."
4
<PAGE>
In June 1996, the Company began developing cosmetics, fragrances and
related products for sale under the Members Only trade name in the United States
and certain other countries pursuant to a license agreement with the owner of
the Members Only trade name. The Members Only trade name is presently used on
clothing and a wide variety of other goods and has been marketed in the United
States. The Company anticipates that development of the line will be completed
in the foruth quarter of 1997 and that retail sales of the Members Only line
will commence by the spring of 1998. See "Business - Products and Services."
The Company expects that it will sell Branded Products directly to
retail outlets in the United States and to international distribution companies.
To date, sales of approximately $48,000 of Branded Products have been made. The
Company entered into an exclusive distribution agreement with Northern Brands,
Inc. for sale of the Company's products in duty-free shops in the United States
and wholesale and retail shops in the Caribbean. The Company entered into verbal
distribution agreements with two foreign distributors which cover certain
countries in the Middle East and the Far East, pursuant to which such
distributors will purchase the Company's products for resale in their
distribution territories. The Company currently has $250,000 in orders from the
distributor in the Middle East which the Company plans to begin shipping in
August 1997. In addition, the Company has entered into verbal sale agency
agreements with two foreign sales agents which cover certain countries in
Europe. The Company expects that its relationship with foreign distributors will
be exclusive for a particular area but will not require the distributor to
purchase any minimum quantity of products. See "Business - Products and
Services."
As a complement to its marketing of Branded Products, the Company,
through its Scent 123 subsidiary, intends to sell Distributed Fragrances
directly to consumers, initially by overnight delivery, through toll-free
telephone numbers. The Company has commenced locating sources of supply,
developing concepts, logos, designs and advertising campaigns, and engaging in
other activities preliminary to the commencement of the sale of Distributed
Fragrances. The Company expects to begin test marketing of the Distributed
Fragrances in the fourth quarter of 1997 and, if successful, to begin national
marketing in February or March 1998. See "Business - Products and Services"
and "Certain Transactions."
The Company was incorporated in Delaware on June 26, 1995, Private
Label was incorporated in New Jersey on July 5, 1967, PLC was incorporated in
New Jersey on July 5, 1967, Fashion Labs was incorporated in Delaware on May 1,
1978, International was incorporated in New Jersey on May 30, 1979 and Scent 123
was incorporated in Delaware on September 6, 1996. The Company's offices are
located at 509 Madison Avenue, New York, New York, 10022, and its telephone
number is (212) 317-0712.
5
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by the Company (1) 1,200,000 shares of Common Stock and
1,200,000 Redeemable Warrants
Offering Price Common Stock - $_______ per share
Redeemable Warrants - $_______ per warrant
Common Stock Outstanding:
Prior to the Offering (2) 3,878,747
After the Offering (2)(3) 5,258,747
Redeemable Warrants Outstanding:
Prior to the Offering (4) 905,500
After the Offering (4) 1,200,000
Terms of the Redeemable Warrants Each Redeemable Warrant is exercisabl
from one year after the date of this
Prospectus to five years after the
date of this Prospectus and entitles
the holder thereof to purchase one
share of Common Stock at an exercise
price of $___ [120% of the initial
public offering price per share of
Common Stock], subject to adjustment in
certain circumstances (the "Exercise
Price"). The Redeemable Warrants are
redeemable by the Company, in whole or
in part, at any time commencing
one year after the date of this
Prospectus, upon 30 days prior written
notice, at a price of $.10 per
Redeemable Warrant, provided that
the closing bid price per share of the
Common Stock exceeds 150% of the
Exercise Price for a period not less
than 20 trading days in any 30 trading
day period ending not more than 15
days prior to the day on which the
Company gives notice of redemption.
See "Description of Securities-
Redeemable Warrants."
6
<PAGE>
Use of Proceeds The Company intends to use the net
proceeds of this Offering for
repayment of indebtedness incurred in
connection with acquisitions and
bridge financings, including an
aggregate of approximately $965,000
to related parties, to expand the
Company's marketing efforts, to
purchase inventory and equipment, to
pay accrued expenses, including an
aggregate of approximately $244,000
to related parties, and for working
capital. See "Use of Proceeds."
Risk Factors The Securities involve a high degree
of risk and immediate substantial
dilution and should not be purchased
by investors who cannot afford to
lose their entire investment.
Prospective investors should consider
carefully the factors set forth under
"Risk Factors" and "Dilution."
Proposed NASDAQ Common Stock - AZUR
Symbols(5) Redeemable Warrants - AZURW
<FN>
(1) Does not include (i) up to an additional 180,000 shares of
Common Stock and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option and (ii) the Underwriter's Warrants.
(2) Does not include (i) up to 750,000 shares of Common Stock reserved for
issuance pursuant to stock options which may be granted pursuant to the
Company's 1997 Stock Option Plan, (ii) 325,500 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements and (iii) 905,500
shares of Common Stock reserved for issuance pursuant to Redeemable
Warrants being offered concurrently with this Offering by the Selling
Securityholders pursuant to the Selling Securityholders' Prospectus.
See "Management - Stock Option Plan," "Certain Transactions" and
"Concurrent Registration of Securities."
(3) Does not include (i) up to an additional 180,000 shares of Common Stock
and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 180,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,200,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants; (iv) up to 120,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants or (v) up to 120,000 shares of
Common Stock issuable upon exercise of the Redeemable Warrants included
in the Underwriter's Warrants. Includes (i) 1,200,000 shares of Common
Stock offered hereby and (ii) 180,000 shares of Common Stock issuable
upon the closing of
7
<PAGE>
this Offering in connection with the acquisition of the companies
comprising the Private Label Group. See "Description of Securities,"
"Underwriting" and "Certain Transactions."
(4) Does not include (i) 180,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option or (ii) 120,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants. See
"Underwriting."
(5) The proposed trading symbols do not imply that an active trading market
will develop for the Common Stock or Redeemable Warrants upon the
completion of this Offering or be sustained thereafter, or that the
Company's Securities will be approved for listing on NASDAQ or will
continue to be listed, if approved. See "Risk Factors."
</FN>
</TABLE>
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following sets forth summary financial information regarding Azurel
including the acquisitions of the Private Label Group in August 1996 and Scent
Overnight in October 1996. The pro forma summary financial information includes
adjustments to reflect the acquisitions of the Private Label Group and Scent
Overnight as if the acquisitions had occurred on January 1, 1995.
The summary financial information as of December 31, 1996 and March 31,
1997, and year ended December 31, 1996, for the period June 26, 1995 (inception)
to December 31, 1995 and the three months ended March 31, 1997 and March 31,
1996, has been abstracted from the financial statements of the Company included
elsewhere herein (audited, with the exception of the three months ended March
31, 1997 and 1996, and all of the pro forma information). The interim financial
statements for the three months ended March 31, 1997 and 1996 are unaudited. In
the opinion of management, these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim financial statements. The results of operations for
the interim periods are not necessarily indicative of results that may be
expected for the full year.
<TABLE>
Historical (1) Pro forma (2)
----------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period For the Period
June 26, 1995 June 26, 1995
Year (inception) Year (inception)
Three months ended Ended through Ended through
March 31, December 31, December 31, December 31, December 31,
1997 1996 1996 1995 1996 1995
-------- --------- ---------------- ----------------- ---------------- ------------------
Statement of Operation Data:
(Dollars and outstanding shares in thousands, except per share data)
Net Sales................. $2,733 $ - $ 3,745 $ - $ 10,196 $ 8,413
Cost of goods sold........ 2,108 - 2,871 - 7,679 6,628
Net Income (Loss)......... (465) (534) (1,373) (288) (1,769) (1,183)
Net Income (Loss)
per share................. (0.12) (0.21) (0.42) (0.20) (0.54) (0.83)
Number of Shares
used in
Computation............... 3,878 2,486 3,288 1,426 3,288 1,426
</TABLE>
Balance Sheet Data:
<TABLE>
<S> <C> <C>
December 31, 1996 March 31, 1997
---------------------- ------------------
Actual Actual
---------------------- -------------------
Current Assets........ $ 3,623 $ 3,851
Total Assets.......... 7,644 7,808
Current Liabilities... 4,162 6,516
Long term debt........ 3,209 1,485
Stockholders'
Equity(Deficiency).... 273 (193)
Working Capital
(Deficit)............. (539) (2,665)
Accumulated Deficit... (2,111) (2,576)
<FN>
(1) Includes the results of operations of the Private Label Group from August
22, 1996, the date of acquisition.
(2) See "Notes To Unaudited Pro Forma Financial Statements" for description of
pro forma adjustments.
</FN>
</TABLE>
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND SHOULD BE
PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE
COMPANY. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS
PROSPECTUS.
Lack of History Upon Which to Evaluate the Company. Although the
Company was organized in June 1995, it only recently (i) has commenced marketing
certain of its proposed products, (ii) acquired the companies comprising its
Private Label Group and (iii) acquired certain assets related to Scent 123's
operations. The financial statements of the Private Label Group for the years
ended December 31, 1996 and 1995 included elsewhere in this Prospectus reflect
the results of operations under prior management for all of fiscal 1995 and for
eight months of fiscal 1996. Although the President of the Private Label Group
remained with the Company, the financial statements cannot be used by
prospective investors to evaluate the ability of the Company's management to
operate the Company's business. Accordingly, the Company's prospects must be
considered in light of the risks, expenses, problems and difficulties frequently
encountered in the establishment of a new business in an industry characterized
by intense competition and changing consumer preferences, as well as in the
commercialization and marketing of new products. See "Business" and the
financial statements and related notes thereto included elsewhere in this
Prospectus.
Dependence Upon Integration of Acquired Operations; History of Losses;
No Assurance of Profitability. The business of the Private Label Group, acquired
in August 1996, currently represents 100% of the Company's revenues and
approximately 91% of the Company's tangible assets. The success of the Company
substantially depends upon the successful integration of the Private Label Group
into the Company's operations. Moreover, while the Private Label Group has been
in business for more than 49 years, and its current management is remaining with
the Company, it has operated at a loss for the years ended December 31, 1996 and
1995 and for the three months ended March 31, 1997. As of March 31, 1997, the
Company had an accumulated deficit of approximately $2,665,000. There can be no
assurance that the Company will be able to integrate successfully the business
of the Private Label Group into the Company or operate the remainder of the
Company's business profitably. See "Business - The Company" and the financial
statements and the related notes thereto included elsewhere in this Prospectus.
Going Concern Qualification in Certified Public Accountant's Report.
Both Azurel and the Private Label Group incurred significant net losses for each
of the fiscal periods included in this Prospectus and had a working capital
deficiency of approximately $539,000 at March 31, 1997. In connection with
the audit of Azurel's and Private Label Group's respective financial statements
as of December 31, 1995 and Azurel's financial statements as of December 31,
1996, the Company has received a report from its independent certified public
accountants, Feldman Radin & Co., P.C., which includes a going concern
qualification in its opinion. See
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<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes thereto included
elsewhere in this Prospectus.
Possible Need for Additional Financing. The Company expects that cash
flow from operations, together with the net proceeds of this Offering, will fund
its cash requirements for at least 12 months following the consummation of the
Offering. However, additional financing may be required in the event that the
Company incurs operating losses in the future or operations do not generate
sufficient funds. Because there can be no assurance that adequate additional
financing will be available on terms acceptable to the Company, if at all, the
Company may be forced to limit or discontinue its existing or planned
operations. Any future financings that involve the sale of the Company's equity
securities may result in dilution to the then current stockholders. See "Use of
Proceeds."
Possible Inability to Meet Substantial Debt Service. The principal
amount of the Company's indebtedness as of March 31, 1997 was approximately
$4,804,000. Consequently, a significant portion of the Company's cash flow will
be used to pay the principal and interest on such indebtedness. It is unlikely
that the Company can meet its debt service and other cash requirements if the
Private Label Group's operations are not profitable, in which case the Company
may require alternative financing. There can be no assurance that alternative
financing will be available to the Company on acceptable terms, if at all. See
"Certain Transactions."
Secured Loans - Existence of Liens on All of Private Label Group's
Assets and Stock Pledge. All of the Private Label Group's assets have been
pledged to a financing institution to secure certain indebtedness relating to a
financing agreement. The agreement provides for cross corporate guarantees
among the members of the Private Label Group and by the Company. In the event
that the Private Label Group defaults on payment of its obligations, including
the making of required payments of principal and interest, the Private Label
Group's indebtedness could be accelerated and, in certain cases, the Private
Label Group's assets could be subject to foreclosure. Moreover, to the extent
that the Private Label Group's assets continue to be pledged to secure
outstanding indebtedness, such assets will remain unavailable to secure
additional debt financing. Such unavailability may adversely affect the
Company's ability to borrow in the future. In addition, all of the outstanding
capital stock of the entities comprising the Private Label Group has been
pledged to Michael J. Assante, an affiliate of the Company, to secure
indebtedness related to the acquisition of the Private Label Group. In the
event that the Company defaults on payment of its obligations, the pledged
capital stock could be foreclosed, in which case the Company would lose
its ownership of the Private Label Group, which would have a material
adverse effect on the Company. See "Certain Transactions."
Related Party Transactions; Loans Due From Officers. Certain of the
Company's shareholders have been retained by the Company as consultants, and
certain shareholders have made loans to the Company. The shareholders involved
in these transactions have received, or will receive, compensation for services
and for the loans. Gerard Semhon and Constantine Bezas, the Company's President
and a director, owe the Company $120,750 and $15,750, respectively, and $48,130,
joint and severally, representing advances made to them which are to be repaid
immediately following this Offering. See "Certain Transactions" and the
financial statements and the related notes thereto included elsewhere in
this Prospectus.
Proceeds to Repay Indebtedness; Benefit to Related Parties. The Company
will use a portion of the proceeds of the Offering to repay (i) the installments
of principal and interest (estimated at $513,000) due under a purchase money
promissory note payable to Michael J. Assante, the president of the Private
Label Group, (ii) principal and interest (estimated at $239,000) due under a
purchase money promissory note given as part of the purchase price for the
assets of Scent Overnight, a company of which Gerard Semhon, the Company's Chief
Executive Officer and Chairman of the Board, is a principal stockholder and
(iii) approximately $356,000 of accrued expenses, which includes accrued
consulting fees totalling approximately $244,147 as of March 31, 1997,
for consulting services rendered by Gerard Semhon, Constantine Bezas, Truitt
Bell and Van Christakos, all officers and directors of the Company, in the
amounts of approximately $74,389, $57,565, $66,518 and $45,675, respectively.
See "Use of Proceeds" and "Certain Transactions."
Dependence Upon Key Customers. Approximately 22% and 12% of Private
Label Group's revenues for the year ended December 31, 1996 were derived from
two major customers. Approximately 21% and 14% of Private Label Group's revenues
for the year ended December 31, 1995 were derived from the same two major
customers. Approximately 16% and 11% of Private label Group's revenues for the
three months ended March 31, 1997 were derived from the same two major
customers. For these periods, revenues of the Private Label Group represent all
of the Company's revenues. There can be no assurance that these customers will
maintain their volume of business with Private Label Group. A loss of the sales
to either of both of these customers could have a material adverse effect on the
Company's results of operations. See "Business" and the financial statements and
the related notes thereto included elsewhere in this Prospectus.
Sales to Affiliates; Notes Receivable From Affiliate. Michael J.
Assante, President of Private Label Group, is the sole officer, director and
shareholder of The Contemporary Cosmetic Group, Inc. ("Contemporary"). Mr.
Assante is also a principal shareholder of Rubigo Cosmetics, Inc.("Rubigo").
Both Contemporary and Rubigo are customers of Private Label Group and
individually comprise less than 5% of Private Label Group's revenues.
Contemporary is indebted to the Company, as a result of sales by the Private
Label Group, as of March 31, 1997 and December 31, 1996 in the amounts of
$269,279 and $255,279, respectively, which is represented by a non-interest
bearing demand promissory note. In addition, Contemporary utilizes approximately
10,000 square feet at the Facility from the Company on a month-to-month basis
for approximately $6,500 per month. The Company believes that transactions
between the Company and each of Contemporary and Rubigo are on terms no less
favorable than transactions involving unaffiliated third parties. The Company
does not believe that the loss of Contemporary and/or Rubigo as customers would
have a material adverse effect on its business. See "Certain Transactions."
Uncertainty of Market Acceptance of Branded Products; Dependence on
Marketing Efforts. The Company has not yet commenced significant marketing
activities for its Branded Products and has limited financial, personnel and
other resources to undertake marketing such activities. Moreover, the market for
fragrances, cosmetics and beauty products is sensitive to changing consumer
preferences and demand. Achieving successful market acceptance for Branded
Products will require substantial marketing efforts and expenditure of
significant funds to create consumer awareness and demand. Considering the
Company's limited financial resources, it will not be able to utilize various
promotional techniques used by competitors but will be able only to engage in
limited promotional and marketing efforts. There can be no assurance that the
Company will have sufficient funds or other resources to achieve successful
12
<PAGE>
market acceptance of its Branded Products or make sufficient sales to achieve
profitability. See "Business - Products and Services."
Seasonality of Company's Products. The cosmetic and fragrance business
in general is subject to seasonal fluctuations, with net sales in the second
half of the year substantially higher than those in the first half as a result
of increased demand by retailers in the United States in anticipation of and
during the back-to-school, Thanksgiving and Holiday seasons. The Company
anticipates that, although there can be no assurance, the sales of Branded
Products and Distributed Fragrances, will follow the general industry trend. See
"Business - - Seasonality and Backlog."
Dependence Upon License Agreements for Branded Products. The Company's
ability to develop cosmetic, skin care and fragrance lines for other companies
under brand names licensed to the Company is dependent upon the Company's
ability to obtain new licenses and retain its existing license of the Members
Only trade name. The Company's current license of the Members Only trade name
(the "License") expires on September 30, 2001. The Company has a right
to renew for an additional five year term subject to certain conditions,
including the requirement that the Company achieve certain minimum sales of the
Members Only fragrances, grooming products and cosmetics. Under the License,
the Company is obligated to pay minimum annual royalties which begin at
$100,000 for the period ending September 30, 1997 and increase to $375,000 for
the last year of the initial term. In addition, the Company's manufacture,
sale and promotion of Members Only fragrances, grooming products and cosmetics
is subject to the prior review and approval of such products by the owner of
the trade name, which approval is not to be unreasonably withheld. Such approval
has been obtained for the Members Only products now being developed. The
failure to obtain prior approval of future additions to the product line on a
timely basis could have a material adverse effect on the Company's ability to
sell Members Only fragrances, grooming products and cosmetics. In addition,
there can be no assurance that the Company will have the ability to satisfy all
of its obligations under the Members Only license agreement, that such license
agreement will be renewed or result in profitable operations or that the
Company will be able to obtain additional license agreements on favorable
terms, if at all. The failure to retain the Members Only license agreement or
to obtain new license agreements could have a material adverse effect on the
Company's business related to the Branded Products. See "Business - Products
and Services."
Marketing Uncertainties Related to Distributed Fragrances. The
Company's ability to market the Distributed Fragrances will depend upon various
factors, many of which are not within the control of the Company. These factors
include, but are not limited to, (i) consumer acceptance of the Company's
marketing concept for the Distributed Fragrances, (ii) the economic climate,
(iii) government regulations concerning the shipment of fragrances, (iv) the
availability of sources of supply of the fragrances, (v) the successful
performance of the Company's advertising and fulfillment firms engaged to assist
the Company in selling the Distributed Fragrances and (vi) the Company's lack of
experience in telemarketing. See "Business - Products and Services."
Dependence Upon Obtaining Sources of Supply for Distributed Fragrances.
The Company's success in selling the Distributed Fragrances depends upon
obtaining an adequate supply of fragrances in order to maintain an appropriate
inventory, and to ensure that such inventory is readily available to its
customers. The Company does not expect to enter into supply agreements with
fragrance manufacturers; but rather, it expects to purchase fragrances from
manufacturers and others on an "as-needed" basis. There can be no assurance that
the Company will be able to acquire such inventory, in which case the Company's
expansion into this market would be adversely affected. See "Business - Products
and Services."
Vulnerability to Economic Conditions. The Company's future operating
results are dependent upon the economic environments in which it operates.
Demand for the Company's products could be adversely affected by economic
conditions affecting consumer confidence and discretionary spending generally.
The Company expects the demand for its products (and consequently its results of
operations) to continue to be sensitive to economic conditions and other factors
beyond its control.
Competition. All aspects of the cosmetic, fragrance and skin care
industry are subject to intense competition throughout the world. In all
aspects of its business, the Company will compete with numerous companies, many
of which are better known in the industry and have established channels of
distribution and substantially all of which have greater financial and other
resources than the Company. These competitors include Estee Lauder, Revlon,
Avon and Maybelline.
In selling the Branded Products, the Company will compete against
numerous companies, many of which have international reputations and broad
distribution channels in place. To date,
13
<PAGE>
the Company has (i) developed only one line of Branded Products using a trade
name developed by it, (ii) not sold any significant amount of Branded Products
and (iii) entered into only one formal agreement with a third party regarding
the marketing of cosmetics and fragrances under a brand name owned by such
third party. There can be no assurance that the Company will successfully
develop or market any Branded Product.
In the sale of Distributed Fragrances, the Company will compete
directly with other direct marketers of such products, including catalogues,
television shopping stations, companies in the flower and gift by wire
businesses and, to a lesser degree, with retail stores. The Company expects that
its major means of competition will be its convenience and overnight order
fulfillment. The Company's method of selling the Distributed Fragrances is
not proprietary in nature and may be replicated by others. In addition, the
Company's possible lack of exclusivity with suppliers may allow such suppliers
or other third parties to engage in the direct marketing of fragrance brands
including, but not limited to, the fragrance brands offered by the Company.
There can be no assurance that the Company will be successful in selling the
Distributed Fragrances. See "Business - Competition."
Government Regulation. The Company's manufacturing activities and the
Facility are subject to extensive and rigorous governmental regulation
concerning the protection of the environment and the quality of manufacturing.
Federal, state and local regulatory agencies actively enforce these regulations
and conduct periodic inspections to determine compliance with such government
regulations. The Food and Drug Administration (the "FDA") enforces regulations
regarding the quality of manufacturing ("Good Manufacturing Practices" or "GMP")
through periodic surveillances and audits. Failure to comply with applicable
regulatory requirements may result in fines, suspension of approvals, cessation
of distribution, product recalls and criminal prosecution, any of which would
have a material adverse effect on the Company. Changes in existing regulations,
the interpretation thereof, or adoption of new regulations could impose costly
new procedures for compliance, or prevent the Company from obtaining, or affect
the timing of, additional regulatory approvals.
The Federal Trade Commission ("FTC") and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, composition storage, record keeping, approval,
advertising and promotion of the Company's products. In general, products
falling within the FDA's definition of "new drugs" require pre-market approval
by the FDA while products falling within the FDA's definition of "cosmetics" do
not require pre-market approval. In the Company's opinion, the Company's
products, as they are and will be promoted, fall within the FDA's definition of
"cosmetics" and therefore do not require pre-market approval. There can be no
assurance, however, that the FDA will concur in this view. In the event that
the Company fails to comply with applicable regulations with respect to any
products, the Company may be required to change its labeling, formulation or
possibly cease manufacture and marketing of such products.
The FDA may require post-marketing testing and surveillance to monitor
the record of the Company's products and continued compliance with regulatory
requirements. The FDA also may require the submission of any lot of a product
for inspection and may restrict the release of any lot that does not comply
with FDA standards, or may otherwise order the suspension of manufacture, recall
or seizure if non-compliant product is discovered. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of a product are discovered following
approval.
The Company may also be subject to foreign regulatory authorities
governing testing or sales of certain of the Company's products. Whether or
not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities or foreign countries must be obtained in certain cases
prior to the commencement of marketing of the product in those countries.
There can be no assurance that any product developed or marketed by the Company
will be approved by the FDA or any foreign regulatory authority.
The Company's proposed method of distributing the Distributed
Fragrances may include shipment by air transportation. The shipment of
fragrances by air is subject to federal regulation and the rules and regulations
promulgated by the Department of Transportation's (the "DOT") Research & Special
Programs Administration. The DOT considers the shipment of alcohol, a component
in fragrances, to be the transportation of hazardous material. Scent 123
obtained a DOT exemption to transport hazardous material by overnight air
transportation. As long as Scent 123 has the DOT exemption, which is in effect
until November 30, 1997, and may thereafter be renewed upon application to and
approval of the DOT, Scent 123 believes that its shipment of products will be in
compliance with current DOT regulations. Scent 123's loss of the DOT exemption
would have a material adverse effect on these business operations. There can be
no assurance that Scent 123 will retain the DOT exemption or that Scent 123 will
be able to comply with any future DOT regulations.
The Company's sale of Distributed Fragrances is intended to utilize
toll-free telephone services. Toll-free telephone service is provided to users
by federally regulated common carrier
14
<PAGE>
telephone companies. The rates, terms and technical quality of this service are
subject to regulations promulgated by the Federal Communications Commission (the
"FCC") and tariffs published by the telecommunications service provider. Except
for the sending of indecent, harassing or obscene messages or material, the
interstate sale of services or products by users of a toll-free telephone number
is not subject to direct federal regulation under the Communications Act of
1934. Fraudulent telephone messages are subject to criminal penalties under
federal and state laws. The Company does not believe that FCC regulations will
affect the proposed sale of Distributed Fragrances, but such regulations could
affect the price, terms, quality and availability of the toll-free telephone
services and may have a material adverse effect on the Company's sale of
Distributed Fragrances.
Potential Liability for Possible Violation of Section 5 of the
Securities Act: Integration of 1997 Bridge Financings with this Offering. In
January 1997, the Company completed a $200,000 private placement of eight units
each consisting of a $25,000 10% promissory note and a warrant to purchase
25,000 shares of Common Stock to three accredited investors and in April 1997
completed a $350,000 private placement of 14 units consisting of the same
securities to seven accredited investors. The Company believes that these
financings were exempt from registration under Regulation D of the Securities
Act of 1933 (the "Securities Act"). The Securities and Exchange Commission (the
"SEC") has indicated to the Company that it believes these financings should be
deemed to be integrated with the Offering with the result that these financings
would not have complied with Regulation D of the Securities Act giving rise,
among other things, to the investors having a rights of rescission. The Company
disagrees with the SEC's conclusion, but if the SEC's position were proven to be
correct the Company may be subject to potential liability in connection with the
1997 Bridge Financings.
Conflict of Interest in Acquisition of Assets of Scent Overnight, Inc.;
No Independent Appraisal of Value. The Company's Scent 123 subsidiary acquired
certain intangible assets from a company controlled by Gerard Semhon, the
Company's Chief Executive Officer and Chairman of the Board. The purchase price
was arbitrarily determined between affiliates and was not determined by an
independent appraisal of the assets. The purchase price was not based upon any
recognized criteria of value and may have exceeded the fair market value of the
assets acquired. See "Certain Transactions."
Dependence on Key Employees. The Company is dependent upon the
experience and abilities of its management, particularly, Gerard Semhon, Chief
Executive Officer and Chairman of the Board, Constantine Bezas, President, and
Michael J. Assante, President and Chief Executive Officer of the Private Label
Group. While the Company has entered into employment agreements only with
Messrs. Semhon and Assante, the loss of the services of any of these or other
key employees would have a material adverse effect on the business, operations
and prospects of the Company. The Company currently has no key-person life
insurance on any of these individuals. See "Business - Management."
Influence of Principal Stockholder; Lack of Control by Management and
Lack of Independent Directors. Upon completion of the Offering Tusany Investment
and Trade, S.A. ("Tusany") will own approximately 29.6% of the outstanding
shares of Common Stock. Although Tusany will not control a majority of the
shares of Common Stock of the Company, it may be able to influence the decisions
on certain matters, including the election of all of the Company's directors,
increasing the authorized capital stock, dissolution, merger or sale of the
assets of the Company, and generally may be able to direct the affairs of the
Company. The management of the Company does not hold a majority of the voting
power in the Company, and upon completion of the Offering will own approximately
18.3% of the outstanding shares of Common Stock. As a result, the Company's
current management neither has control of any issue subject to a stockholder
vote nor the ability to control the election of the Board of Directors. As a
result, there can be no assurance that the Company's current management will be
retained by the Board of Directors. In addition, all current members of the
Company's Board of Directors are employed by the Company and, as such, there are
no current members of the Company's Board of Directors who are not affiliated or
associated with the Company and who are independent of the Company. All
decisions affecting the day-to-day operations of the Company will be made by a
board of Directors, the members of which are not independent of the Company. See
"Principal Stockholders" and "Management."
Immediate Substantial Dilution. The Company's present stockholders
acquired their shares of Common Stock at costs substantially below the
anticipated offering price of the Common Stock to be sold in this Offering.
Therefore, upon the completion of this Offering, investors will incur immediate
and substantial dilution in the per share net tangible book value of their
Common Stock, estimated to be approximately $4.32 per share or approximately
96.0% of the public offering price per share (allocating no value to the
Redeemable Warrants). See "Dilution."
15
<PAGE>
No Dividends and None Anticipated. The Company has neither declared nor
paid any cash dividends on its Common Stock since its incorporation in June
1995, and the Board of Directors does not contemplate the payment of such
dividends in the foreseeable future. Any decisions regarding the payment of
dividends will depend on the Company's earnings, financial position and such
other factors as the Board of Directors deems relevant. In addition, certain
financing agreements and other documents executed in connection with the
acquisition of the Private Label Group prohibit the payment of dividends so long
as certain indebtedness is outstanding. See "Dividend Policy" and "Description
of Securities - Common Stock."
Limitation on Directors' Liabilities under Delaware Law and Board
Indemnification. Pursuant to Delaware Law and the Company's Certificate of
Incorporation, directors of the Company are not liable for monetary damages for
breach of fiduciary duty, except in connection with the following: (i) a breach
of duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) dividend payment or
stock repurchases illegal under Delaware law or (iv) any transaction from which
a director has derived an improper personal benefit. In addition, the Company's
By-laws require the Company to indemnify its officers, directors,and employees
under certain circumstances, including those under which indemnification
would otherwise be discretionary, and to advance expenses in proceedings in
which they could be indemnified. See "Management - Limitation on Directors' or
Officers' Liabilities and Indemnifications."
Offering Price Arbitrarily Determined. The offering price of the
Securities has been determined by negotiation between the Company and the
Underwriter and is not necessarily related to the Company's assets, earnings,
book value or any other objective standard of value.
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of 1,000,000
shares of "blank check" preferred stock, par value $.001 with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. See "Description of Securities - Preferred Stock."
Shares Eligible for Future Sale; Potential Adverse Impact of Concurrent
Offering by Selling Securityholders. Concurrently with this Offering, the
Company is registering for sale an aggregate of 905,500 Selling Securityholders'
Warrants and 905,500 Selling Securityholders' Warrant Shares. The Selling
Securityholders have entered into agreements with the Underwriter not to sell
their Redeemable Warrants or Warrant Shares for a period of three months,
following the completion of the Offering, without the prior written consent of
the Underwriter, which may be granted or withheld in the Underwriter's
discretion. See "Underwriting."
The Company currently has 3,878,747 shares of Common Stock outstanding
that are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. As of April 29, 1997, 1,560,358 shares of
Common Stock were become eligible for sale under Rule 144. In general, under
Rule 144, a person who has satisfied a one-year holding period may, under
certain circumstances, sell within any three month period a number of shares of
Common Stock that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly trading volume in such shares
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity or other
limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. All holders of restricted securities of the
Company have agreed not to publicly sell shares of the Company's Common Stock
for a period of between one and two years from the date of this Prospectus
without the prior written consent of the Underwriter. Any substantial sale of
securities upon the expiration or earlier release of the lock-up, under Rule 144
or otherwise could have a significant adverse effect on the market price of the
Company's securities. See "Shares Eligible for Future Sale."
Effect of Issuance of Common Stock Upon Exercise of Warrants and
Options; Possible Issuance of Additional Common Stock and Options. Immediately
after the Offering, assuming the Underwriter's Over- Allotment Option is not
exercised, the Company will have an aggregate of 16,815,753 shares of Common
Stock authorized but unissued and not reserved for specific purposes and an
additional 1,775,500 shares of Common Stock unissued but reserved for issuance
pursuant to (i) the Company's 1997 Stock Option Plan, (ii) outstanding options
and warrants, (iii) exercise of the Redeemable Warrants, (v) exercise of the
Over-Allotment Option and the Redeemable Warrants underlying the Over-Allotment
Option and (v) exercise of the Underwriter's Warrants and the Redeemable
Warrants included therein. All of such shares may be issued without any action
or approval of the Company's stockholders. Although there are no present plans,
agreements, commitments or undertakings with respect to the issuance of
additional shares or securities convertible into any such shares by the Company,
any shares issued would further dilute the percentage ownership of the Company
held by the public stockholders. The Company has agreed with the Underwriter
that, except for the issuances disclosed in or contemplated by this Prospectus
and issuances in connection with any merger or acquisition of another entity by
the Company, it will not issue any securities, without the Underwriter's
consent, including but not limited to any shares of Common Stock, for a period
of 24 months following the Effective Date, without the prior written consent of
the Underwriter. See "Underwriting."
The exercise of warrants or options and the sale of the underlying
shares of Common Stock (or even the potential of such exercise or sale) may have
a depressive effect on the market price of the Company's securities. Moreover,
the terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of outstanding warrants and
options can be expected to exercise them, to the extent they are able, at a time
when the Company would, in all likelihood, be able to obtain any needed capital
on terms more favorable to the Company than those provided in the warrants and
options. See "Management - Stock Option Plan," "Description of Securities" and
"Underwriting."
16
<PAGE>
No Assurance of Public Market; Volatility of Stock Price. Prior to this
Offering there has been no market for any of the Securities. There can be no
assurance that a trading market will develop after this Offering for the
Securities or that, if developed, it will be sustained. The stock market has,
from time to time, experienced significant price and volume fluctuations that
may be unrelated to the operating performance of any particular company. Various
factors and events, including future announcements of new products by the
Company or its competitors, among other things, developments or disputes
concerning proprietary rights, government regulations in the United States, and
general economic and other external factors, as well as fluctuations in the
Company's financial results, could have a significant impact on the market price
of the Securities.
NASDAQ Eligibility and Maintenance Requirements; Possible Delisting of
Securities. The Company has applied for listing of the Securities on NASDAQ. The
Securities and Exchange Commission (the "Commission") has approved rules
imposing listing criteria for securities on NASDAQ, including maintenance
standards. In order to qualify for initial quotation of securities on NASDAQ, a
company, among other things, must have at least $4,000,000 in total assets,
$2,000,000 in stockholders' equity, $1,000,000 in market value of the public
float and minimum bid price of $3.00 per share. To maintain NASDAQ listing, a
company, among other things, must have at least $2,000,000 in assets and
$1,000,000 in capital and surplus and its stock must have a minimum bid price of
$1.00; provided, however, that a company shall not be required to maintain the
$1.00 per share minimum bid price if it maintains a public float of $1,000,000
and $2,000,000 in capital and surplus. NASDAQ has recently proposed revisions to
its listing and maintenance criteria which if adopted would make it more
difficult for a company to qualify for initial listing and to thereafter
maintain its listing. The proposed new listing criteria, in so far as they would
be applicable to the Company, require a company to have net tangible assets of
$4,000,000, a public float of 1,00,000 shares, a market value of the public
float of not less than $5,000,000 and a minimum bid price of $4.00. The proposed
new maintenance criteria require, among other alternatives, net tangible assets
of $2,000,000, a public float of 500,000shares, a market value of the public
float of not less than $1,000,000 and a minimum bid price of $1.00. NASDAQ has
indicated that for companies, like the Company, who are first listed after June
2, 1997 but before the proposed rules are adopted and become effective, such
companies will be listed under the existing listing criteria but will have to
satisfy the new listing criteria within a period of 90 days after the new
listing criteria become effective.
The Company cannot now satisfy the new listing criteria. The Company
intends to obtain an appraisal of the assets it acquired from the companies
comprising the Private Label Group, to allocate the purchase price for such
assets to the fair market value of the assets as shown on such appraisal (a
substantial portion of the purchase price having been allocated to goodwill
because of the absence of such appraisal) and to restate its financial
statements so as to reflect such re-allocation. The Company believes that as a
result of such appraisal and restatement it will be able to satisfy the new
listing criteria when they become effective; however there can be assurance that
such actions will in fact result in the Company satisfying the new listing
criteria. Should the Company not satisfy the new listing criteria when required
to do so, or should it be unable to satisfy the NASDAQ maintenance criteria for
listing, its Securities may be delisted from NASDAQ. In such event, trading, if
any, of the Securities would thereafter be conducted in the over-the-counter
market, the so-called "pink sheets," or the National Association of Securities
Dealers, Inc.'s (the "NASD") "Electronic Bulletin Board." As a consequence of
such delisting, an investor would likely find it more difficult to dispose of,
or to obtain quotations as to, the price of the Securities.
Penny Stock Regulation. In the event that the Company is unable to
satisfy NASDAQ's initial listing or maintenance criteria requirements, trading
of the Securities would be conducted in the "pink sheets" or the NASD's
Electronic Bulletin Board. In the absence of the Common Stock being quoted on
NASDAQ at a market price of at least $5.00 per share or certain other
exemptions, trading of the Common Stock would be covered by Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), for non-NASDAQ and non-exchange listed securities. Under such rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale.
The Commission has adopted regulations that generally define a "penny
stock" to be an equity security that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share subject to certain
exceptions. Such exceptions include equity securities listed on NASDAQ and
equity securities issued by an issuer that has (i) net tangible assets in excess
of $2,000,000, if such issuer has been in continuous operation for at least
three years, or
17
<PAGE>
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average revenue of at
least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk disclosure schedule explaining the penny
stock market and the risks associated therewith.
If the Securities were to become subject to the regulations applicable
to penny stocks, the market liquidity for the Securities would be severely
affected, limiting the ability of broker-dealers to sell the securities and the
ability of purchasers in this Offering to sell their Securities in the secondary
market. There is no assurance that trading in the Securities will not be subject
to these or other regulations that would adversely affect the market for such
securities.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants offered hereby are redeemable, in whole or in part, at a
price of $.10 per Redeemable Warrant (the "Redemption Price"), commencing one
year after the date of this Prospectus and prior to their expiration on the
fifth anniversary of the date of this Prospectus provided that (i) prior notice
of not less than 30 days is given to the Warrantholders, (ii) the closing bid
price of the Company's Common Stock shall have exceeded $__ per share [150% of
Exercise Price] for a period not less than 20 trading days in any 30 day trading
period ending not more than 15 days prior to the date on which the notice of
redemption is given. Warrantholders shall have exercise rights until the close
of the business day preceding the date fixed for redemption. Notice of
redemption of the Redeemable Warrants could force the holders to exercise the
Redeemable Warrants and pay the Exercise Price at a time when it may be
disadvantageous for them to do so, or to sell the Redeemable Warrants at the
current market price when they might otherwise wish to hold them, or to accept
the Redemption Price, which may be substantially less than the market value of
the Redeemable Warrants at the time of redemption. The Redeemable Warrants may
not be exercised unless the registration statement pursuant to the Securities
Act, covering the underlying shares of Common Stock is current and such shares
have been qualified for sale, or there is an exemption from applicable
qualification requirements, under the securities laws of the state of residence
of the Warrantholder. Although the Company does not presently intend to do so,
the Company reserves the right to call the Redeemable Warrants for redemption
whether or not a current prospectus is in effect or such underlying shares are
not, or cannot be, registered in the applicable states. Such restrictions could
have the effect of preventing certain Warrantholders from liquidating their
Redeemable Warrants. See "Description of Securities - Redeemable Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. Warrantholders have the right to exercise the Redeemable
Warrants for the purchase of shares of Common Stock only if a current prospectus
which will permit the purchase and sale of the Common Stock underlying the
Redeemable Warrants is then effective, but there can be no assurance that the
Company will be able to keep effective such a Prospectus. Although the Company
intends to seek to qualify for sale the shares of Common Stock underlying the
Redeemable Warrants in those states in which the Securities are to be offered,
no assurance can be given that
18
<PAGE>
such qualification will occur. In addition, purchasers may buy Redeemable
Warrants in the aftermarket or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Redeemable Warrants are not so
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company would be unable to issue shares of
Common Stock to those persons desiring to exercise their Redeemable Warrants
unless and until the shares of Common Stock could be registered or qualified for
sale in the jurisdictions in which such purchasers reside, or an exemption to
such qualification exists or is granted in such jurisdiction. The Redeemable
Warrants may lose or be of no value if a prospectus covering the shares of
Common Stock issuable upon the exercise thereof is not kept current or if such
underlying shares of Common Stock are not, or cannot be, registered in the
applicable states. See "Description of Securities - Redeemable Warrants."
Relationship of Underwriter to Trading. The Underwriter may act as a
broker or dealer with respect to the purchase or sale of the Common Stock and
the Redeemable Warrants in the over-the-counter market where each is expected to
trade. The Underwriter also has the right to act as the Company's exclusive
agent in connection with any future solicitation of Warrantholders to exercise
their Redeemable Warrants. Regulation M, which was recently adopted to replace
Rule 10b-6, under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), may prohibit the Underwriter from engaging in any market-making
activities with regard to the Company's securities for a period of up to five
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, the
Underwriter and any solicitating broker/dealer may be unable to provide a market
for the Company's securities during certain periods while the Redeemable
Warrants are exercisable. Any temporary cessation of such market-making
activities could have an adverse effect on the market price of the Company's
securities.
Underwriter's Warrants and Registration Rights. In connection with this
Offering, the Company has agreed to sell to the Underwriter, for nominal
consideration, the Underwriter's Warrants which entitle the Underwriter to
purchase up to 120,000 shares of Common Stock and/or 120,000 Redeemable
Warrants. The securities issuable upon exercise of the Underwriter's Warrants
are identical to those offered pursuant to this Prospectus. The Underwriter's
Warrants are exercisable at a price of $___ per share and $___ per Redeemable
Warrant [150% of initial public offering price of Common Stock and Redeemable
Warrants] for a period of four years commencing one year from the date of this
Prospectus. The exercise of the Underwriter's Warrants and the Redeemable
Warrants contained in the Underwriter's Warrants may (i) dilute the value of the
shares of Common Stock to be acquired by holders of the Redeemable Warrants,
(ii) adversely affect the Company's ability to obtain equity capital and (iii)
adversely affect the market price of the Common Stock if the Common Stock
issuable upon the exercise of the Underwriter's Warrants and the Redeemable
Warrants contained in the Underwriter's Warrants are sold in the public market.
The Underwriter has been granted certain "piggyback" and demand registration
rights for a period of five years from the date of this Prospectus with respect
to the registration under the Securities Act of the securities directly
19
<PAGE>
or indirectly issuable upon exercise of the Underwriter's Warrants. The
exercise of such rights could result in substantial expense to the Company.
See "Underwriting."
20
<PAGE>
DILUTION
At March 31, 1997 the Company had a net tangible book value (deficit)
of approximately ($3,562,000) or ($.92) per share.
The net tangible book value subsequent to March 31, 1997 which gives
effect to the Common Stock and Redeemable Warrants offered hereby (not including
the Over-Allotment Option) and the receipt of the net proceeds therefrom, would
have been $945,000 or $.18 per share. This represents an immediate increase in
net tangible book value of $1.10 per share to existing stockholders, which is
due solely to the purchase of Common Stock by investors in this Offering, and an
immediate dilution of $4.32 per share to new investors (based on an assumed
price of $4.50 per share with no value attributable to the warrants). "Dilution"
is the difference between the assumed initial public offering price and the as
adjusted net tangible book value per share.
The following table illustrates the per share dilution to the new
investors as of March 31, 1997:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock........ $4.50
Deficit pro forma net tangible book value per share
before the Offering.................................... (0.92)
Increase attributable to new investors................. 1.10
-------
Pro forma net tangible book value per share after the
Offering............................................... 0.18
-----
Dilution to new investors.............................. $4.32
======
</TABLE>
The above table assumes no exercise or conversion of
outstanding options, warrants and debt. See "Risk Factors," "Certain
Transactions" and "Underwriting."
The following table summarizes the differences between the
existing stockholders and new investors with respect to the number of
shares of Common Stock purchased from the Company, and the total
consideration and the average price per share paid:
<TABLE>
<S> <C> <C> <C> <C> <C>
Percentage
of Average
Outstanding Percent of Price per
Shares of Shares of Total Total Share of
Common Common Consideration Consideration Common
Stock Stock Paid Paid Stock
----- ----- ---- ---- -----
Existing
Stockholders.... 4,058,747 (1) 77.2% $1,500,000 21.7% $0.37
New Investors... 1,200,000 22.8% 5,400,000 78.3% $4.50
------------- --------------- -------------- -------------
5,258,747 (2) 100.0% $6,900,000 100.0%
============= =============== ============== =============
<FN>
(1) Includes 180,000 shares to be issued to certain individuals on the
date of this Prospectus in connection with the purchase of the four
companies that comprise the Private Label Group. See "Certain
Transactions."
(2) Does not include: (i) 1,200,000 shares of Common Stock issuable upon
exercise of the Warrants
<PAGE>
offered hereby; (ii) up to an additional 360,000 shares of Common Stock
issuable upon exercise of the Underwriter's Over-Allotment Option and
the underlying Redeemable Warrants; (iii) 240,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants and the
Redeemable Warrants included therein; (iv) 750,000 shares of Common
Stock issuable upon exercise of options available for grant under the
1997 Stock Option Plan; (v) 325,500 shares of Common Stock reserved for
issuance pursuant to options and warrants issued in connection with
financing and consulting agreements; and (vi) 850,000 shares reserved
for issuance pursuant to warrants from private placements.
</FN>
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31,1997; and (ii) such capitalization "As Adjusted" to reflect the
issuance and sale of the Common Stock and Redeemable Warrants offered hereby,
the receipt of the net proceeds of the Offering, approximately $4,387,600 and
transactions subsequent to March 31, 1997 that have a material impact on the
financial statements. See "Notes to Unaudited Pro Forma Financial Statements"
and "Use Of Proceeds."
<TABLE>
<S> <C> <C>
Historical As Adjusted (1)(2)(3)
(In thousands) (In thousands)
Current maturities of long term debt......... $ 3,668 $ 2,189
-------- -------
Long-term debt, less current portion......... 1,485 1,485
--------- -------
Stockholders' Equity:
Common Stock, $.001 par value, authorized
24,000,000 shares; 3,878,747 issued
and outstanding; 5,258,747 shares issued and
outstanding as adjusted........................ 4 5
Preferred Stock, $.001 par value, authorized
1,000,000 shares; 0 issued and
outstanding; 0 issued and outstanding
as adjusted............................ - -
Additional paid-in capital............. 2,382 7,533
Accumulated deficit..................... (2,576) (2,688)
--------- ---------
(190) 4,850
Less: stock subscriptions receivable.... (2) (2)
-------- ---------
Total Stockholders' Equity.............. (192) 4,848
---------- ----------
Total Capitalization.................... $ 4,961 $ 8,522
======== =========
<FN>
(1) Does not include: (i) 1,200,000 shares of Common Stock issuable upon
exercise of the Warrants offered hereby; (ii) up to an additional
360,000 shares of Common Stock issuable upon exercise of the
Underwriter's Over-Allotment Option and the underlying Redeemable
Warrants; (iii) 240,000 shares of Common Stock issuable upon exercise
of the Underwriter's Warrants and the Redeemable Warrants included
therein; (iv) 750,000 shares of Common Stock issuable upon exercise of
options available for grant under the 1997 Option Plan; (v) 325,500
shares of Common Stock reserved for issuance pursuant to options and
warrants issued in connection with financing and consulting agreements;
and (vi) 850,000 shares reserved for issuance pursuant to warrants from
private placements.
(2) Reflects the issuance of 180,000 shares of the Company's Common Stock
valued at $765,000 as additional consideration for the acquisition of the
Private Label Group. See "Certain Transactions."
(3) Reflects payment of the following notes: (i) first and
second installments of $377,343 on notes from the Private Label Group
acquisition plus interest; (ii) principal and interest due under
promissory note of $225,000; (iii) principal and interest due under
promissory notes aggregating $300,000; (iv) interest due
<PAGE>
under note assumption of $210,000; (v) remaining principal and interest
due under promissory note of $26,175; (vi) principal and interest due
under promissory notes aggregating $200,000; and (vii) principal and
interest due under promissory note aggregating $350,000. Also reflects
$112,000 of additional interest expense projected to accrue through the
anticipated repayment date. See "Certain Transactions."
</FN>
</TABLE>
<PAGE>
USE OF PROCEEDS
Assuming the sale of the securities offered hereby (based on an assumed
offering price of $4.50 per share of Common Stock and $.10 per Redeemable
Warrant), the net proceeds to the Company, after deducting estimated
underwriting discounts and commissions and expenses payable by the Company in
connection with the Offering are estimated to be approximately $4,387,600
(5,108,000 if the Underwriter's Over-Allotment Option is exercised in full).
The Company expects to use the net proceeds as follows:
<TABLE>
<S> <C> <C>
Percentage of
Purpose Amount Net Proceeds
- ------- ------- ------------
Repayment of outstanding accrued
expenses and indebtedness(1) $2,040,500 46.5%
Marketing (2) $ 800,000 18.2%
Inventory (3) $1,000,000 22.8%
Equipment (4) $ 450,000 10.3%
Working Capital and General Corporate Purposes $ 97,100 2.2%
---------- -----
Total . . . . . . . . . . . . . $4,387,600 100%
========== =====
<FN>
(1) Represents (i) installments of principal and interest (estimated at
$513,000) due on the earlier of the date on which this Offering is
consummated or July 15, 1997, under purchase money promissory notes
payable to Michael J. Assante and Louis DiVita, for the
purchase of the companies comprising the Private Label Group, which
notes bear interest at 9% per annum and are due in installments through
October 2000; (ii) principal and interest (estimated at $239,000) due
under a purchase money promissory note given as part of the purchase
price for the assets of Scent Overnight a company of which Gerard
Semhon is a principal shareholder, which note bears interest at 9% per
annum and is due ten days after the date of this Prospectus; (iii) the
payment of interest due on a promissory note assumed by the Company in
connection with the acquisition of Scent Overnight (estimated at
$34,000); (iv) the payment of principal and interest (estimated at
$892,000) due under promissory notes aggregating $850,000 which were
issued in private placements which notes are due upon the earlier of
twelve months after the date of issuance or the date on which this
Offering is consummated and bear interest at the rate of 10% per annum;
(v) approximately $356,000 of accrued expenses and consulting fees,
which includes accrued consulting fees totalling approximately
$244,147 as of March 31, 1997, for consulting services rendered by
Messrs. Semhon, Bezas, Bell and Christakos in the amounts of
approximately $74,389, $57,565, $66,518, and $45,675, respectively
and (vi) the payment of $40,500 of principal and interest due under a
promissory note issued to Mr. Robert E. Lee, a principal stockholder of
the Company. See "Certain Transactions", "Management" and "Principal
Stockholders."
(2) Represents a portion of anticipated costs associated with marketing
and selling the Branded Products and the Distributed Fragrances,
including salaries, advertising, production and media costs.
25
<PAGE>
(3) Includes purchase of inventory for the sale of the Branded Products
and Distributed Fragrances.
(4) Includes purchase of production equipment for the Facility.
</FN>
</TABLE>
The Company has not determined the specific allocation of the net
proceeds within each of the various uses described above. Specific allocations
of such net proceeds will ultimately depend on the development and consumer
acceptance of the Company's products. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that the
net proceeds of the Offering, together with cash flow from operations, will be
sufficient to satisfy the Company's anticipated cash requirements for the
12 months following the date of the Prospectus. During this period, the
Company's efforts will be directed at developing and implementing its
proposed business operations.
Prior to expenditure, the net proceeds of this Offering will be
invested in principally short-term money-market instruments. Any proceeds
received upon exercise of the Over-Allotment Option or exercise of outstanding
options and warrants will be used for working capital. Additional capital may
be required to finance the costs of implementing the Company's business plans.
26
<PAGE>
DIVIDEND POLICY
The Company has neither declared nor paid any dividends to its
stockholders since its inception and has no intention of declaring or paying any
dividends to its stockholders in the foreseeable future. See Risk Factors -
No Dividends and None Anticipated."
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AZUREL LTD. AND SUBSIDIARIES (the Private Label Group and Scent Overnight)
Forward-Looking Statements
When used in the Registration statement and in future filings by the
Company with the Securities and Exchange commission, the words or phrases "will
likely result" and "the company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "foward-looking statements" within the meaning of the Private
Securities Litigation reform act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, each of
which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking sttements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
General
Azurel, through its wholly-owned subsidiaries, manufactures, markets
and sells private label cosmetics, fragrances and skincare products. Prior to
the completion of the acquisitions of the subsidiaries, Azurel focused its
operations on negotiating and consummating such acquisitions and developing and
implementing marketing strategies for its Branded Products.
In August 1996, Azurel acquired the stock of the Private Label Group,
and in October 1996, Azurel acquired the stock of Scent Overnight.
The following discussion and analysis should be read together with the
financial statements and notes for Azurel and Private Label Group included
herein.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items included in the pro forma
statements of operations:
<TABLE>
<S> <C> <C> <C> <C>
Historical
----------------------------------------------------------------------------------
Three months ended March 31, Year ended December 31,
-------------------------------------- --------------------------------------
1997 1996 1996 1995
--------------- ---------------- ----------------- ---------------
(Dollars in thousands)
--------------- ---------------- ----------------- ---------------
Net sales.................... $ 2,733 $ - $ 3,745 $ -
Cost of goods sold........... 2,107 - 2,871 -
--------------- ---------------- ----------------- ---------------
Gross profit................. 626 - 874 -
Selling, general and
administrative expenses..... 919 261 1,590 260
Amortization expense........ 41 - 62 -
--------------- ---------------- ----------------- ---------------
Operating (loss)............ (334) (261) (778) (260)
Interest expense............ 131 273 595 28
--------------- ---------------- ----------------- ---------------
Net (loss).................. $ (465) $ (534) $ (1,373) $ (288)
=============== ================ ================= ===============
</TABLE>
Historical three months ended March 31, 1997 (the "1997 Interim
Period") and year ended December 31, 1996 (the "1996 Period") compared to the
Historical three months ended March 31, 1996 (the "1996 Interim Period") and
year ended December 31, 1995 (the "1995 Period")
Net sales for the three months ended March 31, 1997 increased by
$2,733182, or approximately 100%, from the comparable period of the 1996 Interim
Period. The overall increase resulted from the acquisition of Private Label
Group on August 22, 1996.
Net sales for the year ended December 31, 1996 increased by $3,745,336,
or approximately 100%, from the 1995 Period. The increase resulted entirely from
the acquisition of Private Label Group on August 22, 1996. The increase is the
attributable to the net sales of Private Label Group for the period August 22,
1996 to December 31, 1996.
Cost of goods sold for the 1997 Interim Period were $2,107,510, or
77.1% of net sales, as compared to no cost of goods sold for the 1996 Interim
Period. The overall increase resulted from the acquisition of Private Label
Group on August 22, 1996.
Cost of goods sold for the 1996 Period were $2,870,888, or 76.7% of net
sales, as compared to no cost of goods sold for the 1995 Period. The increase
resulted entirely from the acquisition of Private Label Group on August 22, 1996
with Private label Group having cost of goods sold for the period August 22,
1996 to December 31, 1996 of approximately $2,870,888.
Selling, general and administrative expenses for the 1997 Interim
Period were $959,268 as compared to $261,231 for the comparable 1996 Interim
Period, representing an increase of $698,397. As a percentage of net sales,
these expenses increased from 0% in the 1996 Interim Period to 33.6% in the 1997
Interim Period. The overall increase resulted from the acquisition of Private
Label Group on August 22, 1996.
Selling, general and administrative expenses for the 1996 Period were
$1,590,248 as compared to $259,637 for the comparable 1995 Period, representing
an increase of $1,330,611. As a percentage of net sales, these expenses
increased from 0% in the 1995 Period to 42.4% in the 1996 Period. The increase
resulted from the acquisition of Private Label Group on August 22, 1996, and the
results of Private Label Group operations for the period August 22, 1996 to
December 31, 1996 and increase in consulting fees, office salaries, professional
fees, advertising and royalty expenses. Consulting fees for the 1996 Period were
$407,803 as compared to $143,288, representing an increase of $264,515.
Consulting fees relate to services provided to the Company regarding the
development of its product lines. Office salaries and professional fees
increased in the 1996 Period by approximately $95,000 and $160,000, respectively
as compared to the 1995 Period. Royalty expense and advertising expenses
increased in the 1996 Period by approximately $125,000 as compared to the 1995
Period. Such expenses increased in the relevant time periods as a result of
increased activity in the development of product and marketing strategies.
Interest expense decreased from $272,520 in the 1996 Interim Period to
$131,189 in the 1997 Interim Period. The 1996 Interim Period included a $125,000
of debt discount relating to bridge financings.
Interest expense increased from $28,369 in the 1995 Period to $595,129
in the 1996 Period. The increase is attributable to borrowings under the Private
Label Group's revolving credit facility and increased borrowings outstanding for
a greater portion of the 1996 Period compared to the 1995 Period and to an
increase in amortization in
<PAGE>
the 1996 Period of debt discounts of $335,420 compared to $10,810 in the 1995
Period.
Liquidity and Capital Resources
From inception to date, Azurel's operations have been funded by a
combination of debt and equity financings. Azurel borrowed an aggregate of
$460,000 in the 1996 Interim Period and repaid an aggregate of $100,000 of such
borrowings in that period (The various obligations are more fully described in
the notes to the financial statements). In the 1997 Interim Period, Azurel
borrowed an additional aggregate amount of $424,000 from various lenders and
repaid $48,304 of borrowings in that same period. In addition, Azurel sold
750,000 shares of Common Stock at $2.00 per share from February through July
1996. In the 1996 Interim Period, Azurel had net proceeds of $596,525 from these
sales.
Azurel borrowed an aggregate of $528,750 in the 1995 Period and repaid
an aggregate of $28,750 of such borrowings in that period (The various
obligations are more fully described in the notes to the financial statements).
In the 1996 Period, Azurel borrowed an additional aggregate amount of $1,037,827
from various lenders and repaid $626,149 of borrowings in that same period.
Azurel offered certain holders of outstanding promissory notes the right to
convert their debt into shares of common stock at $2.00 per share. In July and
October 1996, lenders with obligations totaling $667,494 (including principal
and interest) elected to convert such loans into 438,747 shares of Common Stock.
Azurel sold 750,000 shares of Common Stock at $2.00 per share from February
through July 1996.
In the 1996 Period, Azurel had net proceeds of $1,283,900 from these sales.
Proceeds of the aforementioned financings were utilized from inception
to date to (i) finance operations (approximately $945,000), (ii) advance funds
to the Private Label Group ($675,600), (iii) fund increases to deferred
financing costs, furniture and equipment and deferred registration costs
($375,000), (iv) fund advances to certain stockholders ($184,000), and (v) fund
the acquisition of the Private Label Group ($665,000).
Going Concern
Azurel's financial statements have been presented on a basis that it is
a going concern. Due to significant losses incurred in the 1995 and 1996
Periods, the accountants report has an explanatory paragraph stating that the
Azurel's continued existence is dependent upon its ability to become profitable
and obtain additional equity and/or debt financing of which no assurance can be
given.
Azurel plans to raise additional equity through the sale of securities
in an initial public offering. The Company believes the net proceeds from the
public offering will provide sufficient working capital for the next twelve
months. In addition, the Company plans to achieve profitable operations by
increasing revenues from the acquisition of the Private Label Group, the
acquisition of Scent Overnight and the launching of new product lines. The
Company also plans to reduce the cost of goods sold by the upgrading of
equipment, reducing costs and initiating better controls over inventory.
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BUSINESS
This discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include those discussed in "Risk Factors."
General
The Company directly and through wholly-owned subsidiaries,
manufactures, markets and sells cosmetics, fragrances and skin care products.
Through four wholly-owned subsidiaries comprising its Private Label Group,
acquired by the Company in August 1996, Company operates a manufacturing and
filling facility which sells cosmetics principally to major cosmetic companies
for sale by each customer under the customer's own brand name (commonly known as
"privat label" sales). In addition, in order to take advantage of the Company's
manufacturing capabilities and product development expertise, the Company
currently is developing cosmetic, skin care and fragrance lines which it intends
to market under brand names created internally or owned by others and licensed
to the Company. These products are sometimes referred to as "Branded Products."
To date, the Company has developed only one line of Branded Products internally
and has obtained only one license to sell a product line using a brand name
owned by a third party. In addition, the Company intends, through its Scent 123
subsidiary, which acquired the assets of Scent Overnight in October 1996, to
sell well-recognized men's cologne and women's fragrances directly to the
consumer by overnight delivery through toll-free telephone numbers. These
products are sometimes referred to as "Distributed Fragrances."
Products and Services
Virtually all of the Company's present business is conducted through
the Private Label Group. The Company's Private Label Group consists of four
subsidiaries acquired in August 1996 from Michael J. Assante ("Assante"), who
continues to be employed as the President and CEO of the Private Label Group.
These subsidiaries operate a cosmetic facility (the "Facility") which
manufactures, fills and packages a broad range of cosmetics. The Facility also
includes a laboratory which develops cosmetic products formulae for customers
according to their specific requirements. The laboratory also develops and
maintains a library of cosmetic products formulae for use by customers who have
not developed their own formulae for a specific product. The laboratory also
performs quality control functions for the Facility and is responsible for
assuring compliance with governmental regulations regarding the manufacture and
packaging of cosmetics including compliance with GMP. Although the Private Label
Group was recently acquired by the Company, the Private Label Group has been in
business for more than 49 years and the Private Label Group's management is
remaining with the Company. Substantially all of the Private Label Group's
assets have been pledged to a financing institution to secure indebtedness
relating to a financing agreement. In addition, all of the outstanding capital
stock of the entities comprising the Private Label Group has been pledged to
Assante to secure indebtedness related to the acquisition of the Private Label
Group. See "Management," "Certain Transactions" and "Government Regulation."
The Facility manufactures and fills a wide variety of cosmetics,
including body lotions and powders, lipsticks, mascara, eye shadows, eye liners,
skin care products and hair care products. Depending upon the customer's
requirements, the Company either provides some or all of the raw ingredients and
packaging for the customer's product or uses material provided directly by the
customer. A quantity of raw ingredients and packaging material is maintained in
inventory, but generally such materials are purchased by the Company to fill
specific orders. Presently, the Facility does not manufacture or fill
fragrances, which require additional
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machinery, nor does the Facility manufacture or fill nail products or liquid
soaps.
Generally, a customer places an order for a quantity of merchandise to
be produced and shipped over a period of time, typically one to three months,
with payment due 30 days after each shipment. While the raw ingredients and
packaging materials to produce an order are generally readily available, for
cash management purposes, the necessary raw materials and packaging are ordered
by the Company for receipt by it in stages to coincide with the manufacturing/
packaging cycle and the customer's delivery requirements. In this way, the
Company minimizes the need to maintain an inventory of finished goods, and in
effect, produces product only against the order.
Except for nail products, liquid soaps and fragrances, which it does
not manufacture or fill, the Facility does not limit its services to a
particular market niche within the cosmetic industry. It manufactures a wide
variety of high and low priced products sold in department, specialty and
discount stores. The Company believes that this diversity minimizes its exposure
to business cycles and changes in customer preferences over time.
Since the manufacturing operation has been in business for over 49
years, the laboratory maintains a large library of formulae for a wide variety
of products. Moreover, the laboratory continuously develops new formulae based
on the Company's assessment of future product demand, changing consumer
preferences and the availability of new ingredients. The Company believes that
it can quickly and efficiently develop formulations for a customer's product by
using or adapting a formula from its library. When the Company develops a
formula for a customer's product, the Company, and not the customer, owns the
formula; however, since it is the Company's policy not to use the same formula
for different customers, customers generally continue purchasing from the
Company so long as they sell the product and do not change the formula or have
another laboratory replicate the product formula.
The Company's marketing efforts revolve around its sales force of two
full-time sales representatives and contacts maintained or developed by its
management.
In order to take advantage of the Company's manufacturing capabilities
and product development expertise, the Company currently is developing cosmetic,
skin care and fragrance lines which it intends to market and distribute under
brand names created internally or owned by others and licensed to the Company.
These products are sometimes referred to as "Branded Products." To date, the
Company has developed only one line of Branded Products internally and has
obtained only one license to sell a product line using a brand name owned by a
third party.
Development of the Company's first Branded Product line, an original
unisex fragrance line and related grooming products to be sold under the Sports
Extreme USA(TM) trade name, commenced in January 1996 and was completed in
September 1996, at which time marketing of the line commenced. Presently, the
Sports Extreme USA(TM) line consists of a unisex
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fragrance, bath and shower gel ("Clean Up"), muscle and body relaxer ("Soothe")
and face moisturizer containing sunscreen and alphahydroxy fruit acids
("Protect"). The marketing of the Sports Extreme USA(TM) line will feature
"extreme" sports such as mountain climbing, ice climbing, bungee jumping, sky
surfing, in-line skating, snowboarding, snow bicycling and mountain biking. The
fragrance for the Sports Extreme USA(TM) line was developed for the Company by
Firmenich Incorporated, a major developer of fragrances for the cosmetic
industry. Retail sales of this line commenced in the second quarter of 1997.
The Company anticipates selling Branded Products in the United States
and internationally. In the United States, the Company expects to sell directly
to retail outlets that sell similar products, such as chain drug stores, mass
merchandisers and discount stores. Initially, the Company's personnel,
independent sales representatives or a combination of the two will sell the
Branded Products in the United States. Internationally, the Company expects to
sell to distribution companies having a major presence in each major market. To
date sales of approximately $48,000 of Branded Products have been made. The
Company entered into an exclusive distribution agreement, with Northern Brands,
Inc., for sale of the Company's products in duty-free shops in the United States
and wholesale and retail shops in the Caribbean. The Company entered into verbal
distribution agreements with two foreign distributors which cover certain
countries in the Middle East and the Far East, pursuant to which such
distributors will purchase the Company's products for resale in their
distribution territories. The Company currently has $250,000 in orders from the
distributor in the Middle East which the Company plans to begin shipping in
August 1997. In addition, the Company has entered into verbal sale agency
agreements with two foreign sales agents which cover certain countries in
Europe. The Company expects that its relationship with the foreign distributors
will be exclusive for a particular area but will not require the distributor to
purchase any minimum quantity of products.
In June 1996, the Company began developing cosmetics, fragrances
and related products for sale under the Members Only trade name pursuant to a
license agreement with the owner of the Members Only trade name (the
"Licensor"). The Members Only trade name is a brand name used on men's
outerwear, active wear and a wide variety of other merchandise which has been
marketed on television, radio and print media in the United States.
The license agreement relating to the Members Only trade name grants
the Company the exclusive right in the United States, Canada, Great Britain,
Japan, Korea, Chile, Uruguay, Venezuela and Argentina to manufacture and
distribute fragrances, grooming products and cosmetics under the Members Only
trade name (the "License"). Under certain circumstances, the Company may also
sell Members Only cosmetics and fragrances in other countries, except China and
Taiwan. The License expires on September 30, 2001. The Company has a right to
renew for an additional five year term subject to certain conditions, including
the requirement that the Company achieve certain minimum sales of the licensed
products. Under the License, the Company is required to pay a royalty of five
percent of net sales, subject to minimum royalties which begin at $100,000 for
the period ending September 30, 1997 (16.5 months) and increase to $375,000 for
the last year of the initial term. The minimum royalty is payable in
installments during the applicable year. The Company's manufacture, sale and
promotion of Members Only fragrances, grooming products and cosmetics is subject
to the prior review and approval of such products by the Licensor as is typical
in similar licenses. The Licensor has approved the products currently being
developed by the Company.
The fragrance for the Company's Members Only line was created for the
Company by International Flavors and Fragrances, Inc., a major fragrance
manufacturer. The Company anticipates that development of the line will be
completed in the fourth quarter of 1997 and that retail sales of the Members
Only line will commence by the spring of 1998.
While the Company has had discussions with other companies, it has not
entered into any other formal agreements for the development of cosmetic and
fragrance lines under brand names owned by other companies. There can be no
assurance that the Company will market successfully any original cosmetic or
fragrance line, or that the Company will enter into any additional formal
agreements for the development of cosmetic and fragrance lines for other
companies either under brand names created internally or owned by others and
licensed to the Company.
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As a complement to, and in expansion of, its marketing and distribution
activities relating to Branded Products, the Company, through its Scent 123
subsidiary, intends to sell well-recognized men's cologne and women's
fragrances directly to consumers, initially by overnight delivery. These
products are sometimes referred to as "Distributed Fragrances". A customer will
be able place an order for the delivery of a Distributed Fragrance through
toll-free telephone numbers. The Company has secured "1-800-SCENT-123" and
"1-888-SCENT-123" as its toll-free telephone numbers.
The Company expects to begin test marketing of the Distributed
Fragrances in the fourth quarter of 1997 and, if successful, to begin national
marketing in February or March 1998. The Company has engaged, and is working
with, a communications and marketing firm to assist it in concept development
and creation of a logotype and advertising materials. In the future, the
Company may add other gift products to its product offerings and may offer
other forms of delivery.
The Company has not yet secured any sources of supply for the
Distributed Fragrances. The Company believes it will be able to purchase a
majority of the Distributed Fragrances directly from fragrance manufacturers,
but if it cannot do so, it believes other sources of supply are available. The
Company contemplates selling only a limited selection of sizes of the most
popular perfumes and colognes. From a fragrance manufacturer's perspective, the
Company believes that by not selling the full selection of fragrances, sizes and
related grooming products, it will offer a distribution channel complementing,
rather than competing with, the manufacturer's traditional distribution
channels.
The Company plans to use independent order taking, order fulfillment,
warehousing and shipping services for the sale of the Distributed Fragrances.
Although the Company has not yet engaged any such firms, the Company believes
that there are many firms available that can provide these services. A portion
of the assets acquired by the Company in the acquisition of Scent Overnight
included the results of the investigation, pricing and proposals of such firms.
The Company intends to use the results of this research to expedite the
commencement of the sale of the Distributed Fragrances. See "Certain
Transactions."
Competition
All aspects of the cosmetic, fragrance and skin care industry are
subject to intense competition throughout the world. In all aspects of its
business, the Company will compete with numerous companies, many of which are
better known in the industry and have established channels of distribution and
substantially all of which have greater financial and other resources than the
Company. These competitors include Estee Lauder, Revlon, Avon and Maybelline.
The Company competes against approximately thirty companies in the
United States which manufacture and/or package cosmetic products for
third-parties. To a lesser degree, the Company competes with cosmetic companies
which have their own manufacturing facilities that can produce all, or a part,
of their own products. The Company believes that the primary elements of
competition in the private label manufacture of cosmetics differ depending upon
the
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retail price point of the particular product. With respect to higher priced
cosmetics and fragrances, the principal methods of competition are quality,
including consistency of the work performed, and reliability of meeting delivery
dates. With respect to lower priced products, the principal method of
competition is price. The Company believes that the Facility has a reputation
in the cosmetic industry as a high quality, reliable source for manufacturing
and packaging cosmetics. It is the Company's belief that the availability of its
laboratory gives it a competitive advantage over those firms not having
laboratories to assist customers in the formulation of their products. The
Company also believes that its ability to produce a broad range of products for
sale at varying retail price points is beneficial in attracting and retaining
customers who would prefer all of their products to be produced by the same
manufacturer.
In selling the Branded Products, the Company will compete against
numerous companies, some of which are customers of the Private Label Group.
Many of these competitors are better known in the industry, have established
channels of distribution and greater financial and other resources than the
Company. To date, the Company has not sold any Branded Products, and the
Company has entered into only one formal agreement with a third party regarding
the marketing of cosmetics and fragrances under a brand name owned by such
third party.
The Company believes that the primary elements of competition in the
sale of Branded Products are product awareness and consumer acceptance of the
competing brands. Achieving market acceptance may require substantial marketing
efforts and expenditure of significant funds. Since the Company has limited
financial resources, it will not be able to utilize various promotional
techniques used by its competitors. The Company, in order to compete
successfully, intends to market its Branded Products to niche markets such as
chain drug stores, discount stores and mass merchandisers and to develop Branded
Products which it believes will appeal to the customers of these retailers. The
Company does not expect to sell its Branded Products to prestige department
stores and specialty retailers where it believes its limited financial resources
will put it at the greatest competitive disadvantage. There can be no assurance
that the Company will successfully develop or market any Branded Product.
In the sale of Distributed Fragrances, the Company will compete
directly with other direct marketers of such products, including catalogues and
television shopping stations and, to a lesser degree, with retail stores. The
Company expects that its major means of competition will be its convenience and
overnight order fulfillment. However, the Company's method of selling the
Distributed Fragrances is not proprietary in nature and may be replicated by
others. In addition, the Company's possible lack of exclusivity with suppliers
may allow such suppliers or other third parties to engage in the direct
marketing of fragrance brands including, but not limited to, the fragrance
brands offered by the Company. Management knows of several other companies that
currently market a fragrance line for direct delivery. In selling the
Distributed Fragrances, the Company also will compete directly with well-
established and widely-used companies in the flower-by-wire business, such
as Florist Transworld Delivery Association, as well as companies in the
gift-by-wire business. The Company's sale of the Distributed Fragrances also
expects to compete indirectly with retail stores selling similar fragrances.
There can be no assurance that the Company will be successful in selling the
Distributed Fragrances. See "Risk Factors - Competition."
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Government Regulation
The Company's manufacturing activities and the Facility are subject to
extensive and rigorous governmental regulation relating to the protection of the
environment and the quality of manufacturing. Federal, state and local
regulatory agencies actively enforce these regulations and conduct periodic
inspections to determine compliance with such government regulations. The FDA
enforces regulations regarding GMP through periodic surveillances and audits.
The Company believes that the Private Label Group has obtained all material
approvals, permits and licenses for its manufacturing activities. In the event
that the Company seeks to expand its operations to manufacture and fill
fragrances, the Company would have to obtain new or expanded governmental
permits. However, changes in existing regulations, the interpretation thereof,
or adoption of new regulations could impose costly new procedures for
compliance, or prevent the Company from obtaining, or affect the timing of,
additional regulatory approvals. There can be no assurance that the Private
Label Group, if audited, will be found in compliance with GMP or environmental
regulations. Failure to comply with GMP, environmental or other applicable
regulatory requirements may result in fines, suspension of approvals,
cessation of distribution, product recalls and criminal prosecution, any of
which would have a material adverse effect on the Company.
The Federal Trade Commission ("FTC") and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, composition storage, record keeping, approval,
advertising and promotion of the Company's products. In general, products
falling within the FDA's definition of "new drugs" require pre-market approval
by the FDA while products falling within the FDA's definition of "cosmetics" do
not require pre-market approval. In the Company's opinion, the Company's
products, as they are and will be promoted, fall within the FDA's definition of
"cosmetics" and therefore do not require pre-market approval. There can be no
assurance, however, that the FDA will concur in this view. In the event that
the Company fails to comply with applicable regulations with respect to any
products, the Company may be required to change its labeling, formulation or
possibly cease manufacture and marketing of such products.
The FDA may require post-marketing testing and surveillance to monitor
the record of the Company's products and continued compliance with regulatory
requirements. The FDA also may require the submission of any lot of product for
inspection and may restrict the release of any lot that does not comply with FDA
standards, or may otherwise order the suspension of manufacture, recall or
seizure of non-compliant product is discovered. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of a product are discovered following
approval.
The Company may also be subject to foreign regulatory authorities
governing testing or sales of certain of the Company's products. Whether or not
FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained in certain cases
prior to the commencement of marketing of the product in those countries. There
can be no assurance that any product developed or marketed by the Company will
be approved by the FDA or any foreign regulatory authority.
The Company's proposed method of distributing the Distributed
Fragrances may include shipment by air transportation. The shipment of
fragrances by air is subject to federal regulation and the rules and regulations
promulgated by the DOT's Research & Special Programs Administration. The DOT
considers the shipment of alcohol, a component in fragrances, to be the
transportation of hazardous material. Scent 123 obtained a DOT exemption to
transport hazardous material by overnight air transportation. As long as Scent
123 has the DOT exemption, which is in effect until November 30, 1997, and may
thereafter be renewed upon application and approval thereof, Scent 123 believes
that its shipment of products will be in compliance with current DOT
regulations. Scent 123's loss of the DOT exemption would have a material
adverse effect on its business operations. There can be no assurance that Scent
123 will retain the DOT exemption or that Scent 123 will be able to comply with
any future DOT regulations.
The Company's sale of Distributed Fragrances is intended to utilize
toll-free telephone services. Toll-free telephone service is provided to users
by federally regulated common carrier telephone companies. The rates, terms and
technical quality of this service are subject to regulations promulgated by the
FCC and tariffs published by the telecommunications service provider. Except for
the sending of indecent, harassing or obscene messages or material, the
interstate sale of services or products by users of a toll-free telephone number
is not subject to direct federal regulation under the Communications Act of
1934. Fraudulent telephone messages are subject to criminal penalties under
federal and state laws. The Company does not believe that FCC regulations will
affect the proposed sale of Distributed Fragrances, but such regulations could
affect the price, terms, quality and availability of the toll-free telephone
services and may
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have a material adverse effect on the Company.
Various laws and regulations relating to safe working conditions, and
other employment matters, including the Occupational Safety and Health Act, are
also applicable to the Company. The Company believes it is in substantial
compliance with all material federal, state and local laws and regulations
regarding safe working conditions, and other employment matters.
Trademarks
The Company has one United States registered trademark, Scent
Overnight(R), expiring on August 10, 2003, which was acquired in the acquisition
of Scent Overnight. The Company has filed applications for the registration of
trademarks for the "Scent 123(TM)" and Sports Extreme USA(TM) names in the
United States, but no registrations have yet been issued. See "Business" and
"Certain Transactions."
The right to use trademarks and trade names in connection with the sale
of the Branded Products is material to the Company's business. In cases where
the Company is the licensee of the trademark or trade name, the ownership of
the trademark or trade name will be retained by the licensor. In such cases,
the Company may be subject to material claims of infringement by third-parties
and may or may not be indemnified by the licensor.
The Company will be the owner of brand names developed by it and will
seek to establish protection of names. There can be no assurance, however, that
trademark rights would sufficiently protect the Company's right to use such
names or that, if and when the Company files trademark applications for such
names, such applications would be approved. Notwithstanding such ownership,
third-parties may claim that such names infringe such third party's rights. Such
claims may seek to require the Company to cease use of the names as well as pay
monetary damages. At the time any such claim is brought, the Company may not
have the financial resources to defend against such claim. The cessation of the
use of any brand name used by the Company might have a material adverse effect
on it.
Insurance
In view of the activities conducted by the Company, there are inherent
risks of exposure to certain liabilities including product liability and
negligence claims resulting from the use of the Company's products. The
Company currently carries a general liability insurance policy (including
products liability) which provides for coverage of $1,000,000 per occurrence
and $2,000,000 in the aggregate. The Company also carries property damage
insurance of approximately $2,000,000. The Company does not have insurance
coverage for product withdrawal or recall. Although the Company believes such
insurance is sufficient, no assurance can be given that the amount of
the Company's present coverage will prove to be adequate.
Major Customers and Suppliers
Approximately 22% and 12% of the Company's revenues for the year ended
December 31, 1996 were derived from two major customers. Approximately 21% and
14% of the Company's revenues derived from manufacturing activities for the year
ended December 31, 1995 were derived from the same two major customers.
Approximately 16% and 11% of the Company's revenues for the three months ended
March 31, 1997 were derived from the same two major customers. A loss of the
sales to either of both of these customers could have a material adverse effect
on the Company's results of operations. The Company's principal suppliers of raw
materials are The Mearl Corporation, Whittaker, Clark & Daniels and Chem
Central, Inc., from whom it purchases approximately 6.3%, 6.2% and 5.3%,
respectively, of the raw ingredients used by it.
Employees
The Company presently employs approximately 258 employees of which 253
are located at the Facility. Of the 253 employees located at the Facility, 43
are employed on a full-time basis and approximately 210 are employed on an
as-needed basis. The Company has regularly employed between 175 and 225
individuals on an as-needed basis for approximately 12 months and anticipates a
continued need for a minimum of 210 employees in order to maintain its
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current level of operations. Of the 253 employees located at the Facility, 224
are manufacturing personnel, 14 are laboratory personnel, three are executive
and administrative personnel and 12 are engaged in sales, marketing and customer
service. The manufacturing employees located at the Facility are covered by a
collective bargaining agreement with Local #300-S, Affiliated with the
Production Service and Sales Distribution Council, Industrial Union Council,
which expires on February 28, 1998.
Of the five employees that are not located at the Facility, four are
executive officers who, prior to this Offering, were retained by the Company as
consultants. Prior to this Offering, the Company utilized the services of
independent contractors, on consulting basis, to perform certain functions and
may continue to do so in the future. The Company believes that there is an
available pool of persons and firms who could be hired or retained by the
Company when needed. The Company considers its relationships with both union and
non-union employees to be satisfactory.
Seasonality and Backlog
The cosmetic and fragrance business in general is subject to seasonal
fluctuations, with net sales in the second half of the year substantially higher
than those in the first half as a result of increased demand by retailers in the
United States in anticipation of and during for the back-to-school, Thanksgiving
and Holiday seasons. The Company anticipates that the sales of Branded Products
and Distributed Fragrances will follow the general industry trend.
Although the Company's manufacturing business, as a whole, is not
seasonal, its product mix is subject to seasonal variations. Since the gross
profit margins on various products differ, the backlog and results of operations
in any period are not necessarily indicative of the result for the fiscal year.
At December 31, 1996 the Private Label Group's backlog of orders believed by
the Company to be firm was approximately $3,250,000 and at December 31, 1995
the amount of such orders was approximately $3,075,000. The Company expects that
approximately 90% of the current backlog will be filled during the current
fiscal year. Since the Company's orders for manufacturing and filling are
generally for the delivery of merchandise over a period of time, backlog is
viewed as an important indication of future performance.
Properties
The Company leases 2,400 square feet of space at 509 Madison Avenue,
New York, New York, which is used as its executive offices. The lease expires in
April 2001 and provides for an annual base rent of $74,000, including utilities.
These facilities are in good condition and adequate for the Company's current
needs, and substitute space is readily available.
The Company's manufacturing and packaging plant and laboratory and the
Private Label Group's general and executive offices are located at a leased
155,000 square foot building in Fairlawn, New Jersey. The lease, expiring in
August 2002 provides for annual rent of
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approximately $500,000, including common charges and real estate taxes and is
subject to increase based on increases in the Consumer Price Index. In addition,
the Company is responsible for substantially all repairs to the building. The
Facility is presently operating at less than full capacity and is in good
condition and physically adequate for the Company's present and foreseeable
purposes. The Company expects to continue to update the manufacturing and
packaging equipment at the Facility with more modern and automated equipment.
See "Use of Proceeds."
Contemporary, a related party, utilizes approximately 10,000 square
feet of the Facility on a month-to-month basis for approximately $6,500 per
month under an oral arrangement. There is no assurance that the landlord will
continue to permit this arrangement. See "Certain Transactions."
Legal Proceedings
The Company is not a party to any material legal proceeding, nor is it
aware of any pending or threatened claim of a material nature. The Company
anticipates that it will be subject to claims and suits in the ordinary course
of its business in the future, including product liability and negligence
claims. The Company believes that it will maintain adequate insurance to cover
such anticipated claims, of which, however, there can be no assurance.
The Company has defaulted in the payment of a promissory note, in the
amount of $35,000, given in settlement of a claim made by a creditor. The
Company is presently trying to negotiate an extension on the repayment of the
note until after the date of completion of the Offering.
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MANAGEMENT
Directors, Officers and Significant Employees
The members of the Board of Directors, executive officers of the
Company, significant employees of the Company and their ages and positions with
the Company are as follows:
Name Age Position
Gerard Semhon 60 Chairman of the Board, Chief Executive Officer and
Director
Constantine Bezas 50 President and Director
Joseph Truitt Bell 39 Executive Vice President and Director
Van Christakos 49 Vice President-Operations, Secretary, Treasurer and
Director
Michael J. Assante 59 President and Chief Executive Officer,
Private Label Group
All of the Company's executive officers and directors intend to devote
their full business time to the affairs of the Company effective on the date of
this Prospectus. Prior to the Offering, Messrs. Semhon, Bezas, Bell and
Christakos were retained by the Company as consultants at an annual consulting
fee of $95,000, $85,000, $75,000 and $55,000, respectively, which fees are
inclusive of expenses incurred by each in the performance of their duties. As
consultants, each officer (except for Mr. Assante who has been employed
continuously by the Private Label Group) has devoted less than full time to the
affairs of the Company and has been permitted to devote time to other business
opportunities or activities. The amount of time devoted by each such officer to
the Company's affairs has varied from several hours per week to almost full time
depending upon the person involved and the period of time considered.
Additionally, each such officer has paid his own expenses incurred in performing
his services as a consultant. Commencing on the date of this Prospectus, all
executive officers will become employees. As employees they will be entitled to
employee benefits that are extended to employees generally, including
reimbursement of expenses. Directors are elected to serve until the next meeting
of stockholders and until their successors are duly elected and qualified.
Meetings of stockholders of the Company will be held on an annual basis upon the
completion of this Offering. However, if at any time an annual meeting is not
held for the election of directors, the then current directors will continue to
serve until their successors are elected and qualified. Vacancies and newly
created directorships resulting from any increase in the number of directors may
be filled by a majority vote of Directors then in office. Officers are appointed
by, and serve at the discretion of, the Board of Directors. Non-employee
directors will receive $1,500 for each Board meeting attended in person or by
conference telephone call and are eligible to reeive options under the 1997
Stock Option Plan. See "Use of Proceeds" and "Certain Transactions."
The Board of Directors has not established any committees, however,
after the completion of this Offering, it intends to establish an Audit
Committee and a Compensation Committee both of which are expected to be
comprised of two independent directors.
The following is a brief summary of the background of each director and
executive officer of the Company:
44
<PAGE>
Gerard Semhon has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception in June 1995. Mr. Semhon has over 30
years of management experience in consumer products. From March 1993 to May
1995, Mr. Semhon served as chairman of the board and chief executive officer of
Dominion Associates, Inc. ("Dominion"), a distributor of health and beauty aids
that he helped found. In May 1995, Dominion ceased operations due to a lack of
financial resources. From 1990 to March 1993, Mr. Semhon served as an
international consultant for several cosmetic companies, including Boots Ltd.
and Cambridge Development Corp. In 1983, Mr. Semhon founded Parlux Fragrances,
Inc.("Parlux"), where he was employed until 1990. Parlux operated as the United
States and Canadian distributor of the Giorgio Armani women's fragrance line.
From 1981 to 1983 Mr. Semhon served as Helena Rubinstein, Inc.'s president of
North American Operations. In 1976, Mr. Semhon became president of ITT Corp.
Cosmetics Division. From 1972 to 1976, Mr. Semhon served as Director of
International Marketing for Revlon International, Inc.
Constantine Bezas has served as President and a Director of the Company
since its inception. From March 1993 to May 1995, he served as president of
Dominion. From February 1991 to January 1993, he served as chairman of the
board of Bezas, Tore, Jacobson & Lawrence, Ltd., an advertising firm he
co-founded. From 1974 to 1991, Mr. Bezas was the principal owner/operator of
Aspasia, Inc. a chain of specialty jewelry stores with locations in Connecticut
and New York. During this same period Mr. Bezas also founded Video Cinema, a
four store chain of video rental stores, and Just Delicious, a specialty
gourmet food store chain. From 1971 to 1973, Mr. Bezas was employed by the
Aramis Division of Estee Lauder Cosmetics in various marketing and sales
capacities.
Mr. Bezas and his wife filed a petition under Chapter 11 of the Federal
Bankruptcy Act in December 1992. The case was converted to a proceeding under
Chapter 7 of such Act in August 1994 and Mr. Bezas received a discharge from the
proceeding in January 1995.
Joseph Truitt Bell has served as Executive Vice President and Director
of the Company since its inception. From November 1992 to June 1995, Mr. Bell
served as an independent consultant for several retail establishments. In 1983,
Mr. Bell co-founded Rosenthal-Truitt, Inc., an upscale men's furnishings and
accessories store in Los Angeles, where he worked until October 1992. That
company eventually expanded its business to four stores throughout California
and Texas.
Van Christakos has served as Secretary, Treasurer and a Director of the
Company since its inception. From March 1993 to May 1995, he was employed at
Dominion. From April 1991 to February 1993, Mr. Christakos served as president
of Hamilton Group, a marketing and consulting firm he founded. From 1975 to
1991, Mr. Christakos served as Director of Operations for Aspasia, Inc., a six
store specialty chain of jewelry stores located in Connecticut and New York.In
1984, Mr. Christakos was employed at Just Delicious, a specialty gourmet food
store chain, where he remained until 1986. From 1982 to 1984, he served as the
director of operations for Video Cinema, a four store video rental chain in the
New York Tri-State area.
45
<PAGE>
Michael J. Assante joined the Company in August 1996 as part of the
acquisition of the Private Label Group of which he had been the principal owner
and senior executive for more than 40 years. He presently serves as President
and Chief Executive Officer of the Private Label Group.
Executive Compensation
The following sets forth the compensation paid or accrued by the
Company to the Company's Chief Executive Officer and the Company's other
executive officers whose compensation exceeded $100,000 for the years ended
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
<S> <C> <C> <C>
Name and
Principal Position Year Salary ($) Bonus ($)
Gerard Semhon 1996 $ 95,648 (1) 0
Chairman and 1995 $ 48,000 (1) 0
Chief Executive
Officer
Michael J. 1996 $245,192 (2) 0
Assante 1995 $250,000 (2) 0
President, Private
Label Group
<FN>
(1) During the years ended December 31, 1995 and 1996, Mr. Semhon earned
such amounts for consulting services rendered to the Company, of which
approximately $28,500 and $67,500, respectively, was accrued but not
paid. See "Employment Agreements."
(2) Amounts earned prior to August 1996 represent Mr. Assante's salary as
President of the Private Label Group prior to its acquisition by the
Company. See Employment "Agreements."
</FN>
</TABLE>
The Company did not grant any stock options in the last fiscal year to
any of its executive officers. The Company does not have any long-term incentive
plans for compensating its executive officers.
46
<PAGE>
Employment Agreements
The Company entered into a three year employment agreement, to become
effective on the date of this Prospectus, with Gerard Semhon, the Company's
Chief Executive Officer and Chairman of the Board, under which Mr. Semhon will
serve as a full-time employee and officer and receive an annual salary of
$95,000 bonuses as determined by the Board of Directors. The employment
agreement entitles Mr. Semhon to an annual car allowance of $9,600 and the right
to participate in welfare plans adopted by the Company and to enjoy medical,
dental and disability insurance benefits and life insurance benefits under
policies obtained by the Company for such purposes. To date, the Company has not
instituted any employee welfare plans, nor has the Company obtained any dental
or disability insurance coverage for its employees. The agreement is
automatically renewable for successive one year terms. The employment agreement
may be terminated by the Company for cause, as described in the agreement. In
the event that the Company terminates Mr. Semhon's agreement without cause, Mr.
Semhon is to receive his full compensation for the remainder of the term of the
agreement, but in no event less than 12 months compensation. In the event of a
change in control of the Board of Directors, Mr. Semhon is to receive two times
his full compensation for the remainder of the term of the agreement. In
addition, the agreement precludes Mr. Semhon from disclosing confidential
information, and from competing with the Company during the term of his
employment and for one year thereafter. Prior to the effectiveness of the
employment agreement, Mr. Semhon served as a consultant to the Company,
receiving compensation at the rate of approximately $95,000 per annum, plus
expenses.
In August 1996, the Company entered into a three year employment
agreement with Michael J. Assante under which he will serve as President and
Chief Executive Officer of each of the four companies that comprise the Private
Label Group. Mr. Assante will receive a base annual salary of $195,000 and an
annual car allowance of $12,000. In addition, the Company will maintain a
$1.1 million life insurance policy on the life of Mr. Assante, the beneficiary
of which will be designated by Mr. Assante. The employment agreement is
renewable at his option for an additional two year period. Mr. Assante will
receive a bonus equal to 10% of the amount by which the Private Label Group's
annual profit, before interest and taxes but after depreciation and
amortization, exceeds $500,000 for each of the years ending December 31, 1997,
1998 and 1999. The employment agreement may be terminated by the Company for
cause, as described in the agreement. Mr. Assante is entitled to receive his
salary for the remaining term of the agreement as severance pay in the event
that the Company terminates the agreement without cause. In addition, the
agreement precludes Mr. Assante from disclosing confidential information
during the term of his employment and for five years thereafter, and from
competing with the Company during the term of his employment and for one year
thereafter.
Consulting Agreements
The Company entered into a consulting agreement with ETR
& Associates, Inc. ("ETR") in June 1995, pursuant to which ETR provides general
management advisory services to the Company ("Consulting Agreement"). Mr.
Robert E. Lee, an affiliate of the Company, is the President of ETR, the
General Partner of Woodward Partners, LLC ("Woodward") and exercises
investment power over the investments owned by Metco Investors, LLC ("Metco").
ETR, Woodward and Metco (sometimes referred to as the "Consulting Group")
advise the Company's Board of Directors on key policy decisions as requested by
the Company. The Consulting Group's services have been primarily related to
assistance in analyzing the acquisition of the Private Label Group and
identifying persons to enter into business relationships with the Company. These
persons include trade mark owners, packaging sources and owners of skin care
ingredients. In addition, Metco is assisting the Company in securing
distributors in England. Pursuant to the Consulting Agreement, in 1995 and
1996 the Company issued an aggregate of 175,000 shares of Common Stock to the
Consulting Group (25,000 shares to ETR, 50,000 shares to Woodward and 100,000
shares to Metco). See "Certain Transactions."
In July 1996, the Company entered into a brokerage and consulting
agreement with V.A.N. Marketing Ltd. ("VAN"). Under the agreement, VAN is
entitled to a finder's fee of 2 1/2 percent of the purchase price of the Private
Label Group, 5,000 shares of the Company's Common Stock and options to purchase
20,000 shares of the Company's Common Stock at $4.80 per share, expiring in
July 1999. $22,500 of the cash fee was paid upon closing of the acquisition
and the remaining balance is due one year thereafter. Additionally, VAN will
receive a monthly consulting fee of $3,000 for each of the first 12 months
following the closing of the acquisition and $5,000 for each of the next 12
months.
The Company entered into a two year consulting agreement with Metco
in November 1996 pursuant to which Metco provides general management consulting
services and advisory services in the establishment of distribution channels
in the United Kingdom and Ireland (the "Metco Consulting Agreement"). The
consulting fee of $16,500 due under the Metco Consulting Agreement was prepaid
in November 1996.
Mr. Louis DiVita ("DiVita"), a former shareholder of the companies
comprising the Private Label Group, serves as a consultant to the Private Label
Group pursuant to a consulting agreement dated August 17, 1993 pursuant to
which DiVita provides services relating to the Private Label Group's computer
system. The agreement provides for a monthly consulting fee of $11,117 through
August 2003. See "Certain Transactions."
Stock Option Plan
In March 1997, the Board of Directors adopted, and the stockholders
subsequently approved, the Company's 1997 Stock Option Plan (the "1997 Plan").
The 1997 Plan provides for grants to officers and other employees of the
Company, non-employee directors, consultants and advisors and other persons who
may perform significant services on behalf of the Company and will be
administered by the Board of Directors or a committee (the "Committee") of two
or more directors, each of whom is a "Non-Employee Director" within the meaning
of Rule 16b-3 under the Exchange Act. Pursuant to the 1997 Plan, options to
acquire an aggregate of 750,000 shares of Common Stock may be granted subject to
adjustment as provided in the 1997 Plan. As of the date of this Prospectus, no
options have been granted pursuant to the 1997 Plan.
The 1997 Plan authorizes the issuance of incentive stock options
("ISOs"), as defined in Section 422A of the Internal Revenue Code of 1986 (the
"Code"), as amended, as well as non-qualified stock options ("NQSOs"). Only
"employees" (within the meaning of Section 3401(c) of the Code) of the Company
shall be eligible for the grant of Incentive Stock Options. The exercise price
of each ISO may not be less than 100% of the fair market value of the Common
Stock at the time of grant, except that in the case of a grant to an employee
who owns 10% or more of the then outstanding stock of the Company or a
subsidiary or parent of the Company (a "10% Stockholder"), the exercise price
shall be at least 110% of the fair market value of the Common Stock on the date
of grant. The exercise price of each NQSO is determined by the
47
<PAGE>
Committee, but shall not be less than 85% of the fair market value of the
Common Stock on the date of grant. Notwithstanding the foregoing, the exercise
price of any option granted on or after the effective date of the registration
of any class of equity security of the Company pursuant to Section 12 of the
Exchange Act, and prior to six months after the termination of such
registration, may be no less than 100% of the fair market value per share on the
date of the grant. The Board or the Committee shall provide, in each stock
option agreement, when the term of the option subject to such agreement expires
and the date when it becomes exercisable, but in no event will an option granted
under the 1997 Plan be exercisable after the expiration of ten years from the
date it is granted. Options may not be transferred during the lifetime of an
option holder and are only exercisable during the optionee's lifetime only by
the optionee or by his or her guardian or legal representative. The 1997 Plan
shall terminate automatically as of the close of business on the day preceding
the 10th anniversary date of its adoption, subject to earlier termination.
To the extent Fair Market Value, as defined in the Code, of Common
Stock with respect to which Incentive Stock Options granted hereunder are
exercisable for the first time by an optionee in any calendar year exceeds
$100,000, such options granted shall be treated as NQSO's to the extent
required by Section 422 of the Code.
If the outstanding shares of Common Stock are changed by reason of an
adjustment to the capitalization of the Company or as a result of a merger or
consolidation, an appropriate adjustment shall be made by the Board or the
Committee in the number, kind and price of shares as to which options may be
granted and exercised.
Subject to the provisions of the 1997 Plan, the Board of Directors or
the Committee has the authority to determine the individuals to whom stock
options are to be granted, the number of shares to be covered by each option,
the exercise price, the type of option, the option period, the restrictions, if
any, on the exercise of the option, the terms for payment of the option price
and all other terms and provisions of such options (which need not be
identical). Payments by holders of options, upon exercise of an option, may be
made (as determined by the Board or the Committee) in cash or such other form
of payment as may be permitted under the 1996 Plan, including without
limitation, by promissory note or by delivery of shares of Common Stock.
Indemnification and Limitation on Directors' and Officers' Liabilities
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions. In
addition, bylaws of the Company provide that the Company is required to
indemnify its officers, directors and employees and agents under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. The bylaws provide that the Company,
among other things, will indemnify such officers and directors, employees and
agents against certain liabilities that may arise by reason of their status or
service as directors, officers or employees (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. At present the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted. The Company
believes that its charter provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
Under Delaware law, Directors of the Company are not liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
except for liability in connection with (i) a breach of duty of loyalty, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) dividend payments or stock repurchased in
violation of Delaware law or (iv) any transaction in which a director has
derived an improper personal benefit.
48
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus,
immediately before and after the Closing, but before the exercise of any
Redeemable Warrants, certain information concerning the shares of Common Stock
beneficially owned by each director and officer of the Company, by all officers
and directors of the Company as a group, and by each stockholder known by the
Company to be a beneficial owner of more than 5% of the outstanding shares of
Common Stock.
<TABLE>
<S> <C> <C> <C> <C>
Number of Shares Percentage of
Beneficially Owned (2) Common Stock (2)
Name and Address Before After Before After
of Beneficial Owner (1) Offering Offering Offering Offering (3)
- ----------------------- -------- -------- -------- ------------
Gerard Semhon 338,200 (4) 338,200 8.7% 6.4%
Constantine Bezas 195,634 195,634 5.0% 3.7%
Joseph Truitt Bell 146,233 146,233 3.8% 2.8%
Van Christakos 110,933 110,933 2.9% 2.1%
Tusany Investment &
Trade S.A.(5) 1,559,355 (6) 1,559,355 40.2% 29.6%
c/o Morgan and Morgan Trust Co.
Pasea Estate, P.O. Box 3149
Roadtown, Tortola BVI
Michael J. Assante 0 170,000 (7) 0 3.2%
Fred Kassner 250,000 250,000 6.4% 4.7%
69 Spring Street
Ramsey, NJ 07446
Robert E. Lee 425,000 (8) 425,000 11.0% 8.1%
465 West Saddle River Road
Upper Saddle River, NJ 07458
Liam Development 210,000 (9) 210,000 5.4% 4.0%
62 Viola Drive
Glen Cove, NY 11542
Metco Investors, LLC 200,000(10) 200,000 5.1% 3.9%
1000D Lake Street
Ramsey, NJ 07446
All officers and directors
as a group (5 persons) 791,000 961,000 20.4% 18.3%
- --------------
<FN>
(1) Unless otherwise indicated, the address of each stockholder listed is c/o
Azurel Ltd., 509 Madison Avenue, New York, New York 10022.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a
right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to
be outstanding for the purposes of computing the percentage ownership
of any
50
<PAGE>
other person shown in the table.
(3) Includes (i) 180,000 shares of Common Stock issued on the date of this
Prospectus in connection with the acquisition of the Private Label Group
and (ii) 1,200,000 shares of Common Stock offered hereby. See "Certain
Transactions," "Underwriting" and "Concurrent Registration of Securities."
(4) Includes 107,600 shares of Common Stock owned by Diane Papas, who
is the wife of Gerard Semhon, of which shares Mr. Semhon disclaims
beneficial ownership.
(5) Jeanne Pierre Neuhaus is the beneficial owner of 69% of Tusany Investment
& Trade S.A. Tusany was formed under the Laws of the British Virgin
Islands on March 3, 1994.
(6) Does not include shares underlying 50,000 Redeemable Warrants registered
in the Concurrent Offering.
(7) Represents shares of Common Stock issued to Mr. Assante on the date of
this Prospectus as part of the purchase price for the capital stock of
the four companies that comprise the Private Label Group. See "Certain
Transactions."
(8) Includes (i) 150,000 options to purchase Common Stock beneficially owned
by ETR & Associates, Inc., of which Mr. Lee is President, (ii) 50,000
shares of Common Stock beneficially owned by Woodward Partners, of which
Mr. Lee is General Partner. and (iii) 150,000 shares of Common Stock and
shares underlying 50,000 options to purchase Common Stock beneficially
owned by Metco Investors, LLC, over which investments Mr. Lee exercises
investment power. Does not include (i) 55,500 warrants to purchase Common
Stock issued to Mr. Lee and (ii) shares underlying 25,000 Redeemable
Warrants issued to Metco Investors, LLC being registered in the Concurrent
Offering since such warrants are not yet exercisable. See "Certain
Transactions" and "Concurrent Registration of Securities." See "Certain
Transactions."
(9) Represents shares of Common Stock issued to Liam Development, Ltd. in
connection with the conversion of the principal due under a promissory
note assumed by the Company. See "Certain Transactions."
(10) Includes 150,000 shares of Common Stock and 50,000 options to purchase
Common Stock. Does not include shares underlying 25,000 Redeemable
Warrants being registered in the Concurrent Offering. See "Certain
Transactions" and "Concurrent Registration of Securities."
</FN>
</TABLE>
51
<PAGE>
CERTAIN TRANSACTIONS
In June and September 1995, the Company issued an aggregate of
2,175,000 shares of Common Stock to twelve founders. The twelve founders of the
Company named below each purchased the number of shares set forth in parenthesis
after their names at $.001 per share for an aggregate consideration of $2,175.
The founders are Gerard Semhon (264,600), Constantine Bezas (200,934), Joseph
Truitt Bell (150,933), Van Christakos (110,933), Diane Papas (107,600), Tusany
Investment & Trade, S.A. ("Tusany") (1,250,000), Edward Pedersen (15,625),
Kenneth Lee (15,625), James G. Cooley (6,250), Michalaur International
("Michalaur") (18,750), Valerie A. Profitt (25,000) and Leslie Bines (8,750).
Tusany is a company organized under the laws of the British Virgin Islands whose
affairs are managed by Morgan & Morgan Ltd., a company engaged in investment
business on behalf of various clients. Jeanne Pierre Neuhaus is the beneficial
owner of 69% of Tusany. Michalaur, a company engaged in investment related
activities incorporated in New York in 1993, is controlled by John Palmieri, its
president.
In June 1995, the Company entered into the Consulting Agreement with
ETR pursuant to which ETR provides general management advisory services to the
Company. Mr. Robert E. Lee is the President of ETR, the General Partner of
Woodward and exercises investment power over the investments owned by Metco, the
three entities that comprise the Consulting Group. The Consulting Group advises
the Company's Board of Directors on key policy decisions as requested by the
Company. The Consulting Group's services have been primarily related to
assistance in analyzing the acquisition of the Private Label Group and
identifying persons to enter into business relationships with the Company.
These persons include trademark owners, packaging sources and owners of skin
care ingredients. In addition, Metco is assisting the Company in securing
distributors in England. Pursuant to the Consulting Agreement, in 1995 and
1996 the Company issued an aggregate of 175,000 shares of Common Stock to the
Consulting Group (25,000 shares to ETR, 50,000 shares to Woodward and 100,000
shares to Metco).
In July 1995, the Company, as an accommodation maker for Messrs. Semhon
and Bezas, issued a promissory note in the principal amount of $28,750 to ETR.
The proceeds of this loan were paid to Messrs. Semhon and Bezas. The note plus
accrued interest was repaid by the Company in September and October 1995, and
the repayment was treated as an advance to stockholders. As additional
consideration for this loan, ETR was granted an option to purchase 150,000
shares of Common Stock at $1.00 per share, which expires in July 2000.
In September 1995, the Company issued a promissory note in the
principal amount of $50,000 to Bola Business Ltd. ("Bola"). The note accrued
interest at 10% per annum and was secured by an aggregate of 200,000 shares of
Common Stock owned by Messrs. Semhon and Bezas, officers and directors of the
Company. The proceeds of this loan were utilized for working capital. As
additional consideration for the loan, the Company issued Bola 25,000 shares of
Common Stock and granted Bola the option to purchase 50,000 shares of Common
Stock at $1.00 per share, which option expires in September 2002. The note and
accrued interest were repaid in April 1996.
In October 1995, the Company issued a promissory note of $200,000 to
Tusany Investment and Trade, S.A., a founder and principal stockholder of the
Company ("Tusany"), which accrued interest at 10% per annum. The proceeds of
this loan were advanced to the Private Label Group as part of the Company's
obligation in connection with the acquisition of the Private Label Group. In
July 1996, Tusany converted the principal plus accrued interest due under the
note into 106,972 shares of Common Stock as part of a private placement
completed by the Company in July 1996 ("July 1996 Private Placement"). See
"Principal Stockholders."
52
<PAGE>
In December 1995, the Company completed a $250,000 private placement of
5 units, each unit consisting of (i) the Company's 18 month 12% promissory note
in the original principal amount of $50,000 and (ii) 25,000 shares of the
Company's Common Stock to eleven unaffiliated, accredited investors (the "1995
Private Placement"). The Company received net proceeds of $210,000 (after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as placement agent), which were used for working capital and to repay
indebtedness. See "Underwriting".
In January 1996, the Company issued a promissory note of $50,000 to a
principal of the Underwriter. The note and accrued interest, at 8% per annum,
was repaid in April and May 1996. The Company used the proceeds of this loan as
security for its non-recourse guarantee under an agreement ("Finova Agreement")
with the Private Label Group's lender, Finova Capital Corporation ("Finova").
In January 1996, the Company issued a promissory note of $160,000 to
Metco. The note accrued interest at 10% per annum and was due, as to $100,000,
in February 1996, and, as to the remaining principal plus accrued interest, in
March 1996. In consideration for this loan, the Company issued Metco 25,000
shares of Common Stock and an option to purchase 50,000 shares of Common Stock
at $1.25 per share, which expires in January 1999. Additionally, the Company
issued 25,000 shares of Common Stock to Metco as a penalty for the Company's
late repayment of a portion of the loan. The note was repaid in February and May
1996. The Company used $10,000 of the proceeds of this loan for working capital
and $150,000 as security for its non-recourse guarantee under the
Finova Agreement.
In February 1996, the Company completed a $250,000 private placement of
5 units, each unit consisting of (i) the Company's two month 12% promissory note
in the original principal amount of $50,000, and (ii) 25,000 shares of the
Company's Common Stock to three accredited investors, including 50,000 shares
to Tusany ("February 1996 Private Placement"). The Company received net proceeds
of $210,000 (after deducting expenses of $7,500 and commissions of $32,500 to
the Underwriter for acting as placement agent). As part of the Company's
obligation in connection with the acquisition of the Private Label Group, the
net proceeds of the February 1996 Private Placement were advanced to the
Private Label Group to pay a portion of a jury award rendered in a legal
proceeding against the Private Label Group. See "Underwriting."
In connection with the 1995 and February 1996 Private Placements,
Gerard Semhon, the Company's Chief Executive Officer and Chairman of the Board,
agreed to indemnify the Company against any claims that may be asserted against
the Company by creditors of Dominion Associates, Inc. ("Dominion"), a company
that ceased operations in May 1995. Gerard Semhon, the Chief Executive Officer
and a Director of the Company, and Constantine Bezas, the President and a
Director of the Company, served as executive officers of Dominion.
In February 1996, the Company issued 10,000 shares of Common Stock for
legal services rendered to the Company.
53
<PAGE>
In July 1996, the Company completed the July 1996 Private Placement of
978,747 shares of Common Stock at $2.00 per share to 28 accredited investors,
including 100,000 shares issued to Tusany for its participation in the
financing. The Company received $1,314,950 of net proceeds (after deducting
expenses of $11,050, commissions of $174,000 to the Underwriter for acting as
the placement agent and the promissory note conversions described below). As
part of the July 1996 Private Placement, certain noteholders of the Company,
including holders of notes issued in the 1995 and February 1996 Private
Placements converted an aggregate of $457,494 principal amount and interest
into 278,747 shares of Common Stock. Of the aggregate debt converted, Tusany
converted principal and interest due under a $50,000 promissory note issued in
the February 1996 Private Placement into 52,383 shares of Common Stock and
principal and interest due under a $200,000 promissory note issued in October
1995 into 106,972 shares of Common Stock. The Company used the net proceeds of
the July 1996 Private Placement (i) to repay noteholders that did not convert
their indebtedness, (ii) to repay other indebtedness, (iii) for the purchase
price of and other fees related to the Private Label Group acquisition and (iv)
for working capital. See "Underwriting."
In July 1996, the Company issued a promissory note of $22,000 to Metco.
The note and interest were repaid in September 1996. The Company used the
proceeds of this loan for working capital.
On August 22, 1996, the Company purchased all of the issued and
outstanding capital stock of the four companies that comprise the Private Label
Group from Assante. The purchase price was $2,782,500, of which $125,000 was
paid in cash at the closing, $1,675,000 (which bears interest at 9% per annum)
was paid by the delivery of the Company's promissory note (the "Assante Note"),
and $850,000 will be paid promptly after the date of this Prospectus by the
issuance of Common Stock of the Company valued at the public offering price.
$359,375 of principal of the Assante Note plus interest, will be paid at the
earlier of July 15, 1997 or upon the closing of this Offering, and the balance
will be paid in approximately nine equal installments commencing 90 days after
the first payment and each six months thereafter. The Assante Note may be
prepaid without penalty at any time and is secured by a pledge of the purchased
stock. One half of the stock will be released from the pledge when one half of
the Assante Note is paid and the balance of the stock thereafter will be
released pro rata upon payments of the Assante Note. In addition to the purchase
price, the Company is obligated to pay DiVita an amount equal to 5% of the
consideration Assante receives on the sale of the Private Label Group stock.
Therefore, at the closing, the Company paid DiVita $6,250, in cash, issued
a promissory note to DiVita in the original principal amount of $83,750
(the "DiVita Note") and upon completion of this Offering is to issue DiVita such
number of shares of the Company's Common Stock as is valued at $42,500. The
terms of the DiVita Note are substantially identical to the terms of the Assante
Note. $17,968 of principal of the DiVita Note, plus interest, will be paid at
the earlier of July 15, 1997, or upon the closing of the Offering. In addition,
upon
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completion of this Offering, the Company is to issue Private Label Group's
counsel such number of shares of the Company's Common Stock as is valued at
$7,500 as payment for legal services rendered to the Private Label Group in
connection with the acquisition. See "Use of Proceeds."
As part of the redemption of the stock of the companies which comprise
the Private Label Group from DiVita (i) the companies owe the balance of the
redemption price ($390,830 as of June 30, 1996) which is payable in monthly
installments of $5,551.02 (inclusive of interest at 6% per annum) through
September 2003 and (ii) DiVita serves as a consultant to the Private Label Group
pursuant to a consulting agreement dated August 17, 1993. Mr. Divita provides
services relating to the computer system of the Private Label Group. The
agreement provides for a monthly consulting fee of $11,117 through August 2003.
In connection with the acquisition of the Private Label Group, in
February 1996 the Company (i) secured an uncommitted line of credit with Finova
to replace the Private Label Group's previous line of credit, (ii) pledged a
$250,000 certificate of deposit as security for its non-recourse guarantee
under the Finova Agreement, and (iii) paid $250,000 of a jury award of
approximately $260,000 rendered in a legal proceeding against the Private Label
Group. The Finova Agreement prohibits the payment of dividends so long as
certain indebtedness is outstanding.
As a condition, and on the closing, of the acquisition of the Private
Label Group, the Company entered into an employment agreement with Assante under
which he serves as President of each of the Private Label Group companies.
Assante receives a base annual salary of $195,000. Assante will receive a bonus
equal to 10% of the amount by which the Private Label Group's annual profit,
before interest and taxes but after depreciation and amortization, exceeds
$500,000 for each of the years ending December 31, 1997, 1998, and 1999. The
employment agreement is for three years and is renewable at his option for an
additional two year period. See "Management - Employment Agreements."
Mr. Assante is the sole officer, director and shareholder of
Contemporary, a company that subleases approximately 10,000 square feet
at the Facility from the Company on a month-to-month basis for approximately
$6,500 per month. Mr. Assante is also a principal shareholder of Rubigo. Both
Contemporary and Rubigo are customers of the Private Label Group. For the years
ended December 31, 1995 and December 31, 1994, and for the nine months ended
September 30, 1996, Contemporary accounted for approximately $337,500, $288,000
and $217,500, respectively, of Private Label Group's revenues. For the same
periods, Rubigo accounted for approximately $169,000, $441,000 and $265,000,
respectively, of Private Label Group's revenues. The Company believes that
transactions between the Company and Contemporary (including the sublease) and
Rubigo are on terms no less favorable than transactions involving unaffiliated
third parties.
In October 1996, the Company acquired all of the assets of Scent
Overnight, a company of which Gerard Semhon, the Company's Chief Executive
Officer and Chairman of the Board, is a majority stockholder for (i) $225,000
and (ii) the assumption of certain indebtedness totalling approximately
$210,000. The purchase price was arbitrarily determined between affiliates and
was not determined by an independent appraisal of the assets. The purchase
price was not based upon any recognized criteria of value and may have exceeded
the fair market value of the assets acquired. The acquisition is being accounted
for by the Company under the purchase method of accounting with the basis used
to record the assets of Scent Overnight as zero, which is Scent Overnight's
historical cost basis. See the financial statements and related notes thereto
included elsewhere in this Prospectus. The $225,000 plus interest at 9% per
annum is due upon the consummation of this Offering and is evidenced by the
Company's promissory note ("Scent Note"). The assumed obligation is due to
Liam Development Ltd. ("Liam") pursuant to a promissory note made by Scent
Overnight ("Liam Note"). In October 1995, the Company granted the right to
convert the principal due under the Liam Note into shares of the Company's
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Common Stock at $1.00 per share. Liam converted the principal due under the Liam
Note in October 1996 into 210,000 shares. The Company intends to apply
$268,500 of the proceeds of this Offering to repay the Scent Note and the
accrued interest due under the Liam Note. Scent Overnight was formed by Mr.
Semhon to engage in the Distributed Fragrances business, however, in July 1994,
it suspended its operations due to lack of capital. Prior to the suspension of
operations, Scent Overnight had conducted research into the availability of the
resources necessary for the proposed business, such as locating order taking,
order fulfillment, delivery and advertising services and sources of supply and
developed a plan for the operation of the business. This information was among
the assets acquired by the Company in the acquisition. See "Use of Proceeds"
and "Business - Trademarks."
Between June 1995 and June 1996, the Company advanced an aggregate of
$184,480 to Messrs. Semhon and Bezas, officers and directors of the Company. Of
the $184,480, $48,130 is jointly and severally owed by Messrs. Semhon and Bezas,
$120,750 is owed by Mr. Semhon and $15,750 is owed by Mr. Bezas. The advances do
not bear interest and will be repaid immediately following the Offering.
In October 1996, the Company completed a $300,000 private placement of
12 units, each unit consisting of (i) the Company's 12 month 10% promissory note
(each a "Bridge Note I") and (ii) a warrant to purchase up to 25,000 shares of
Common Stock (each a "Bridge Warrant I") ("October 1996 Private Placement") to
seven accredited investors, including Metco, Tusany and Michalaur, who invested
$25,000, $50,000 and $50,000, respectively. The Company intends to repay the
Bridge Notes I out of the proceeds of this Offering. On the date of this
Prospectus, the terms of the Bridge 300,000 Warrants I will be modified
automatically to the terms of the 300,000 Redeemable Warrants. The Company
received net proceeds of $270,000, after deducting commissions of $30,000 to
the Underwriter for acting as placement agent. The net proceeds of the October
1996 Private Placement were used for expenses related to the Offering and
working capital. See "Selling Securityholders," "Description of Securities -
Redeemable Warrants," and "Use of Proceeds" and "Underwriting."
In November 1996, the Company issued a promissory note in the amount of
$55,500 to Mr. Robert E. Lee and used the proceeds of this loan for working
capital. In December 1996 and January 1997, the Company paid $15,000 of
principal and $5,550 of prepaid interest due under the note. The remaining
principal is due on the earlier of February 1, 1997, or upon the date of the
closing of this Offering. In consideration for extending the original maturity
date of this loan, Mr. Lee received warrants to purchase 55,500 shares of Common
Stock at $4.80 per share, which expire in December 2000.
In November 1996, the Company entered into the Metco Consulting
Agreement with Metco pursuant to which Metco provides general management
consulting services and advisory services in the establishment of distribution
channels in the United Kingdom and Ireland. The Metco Consulting Agreement has
a two year term and provides for payment of a $16,500 consulting fee, which was
prepaid in November 1996.
In January 1997, the Company completed a $200,000 private placement of
8 units, each unit consisting of (i) the Company's 12 month 10% promissory
note (each a "Bridge Note II") and (ii) a warrant to purchase up to 25,000
shares of Common Stock (each a "Bridge Warrant II") ("January 1997 Private
Placement") to three accredited investors, including Edward Pedersen, one of
the Company's founders. Mr. Pedersen received a $50,000 Bridge Note II and a
50,000 Bridge Warrant II in connection with his participation in the January
1997 Private Placement. The Company intends to repay the Bridge Notes II out
of the proceeds of this Offering. On the date of this Prospectus, the terms of
the 200,000 Bridge Warrants II will be modified automatically to 200,000
Redeemable Warrants. The Company received net proceeds of $180,000
after deducting commissions of $20,000 to the Underwriter for acting as
placement agent. The net proceeds of the January 1997 Private Placement were
used for expenses related to the Offering and working capital. See "Selling
Securityholders," "Description of Securities - Redeemable Warrants," "Use of
Proceeds" and "Underwriting."
In April 1997, the Company completed a $350,000 private placement of
14 units, each unit consisting of (i) the Company's 12 month 10% promissory note
(each a "Bridge Note III") in the principal amount of $25,000 and (ii) a warrant
to purchase up to 25,000 shares of Common Stock (each a "Bridge Warrant III")
("April 1997 Private Placement") to seven accredited investors, including Metco
and Michaular, who invested $87,500 and $106,250, respectively. The Company
intends to repay the Bridge Note III out of the proceeds of this Offering.
On the date of this Prospectus, the terms of the 350,000 Bridge Warrants III
will be modified automatically to 350,000 Redeemable Warrants. The Company
received net proceeds of $315,000 after deducting commissions of $35,000 to the
Underwriter for acting as placement agent. The net proceeds of the April 1997
Private Placement were used for expenses related to the Offering and working
capital. See "Selling Securityholders," "Description of Securities - Redeemable
Warrants," "Use of Proceeds," and "Underwriting."
Except as disclosed above and pursuant to certain loan transactions
with officers, all previous transactions between the Company and its officers,
directors or 5% stockholders and their affiliates were made on terms no less
favorable to the Company than those available from unaffiliated parties. See
"Risk Factors -- Related Party Transactions; Loans Due From Officers." All
future transactions between the Company and its officers, directors or 5%
stockholders, and their affiliates, will be on terms no less favorable than
could be obtained from unaffiliated third parties.
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DESCRIPTION OF SECURITIES
The following summary description of the Securities is qualified in its
entirety by reference to the Company's Certificate of Incorporation, as amended,
and its By-laws, copies of which have been filed as Exhibits to the Registration
Statement of which this Prospectus is a part.
The Company is authorized to issue 24,000,000 shares of Common Stock,
$.001 par value per share and 1,000,000 shares of Blank Check Preferred Stock,
$.001 per share. As of the date of this Prospectus, prior to giving effect to
the Securities to be issued in the Offering, there are 3,878,747 shares of
Common Stock outstanding and held by 50 stockholders of record. No shares of
Preferred Stock have been issued by the Company. An additional 825,500 shares
of Common Stock are reserved for issuance upon the exercise of various options
and warrants outstanding as of the date of this Prospectus.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
of Common Stock on all matters submitted to a vote of stockholders of the
Company and to receive dividends when declared by the Board of Directors from
funds legally available therefor. Upon the liquidation, dissolution or winding
up of the Company, holders of shares of Common Stock are entitled to share
ratably in any assets available for distribution to stockholders after payment
of all obligations of the Company and after provision has been made with
respect to each class of stock, if any, having preference over the Common
Stock. Holders of shares of Common Stock do not have cumulative voting rights
or preemptive, subscription or conversion rights. See "Risk Factors - Dividend
Policy."
Redeemable Warrants
Each Redeemable Warrant entitles its holder to purchase one share of
Common Stock at an exercise price of _________ per share [120% of the initial
public offering price] (the "Exercise Price"). The Redeemable Warrants are
exercisable commencing one year from the date of this Prospectus and expire five
years after the date of this Prospectus.
The Redeemable Warrants will be issued pursuant to a warrant agreement
(the "Redeemable Warrant Agreement") among the Company, the Underwriter and the
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form.
The Exercise Price of the Redeemable Warrants and the number and kind
of shares of Common Stock or other securities and property issuable upon
exercise of the Redeemable Warrants are subject to adjustment in certain
circumstances, including stock splits, dividends, or subdivisions, combinations
or recapitalizations of the Common Stock. Additionally, an adjustment will be
made upon the sale of all or substantially all of the assets of the Company in
order to enable Warrantholders to purchase the kind and number of shares of
stock or other securities or property (including cash) receivable in such event
by a holder or the number of shares of Common Stock that might otherwise have
been purchased upon exercise of the Redeemable Warrant.
The Redeemable Warrants do not confer upon the holder any voting or
any other rights of a stockholder of the Company. Upon notice to the
Warrantholders, the Board of Directors has the
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right to reduce the exercise price or extend the expiration date of the
Redeemable Warrants.
Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant certificate evidencing those Redeemable Warrants on or prior to the
respective expiration date (or earlier redemption date) of the Redeemable
Warrants at the offices of the Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the warrant certificate completed and executed
as indicated accompanied by payment of the full exercise price (by certified
check payable to the order of the warrant agent) for the number of Redeemable
Warrants being exercised.
No Redeemable Warrant will be exercisable unless at the time of
exercise the Company has filed with the Commission a current prospectus covering
the issuance of shares of Common Stock issuable upon exercise of the Redeemable
Warrant and the issuance of shares has been registered or qualified or is deemed
to be exempt from registration or qualification under the securities laws of the
state of residence of the Warrantholder. The Company has undertaken to use its
best efforts to maintain a current prospectus relating to the issuance of shares
of Common Stock upon the exercise of the Redeemable Warrant Agreement. While it
is the Company's intention to maintain a current prospectus, there can be no
assurance that it will be able to do so. See "Risk Factors - Current
Prospectus and State Blue Sky Registration Required to Exercise Redeemable
Warrants."
No fractional shares will be issued upon exercise of the Redeemable
Warrants. However, the Company will pay to that Warrantholder, in lieu of the
issuance of any fractional share which would otherwise be issuable, an amount in
cash based on the market value of the Common Stock on the last trading day prior
to the exercise date.
The Redeemable Warrants are redeemable by the Company at a price of
$.10 per Redeemable Warrant, commencing one year after the date of this
Prospectus and prior to their expiration, on 30 days prior written notice to the
registered holders of the Redeemable Warrants, provided the closing bid price
per share of the Common Stock if traded on NASDAQ (or the last sale price, if
the Common Stock is then traded on a national securities exchange or the Nasdaq
National Market) for a period not less than 20 trading days in any 30 day
trading period, ending not more than 15 days prior to the date of any redemption
notice, exceeds at least 150% of the then Exercise Price. The Redeemable
Warrants shall be exercisable until the close of the business day preceding the
date fixed for redemption. Under certain circumstances the Underwriter will
receive a warrant solicitation fee. See "Underwriting."
Preferred Stock
The Company is authorized to issue preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company has no present intention to issue any shares
of its preferred stock.
Registration Rights
The Company is registering 905,500 Redeemable Warrants in the
Concurrent Offering of behalf of the Selling Securityholders, which securities
were issued in connection with private placements and certain financings. The
securities offered in the Concurrent Offering are being registered pursuant to
the exercise of piggyback registration rights granted by the Company. Certain
Securityholders have demand and piggyback registration rights. Such
Securityholders are subject to agreements not to sell their securities for one
to two years. See "Concurrent Registration of Securities" and "Certain
Transactions."
Underwriter's Warrants
See "Underwriting" for a description of the material terms of the
Underwriter's Warrants to be issued by the Company to the Underwriter upon
completion of the Offering.
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Delaware Law with Respect to Business Combinations
As of the date of this Prospectus, the Company will be subject to the
State of Delaware's "business combination" statute, Section 203 of the Delaware
General Corporation Law. In general, such statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with a person who
is an "interested stockholder" for a period of three years after the date of the
transaction in which that person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates, owns (or, within three years prior to
the proposed business combination, did own) 15% or more of the Delaware
corporation's voting stock. The statute could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
Reports to Stockholders
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available such other
periodic reports as the Company may determine to be appropriate or as may be
required by law.
Application for Listing
The Company has applied for listing of the Common Stock and Redeemable
Warrants on NASDAQ under the symbols "AZUR" and "AZURW," respectively. No
assurance can be given that such applications will be approved or that a trading
market for the Securities will develop or, if developed, be sustained.
Transfer Agent and Redeemable Warrant Agent
The Company has appointed North American Transfer Co. as Transfer Agent
and Registrar for its Common Stock and Warrant Agent for its Redeemable
Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon sale of the Securities, the Company will have outstanding
5,258,747 shares of Common Stock and 1,200,000 Redeemable Warrants (5,438,747
shares of Common Stock, and 1,380,000 Redeemable Warrants if the Underwriter's
Over-Allotment Option is exercised in full). The Securities to be sold in this
Offering (assuming no exercise of the Underwriter's Over-Allotment Option) and
905,500 Redeemable Warrants registered concurrently with this Prospectus being
offered pursuant to the Selling Securityholder Prospectus included in the
Registration Statement of which this Prospectus forms a part, will be freely
tradable subject to "lock-up" agreements described below without restriction
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (in general, a person who has a control relationship with the
Company), which shares will be subject to the resale limitations of Rule 144
adopted under the Securities Act ("Rule 144"). There are currently 3,878,747
shares deemed to be "restricted securities," as that term is defined under Rule
144, in that such shares were issued and sold by the Company in private
transactions not involving a public offering and are not currently part of an
effective registration. Except for the "lock-up" agreements described below,
such shares will become eligible for sale under Rule 144, at various times
between April 27, 1997 and October, 1997. In addition, the Company has granted
the Underwriter demand and piggyback registration rights with respect to the
securities issuable upon exercise of the Underwriter's Warrants. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
even the availability of such shares for sale will have on the market prices
prevailing from time to time. If the holders of the shares eligible for
registration so choose they could require the Company to register all of said
shares at any time.
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In general, under Rule 144, subject to the satisfaction of certain
other conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or if the Common Stock is quoted on NASDAQ or a stock exchange, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least two years is entitled to sell such shares under Rule
144 without regard to any of the volume limitations described above.
All of the Company's current stockholders and warrantholders have
agreed not to sell or otherwise dispose of their shares of Common Stock
(the "Lock-Up") for a period ranging from three months to two years following
completion of the Offering without the prior written consent of the Underwriter.
Following expiration of the Lock-Up, 2,580,000 shares of Common Stock
outstanding prior to the Offering will be available for immediate resale
pursuant to Rule 144, subject to compliance with affiliates of the Company with
the volume limitations of Rule 144. Affiliates of the Company currently own an
aggregate of 2,041,000 shares Common Stock. See "Underwriting."
Prior to this Offering, no market for the Securities existed. The
effect, if any, of public sales of the restricted shares of Common Stock or the
availability of such shares for future sale on prevailing market prices cannot
be predicted. Nevertheless, the possibility exists that substantial amounts of
restricted shares may be resold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement") between the Company and the
Underwriter, the Underwriter has agreed to purchase from the Company, on a "firm
commitment" basis, all of the Securities.
The Underwriter has advised the Company that it proposes initially to
offer the Securities to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
prices, less concessions not in excess of $___ per share of Common Stock and
$___ per Redeemable Warrant.
The Underwriter has informed the Company that it does not expect sales
to discretionary accounts to exceed five percent of the securities offered
hereby.
The Company has granted the Underwriter an option, exercisable during
the 30 calendar day period after the closing of the Offering, to purchase from
the Company at the initial public offering price less underwriting discounts and
the non-accountable expense allowance, up to an aggregate of 180,000 shares of
Common Stock and/or 180,000 Redeemable Warrants for the sole purpose of covering
over allotments, if any.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, none of which has been
paid to date. Further, the Company has agreed to reimburse the Underwriter for
certain accountable expenses relating to the Offering.
Upon the exercise of any Redeemable Warrant for a period of four years
commencing one year after the date of this Prospectus, the Company has agreed to
pay to the Underwriter a fee of 5% of the exercise price for each Redeemable
Warrant exercised; provided, however, that the Underwriter will not be entitled
to receive such compensation in Redeemable Warrant exercise transactions in
which (i) the market price of Common Stock at the time of exercise is lower than
the exercise price of the Redeemable Warrants; (ii) the Redeemable Warrants are
held in any discretionary account; (iii) disclosure of compensation arrangements
is not made, in addition to the disclosure provided in this Prospectus, in
documents provided to holders of the Redeemable Warrants at the time of
exercise; (iv) the exercise of the Redeemable Warrants is unsolicited by the
Underwriter; (v) the solicitation of exercise of the Redeemable Warrants was in
violation of Regulation M promulgated under the Exchange Act; or (vi) the
Underwriter is not designated in writing as the soliciting NASD Member. The
Underwriter and any other soliciting broker/dealers will be prohibited from
engaging in any market making activities or solicited brokerage activites with
regard to the Company's securities during the periods prescribed by Rule 101 of
Regulation M before the solicitation of the exercise of any Warrant until the
later of the termination of such solicitation; activity or the termination of
any right the Underwriter and any other soliciting broker/dealer may have to
receive a fee for the solicitation of the exercise of the Redeemable Warrants.
All of the Company's current stockholders and warrantholders have
agreed not to sell or otherwise dispose of any of their shares of Common Stock,
Redeemable Warrants or shares of Common Stock issuable upon conversion or
exercise of securities convertible into Common Stock for a period ranging from
three months to two years from the date of this Prospectus without the prior
written consent of the Underwriter. An appropriate restrictive legend
will be marked on the face of certificates representing all such shares of
Common Stock and Redeemable Warrants. See "Principal Stockholders."
The Underwriter has no present intention, plan, proposal, arrangement
or understanding to engage in any transactions with the Selling Securityholders
with regard to their securities of the Company or to waive or shorten any
lock-ups. If any such transaction is entered into or any such lock-ups are
waived or shortened, to the extent that the Company is aware of any such
transaction or early release and is required to disclose the same, such
information will be disclosed in a timely manner. The Underwriter has no
knowledge of present or future plans, proposals, agreements, arrangements or
understandings with respect to engaging in transactions with or by the Selling
Securityholders.
The Company has agreed, if requested by the Underwriter at any time
within three years after the date of closing of the Offering, to nominate and
use its best efforts to elect a designee of the Underwriter as a director of the
Company or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. Such designee may be an officer, director,
partner, employee, affiliate of or consultant to the Underwriter. The person to
be designated by the Underwriter has not been identified to date.
The Company has also agreed to retain the Underwriter, pursuant to a
financial advisory and investment banking agreement (the "Advisory Agreement"),
as the Company's financial consultant at a monthly rate of $2,000 for 24 months
commencing on the date of this Prospectus, all of which is payable at the
closing of the Offering. Pursuant to the Advisory Agreement, the
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Underwriter will render certain financial advisory and investment banking
services to the Company, including advice as to the Company's financial public
relations, internal operations, corporate finance matters and other related
matters.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, warrants to purchase from the Company
for four years commencing one year after the date of this prospectus. 120,000
shares of Common Stock and/or 120,000 Redeemable Warrants (the "Underwriter's
Warrants") at an excess price equal to 150% of the initial public offering price
of the Common Stock and Redeemable Warrants. The shares of Common Stock and
Redeemable Warrants contained in the Underwriter's Warrants will be identical to
the Securities being offered hereby. The Underwriter's Warrants contain
anti-dilution provisions identical to the Redeemable Warrants that provide for
adjustment of the exercise price upon the occurrence of certain events. The
Underwriter's Warrants are not transferable for a period of one year after the
date hereof, except to officers of the Underwriter, members of the selling group
and their officers and partners.
The Company has agreed that, upon written request of the then holder(s)
of a majority of the Redeemable Warrants and the shares of Common Stock issued
and/or issuable upon exercise of the Underwriter's Warrants (the "Underwriter's
Warrant Shares") which were originally issued to the Underwriter or to its
designees, made at any time within the period commencing one year and ending
five years after the Effective Date, the Company will file at its sole expense,
no more than once, a registration statement under the Securities Act
registering the Underwriter's Redeemable Warrants and Warrant Shares. The
Company has agreed to use its best efforts to cause such a registration
statement to become effective. The holders of the Underwriter's Warrants may
demand registration without exercising the Underwriter's Warrants and, in fact,
are never required to exercise the same.
The Company has also agreed that if, at any time within the period
commencing one year and ending five years after the Effective Date, it should
file a registration statement with the Commission pursuant to the Securities
Act, regardless of whether some of the holders of the Underwriter's Warrants
and the Underwriter's Warrant Shares shall have availed themselves of any
of the registration rights above, the Company, at its own expense, will
offer to said holders (with certain exceptions) the opportunity to register
or qualify the Underwriter's Warrant Shares. The objection of a subsequent
underwriter to the above "piggyback" registration rights would preclude such
inclusion. However, in such event the Company will, within six months of the
completion of such subsequent underwriting, file at its sole expense a
registration statement relating to such excluded securities.
During the term of the Underwriter's Warrants, the holders of the
Underwriter's Warrants are given the opportunity to profit from a rise in the
market price of the Securities. To the extent that the Underwriter's Warrants
are exercised, dilution of the interests of the Company's then stockholders will
occur. Furthermore, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holder of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than to those provided in the Underwriter's
Warrants.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement of which this Prospectus constitutes
a part, including liabilities under the Securities Act. To the extent this
section may purport to provide exculpation from possible liabilities arising
under the federal securities laws, the Company has been advised that it is the
opinion of the Commission that such indemnification is against public policy and
is therefore unenforceable.
In connection with this Offering, certain underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The underwriters also may create a short position for
the account of the underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the underwriter may impose "penalty bids" under contractual
arrangements with other underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other underwriters,
the selling concession with respect to shares of Common Stock and Warrants that
are distributed in the Offering but subsequently purchased for the account of
the Underwriter in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if they
are undertaken they may be discontinued at any time.
In addition, the Underwriting Agreement provides that for a period of
two years from the date of the Offering, the Company will not issue any shares
of Common Stock or Preferred Stock, or securities convertible into or
exercisable for Common Stock or Preferred Stock, without the prior written
consent of the Underwriter. However, the Company may issue securities (A) upon
(i) the exercise of any warrants or options outstanding as of the completion of
this Offering, and (ii) the exercise of the Underwriter's Warrants, (B) pursuant
to the Company's 1997 Plan, or (C) in connection with any merger or acquisition
of another entity by the Company.
The Underwriter has acted as the placement agent for the Company in
private securities offerings conducted between December 1995 and April 1997,
for which the Placement Agent received commissions and expenses aggregating
approximately $400,000. In January 1996, the Company issued a promissory note
of $50,000 to a principal of the Underwriter. The note and accrued interest
were repaid in April and May 1996. See "Certain Transactions."
The foregoing is a summary of the principal terms of the Underwriting
Agreement, the Underwriter's Warrants, and the Advisory Agreement and does not
purport to be complete. Reference is made to the copies of the Underwriting
Agreement, the Underwriter's Warrant Agreement and the Advisory Agreement that
are filed as exhibits to the Registration Statement
62
<PAGE>
of which this Prospectus constitutes a part.
Prior to the Offering, there has been no public market for the
Securities offered hereby. Consequently, the initial public offering price of
the Securities and the exercise price and other terms of the Redeemable Warrants
have been determined by negotiation between the Company and the Underwriter and
are not necessarily related to the Company's asset value, earnings, book value
or other such criteria of value. Factors considered in determining the initial
public offering price of the Securities and the exercise price of the
Redeemable Warrants include the prospects for the industry in which
the Company operates, the Company's management, the general condition of the
securities markets and the demand for securities in similar companies.
63
<PAGE>
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, 905,500 Warrants (the "Selling
Securityholders' Warrants") and 905,500 shares underlying the Selling
Securityholders' Warrants (the "Warrant Shares") have been registered by the
Company under the Securities Act on behalf of certain of Selling
Securityholders, pursuant to a Selling Securityholders' Prospectus included
within the Registration Statement of which this Prospectus forms a part. The
Selling Securityholders' Warrants and the Selling Securityholders' Warrant
Shares are not part of this underwritten offering. All of the Selling
Securityholders have agreed not to sell or otherwise dispose of the Selling
Securityholders' Warrants and the Selling Securityholders' Warrant Shares for a
period of three months following completion of the Offering without the prior
written consent of the Underwriter. The Company will not receive any of the
proceeds from the sale of the Selling Securityholders' Warrants or the Selling
Securityholders' Warrant Shares, but will receive proceeds from the exercise of
the Selling Securityholders' Warrants. See "Underwriting."
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters will be passed upon for the Company by Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP, New York, N.Y. Certain legal matters will be passed
upon for the Underwriter by Snow Becker Krauss P.C., New York, N.Y. Gersten,
Savage, Kaplowitz, Fredericks & Curtin, LLP has acted as counsel to the
Underwriter in other transactions and may so act in the future.
EXPERTS
The audited financial statements for the years ended, December 31, 1995
and 1996 included in the Prospectus have been audited by Feldman Radin & Co.,
P.C., independent certified public accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein, and are included
in reliance upon such report and upon the authority of said firm as experts in
accounting and auditing.
64
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
For further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements herein contained concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. The Registration Statement and the exhibits may be
inspected without charge at the offices of the Commission and, upon payment to
the Commission of prescribed fees and rates, copies of all or any part thereof
may be obtained from the Commission's principal office at the Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. Electronic registration statements filed through the Electronic Data
Gathering, Analysis, and Retrieval system are publicly available through the
Commission's Website (http://www.sec.gov).
On the date which the Registration Statement of which this Prospectus
forms a part is declared effective by the Securities and Exchange Commission,
the Company will become subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, will file reports, proxy and information statements and other
information with the Securities and Exchange Commission. Such reports, proxy and
information statements and other information can be inspected and copies at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of such material may also
be obtained from the Public Reference Section of the Commission at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically. The Company intends to furnish its
stockholders with annual reports containing audited financial statements and
such other reports as the Company deems appropriate or as may be required by
law.
65
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
AZUREL LTD. AND SUBSIDIARIES
Independent Auditor's Report ............................. F-2
Consolidated Balance Sheets .............................. F-3
Consolidated Statements of Operations .................... F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows .................... F-6
Notes to Consolidated Financial Statements ............... F-8
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
Independent Auditor's Report ............................. F-22
Combined Balance Sheets .................................. F-23
Combined Statements of Operations ........................ F-24
Combined Statements of Changes in Stockholders' Deficit .. F-25
Combined Statements of Cash Flows ........................ F-26
Notes to Combined Financial Statements ................... F-27
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Statement of Operations - Year Ended December 31 F-34
Pro Forma Statement of Operations - Year Ended December 31 F-35
Notes to Unaudited Pro Forma Financial Statements ........ F-36
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
Azurel Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Azurel
Ltd. and Subsidiaries as of December 31, 1996 and the related statements of
operations, changes in stockholders' deficit and cash flows for the year ended
December 31, 1996 and from June 26, 1995 (inception) through December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Azurel Ltd. and
Subsidiaries as of December 31, 1996 and the results of its operations and its
cash flows for the year ended December 31, 1996 and from June 26, 1995
(inception) through December 31, 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Azurel Ltd. and Subsidiaries will continue as a going concern. As discussed in
Note 3 to the financial statements, the Company has incurred significant net
losses and has a working capital deficit which raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 3. The financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
March 7, 1997
New York, New York
F-2
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
March 31, December 31,
1997 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 64,716 $ -
Restricted cash 268,731 268,731
Accounts receivable, net of allowance for doubtful
account of $50,000 and $50,000, respectively 1,619,074 1,515,407
Note receivable affiliate 269,279 255,679
Inventories 1,325,154 1,241,509
Prepaid expenses 49,146 50,641
Due from stockholders and related parties 184,480 184,480
Other current assets 70,395 106,891
---------- ----------
TOTAL CURRENT ASSETS 3,850,975 3,623,338
FURNITURE AND EQUIPMENT 527,241 571,507
DEFERRED FINANCING COSTS 48,977 32,797
DEFERRED REGISTRATION COSTS 181,099 175,514
GOODWILL 3,139,687 3,180,214
OTHER ASSETS 60,470 60,470
--------- -----------
$ 7,808,449 $ 7,643,840
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ - $ 10,635
Accounts payable 1,103,826 1,058,163
Accrued expenses 1,090,045 944,430
Accrued payroll taxes and penalties 596,679 519,323
Customer advances 57,760 57,760
Current portion of long-term debt 3,647,601 1,551,816
Current portion of capital lease obligations 20,398 19,770
---------- ----------
TOTAL CURRENT LIABILITIES 6,516,309 4,161,897
LONG-TERM DEBT 1,468,965 3,189,054
CAPITAL LEASE OBLIGATIONS 15,753 20,322
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.001 per share,
10,000,000 shares authorized 3,879 3,879
Additional paid-in capital 2,382,190 2,382,190
Accumulated deficit (2,576,472) (2,111,327)
----------- ----------
(190,403) 274,742
Less stock subscriptions receivable (2,175) (2,175)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (192,578) 272,567
----------- -----------
$ 7,808,449 $ 7,643,840
========= ==========
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
Three months Three months June 26, 1995
ended ended Year ended (Inception)
March 31, March 31, December 31, December 31,
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
NET SALES $ 2,733,182 $ - $ 3,745,336 $ -
COST OF GOODS OF SOLD 2,107,510 - 2,870,888 -
--------- ----------- ----------- ---------
GROSS PROFIT 625,672 - 874,448 -
GENERAL AND ADMINISTRATIVE EXPENSES 959,628 261,231 1,652,240 259,637
------------- ------------- ------------ -----------
LOSS FROM OPERATIONS (333,956) (261,231) (777,792) (259,637)
INTEREST EXPENSE 131,189 272,520 595,129 28,369
------------- ------------- ------------- ------------
NET LOSS $ (465,145) $ (533,751) $(1,372,9210) $ (288,006)
=========== ============ ============ ==========
LOSS PER COMMON SHARES $ (0.12) $ (0.21) $ (0.42) $ (0.20)
=============== =============== ============== =============
WEIGHTED AVERAGE COMMON SHARES
USED 3,878,747 2,485,599 3,287,759 1,426,146
============ ============ ============= ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Total
Common Stock Additional Stock Stockholders
Number of Paid-in Accumulated Subscriptions Equity
Shares Amount Capital Deficit Receivable (Deficit)
------ ------ ------- ------- ---------- ---------
Balance - June 26, 1995 (Inception)....... - $ - $ - $ - $ - $ -
Issuance of common stock 2,175,000 2,175 - - (2,175) -
Stock issued in connection with
bridge financing 125,000 125 64,734 - - 64,859
Stock issued for services 125,000 125 - - - 125
stock isued in connection with a loan 25,000 25 - - - 25
Distribution - - - (225,400) - (225,400)
Net (loss) - - - (288,006) - (288,006)
Balance - December 31, 1995................ 2,450,000 2,450 64,734 (513,406) (2,175) (448,397)
Stock issued in connection with
bridge financing 125,000 125 124,875 - - 125,000
Sale of common stock 750,000 750 1,283,150 - - 1,283,900
Stock issued for services 60,000 60 119,940 - - 120,000
Stock issued in connection with acquisition 5,000 5 21,245 - - 21,250
Stock issued in connection with a penalty 25,000 25 49,975 - - 50,000
Stock issued in connection with a loan 25,000 25 38,070 - - 38,095
Conversion of debt to common stock 438,747 439 642,701 - - 643,140
Stock options issued for services - - 37,500 - - 37,500
Distribution - - - (225,000) - (225,000)
Net(loss) - - - (1,372,921) - (1,372,921)
Balance - December 31, 1996................ 3,878,747 3,879 2,382,190 (2,111,327) (2,175) 272,567
Net (loss), three months ended -
March 31, 1997 (unaudited) - - - (465,145) - (465,145)
----------- ------- --------- ----------- ---------- ------------
Balance - March 31, 1997 (unaudited)....... 3,878,747 $ 3,879 $ 2,382,190 $ (2,576,472) $ (2,175) $ (192,578)
</TABLE>
See notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C> <C>
Three months Three months June 26, 1995
ended ended Year ended (Inception) to
March 31, March 31, December 31, December 31,
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (465,145) $ (533,751) $ (1,372,921) $ (288,006)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation 43,767 - 57,384 -
Amortization of goodwill 40,527 - 61,992 -
Amortization of discount on notes payable - 163,095 217,169 10,810
Amortization of deferred financing costs 14,189 47,604 118,271 -
Stock options issued for services - 37,500 37,500 -
Stock issued for penalty - - 50,000 -
Interest converted into stock - - 29,994 -
Stock issued for services - - 120,000 125
Changes in assets and liabilities, net of effects
of acquisitions:
(Increase) decrease in accounts receivable (117,267) - 34,613 -
(Increase) decrease in inventories (83,645) - 249,265 -
(Increase) decrease in prepaid expenses 1,495 - (50,042) -
(Increase) decrease in other current assets 36,496 - (9,694) -
(Increase) decrease in other assets - (3,685) (24,347) (490)
Increase (decrease) in accounts payable 46,162 - 465,329 -
Increase (decrease) in accrued expenses 222,971 57,435 218,844 127,730
Increase (decrease) in customer advance - - (97,382) -
---------- --------- --------- ----------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES (260,450) (231,802) 105,975 (149,831)
---------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment - - (87,411) -
Cash paid in acquisition of Private Label Group - - (665,107) -
---------- --------- --------- ----------
NET CASH USED IN INVESTING ACTIVITIES - - (752,518) -
---------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) in restricted cash - (137,612) (7,304) -
Increase (decrease) in cash overdraft (10,635) - 10,635 -
(Increase) in due from stockholders and related parties - (22,000) (92,100) (92,380)
(Increase) in due from the Private Label Group - (500,000) (675,600) (180,000)
(Increase) decrease in deferred financing costs (30,369) (37,500) (80,860) (70,208)
(Increase) in deferred registration costs (5,585) (29,550) (171,514) (4,000)
Payment of capital lease obligations (3,941) - (11,520) -
Proceeds from long-term debt 424,000 460,000 1,037,829 528,750
Payment of long-term debt (48,304) (100,000) (626,149) (28,750)
Costs incurred in connection with stock issuance - - (240,455) -
Issuance of common stock - 596,525 1,500,000 -
---------- --------- --------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 325,166 229,863 642,962 153,412
---------- --------- --------- ----------
NET INCREASE (DECREASE) IN CASH 64,716 (1,939) (3,581) 3,581
CASH AT BEGINNING OF PERIOD - 2,546 3,581 -
---------- --------- --------- ----------
CASH AT END OF PERIOD $ 64,716 $ 607 $ - $ 3,581
=========== =========== ========= ============
</TABLE>
See notes to financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C> <C>
Three months Three months June 26, 1995
ended ended Year ended (Inception) to
March 31, March 31, December 31, December 31,
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 52,727 $ - $ 259,083 $ -
=========== ============ ============ ==========
Taxes $ - $ - $ - $ -
=========== ============ ============ ==========
Non cash activities:
Issuance of common stock through long-term debt $ - $ 163,095 $ 163,095 $ 64,884
=========== ============ ============ ==========
Issuance of common stock through stock
subscriptions receivable $ - $ - $ - $ 2,175
=========== ============ ============ ==========
Issuance of common stock in connection with
acquisition of Private Label $ - $ - $ 21,250 $ -
=========== ============ ============ ==========
Conversion of debt to common stock $ - $ - $ 637,500 $ -
=========== ============ ============ ==========
Distribution through assumption of long term-debt $ - $ - $ 225,000 $ 225,400
=========== ============ ============ ==========
Purchase of equipment through capital lease obligations $ $ - $ 11,304 $
=========== ============ ============ ==========
Assumption of debt in connection with acquisition
of Private Label $ - $ - $ 1,758,750 $ -
=========== ============ ============ ==========
Stock issued for services $ - $ - $ 120,000 $ 125
=========== ============ ============ ==========
Stock options issued for services $ - $ - $ 37,500 $ -
=========== ============ ============ ==========
Stock issued for penalty $ - $ - $ 50,000 $ -
=========== ============ ============ ==========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements and footnotes for the three months ended March
31, 1997 and 1996 are unaudited. In the opinion of management, these
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the interim
financial statements. The results of operations for the interim periods
are not necessarily indicative of results that may be expected for the
full year.
1. BUSINESS
Azurel Ltd. (the "Company") was incorporated in Delaware on June 26,
1995. The Company acquired the stock of a cosmetic manufacturing
company, Private Label Cosmetics, Inc. and Affiliates (the "Private
Label Group") on August 22, 1996. In July 1996, the Company formed a
subsidiary, Scent 123, Inc. ("Scent 123"). In October 1996, Scent 123
acquired the assets of Scent Overnight, Inc. ("Scent Overnight") an
overnight delivery service of men's cologne and women's fragrances. The
Company will also market and develop original cosmetic and fragrance
lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation - The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries, Private Label Group and Scent 123. All
material intercompany transactions have been eliminated.
b. Accounting estimates - The preparation of financial statements
in accordance with generally accepted accounting principles
requires management to make significant estimates and
assumptions that effect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
c. Inventories - Inventories are recorded at the lower of cost or
market. Cost was determined using the average cost method.
d. Property and equipment - Property and equipment are stated at
cost and depreciated using the straight-line method over the
estimated useful lives of the assets.
e. Deferred registration costs - Deferred registration costs will
be charged against additional paid-in capital upon the
successful completion of the Company's proposed public
offering. In the event the offering is not completed, such
costs will be charged to expense.
f. Deferred financing costs - Deferred financing costs will be
charged to interest expense over the term of the respective
loans.
g. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables, accounts
payable, and accrued expenses approximate fair
F-8
<PAGE>
value based on the short-term maturity of these instruments.
h. Income taxes - The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No.
109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS No.
109 additionally requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred
tax assets.
i. Stock based compensation - The Company accounts for employee
stock transactions in accordance with APB Opinion No. 25,
"Accounting For Stock Issued To Employees." The Company has
adopted the proforma disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation."
j. Goodwill - Goodwill resulting from the acquisition of the
Private Label Group represents the remaining unamortized value
of the excess of the purchase price over the fair value of the
net assets of the Private Label Group. Goodwill is amortized
on a straight line basis over a period of 20 years.
k. Impairment of long - lived assets - The Company has adopted
Statement of Financial Accounting Standards No. 121,
"Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of" as of January 1, 1996.
Such adoption had no material effect on the financial
statements of the Company.
3. BASIS OF PRESENTATION
The Company's financial statements have been presented on a basis that
it is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
Company intends to seek additional equity capital through an initial
public offering to adequately fund operations, working capital needs
and growth plans.
The Company had incurred significant net losses from June 26, 1995
(inception) through December 31, 1996 and has a working capital
deficiency of approximately $1,200,000 at December 31, 1996 which
raises substantial doubt about its ability to continue as a going
concern. Accordingly, continued existence is dependent upon the
Company's ability to become profitable and to obtain additional equity
capital, neither of which can be assured.
F-9
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
December 31,
1996
-----------------
Raw Materials $ 672,769
Work In Process 483,282
Finished Goods 85,458
-----------------
$ 1,241,509
=================
</TABLE>
5. DUE FROM STOCKHOLDERS
As of December 31, 1996, the Company is owed $184,480 from
stockholders representing short term non-interest bearing advances.
6. NOTE RECEIVABLE AFFILIATE
As of December 31, 1996, the Company is owed $255,679 from an
affiliated company. The note is non-interest bearing and is due on
demand.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C> <C>
Estimated
useful lives
---------------------
Machinery and equipment held under
capital lease obligations 5-7 $ 41,478
Machinery and equipment 5-7 585,036
Leasehold improvements 15 2,377
-----------
628,891
Less accumulated depreciation 57,384
-----------
$ 571,507
===========
</TABLE>
F-10
<PAGE>
8. LONG-TERM DEBT
<TABLE>
<S> <C>
The following is a summary of long-term debt:
December 31,
1996
--------------
Note payable, bears interest at the rate of 6% per
annum. Monthly payments consisting of principal
and interest are approximately $5,551 through
August 2003. $ 390,829
Notes payable, bears interest at the rate of 8.5% per
annum. Due in June 1997. 91,375
Note payable to Finova Financial Corporation,
bears interest at the rate of prime plus 3% per
annum. Monthly payments of $10,150 are due
each month with the remaining balance due in
February 1998. 1,829,966
Notes payable to bridge lenders, bearing interest at
10% per annum, payable at the earlier of a public
offering or through October 1997. 300,000
Note payable to bridge lenders, bearing interest at
10% per annum, payable at the earlier of a public
offering or through December 1997. 100,000
Note payable, bearing interest at 9% per annum, due
at the earlier of a public offering or December 31,
1998. 225,000
Notes payable, bearing interest at 9% per annum,
principal and interest due in installments through
November 2000. 1,758,750
Other
44,950
-----------
4,740,870
Less current portion 1,551,816
------------
$ 3,189,054
===========
</TABLE>
F-11
<PAGE>
Long-term debt maturities for the next five years are as follows:
<TABLE>
<S> <C>
1997 $ 1,551,815
1998 2,144,134
1999 438,976
2000 442,170
2001 58,374
</TABLE>
9. ACCRUED PAYROLL TAXES AND PENALTIES
At December 31, 1996, the Private Label Group owed $519,323 in accrued
payroll taxes and penalties for the period September 1996 through
December 1996.
10. CAPITAL LEASE OBLIGATIONS
The Company leases machinery and equipment under non-cancelable lease
agreements which expire at various times through December 1999.
<TABLE>
<S> <C>
Principal portion of capital lease payments $ 40,092
Less: current portion 19,770
--------------
$ 20,322
==============
</TABLE>
The future minimum principal payments under capital leases are as
follows:
<TABLE>
<S> <C>
1997 $ 19,770
1998 18,714
1999 1,608
</TABLE>
11. PRIVATE PLACEMENTS AND OTHER FINANCING
a. In July 1995, the Company issued a promissory note in the
principal amount of $28,750 bearing interest at the rate of
10% per annum. The loan was repaid in September and October
1995. Additionally, the Company granted the lender the option
to purchase 150,000 shares of common stock at $1.00 per share
which expires in five years.
F-12
<PAGE>
b. In September through December 1995, the Company obtained
bridge loans totaling $250,000. The convertible promissory
notes bore interest at the rate of 12% per annum and are
payable at the earlier of (i) 18 months from the date of
issuance or (ii) upon the receipt by the Company of gross
proceeds of a minimum of $1,000,000 through any public or
private offering. Additionally, as consideration for the
bridge loans, the Company issued an aggregate of 125,000
shares of common stock to the lenders. These shares were
valued at $64,859. In July 1996, notes plus interest totaling
$138,784 were converted into 69,392 shares of common stock and
$132,859 was repaid.
c. In September 1995, the Company issued a promissory note in the
principal amount of $50,000 bearing interest at the rate of
10% per annum and secured by an aggregate of 200,000 shares of
common stock owned by two officers/directors of the Company.
As additional consideration for the loan, the Company issued
25,000 shares of common stock valued at $25 and granted the
lender the option to purchase 50,000 shares of common stock at
$1.00 per share, which expires in September 2002. The note and
accrued interest were repaid in April 1996.
d. In September 1995, the Company was negotiating the purchase of
Scent and assumed a promissory note owed by Scent in the
principal amount of $210,000 plus accrued interest of $15,400
which was recorded as a stockholder distribution. The note
bore interest at the rate of 8% per annum and was due with
accrued interest at the earlier of December 31, 1996 or upon
the closing of the Company's initial public offering. In
October 1996, the lender converted the principal due under the
note into 210,000 shares of common stock. In January 1997, the
accrued interest was extended and is due at the earlier of
March 31, 1997 or upon the effective date of a public
offering.
e. In October 1995, the Company issued a promissory note in the
principal amount of $200,000. The note bore interest at the
rate of 10% per annum and was due in October 1997. In July
1996, the lender converted the principal plus accrued interest
due under the note into 106,972 shares of common stock.
f. In December 1995 and February 1996 the Private Label Group
issued promissory notes in the principal amounts of $50,000
and $50,200 to the former stockholder. The remaining principal
balance of $91,375 plus interest at the rate of 8.5 % per
annum is due in June 1997.
g. In January 1996, the Company issued a promissory note in the
principal amount of $160,000 bearing interest at the rate of
10% per annum and due, as to $100,000, in February 1996, and,
as to, the remaining principal plus accrued interest, in March
1996. In consideration for this loan, the Company issued the
lender 25,000 shares of common stock valued at $38,095 and an
option to purchase 50,000 shares of common stock at $1.25 per
share which was valued at $37,500 and expires in February
2003. Additionally, the Company issued 25,000 shares of common
stock to the lender valued at $50,000 as a penalty for the
Company's late repayment of a portion of the loan. The note
was repaid in February and May 1996.
F-13
<PAGE>
h. In January 1996, the Company issued a demand promissory note
to an individual in the principal amount of $50,000 bearing
interest at the rate of 8% per annum. The note was repaid in
April and May 1996.
i. In February 1996, the Company obtained bridge loans totaling
$250,000. The promissory notes bear interest at the rate of
12% per annum and are payable at the earlier of (i) two months
from the date of issuance, or (ii) upon the receipt by the
Company of gross proceeds of a minimum of $1,000,000 through
any public or private offering. Additionally, as consideration
for the bridge loans, the Company issued an aggregate of
125,000 shares of common stock to the lenders which were
valued at $125,000. In April and July 1996, notes plus
interest totaling $104,767 were converted into 52,383 shares
of common stock and $104,767 was repaid.
j. In February 1996, the Private Label Group entered into a two
year loan agreement with Finova Financial Corporation
("Finova"). Pursuant to the agreement, the line of credit is
$2,000,000, bears interest at the rate of prime plus 3% per
annum, is secured by the Private Label Group's accounts
receivable, inventory and equipment and is guaranteed by the
Private Label Group's former stockholder and the Company.
Monthly principal installments of $10,150 are due on the last
day of each month with the remaining balance due in February
1998. Additionally, the Company deposited $250,000 with Finova
as additional collateral. As of December 31, 1996 the
collateral balance was $268,731.
k. In July 1996, the Company completed a private placement of
978,747 shares of common stock at $2.00 per share. The Company
issued 750,000 shares of common stock at $2.00 per share and
converted various notes into 228,747 shares of common stock at
$2.00 per share.
l. On August 22, 1996 in connection with the acquisition of the
Private Label Group, the Company issued to former stockholders
of the Private Label Group promissory notes for a principal
sum of $1,758,750 bearing interest at the rate of 9% per
annum. The first and second installments totaling $359,375 and
$17,968 plus their respective accrued interest are due July
15, 1997. Remaining principal installments plus accrued
interest are due through November 2000.
m. In July 1996, the Company issued a promissory note in the
amount of $22,000 representing $20,000 in principal and $2,000
in prepaid interest. The note was due on the earlier of (i)
180 days or (ii) upon consummation of a public offering. The
note was paid in full in September 1996.
n. In October 1996, the Company acquired all of the assets of
Scent Overnight and issued a $225,000 promissory note which
was recorded as a stockholder distribution. The note bears
interest at the rate of 9% per annum and is due upon the
earlier of December 31, 1998 or upon the receipt of gross
proceeds of at least $1,000,000 pursuant to any public or
private debt or equity financing of any securities.
o. In October 1996, the Company completed a $300,000 private
placement of 12 units,
F-14
<PAGE>
each consisting of (i) the Company's promissory note bearing
interest at the rate of 10% per annum and due at the earlier
of 12 months or at the closing of the Company's initial public
offering and (ii) a warrant to purchase up to 25,000 shares of
common stock at $4.80 per share exercisable after one year and
expiring three years from the exercise date.
p. On November 8, 1996, the Company issued a promissory note in
the amount of $55,500 representing $49,950 in principal and
$5,550 in prepaid interest. The note was due on the earlier of
(i) December 8, 1996 or (ii) within three days of closing any
portion of the concurrent bridge loan. In November 1996, the
promissory note was extended and was due, as to $15,000 by
December 8, 1996, and, as to, the remaining balance of $40,500
on or before January 15, 1997 or upon the effective date of a
public offering. As consideration for extension of the note
the Company granted the lender an option to purchase up to
55,500 shares of common stock at $4.80 per share which expires
in November 2000. The note was further extended to July 15,
1997 when the remaining principal of $44,950 plus interest of
$5,550 is due.
q. In December 1996 and January 1997, the Company completed a
$200,000 private placement of 8 units, each consisting of (i)
the Company's 10% promissory note due at the earlier of 12
months or at the closing of the Company's initial public
offering and (ii) a warrant to purchase up to 25,000 shares of
common stock at $4.80 per share exercisable after one year and
expiring three years from the exercise date.
r. In April 1997 the Company completed a $350,000 private
placement of 14 units , each consisting of (i) the Company's
10% promissory note due at the earlier of 12 months or at the
closing of the Company's initial public offering and (ii) a
warrant to purchase up to 25,000 shares of common stock at
$4.80 per share exercisable after one year and expiring three
years from the exercise date.
12. STOCKHOLDERS' EQUITY
a. The Company is authorized to issue an aggregate of 10,000,000
shares of common stock, $.001 par value per share.
b. In July and September 1995, the Company issued 2,175,000
shares of common stock to the founders of the Company.
c. In July 1995, the Company granted a financial consultant the
option to purchase 150,000 shares of common stock at an
exercise price of $1.00 per share, which expires in July 2000.
d. In September 1995, the Company issued 25,000 shares of common
stock in consideration for a $50,000 loan. The shares were
valued at $25. Additionally, the Company granted the lender
the option to purchase 50,000 shares of common stock for an
exercise price of $1.00 per share, which expires in September
2002.
F-15
<PAGE>
e. In September 1995 through December 1995, the Company issued an
aggregate of 125,000 shares of common stock to eleven bridge
lenders which shares were valued at $64,859.
f. In September 1995, the Company issued 125,000 shares of common
stock for consulting services which were valued at $125.
g. In January 1996, the Company, in consideration for a $160,000
loan, issued the lender 25,000 shares of common stock valued
at $38,095 and an option to purchase 50,000 shares of common
stock at $1.25 per share, which was valued at $37,500 and
expires in February 2003. Additionally, the Company issued
25,000 shares of common stock valued at $50,000 to the lender
as a penalty for the Company's late repayment of a portion of
the loan.
h. In February 1996, the Company issued an aggregate of 125,000
shares of common stock to three bridge lenders which were
valued at $125,000.
i. In February and March 1996, the Company issued 60,000 shares
of common stock for professional services which was valued at
$120,000.
j. In February through July 1996, the Company issued 750,000
shares of common stock at $2.00 per share in a private
placement.
k. In July 1996, the Company granted a consultant the option to
purchase 20,000 shares of common stock at an exercise price of
$4.80 per share, which expires in July 1999. Additionally, the
Company issued 5,000 shares of common stock to the consultant
in August 1996 for services rendered which was valued at
$21,250.
l. In July 1996, the Company converted various notes into 228,747
shares of common stock at $2.00 per share.
m. In October 1996, the lender of a $210,000 note converted the
principal of the note into 210,000 shares of common stock.
n. In August through October 1996, the Company granted lenders of
a $300,000 private placement warrants to purchase up to
300,000 shares of common stock at $4.80 per share which are
exercisable after one year and expire three years from the
exercise date.
o. In November 1996, the Company granted the lender of a $55,500
promissory note a warrant to purchase up to 55,500 shares of
common stock at $4.80 per share which expires in November
2000.
p. In December 1996 and January 1997, the Company granted lenders
of a $200,000 private placement warrants to purchase up to
200,000 shares of common stock at $4.80 per share which are
exercisable after one year and expire three years from the
exercise date.
F-16
<PAGE>
r. In February through April 1997, the Company granted lenders of
a $350,000 private placement warrants to purchase up to
350,000 shares of common stock at $4.80 per share which are
exercisable after one year and expire three years from the
exercise date.
13. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. At December 31, 1996, the Company
had net deferred tax assets of $965,000. The Company has recorded a
valuation allowance for the full amount of the net deferred tax assets.
The following table illustrates the source and status of the Company's
major deferred tax assets and (liabilities):
<TABLE>
<S> <C>
Net operating loss carryforward $ 877,000
Accounts receivable allowance 18,000
Inventory allowance 70,000
Valuation allowance (965,000)
------------------
Net deferred tax asset recorded $ -
==================
</TABLE>
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<S> <C> <C>
December 31,
-------------------------------------
1996 1995
--------------- ----------------
Income tax benefit computed at statutory rate $ (480,000) $ (100,000)
Tax benefit not recognized 480,000 100,000
--------------- ----------------
Provision for income taxes (benefit) $ - $ -
=============== ================
</TABLE>
F-17
<PAGE>
The Company has net operating loss carryforwards for tax purposes
totaling $2,660,000 at December 31, 1996 expiring in the years 2008 to
2011. Substantially all of the carryforwards are subject to limitations
on annual utilization because there are "equity structure shifts" or
"owner shifts" involving 5% stockholders (as these terms are defined in
Section 382 of the Internal Revenue Code), which have resulted in a
more than 50% change in ownership. The annual limitation is based on
the value of the Private Label Group as of the date of the ownership
change multiplied by the applicable Federal Long Term Tax Exempt Bond
Rate.
14. COMMITMENTS
a. In February 1996, the Company entered into a guarantee
agreement with Finova for a $2,000,000 line of credit for the
Private Label Group. Additionally, the Company, on behalf of
the Private Label Group, deposited $250,000 with Finova as
security for its guarantee.
b. In May 1996, the Company entered into a license agreement with
the owner of the "Members Only" trademark. The agreement
grants the Company the exclusive right to manufacture and
distribute cosmetics and other items under the "Members Only"
mark. The agreement expires in September 2001, with the
Company's option to renew the license agreement for an
additional five year term. Under this agreement, the Company
is to required to pay minimum royalties of $1,225,000 through
September 2001.
c. In August 1996, the Company entered into a three year
employment agreement with the former sole stockholder
("Stockholder") of the Private Label Group, the Stockholder
will receive a base annual salary of $195,000 with the
Stockholder's option to renew the agreement for an additional
two years. Additionally, the Stockholder will receive a bonus
equal to 10% of the Private Label Group's net profits in
excess of $500,000 for the years ending December 31, 1997
through December 31, 1999.
d. In July 1996, the Company entered into a brokerage and
consulting agreement with V.A.N. Marketing Ltd. ("VAN"). Under
the agreement, VAN will receive a finder's fee of
approximately $69,000 which represents two and one half
percent of the purchase price of the Private Label Group,
5,000 shares of the Company's common stock and 20,000 stock
options at an exercise price of $4.80 per share, which expire
in July 1999. The finder's fee is payable as follows: $22,500
upon signing of the contract and the remaining balance due one
year later. Additionally, VAN will receive for the two years
commencing at the close of the contract a monthly consulting
fee of $3,000 for the first twelve months and $5,000 for the
remaining twelve months.
e. In November 1996, the Company entered into a consulting
agreement where the consultant is to receive $16,500 over a
two year period. The consulting fee of $16,500 was prepaid in
November 1996.
F-18
<PAGE>
f. Rent expense under all operating leases was $212,000 and
$7,600 for the year ended December 31, 1996 and from June 26,
1995 (inception) to December 31, 1995, respectively.
The future minimum rental payments to be made under
noncancellable operating leases as of December 31, 1996 is as
follows:
<TABLE>
<S> <C>
1997 $ 541,702
1998 557,419
1999 573,200
2000 589,055
2001 605,479
</TABLE>
g. The Company is paying a monthly consulting fee of $11,117 to a
former stockholder of the Private Label Group through August
2003.
h. The Company does not have insurance coverage for product
withdrawal / recall.
i. In January 1997, the Company entered into an agreement for the
full settlement of an advertising expense claim with a payment
of $5,000 and delivery of a non interest bearing promissory
note for the sum of $35,000 due April 20, 1997. The settlement
of $40,000 was accrued at December 31, 1996.
j. Under the Company's 1997 Stock Option Plan, up to 750,000
shares of common stock are reserved for issuance. The exercise
price of the options will be determined by a committee
selected by the Board of Directors, but the exercise price
will not be less than 85% of the fair market value on the date
of grant. No options have been issued under this plan.
15. SIGNIFICANT CUSTOMERS
Approximately 22% and 12% of the Private Label Group's revenue was
derived from two major customers for the year ended December 31, 1996.
16. ACQUISITIONS
a. On August 22, 1996, the Company purchased all of the issued
and outstanding capital stock of the Private Label Group for a
purchase price of $2,782,500 of which $131,250 in cash was
paid at closing, $1,758,750 was paid by the delivery of the
Company's promissory notes (which bear interest at the rate of
9% per annum) and $892,500 will be paid promptly after the
closing of the initial public offering by the issuance of
common stock valued at the public offering price. In addition,
upon
F-19
<PAGE>
completion of the closing of the initial public offering, the
Company is to issue to Private Label Group's counsel such
number of shares of common stock as is valued at $7,500.
The acquisition of the Private Label Group has been accounted
for as a purchase and accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair
values which approximates book value. The following table
summarizes this acquisition:
<TABLE>
<S> <C>
Purchase Price, including acquisition costs $ 2,174,790
Liabilities assumed 4,754,844
Assets acquired (3,687,428)
-----------
Goodwill $ 3,242,206
============
</TABLE>
The results of operations for the Private Label Group for the
period August 22, 1996 to December 31, 1996 are included in
the accompanying consolidated financial statements for the
year ended December 31, 1996.
The following schedule combines the unaudited pro forma
results of operations of the Company for the year ended
December 31, 1996 and from June 26, 1995 (inception) to
December 31, 1995 and the Private Label Group for the years
ended December 31, 1996 and 1995 as if the acquisition had
occurred on January 1, 1995 and includes such adjustments
which are directly attributable to the acquisition. It should
not be considered indicative of the results that would have
been achieved had the acquisitions not occurred or the results
that would have been obtained had the acquisition actually
occurred on January 1, 1995.
<TABLE>
<S> <C> <C>
Year Ended December 31,
----------------------------------------------
1996 1995
-------------------- --------------------
Net sales $ 10,195,659 $ 8,413,225
Net loss (1,769,455) (1,182,560)
Net loss per share (0.54) (0.83)
Shares used in computation 3,287,759 1,426,146
</TABLE>
b. In October 1996, the Company acquired all of the assets of Scent
Overnight, a company of which the Company's Chief Executive Officer and
Chairman of the Board, is a majority stockholder for (i) a $225,000
promissory note bearing interest at the rate of 9% per annum and due at
the earlier of the closing of the Company's initial public offering or
December 31, 1998, and (ii) the assumption of a promissory note of
$210,000 plus accrued interest of $15,400 which was assumed by the
Company in September 1995.
F-20
<PAGE>
The acquisition was accounted for under the purchase method of
accounting with the basis used to record the assets of Scent Overnight
as zero which is the transferor's historical cost basis. The assets of
Scent Overnight consisted of only intangible assets which is primarily
Scent Overnight's name and the debt assumption which are considered a
stockholder distribution to the majority stockholder. Scent had no
operations during the year ended December 31, 1996.
17. SUBSEQUENT EVENT
The Company, upon stockholder consent, amended its Certificate of
Incorporation to increase the Company's authorized number of shares to
25,000,000, consisting of 24,000,000 common shares and 1,000,000
preferred shares.
F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Private Label Cosmetics, Inc. and affiliates
We have audited the accompanying combined balance sheet of Private
Label Cosmetics, Inc. and affiliates as of December 31, 1995 and the related
combined statements of operations, changes in stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Private Label Group's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present
fairly, in all material respects, the combined financial position of Private
Label Cosmetics, Inc. and affiliates as of December 31, 1995 and the results of
its combined operations and its combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared
assuming that Private Label Cosmetics, Inc. and affiliates will continue as a
going concern. As discussed in Note 3 to the combined financial statements, the
Private Label Group incurred significant net losses for the year ended December
31, 1995 which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
December 20, 1996
New York, New York
F-22
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995
ASSETS
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
account of $15,000 $1,127,920
Inventories 1,108,696
Prepaid insurance and taxes 33,452
Due from affiliates 327,512
-----------
TOTAL CURRENT ASSETS 2,597,580
PROPERTY AND EQUIPMENT 521,375
OTHER ASSETS 38,303
------
$3,157,258
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $30,711
Accounts payable 958,255
Accrued expenses 297,533
Accrued payroll taxes and penalties 420,045
Accrued lawsuit settlement 257,000
Customer advances 113,628
Advances by Azurel Ltd. 180,000
Current portion of long-term debt 168,786
Current portion of capital lease obligations 92,651
-----------
TOTAL CURRENT LIABILITIES 2,518,609
LONG-TERM LIABILITIES:
Long-term debt 1,462,574
Capital lease obligations 103,245
-------
TOTAL LONG-TERM LIABILITIES 1,565,819
STOCKHOLDERS' DEFICIT:
Common stock 59,223
Accumulated deficit (230,643)
Treasury stock (755,750)
----------
TOTAL STOCKHOLDERS' DEFICIT (927,170)
--------
$3,157,258
==========
</TABLE>
See notes to combined financial statements.
F-23
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<S> <C> <C>
Three
Months Ended
March 31, December 31,
1996 1995
---- ----
(Unaudited)
NET SALES $ 2,546,826 $ 8,413,225
COST OF GOODS SOLD 1,965,608 6,627,898
----------- ----------
GROSS PROFIT 581,218 1,785,327
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 561,677 2,103,320
----------- ---------
INCOME (LOSS) FROM OPERATIONS 19,541 (317,993)
INTEREST EXPENSE (43,502) (197,663)
------------ ------------
NET (LOSS) $ (23,961) $ (515,656)
============ ==============
</TABLE>
See notes to combined financial statements.
F-24
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock, No Par Value, 7,000 Shares Authorized
---------------------------------------------------
Private Label Fashion P.L.C. International Cosmetics
Cosmetics, Inc. Laboratories, Inc. Specialties, Inc. Group, Inc. Total
--------------- ------------------ ----------------- ----------- Common
Shares Amount Shares Amount Shares Amount Shares Amount Stock
-------- -------- -------- -------- ------- ------- ------- ------- -------
Balance - December 31, 1994....... 50 46,623 49 10,100 500 500 500 2,000 59,223
Net loss - - - - - - - - -
Balance - December 31, 1995....... 50 46,623 49 10,100 500 500 500 2,000 59,223
Net loss, three months ended
March 31, 1996 (unaudited)... - - - - - - - - -
Balance - March 31, 1996
(unaudited).................... 50 $ 46,623 49 $ 10,100 500 $ 500 500 $ 2,000 $ 59,223
====== ======= ===== ========= ======= ======= ====== ======= ========
Shares authorized, no par value 2,500 1,000 2,500 1,000
===== ====== ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Retained
Earnings Total
(Accumulated Treasury Stockholders'
Deficit) Stock (Deficit)
-------- ----- ---------
Balance - December 31, 1994......... 285,013 (755,750) (411,514)
Net loss (515,656) - (515,656)
-------- ---------- --------
Balance - December 31, 1995......... (230,643) (755,750) (927,170)
Net loss, three months ended
March 31, 1996 (unaudited)..... (23,961) - (23,961)
--- ---- ------- --------- ---------
Balance - March 31, 1996 (unaudited.... $(254,604) $(755,750) $(951,131)
=== ==== ========= ========= =========
Shares authorized, no par value
</TABLE>
See notes to combined financial statements.
F-25
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Three
Months Ended
March 31, December 31,
1996 1995
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (23,961) $ (515,656)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 45,933 160,677
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (232,122) 232,042
(Increase) decrease in inventories (87,274) (212,552)
(Increase) decrease in prepaid insurance and taxes (400) 2,085
(Increase) decrease in due from affiliates 1,989 -
(Increase) decrease in other assets - (7,670)
Increase (decrease) in accounts payable 59,538 76,779
Increase (decrease) in accrued expenses (26,782) 110,939
Increase (decrease) in accrued taxes 241,905 -
Increase (decrease) in accrued payroll taxes (420,045) 384,696
Increase (decrease) in accrued lawsuit settlement (257,000) -
Increase (decrease) in customer in advance 82,001 (9,254)
----------- ------------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES (616,218) 222,086
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (40,673) (28,129)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (40,673) (28,129)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (1,212,392) (340,284)
Proceeds from long-term debt 1,741,841 -
Payment of capital lease obligations (145,902) (81,823)
Decrease in due from related parties - 64,411
Proceeds from advances by Azurel Ltd. 250,000 180,000
----------- ----------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 633,547 (177,696)
NET INCREASE (DECREASE) IN CASH (23,344) 16,261
CASH AT BEGINNING OF PERIOD (30,711) (46,972)
------------ -----------
CASH AT END OF PERIOD $ (54,055) $ (30,711)
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 43,502 $ 207,789
============ ============
Taxes $ - $ 1,679
============ ============
Noncash activity:
Purchase of machinery through capital lease obligations $ - $ 64,000
============ ============
</TABLE>
See notes to combined financial statements.
F-26
<PAGE>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. BUSINESS
Private Label Cosmetics, Inc. and affiliates (the "Private Label
Group") are located in Fairlawn, New Jersey and manufacture cosmetics
for sale to major cosmetic companies. In August 1996, Azurel Ltd. (the
"Company") purchased all of the issued and outstanding capital stock of
the Private Label Group for a purchase price of $2,782,500 of which
$131,250 in cash was paid at closing, $1,758,750 was paid by the
delivery of the Company's promissory notes (which bear interest at the
rate of 9% per annum) and $892,500 will be paid promptly after the
closing of the initial public offering by the issuance of common stock
valued at the public offering price. In addition, upon completion of
the closing of the initial public offering, the Company is to issue to
Private Label Group's counsel such number of shares of common stock as
is valued at $7,500.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Combination - The combined financial statements
include the accounts of Private Label Cosmetics, Inc., P.L.C.
Specialties, Inc., Fashion Laboratories, Inc. and International
Cosmetic Group, Inc. The accompanying financial statements of the
Private Label Group are combined as all entities are under common
control. Material intercompany accounts and transactions are
eliminated in the combination.
b. Accounting estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that
effect the reporting amount of assets and liabilities at the date
of the financial statements and the reported amount of revenues
and expenses during the reported period. Actual results could
differ from those estimates.
c. Inventories - Inventories are recorded at the lower of cost or
market. Cost was determined using the average cost method.
d. Property and equipment - Property and equipment is stated at cost
and is depreciated using the straight line method over their
estimated useful lives. Capitalized leases are stated at cost and
are depreciated using the straight line method over the lower of
the life of the lease or its estimated useful life.
e. Income taxes - The Private Label Group accounts for income taxes
under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between
the financial statement
F-27
<PAGE>
and tax basis of assets and liabilities, and for the expected
future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood
of realization of deferred tax assets.
f. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, trade receivables,
accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments.
3. BASIS OF PRESENTATION
The Private Label Group's financial statements have been presented on a
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Private Label Group intends to seek additional equity
capital through an initial public offering to adequately fund
operations, working capital needs and growth plans.
The Private Label Group had incurred significant net losses for the
year ended December 31, 1995 which raises substantial doubt about its
ability to continue as a going concern. Accordingly, continued
existence is dependent upon the Private Label Group's ability to become
profitable and to obtain additional equity capital, neither of which
can be assured.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
December 31,
1995
--------------------
Raw Materials $ 362,500
Work In Process 642,422
Finished Goods 103,774
--------------------
$ 1,108,696
====================
</TABLE>
F-28
<PAGE>
5. TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Receipts from
allocated general
and
Sales to administrative
Due from Trade accounts affiliates Consulting fee expenses
affiliates receivable Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, (c)
1995 (a) 1995 1995 1995 1995
--------------- ---------------- ----------------- ----------------- ------------------
D & A
Advertising
Corp. $ 2,833 $ - $ - $ 10,000 $ -
The
Contemporary
Cosmetic Group,
Inc. (b) 324,679 146,678 355,000 - 200,000
Rubigo
Cosmetics, Inc. - 22,562 166,000 - -
--------------- ---------------- ----------------- ----------------- -------------
$ 327,512 $ 169,240 $ 521,000 $ 10,000 $ 200,000
=============== ================ ================= ================= =============
<FN>
(a) These amounts are due on demand and are non-interest bearing.
(b) The most recent unaudited financial statement at May 31, 1995
states a negative net worth of $223,226 for The Contemporary
Cosmetic Group, Inc.
(c) Reported in sales.
</FN>
</TABLE>
6. MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following at December 31, 1995:
<TABLE>
<S> <C> <C>
Estimated
useful lives
-------------
Machinery and equipment held under
capital lease obligations 5-7 $ 351,927
Machinery and equipment 5-7 2,057,563
Leasehold improvements 15 211,498
-----------
2,620,988
Less accumulated depreciation 2,099,613
-----------
$ 521,375
===========
</TABLE>
F-29
<PAGE>
7. ACCRUED PAYROLL TAXES AND PENALTIES
At December 31, 1995, the Private Label Group owed $420,045 in accrued
payroll taxes and penalties for the period September 30, 1995 through
December 31, 1995.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Note payable to bank, bears interest at the
rate of prime plus 1 1/4% per annum,
monthly payments consist of principal
and interest are approximately $20,429
through July 1997, collateralized by machinery
and equipment. $ 358,333
Revolving bank loan, bears interest at the rate
of prime plus 1 1/4%, matures in March 1996,
interest payable monthly, collateralized by
accounts receivable, inventory and machinery. 850,620
Note payable to former majority stockholder,
bears interest at the rate of 6%
per annum. Monthly payments consisting of
principal and interest are approximately
$5,551 through August 2003. 422,407
-----------
1,631,360
Less current portion 168,786
-----------
$ 1,462,574
===========
</TABLE>
In February 1996, the Private Label Group repaid the note payable to
bank and the revolving bank loan and entered into a two year loan
agreement with Finova Financial Corporation ("Finova"). Pursuant to the
agreement, the line of credit is $2,000,000, bears interest at the rate
of prime plus 3% per annum, is secured by the Private Label Group's
accounts receivable, inventory and equipment and is guaranteed by the
Private Label Group's sole stockholder and the Company. Monthly
installments of $10,150 are due on the last day of each month with the
remaining balance due in February 1998. Additionally, the Company on
behalf of the Private Label Group deposited $250,000 with Finova as
collateral for the agreement. The financial statements reflect the
terms of the Finova agreement.
F-30
<PAGE>
Long-term debt maturities based on the Finova debt for the next five
years are as follows:
<TABLE>
<S> <C>
1996 $ 168,786
1997 167,746
1998 1,024,283
1999 51,788
2000 54,983
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Private Label Group leases machinery and equipment under
non-cancelable lease agreements which expire at various times through
December 1998.
<TABLE>
<S> <C>
Principal portion of capital lease payments $ 195,896
Less: current portion 92,651
---------------
$ 103,245
===============
</TABLE>
The future minimum principal payments under capital leases are as
follows:
<TABLE>
<S> <C>
1996 $ 92,651
1997 70,082
1998 33,163
</TABLE>
10. ADVANCES BY AZUREL LTD.
In October 1995, the Company advanced the Private Label Group $180,000
for working capital. In February 1996, the Company advanced the Private
Label Group $250,000 for a lawsuit settlement and $250,000 as security
for a loan (see Notes 8 and 14). In August 1996, the Company advanced
the Private Label Group an additional $150,000 for working capital.
F-31
<PAGE>
11. INCOME TAXES
The Private Label Group accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS No. 109"). SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. At December 31, 1995,
the Private Label Group had net deferred tax assets of $620,000. The
Private Label Group has recorded a valuation allowance for the full
amount of the net deferred tax assets.
The following table illustrates the source and status of the Private
Label Group's major deferred tax assets and (liabilities):
<TABLE>
<S> <C>
Net operating loss carryforward $ 495,000
Litigation accruals 90,000
Inventory allowance 35,000
Valuation allowance (620,000)
--------------
Net deferred tax asset recorded $ -
==============
</TABLE>
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<S> <C>
December 31,
1995
---------------
Income tax benefit computed at statutory rate $ (180,000)
Tax benefit not recognized 180,000
---------------
Provision for income taxes (benefit) $ -
===============
</TABLE>
The Private Label Group has net operating loss carryforwards for tax
purposes totaling $1,413,000 at December 31, 1995 expiring in the years
2008 to 2010. Substantially all of the carryforwards are subject to
limitations on annual utilization because there are "equity structure
shifts" or "owner shifts" involving 5% stockholders (as these terms are
defined in Section 382 of the Internal Revenue Code), which have
resulted in a more than 50% change in ownership. The annual limitation
is based on the value of the Private Label Group as of the date of the
ownership change multiplied by the applicable Federal Long Term Tax
Exempt Bond Rate.
F-32
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
a. The Private Label Group leases office and warehouse space under a
non-cancelable operating lease. Rent expense under this lease was
approximately $482,000 for the year ended December 31, 1995. The
lease expires in August 2002. Minimum rental commitments for the
next five years are as follows:
<TABLE>
<S> <C>
1996 $ 453,000
1997 466,000
1998 480,000
1999 493,000
2000 506,000
</TABLE>
b. The Private Label Group is paying a monthly consulting fee of
$11,117 to a former stockholder through August 2003.
c. The Private Label Group does not have insurance coverage for
product withdrawal / recall.
13. SIGNIFICANT CUSTOMERS
Approximately 21% and 14% of the Private Label Group's revenue was
derived from two major customers for the year ended December 31, 1995.
14. ACCRUED LAWSUIT SETTLEMENT
A jury verdict against the Private Label Group was entered on December
22, 1995 in the net amount of $223,095, together with prejudgment
interest and costs of suit. Judgment subsequently entered on such
verdict in the amount of $257,000 including costs and interest, was
satisfied on behalf of the Private Label Group in full in February 1996
with an advance by the Company of $250,000. The judgment of $257,000
was accrued at December 31, 1995.
F-33
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements for the year endedDecember 31, 1996
of the Company and the Private Label Group arebased on historical financial data
of the aforementioned companies, as ifthe acquisition of the Private Label Group
had occurred at the beginning ofthe fiscal year ended December 31, 1996 for the
statement of operations.These pro forma financial statements are not necessarily
indicative of theresults that will be achieved for future periods.These pro
forma financialstatements and the notes thereto should be read in conjunction
with theCompany's financial statements and the financial statements of the
PrivateLabel Group included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro forma Statement of Operations (Unaudited)
<S> <C> <C> <C> <C>
Year Ended
December 31,
1996 Adjustments
---- ----------- Pro forma
Azurel Dr Cr adjusted
------ -- -- --------
Net Sales $3,745,336 c 6,450,323 $10,195,659
Cost of Sales 2,870,888 c 4,808,210 7,679,098
- ------------- --------- ----------- ---------
Gross Profit 874,448 2,516,561
Selling, General and
Administrative Expenses 1,590,248 c 1,630,580 3,220,828
Amortization Expense 61,992 a 138,368 200,360
------ -------
Income (Loss) From
Operation (777,792) (904,627)
------------ ----------
Interest Expense 595,129 b 101,044 864,828
c 151,780
d 16,875
595,129 864,828
---------- ----------
Net (Loss) $ (1,372,921) $ (1,769,455)
============ ============
</TABLE>
F-34
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements for the year ended December 31,1995
of the Company and the Private Label Group are based on historicalfinancial data
of the aforementioned companies, as if the acquisition of thePrivate Label Group
had occurred at the beginning of the fiscal year endedDecember 31, 1995 for the
statement of operations. These pro forma financialstatements are not necessarily
indicative of the results that will be achieved forfuture periods.These pro
forma financial statements and the notes thereto shouldbe read in conjunction
with the Company's financial statements and the financialstatements of the
Private Label Group included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro forma Statement of Operations (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Azurel Private Label Combined Adjustments Pro forma
Dr Cr adjusted
------ -------------- --------- -- -- --------
(Historical)
Net Sales $ - $8,413,225 $8,413,225 $8,413,225
Cost of Sales - 6,627,898 6,627,898 6,627,898
--------- --------- --------- ---------
Gross Profit - 1,785,327 1,785,327 1,785,327
Selling, General and
Administrative Expenses 259,637 2,103,320 2,362,957 2,362,957
Amortization
Expense - - - a 200,360 200,360
--------- ---------- ----------- ---------- ----------
Income (Loss) From
Operation (259,637) (317,993) (577,630) (777,990)
--------- --------- --------- ---------
Interest Expense 28,369 197,663 226,032 b 158,288 404,570
d 20,250
----------- --------- ----------
28,369 197,663 226,032 404,570
----------- --------- ---------- ----------
Net Income (Loss) $(288,006) $(515,656) $(803,662) $(1,182,560)
========= ========= ========== ===========
</TABLE>
F-35
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) The unaudited pro forma statement of operations for the year ended
December 31, 1996 and year ended December 31, 1995 presents pro forma
results of operations of the Company and the Private Label Group as if
the acquisition of the Private Label Group had occurred at the
beginning of the period. It should not be considered indicative of the
results that would have been achieved had the acquisition actually
occurred on such date.
(a) The amortization of goodwill arising from the acquisition of
the Private Label Group over 20 years.
(b) To record the interest on notes of $1,758,750 from the Private
Label Group acquisition at 9% per annum.
(c) To record the operations of the Private Label Group for the
period January 1, 1996 to August 22, 1996 (date of acquisition
by the Company).
(2) The acquisition of Scent Overnight in October 1996 has been accounted
for as a distribution from stockholders' equity under the purchase
method of accounting.
(d) To record the interest on notes of $225,000 from the Scent
Overnight acquisition at 9% per annum.
F-36
<PAGE>
<PAGE>
[Marketing Display]
<PAGE>
No underwriter, dealer, salesman or
other person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and,
if given or made, such information
or representation must not be relied
upon as having been authorized by the
Company or the Underwriter. This
Prospectus does not constitute an AZUREL LTD.
offer or solicitation to any person 1,200,000 Shares of Common Stock and
in any jurisdiction where such offer 1,200,000 Redeemable Common Stock
or solicitation would be unlawful. Purchase Warrants
Neither delivery of this Prospectus
nor any sale hereunder shall, under
any circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.....................
Risk Factors...........................
Dilution...............................
Capitalization.........................
Use of Proceeds........................
Dividend Policy........................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations......................... PROSPECTUS
Business................................
Management..............................
Principal Stockholders..................
Certain Transactions.................... NETWORK 1 FINANCIAL SECURITIES, INC.
Description of Securities...............
Shares Eligible for Future Sale.........
Underwriting............................
Concurrent Registration of
Securities.............................
Legal Matters...........................
Experts.................................
Additional Information.................. __________
Financial Statements....................
Until _______, 1997 (25 days after the
date of this Prospectus), all dealers
effecting transactions in the Company's
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a
Prospectus with respect to their unsold
allotments or subscriptions.
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
DATED MAY ___, 1997
PROSPECTUS
AZUREL LTD.
905,500 Redeemable Common Stock Purchase Warrants
This prospectus relates to 905,500 Redeemable Warrants (the "Selling
Securityholders' Warrants") and the 905,500 shares of Common Stock issuable upon
exercise thereof (the "Selling Securityholders' Warrant Shares") which are being
offered for sale by certain Selling Warrantholders (the "Selling
Warrantholders").
Each Redeemable Warrant expires on _______, 2002, five years after the
date of this Prospectus (the "Expiration Date") and entitles the holder thereof,
commencing one year from the date of this Prospectus, to purchase one share of
Common Stock at an exercise price of $______ [120% of initial public offering
price of Common Stock] (the "Exercise Price"), subject to adjustment in certain
events. The Redeemable Warrants are redeemable by the Company, at a price of
$.10 per Redeemable Warrant, at any time commencing one year after the date of
this Prospectus and prior to the Expiration Date, on 30 days prior written
notice to the Selling Warrantholders, provided that the closing bid price per
share of the Common Stock exceeds 150% of the Exercise Price for a period not
less than 20 trading days in any 30 day trading period ending not more than 15
days prior to the date of any redemption notice. The Redeemable Warrants shall
be exercisable until the close of the business day preceding the date fixed for
redemption. See "Underwriting" and "Description of Securities Redeemable
Warrants."
The Selling Warrantholders may not sell or otherwise dispose of any of the
Selling Securityholders' Warrants for a period of three (3) months after the
Effective Date without the prior written consent of the Underwriter. See
"Selling Securityholders and Plan of Distribution."
The Company will not receive any of the proceeds from the sales of the
Selling Securityholders' Warrants although it will receive the exercise price of
the Selling Securityholders' Warrants, if exercised. The Company is paying the
expenses incurred in connection with the registration for sale of the Selling
Securityholders.' The Selling Securityholders' may be offered from time to time
by the Selling Warrantholders, their pledgee and/or their donees (who will be
identified in a prospectus supplement as appropriate), through ordinary
brokerage transactions in the over-the-counter market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. No underwriting arrangements have been entered into by the
Selling Warrantholders. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Selling Warrantholders, their pledgees
and/or their pledgees and/or their donees, in connection with sales of the
Selling Securityholders' Warrants.
THESE SECURITIES ARE SPECULATIVE SECURITIES INVOLVING A HIGH DEGREE OF
RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT IN THE COMPANY. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 9 AND 19,
RESPECTIVELY, OF THIS PROSPECTUS.
The Selling Warrantholders, their pledges and/or their donees, may be
deemed to be "Underwriters" as defined in the Securities Act of 1933, as amended
(the "Securities Act"). If any broker-dealers are used by the Selling
Warrantholders, their pledgees and/or their donees, any commissions paid to
broker-dealers and, if broker-dealers purchase any Selling Securityholders'
Warrants as principals, any profits received by such broker-dealers on the
resale of the Selling Securityholders' Warrants may be deemed to be underwriting
discounts or commissions under the Securities Act. In addition, any profits
realized by the Selling Warrantholders, their pledgees and/or their donees, may
be deemed to be underwriting commissions. All costs, expenses and fees in
connection with the registration of the Selling Securityholders' Warrants will
be borne by the Company, except for any commission paid to
<PAGE>
broker-dealers or other selling expenses.
On the date of this Prospectus, a registration statement under the
Securities Act with respect to a public offering underwritten by Network 1
Financial Securities, Inc. (the "Underwriter") of 1,200,000 shares of Common
Stock and 1,200,000 Redeemable Warrants (without giving effect to the
Underwriter's over-allotment option to purchase an additional 180,000 shares of
Common Stock and/or 180,000 Redeemable Warrants (the "Over-Allotment Option")
was declared effective by the Securities and Exchange Commission (the
"Offering"). In connection with the Offering of the Common Stock and Redeemable
Warrants, the Company granted the Underwriter warrants to purchase 120,000
shares of Common Stock and/or 120,000 Redeemable Warrants (the "Underwriter's
Warrant"). Prior to the Offering, no public market for the Securities has
existed, and no assurance can be given that any market for such Securities will
develop on completion off the Offering or, if developed, be sustained.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ORANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSIONOR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is ________________, 1997
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
THE OFFERING
Securities Offered 905,500 Redeemable Warrants and 905,500
shares of Common stock underlying Redeemable
Warrants
Common Stock Outstanding(1)(2) 5,258,747
Redeemable Warrants Outstanding(3) 2,105,500
Terms of the Redeemable Warrants Each Redeemable Warrant is exercisable from
one year after the date of this Prospectus
to five years after the date of this
Prospectus and entitles the holder thereof
to purchase one share of Common Stock at an
exercise price of $___, [120% of the initial
public offering price per share of Common
Stock] subject to adjustment in certain
circumstances (the "Exercise Price"). The
Redeemable Warrants are redeemable by the
Company, in whole or in part, at any time
commencing one year after the date of this
Prospectus, upon 30 days prior written
notice, at a price of $.10 per Redeemable
Warrant, provided that the closing bid price
of the Common Stock exceeds 150%
of the Exercise Price for a period not less
than 20 trading days in any 30 trading day
period ending not more than 15 days prior to
the day on which the Company gives notice of
redemption. See "Description of
Securities-Redeemable Warrants."
Risk Factors The Securities involve a high degree of risk
and should not be purchased by investors
who cannot afford to lose their entire
investment. Prospective investors should
consider carefully the factors set
forth under "Risk Factors."
Proposed NASDAQ Common Stock - AZUR
Symbols (4) Redeemable Warrants - AZURW
(1) Does not include (i) up to 750,000 shares of Common Stock reserved for
issuance pursuant to stock options which may be granted pursuant to the
Company's 1997 Stock Option Plan, (ii) 325,500 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements or (iii) 905,500
shares of Common Stock reserved for issuance pursuant to Redeemable
Warrants being offered hereby. See "Management - Stock Option Plan"
and "Certain Transactions."
(2) Does not include (i) up to an additional 180,000 shares of Common Stock
and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 180,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,200,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants offered by the Company; (iv) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants or (v) up to
120,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants included in the Underwriter's Warrants. Includes (i) 1,200,000
shares of Common Stock offered by the Company, (ii) 180,000 shares
of Common Stock issuable upon the closing of the Company's offering in
connection with the acquisition of the companies comprising the Private
Label Group and (iii) 905,500 shares of Common Stock reserved for
issuance pursuant to Redeemable Warrants being offered hereby. See
"Description of Securities," "Underwriting," and "Certain
Transactions."
(3) Does not include (i) 180,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option, (ii) 180,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants or
(iii) 905,500 shares of Common Stock reserved for issuance pursuant to
Redeemable Warrants being offered hereby. Includes 1,200,000 Redeemable
Warrants offered by the Company. See "Underwriting."
(4) The proposed trading symbols do not imply that an active trading market
will develop for the Common Stock or Redeemable Warrants upon the
completion of this Offering or be sustained thereafter or that the
Company's Securities will be approved for listing on NASDAQ or will
continue to be listed, if approved. See "Risk Factors."
<PAGE>
[Alternate Page for Selling Securityholder Prospectus]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has issued an aggregate of 905,500 Redeemable Warrants to
the Selling Securityholders that are being offered pursuant to this Prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Certain Transactions." The
Selling Securityholders have advised the Company that sales of the Redeemable
Warrants may be effected from time-to-time by themselves, their pledgees and/or
their donees, in transactions (which may include block transactions) in the
over-the- counter market, in negotiated transactions, through the writing of
options on the Common Stock and Redeemable Warrants, or a combination of such
methods of sale or otherwise, at fixed prices that may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. The Selling
Securityholders, their pledgees and/or their donees, may effect such
transactions by selling Redeemable Warrants directly to purchasers or through
broker-dealers that may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholder and/or the purchasers of Redeemable Warrants for whom
such broker-dealers may act as agents or to whom they sell as principals, or
both.
The Selling Securityholders, their pledgees and/or their donees, any
broker-dealers that act in connection with the sale of the Redeemable Warrants
as principals may be deemed to be "Underwriters" within the meaning of Section
2(11) of the Securities Act and any commissions received by them and any profit
on the resale of the Redeemable Warrants as principals might be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders' Warrants being registered on behalf of the Selling
Securityholders are restricted securities while held by the Selling
Securityholders and the resale of such securities by the Selling Securityholders
is subject to prospectus delivery and other requirements of the Act. The Selling
Securityholders, their pledgees and/or their donees, may agree to indemnify any
agent, dealer or broker-dealer who participates in transactions involving sale
of the Redeemable Warrants against certain liabilities, including liabilities
arising under the Securities Act. The Company will not receive any proceeds from
the sales of the Selling Securityholders' Warrants by the Selling
Securityholders except upon exercise of the Redeemable Warrants. Sales of the
Selling Securityholders' Securities by the Selling Securityholders, or even the
potential of such sales, would likely have an adverse effect on the market price
of the Company's Securities.
At the time a particular offer of the securities is made by or on
behalf of the Selling Securityholders, to the extent required, a prospectus
supplement will be distributed which will set forth the number of shares being
offered and the terms of the Offering, including the name or names of any
Underwriters, dealers or agents, the purchase price paid by any Underwriters for
shares purchased from the selling stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
<PAGE>
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations thereto, any person engaged in distribution of
Company securities offered by this prospectus may not simultaneously engage in
market-making activities with respect to Company securities during the
applicable "cooling off" period prior to the commencement of such distribution.
In addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M in connection
with transactions in the shares, which provisions may limit the timing of
purchases and sales of the Company's securities by the Selling Securityholders.
The following table sets forth certain information with respect to
persons for whom the Company is registering the Selling Securityholders'
for resale to the public. Beneficial ownership of the Selling Securityholders'
Securities by such Selling Securityholders after the Offering will depend on
the number of Selling Securityholders' Securities sold by each Selling
Securityholder. The securities held by the Selling Securityholders are
restricted securities while held by such Selling Securityholders and the
resale of such securities by the Selling Securityholders is subject to
prospectus delivery and other requirements of the Act. The Selling
Securityholders' Securities offered by the Selling Securityholders are not being
underwritten by the Underwriter.
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Beneficial Beneficial
Ownership Ownership
Prior to Selling After Selling
Securityholders' Amount Securityholders'
Offering Being Registered Offering(1)
------------------------------- ------------------------- ------------------------
Redeemable Redeemable
Warrants Redeemable Warrants
Securityholder Shares and/or options (2) Shares Warrants(1) Shares and/or options (2) Percentage
- -------------- ------ -------------- ------ --------- ------- ---------------- ----------
Margaret Amarante 0 50,000 0 50,000 0 0 0
Bola Business Ltd. 25,000 50,000 0 0 25,000 50,000 *
Comax Co. Ltd. 0 25,000 0 25,000 0 0 0
John DeAngelis 0 50,000 0 50,000 0 0 0
Richard Epstein 0 25,000 0 25,000 0 0 0
ETR & Associates, Inc.(3) 25,000 150,000 0 25,000 25,000 125,000 4%
Ernest Gottdiener 0 25,000 0 25,000 0 0 0
Angela James 0 50,000 0 50,000 0 0 0
Martin & Miriam Knecht 0 25,000 0 25,000 0 0 0
Robert E. Lee(3) 425,000 55,500 0 55,500 425,000 0 4%
Metco Investors LLC (3) 150,000 162,500 0 112,500 150,000 50,000 4%
Michalaur International (4) 18,750 156,250 0 156,250 0 0 0
Robert Molfetta 0 25,000 0 25,000 0 0 0
Robert E. Murello 0 50,000 0 50,000 0 0 0
Edward W. Pedersen (4) 15,625 50,000 0 50,000 15,625 0 *
John J. Scamardella 0 100,000 0 100,000 0 0 0
Tusany Investment &
Trade S.A. (4) 1,559,355 50,000 309,355 50,000 1,559,355 0 24.7%
James J. Wrynn 0 56,250 0 56,250 0 0 0
- ------------
<FN>
* Less than 1%
(1) Assumes all of the Selling Securityholder Securities offered hereby are
sold and no additional securities are acquired.
(2) Represent Redeemable Warrants acquired by the Selling Securityholder in
exchange for warrants containing substantially idential terms pursuant to
an exchange exempt from registration under Section 3(a)(9) of the
Securities Act, or options granted to the Selling Securityholder.
(3) Mr. Robert E. Lee is the President of ETR & Associates, Inc. ("ETR"), the
General Partner of Woodward Partners, LLC ("Woodward") and exercises
investment power over the investments owned by Metco Investors, LLC
("Metco"). ETR, Woodward and Metco provide general management advisory
services to the Company. The percentage ownership after the Selling
Securityholders' Offering, includes securities owned by Mr. Lee, ETR,
Woodward and Metco. See "Principal Stockholders" and "Certain
Transactions."
(4) Such Selling Stockholder is one the founders of the Company. See "Certain
Transactions."
</FN>
</TABLE>
II-16
<PAGE>
[Alternate Page for Selling Securityholder's Prospectus]
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters will be passed upon for the Company by Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP, New York, N.Y. Certain legal matters will be passed
upon for the Underwriter by Snow Becker Krauss P.C., New York, N.Y. Gersten,
Savage, Kaplowitz. Fredericks & Curtin, LLP has acted as counsel to the
Underwriter in other transactions, and may so act in the future.
EXPERTS
The audited financial statements for the years ended 1995 and 1996
included in the Prospectus have been audited by Feldman Radin & Co., P.C.,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
For further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements herein contained concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. The Registration Statement and the exhibits may be
inspected without charge at the offices of the Commission and, upon payment to
the Commission of prescribed fees and rates, copies of all or any part thereof
may be obtained from the Commission's principal office at the Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. Electronic registration statements filed through the Electronic Data
Gathering, Analysis, and Retrieval system are publicly available through the
Commission's Website (http://www.sec.gov).
On the Effective Date, the Company will become subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, will file reports, proxy and information
statements and other information with the Securities and Exchange Commission.
Such reports, proxy and information statements and other information can be
inspected and copies at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material may also be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
<PAGE>
No underwriter, dealer, salesman or
other person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and,
if given or made, such information or
representation must not be relied upon
as having been authorized by the
Company or the Underwriter. This AZUREL LTD.
Prospectus does not constitute an
offer or solicitation to any person 905,500 Redeemable Common Stock
in any jurisdiction where such offer Purchase Warrants
or solicitation would be unlawful.
Neither delivery of this Prospectus
nor any sale hereunder shall, under
any circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.....................
Risk Factors...........................
Dilution...............................
Capitalization.........................
Use of Proceeds........................
Dividend Policy........................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations........................ PROSPECTUS
Business...............................
Management.............................
Principal Stockholders.................
Certain Transactions...................
Description of Securities..............
Shares Eligible for Future Sale........
Selling Securityholders................ _____________ , 1997
Plan of Distribution...................
Legal Matters..........................
Experts................................
Additional Information.................
Financial Statements...................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, among other
things, and subject to certain conditions, authorizes the Company to indemnify
its officers and directors against certain liabilities and expenses incurred by
such persons in connection with claims made by reason of their being such an
officer or director. The Certificate of Incorporation and By-Laws of the Company
provide for indemnification of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to
indemnify the directors and certain officers of the Registrant and certain other
persons against certain civil liabilities.
Under Delaware law, directors of the Company are not liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
except for liability in connection with (i) a breach of duty of loyalty, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) dividend payments or stock repurchased in
violation of Delaware law or (iv) any transaction in which a director has
derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following is a statement of the expenses to be paid by
the Company, after payment of commissions and expenses to the Underwriter, in
connection with the issuance and distribution of the securities being
registered:
SEC Registration Fee...................................................$7,301*
NASD Filing Fee.........................................................2,635
NASDAQ Filing Fee......................................................10,000*
Printing and Engraving Expenses........................................50,000*
Legal Fees and Expenses (other than blue sky).........................175,000*
Accounting Fees and Expenses..........................................110,000*
Blue Sky Fees and Expenses.............................................45,000*
Transfer Agent and Registrar Fees and Expenses..........................4,500*
Miscellaneous..........................................................10,000*
TOTAL.......................................................$414,436*
*Estimated
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Company has issued securities to a
limited number of persons, without registering the securities under the
Securities Act. There were no underwriting discounts or commissions paid in
connection with the issuance of any of said securities, except as noted.
In reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a
II-1
<PAGE>
transaction not involving a public offering, in June and September 1995, the
Company issued an aggregate of 2,175,000 shares of Common Stock to the twelve
founders of the Company for $.001 per share: Gerard Semhon, Constantine Bezas,
Joseph Truitt Bell, Van Christakos, Diane Papas, Tusany Investment & Trade,
S.A., Edward Pedersen, Kenneth Lee, James G. Cooley, Michalaur International,
Valerie A. Profitt and Leslie Bines.
In 1995 and 1996, the Company issued an aggregate of 175,000 shares of
Common Stock valued at $100,125 to the Consulting Group (25,000 shares to ETP,
50,000 shares to Woodward and 100,000 shares to Metco) in exchange for
consulting services. The issuances were made in reliance upon Section 4(2) of
the Securities Act, which provides an exemption for a transaction not involving
a public offering.
In July 1995, the Company granted ETR an option to purchase 150,000
shares of Common stock at $1.00 per share, which expires in July 2000, as
additional consideration for a loan in the original principal amount of $28,750,
which was subsequently repaid. The grant was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In September 1995, the Company issued Bola 25,000 shares of Common
Stock, valued at $25, and granted Bola the option to purchase 50,000 shares of
Common Stock at $1.00 per share, which expires in September 2002, as additional
consideration for a loan. The issuance and grant were made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In December 1995, the Company completed a $250,000 private placement of
5 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 18 month
12% promissory note in the original principal amount of $50,000, and (ii) 25,000
shares of Common Stock. The Company received $210,000 of net proceeds after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as placement agent. In connection with this private placement, the
Company issued the securities described in the following table to 11
unaffiliated investors, each an "accredited investor" within the meaning of
Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount of Number of
Name Note Purchased Shares Issued
- ---- -------------- -------------
Drew Dellinger $25,000 12,500
Wayne Robbins $25,000 12,500
Betty Presley $25,000 12,500
William Kennedy $25,000 12,500
II-2
<PAGE>
Louis D. Zachau $12,500 6,250
Larry Bucsek $50,000 25,000
Ronald I. Harris $10,000 5,000
Shelby Goldring $10,000 5,000
Bruce Levenbrook $10,000 5,000
Wolf Financial Group Inc., DIP $47,500 23,750
Ronald S. Mack - IRA $10,000 5,000
</TABLE>
In February 1996, the Company completed a $250,000 private placement of
5 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 18 month
12% promissory note in the original principal amount of $50,000, and (ii) 25,000
shares of Common Stock. The Company received $210,000 of net proceeds (after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as the placement agent. In connection with this private placement, the
Company issued the securities described in the following table to two affiliated
and one unaffiliated investors, each an "accredited investor" within the
meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
of Note Shares
Name Purchased Issued
Wolf Financial Group Inc., DIP $100,000 50,000
Bola Business Ltd. $ 50,000 25,000
Tusany Investment & Trade, S.A. $100,000 50,000
</TABLE>
In February 1996, the Company issued 10,000 shares of Common Stock in
exchange for legal services rendered to the Company. The issuance was made in
reliance upon Section 4(2) of the Securities Act, which provides an exemption
for a transaction not involving a public offering.
In March 1996, the Company issued Metco 25,000 shares of Common Stock
and an option to purchase 50,000 shares of Common Stock at $1.25 per share,
which expires in January 1999, in consideration for a loan. In March 1996, the
Company issued an additional 25,000 shares of Common Stock to Metco as a penalty
for the Company's late payment of a portion of a loan. These issuances were
made in reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a transaction not involving a public offering.
In July 1996, the Company completed a private placement of 978,747
shares of Common Stock at $2.00 per share in reliance upon Rule 506 of
Regulation D of the Securities Act, which provides a safe harbor under the
Section 4(2) exemption for a transaction not involving a public offering.
The Company received $1,314,950 of net proceeds after deducting expenses of
$11,050 and commissions of $174,000 to the Underwriter for acting as
placement agent. As part of this private placement, certain
II-3
<PAGE>
noteholders of the Company converted $457,494 principal amount and interest into
278,747 shares of Common Stock. Of the aggregate debt converted, Tusany
converted principal and interest due under a $50,000 promissory note issued
in the February 1996 private placement into 52,383 shares of Common Stock and
principal and interest due under a $200,000 promissory note issued in October
1995 into 106,972 shares of Common Stock. In connection with this private
placement, the Company issued the securities described in the following table
to 24 unaffiliated and one affiliated investor, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<PAGE>
<TABLE>
<S> <C> <C>
Number
of Shares
Name Purchase Price of Common Stock
Alan J. Rubin $50,000 25,000
Vahik Babaian $100,000 50,000
William M. Kennedy $100,000 50,000
David's Art, Inc. d/b/a Art Connection $50,000 25,000
Derek C. Ferguson $50,000 25,000
Mark Frankel $50,000 25,000
Steven M. Frankel $50,000 25,000
Levanthal, Paget LLC $50,000 25,000
Fred Kassner $500,000 250,000
David E. Ruggieri $100,000 50,000
Jeffrey P. & Jacalyn K. Flack $50,000 25,000
David Edward Blockstein $25,000 12,500
Robert J. Roehrich $50,000 25,000
Richard J. Brown $25,000 12,500
Robert J. Stein $25,000 12,500
Anthony and Maya Cirillo $25,000 12,500
Tusany Investment & Trade, S.A. $518,710 259,355
Drew Dellinger $27,440 13,720
Wayne Robbins $27,440 13,720
Betty Presley $27,432 13,716
Louis Zachau $13,682 6,841
Ronald Harris $10,716 5,358
Shelby Goldring $10,716 5,358
Bruce Levenbrook $10,716 5,358
Ronald Mack-IRA $10,642 5,321
</TABLE>
In August 1996 the Company issued to V.A.N. Marketing Ltd. ("VAN")
5,000 shares of Common Stock, valued for accounting purposes at $21,250, and
granted options to purchase 20,000 shares of the Company's Common Stock at
$4.80 per share, expiring in July 1999 for services rendered under a brokerage
and consulting agreement. The issuance was made in reliance upon Section 4(2)
of the Securities Act, which provides an exemption for a transaction not
involving a public offering.
In October 1996, the Company issued 210,000 shares of Common Stock to
Liam Development Ltd. upon conversion of a promissory note into shares of the
Company's Common Stock at $1.00 per share. The issuance was made in reliance
upon Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In October 1996, the Company completed a $300,000 private placement of
12 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000, and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The Company
received net proceeds of $270,000 after deducting commissions of $30,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described
II-4
<PAGE>
in the following table to three affiliated and four unaffiliated investors, each
an "accredited investor" within the meaning of Regulation D of the Securities
Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
Michalaur International $50,000 50,000
Robert E. Murello $50,000 50,000
Margaret Amarante $50,000 50,000
Angela James $50,000 50,000
Metco Investors LLC $25,000 25,000
Robert Molfetta $25,000 25,000
Tusany Investment & Trade,
S.A. $50,000 50,000
</TABLE>
In November 1996, the Company issued Mr. Robert E. Lee warrants to
purchase 55,500 shares of Common Stock at an exercise price of $4.80 per share,
which expire in December 2000, as consideration for the extension of the
maturity date of a loan made by Mr. Lee to the Company. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The issuances
made in reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a transaction not involving a public offering.
In January 1997, the Company completed a $200,000 private placement of
8 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000, and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The Company
received net proceeds of $180,000 after deducting commissions of $20,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described in the following table to
one affiliated and two unaffiliated investors, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
- ---- ----------------- ---------------
John DeAngelis $50,000 50,000
Edward Pedersen $50,000 50,000
John J. Scamardella $100,000 100,000
</TABLE>
In April 1997, the Company completed a $350,000 private placement of 14
units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000 and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The Company received
net proceeds of $315,000 after deducting commissions of $35,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described in the following table to
two affiliated and five unaffiliated investors, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
- ---- ----------------- ---------------
Michalaur International $106,250 $106,250
Metco Investors LLC 87,500 87,500
James J. Wrynn 56,250 56,250
Richard Epstein 25,000 25,000
Ernest Gottdiener 25,000 25,000
Comax Co. Ltd. 25,000 25,000
Martin & Miriam Knecht 25,000 25,000
</TABLE>
Item 27. List of Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
1.1* Form of Underwriting Agreement
1.2* Form of Financial Advisory and Investment Banking Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Amended By-Laws of the Registrant.
3.3**** Amended Certificate of Incorporation of the Registrant
4.1**** Specimen Common Stock Certificate.
4.2**** Specimen Redeemable Common Stock Purchase Warrant Certificate.
4.3* Form of Public Warrant Agreement.
4.4* Form of Warrant Agreement between the Registrant and Network
1, including Form of Underwriter's Warrant Certificate.
5.1* Opinion of Gersten, Savage, Kaplowitz, Fredericks &
Curtin, LLP.
10.1* Employment Agreement between the Registrant and Gerard
Semhon dated October 28, 1996.
10.2* Employment Agreement between the Registrant and Michael J.
Assante dated August 22, 1996.
II-5
<PAGE>
10.3*** Lease for 509 Madison Avenue, New York, New York 10022 dated
April 29, 1996.
10.4*** Lease for 20-10 Maple Avenue, Fair Lawn, New Jersey dated
April 11, 1991.
10.5* License Agreement between the Registrant and Europe Craft
Imports, Inc. dated May 15, 1996.
10.6* Stock Purchase and Sale Agreement dated July 17, 1996 by and
among Michael J. Assante, Azurel Ltd., Private Label
Cosmetics, Inc., P.L.C. Specialties, Inc., International
Cosmetic Group, Inc. and Fashion Laboratories, Inc.
10.7* Agreement by and between Scent Overnight, Inc. and Scent 123,
Inc. dated September 9, 1996.
10.8**** Registrant's 1997 Stock Option Plan.
10.9* Registrant's Promissory Note dated August 22, 1996 in the
principal amount of $1,675,000 issued to Michael J. Assante.
10.10* Registrants' Promissory Note dated August 22,
1996 in the principal amount of $83,750 issued
to Louis DiVita.
10.11* Consulting Services Agreement dated August 12, 1993 between
Louis DiVita and Private Label Cosmetics, Inc. PLC
Specialties, Inc., Fashion Laboratories, Inc., Contemporary
Cosmetic Group, Inc., International Cosmetic Group, Inc.,
D.A. Advertising Group International, Inc. and Intra-Africa
Corporation.
10.12* Security Agreement dated February 16, 1996 between
Finova Capital Corporation and the Private Label Group and
Guaranty by Michael J. Assante and Denise Assante.
10.13* Collective Bargaining Agreement, dated May 24, 1995. between
10.14* Rubigo Cosmetics Agreement - January 1992
10.15* Revolving Credit Agreement and Guarantees.
21.1** Subsidiaries of the Registrant.
23.1**** Consent of Independent Certified Public Accountants for the
Registrant.
23.2* Consent of Gersten, Savage, Kaplowitz & Curtin, LLP counsel
for Registrant (included in Exhibit 5.1).
24.1* Power of Attorney (Included with signature page).
27.1 Financial Data Schedule
* Previously filed.
** To be filed by amendment.
*** Exempt from filing because Registrant received a harship exemption.
**** Filed herewith
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events which individually or
in the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any additional or changed material information with respect
to the plan of distribution;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(d) The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangements,
statute or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(f) For purposes of determining any liability under the Securities Act, the
Registered will treat the information omitted from the from of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h), under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and treat that offering of the securities at that time
as the initial bona fide offering of those securities.
(g) Transactions with or by Selling Security Holders; Lock-Up Periods.
The undersigned small business issur hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement in
the event that there is a change in the plans, proposals, agreements,
arrangements or understandings, if any, with respect to transactions
with or by Selling Security Holders or plans to waive or shorten the
lock-up periods applicable to such Selling Security Holders from those
set forth in the Registration Statement; and
(2) In the event that all or a port of the Selling Security Holders are
released by the Underwriter from their respective lock-up agreements,
to file (i) a post-effective amendment to this Registration Statement
if more than 10% of the Selling Security Holders' Securities are
proposed to be released and (ii) a sticker prospectus supplement if
between 5% and 10% of the Selling Security Holders' Securities are
proposed to be released.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements to the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York on June 13 , 1997.
AZUREL LTD.
By:/s/ Gerard Semhon
Gerard Semhon, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer,
Principal Financial and Accounting
Officer)
In accordance with the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
/s/ Gerard Semhon Chief Executive Officer and June 13, 1997
Gerard Semhon Chairman of the Board (Principal
Executive Officer, Principal
Financial and Accounting Officer)
/s/ Constantine Bezas President and Director June 13, 1997
Constantine Bezas
/s/ Joseph Truitt Bell Executive Vice President and Director June 13, 1997
Joseph Truitt Bell
/s/ Van Christakos Secretary, Treasurer and Director June 13, 1997
Van Christakos
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
AZUREL LTD.
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, the undersigned officer of Azurel Ltd., a Delaware corporation (the
"Corporation"), does hereby certify as follows:
FIRST: The Certificate of Incorporation of the Corporation was filed in the
office of the Secretary of State of Delaware on June 26, 1995.
SECOND: The Certificate of Incorporation of the Corporation is amended by the
following resolution adopted by the Board of Directors and the shareholders of
the Corporation:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by restating in its entirety Article
FOURTH as follows:
"FOURTH: the aggregate number of shares which the corporation
is authorized to issue is 25,000,000, divided as follows:
A. 24,000,000 shares of common stock, $.001 per share par
value, and
B. 1,000,000 shares of Preferred Stock, $.001 per share par
value, to be issued in series. The shares of Preferred
Stock may be issued in one or more series, and each
series shall be so designated as to distinguish the
shares thereof from the shares of all other series.
Authority is hereby expressly granted to the Board of
Directors of the corporation to fix, subject to the
provisions herein set forth, before the issuance of any
shares of a particular series, the number, designation,
and relative rights, preferences, and limitations of the
shares of such series including (1) voting rights, if
any, which may include the right to vote together as a
single class with the Common Stock and any other series
of the Preferred Stock with the number of votes per share
accorded to shares of such series being the same as or
different from that accorded to such other shares, (2)
the dividend rate per annum, if any, and the terms and
conditions pertaining to dividends and whether such
dividends shall be cumulative, (3) the amount or amounts
payable upon such voluntary or involuntary liquidations,
(4) the redemption price or prices, if any, and the terms
and conditions of the redemption, (5) sinking fund
provisions, if any, for the redemption or purchase of
such shares, (6) the terms and conditions on which such
shares are convertible, in the event the shares are to
have conversion rights, and (7) any other rights,
preferences and limitations pertaining to such series
which may be fixed by the Board of Directors
<PAGE>
pursuant to the Delaware General Corporation Law;"
THIRD: The Amendment to the Certificate of Incorporation was authorized by the
written consent of the directors in accordance with Section 141 of the General
Corporation Law of the State of Delaware and by the written consent of the
shareholders pursuant to Section 228 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, the undersigned President of the Corporation has signed this
Certificate as of the 13th day of September 1995, and hereby affirms that this
is his true act and deed and that the statements contained herein are true
under penalty of perjury.
/s/ Constantine Bezas
---------------------
Constantine Bezas
President
[FRONT OF COMMON STOCK CERTIFICATE]
INCORPORATED UNDER THE LAWS CUSIP 055013 106
OF THE STATE OF DELAWARE SEE REVERSE FOR
CERTAIN DEFINITIONS
AZUREL LTD.
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR
VALUE OF
AZUREL LTD.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Van Christakos /s/ Constantine Bezas
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
NORTH AMERICAN TRANSFER CO. BY TRANSFER AGENT
(FREEPORT, N.Y.) AND REGISTRAR
AZUREL LTD.
CORPORATE
SEAL
1995
DELAWARE
AUTHORIZED
OFFICER
<PAGE>
[BACK OF COMMON STOCK CERTIFICATE]
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT-___ Custodian ____
(Cust) (Minor)
under Uniform Gifts to Minors
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of Act _____
survivorship and not as tenants (State)
in common
Additional abbreviations may also be used though not in the above list.
For Value Received, ______ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated __________________
-----------------------------------------
NOTICE:
THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS
WRITTENUPONTHE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
X
-----------------------------------------
Signature Guaranteed
-----------------------------------------
[FRONT OF CERTIFICATE]
VOID AFTER APRIL 12, 2000
REDEEMABLE WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
No. WARRANTS
AZUREL LTD.
CUSIP 055013 11 4
This certifies that FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, $.001 par
value, of Azurel Ltd., a Delaware corporation (the "Company"), at any time prior
to the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of North American Transfer Co., as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$ , subject to adjustment (the "Purchase Price") in lawful money of the United
States of America in cash or by official bank or certified check made payable to
the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated as of_____, by
and among the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement,
the Purchase Price and the number of shares of Common Stock subject to purchase
upon the exercise of each Warrant represented hereby are subject to modification
or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on _____, or
such earlier date as the Warrants shall be redeemed. If each such date shall in
the State of New York be a holiday or a day on which banks are authorized to
close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of this Warrant unless a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to such securities is
effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective,
keep such registration statement current, if required under the Act, while any
of the Warrants are outstanding, provided that the market price of the Common
Stock exceeds the Exercise Price of the Warrants. This Warrant shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.10 per Warrant commencing , on 30 days' prior written notice,
provided that the average closing bid price of the Company's Common Stock shall
equal or exceed $ per share for a period not less than 20 trading days in any 30
day trading period ending not more than 15 days prior to the date of any
redemption notice. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrant except to receive the
$.10 per Warrant upon surrender of this Certificate.
Under certain circumstances, Network 1 Financial Securities, Inc. shall be
entitled to receive an aggregate of five percent of the Purchase Price of the
Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and shall not be affected
by any notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
AZUREL LTD.
Dated: BY
/s/ Constantine Bezas
PRESIDENT
COUNTERSIGNED:
NORTH AMERICAN TRANSFER CO.
(FREEPORT, N.Y.)
AS WARRANT AGENT
BY BY
/s/ Van Christakos
AUTHORIZED OFFICER SECRETARY
AZUREL LTD.
CORPORATE SEAL
1995
DELAWARE
<PAGE>
[BACK OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed By the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[please print or type name and address, including zip code]
and be delivered to
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[please print or type name and address, including zip code]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by Network 1 Financial
Securities, Inc. unless the following box is checked.
2. The exercise of this Warrant was solicited by ____________________________.
3. If the exercise of this Warrant was not solicited, please check the
following box.
Dated: _________________________ X _____________________________
_____________________________
_____________________________
Address
_____________________________
Social Security or Taxpayer
Identification Number
X _____________________________
Signature Guaranteed
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[please print or type name and address, including zip code, of assignee]
of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints
- --------------------------------------------------------------------------------
Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: ________________________ X _______________________________
_______________________________
Address
_______________________________
Social Security or
Taxpayer Identification Number
X _______________________________
Signature Guaranteed
_______________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE.
1. PURPOSE OF PLAN; ADMINISTRATION
1.1 Purpose.
--------
The Azurel Ltd. 1997 Stock Option Plan (hereinafter, the "Plan") is
hereby established to grant to officers and other employees of Azurel Ltd. (the
"Company") or of its parents or subsidiaries (as defined in Sections 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code")), if any (individually and collectively, the Company"), and to
non-employee directors, consultants and advisors and other persons who may
perform significant services for or on behalf of the Company, a favorable
opportunity to acquire common stock, $.001 par value ("Common Stock"), of the
Company and, thereby, to create an incentive for such persons to remain in the
employ of or provide services to the Company and to contribute to its success.
The Company may grant under the Plan both incentive stock options
within the meaning of Section 422 of the Code ("Incentive Stock Options") and
stock options that do not qualify for treatment as Incentive Stock Options
("Nonstatutory Options"). Unless expressly provided to the contrary herein, all
references herein to "options," shall include both incentive Stock Options and
Nonstatutory Options.
1.2 Administration.
----------------
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), if each member is a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
or a committee (the "Committee") of two or more directors, each of whom is a
Non-Employee Director. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board. Until such time that the Committee is properly appointed, the
Board shall administer the Plan in accordance with the terms of this Section
1.2.
A majority of the members of the Committee shall constitute a quorum
for the purposes of the Plan. Provided a quorum is present, the Committee may
take action by affirmative vote or consent of a majority of its members present
at a meeting. Meetings may be held telephonically as long as all members are
able to hear one another, and a member of the Committee shall be deemed to be
present for this purpose if he or she is in simultaneous communication by
telephone with the other members who are able to hear one another. In lieu of
action at a meeting, the Committee may act by written consent of a majority of
its members.
Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option Agreements
(as defined in Section 3.4) entered into pursuant hereto and to define the terms
used therein, to prescribe, adopt, amend and rescind rules and regulations
relating to the administration of the Plan and to make all other determinations
necessary or advisable for the administration of the Plan; provided, however,
that
1
<PAGE>
the Committee may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper; and, provided, further, in its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under the Plan. Subject to the
express limitations of the Plan, the Committee shall designate the individuals
from among the class of persons eligible to participate as provided in Section
1.3 who shall receive options, whether an optionee will receive Incentive Stock
Options or Nonstatutory Options, or both, and the amount, price, restrictions
and all other terms and provisions of such options (which need not be
identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
1.3 Participation.
-------------
Officers and other employees of the Company, non-employee directors,
consultants and advisors and other persons who may perform significant services
on behalf of the Company shall be eligible for selection to participate in the
Plan upon approval by the Committee; provided, however, that only "employees"
(within the meaning of Section 3401(c) of the Code) of the Company shall be
eligible for the grant of Incentive Stock Options. An individual who has been
granted an option may, if otherwise eligible, be granted additional options if
the Committee shall so determine. No person is eligible to participate in the
Plan by matter of right; only those eligible persons who are selected by the
Committee in its discretion shall participate in the Plan.
1.4 Stock Subject to the Plan.
--------------------------
Subject to adjustment as provided in Section 3.5, the stock to be
offered under the Plan shall be shares of authorized but unissued Common Stock,
including any shares repurchased under the terms of the Plan or any Stock Option
Agreement entered into pursuant hereto. The cumulative aggregate number of
shares of Common Stock to be issued under the Plan shall not exceed 750,000,
subject to adjustment as set forth in Section 3.5.
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
this Section 1.4, where the exercise price of options is paid
by means of the grantee's surrender of previously owned shares of Common Stock,
only the net
2
<PAGE>
number of additional shares issued and which remain outstanding in connection
with such exercise shall be deemed "issued" for purposes of the Plan.
2. STOCK OPTIONS
2.1 Exercise Price; Payment.
-----------------------
(a) The exercise price of each Incentive Stock Option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who at the time such
option is granted owns (within the meaning of section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of capital stock of
the Company, the option exercise price shall be at least 110% of the Fair Market
Value of Common Stock on the date of grant. The exercise price of each
Nonstatutory Option also shall be determined by the Committee, but shall not be
less than 85% of the Fair Market Value of Common Stock on the date of grant. The
status of each option granted under the Plan as either an Incentive Stock Option
or a Nonstatutory Option shall be determined by the Committee at the time the
Committee acts to grant the option, and shall be clearly identified as such in
the Stock Option Agreement relating thereto.
"Fair Market Value" for purposes of the Plan shall mean: (i) the
closing price of a share of Common Stock on the principal exchange on which
shares of Common Stock are then trading, if any, on the day immediately
preceding the date of grant, or, if shares were not traded on the day preceding
such date of grant, then on the next preceding trading day during which a sale
occurred; or (ii) if Common Stock is not traded on an exchange but is quoted on
Nasdaq or a successor quotation system, (1) the last sales price (if Common
Stock is then listed on the Nasdaq Stock Market) or (2) the mean between the
closing representative bid and asked price (in all other cases) for Common Stock
on the day prior to the date of grant as reported by Nasdaq or such successor
quotation system; or (iii) if there is no listing or trading of Common Stock
either on a national exchange or over-the-counter, that price determined in good
faith by the Committee to be the fair value per share of Common Stock, based
upon such evidence as it deems necessary or advisable.
(b) In the discretion of the Committee at the time the option is
exercised, the exercise price of any option granted under the Plan shall be paid
in full in cash, by check or by the optionee's interest-bearing promissory note
(subject to any limitations of applicable state corporations law) delivered at
the time of exercise; provided, however, that subject to the timing requirements
of Section 2.7, in the discretion of the Committee and upon receipt of all
regulatory approvals, the person exercising the option may deliver as payment in
whole or in part of such exercise price certificates for Common Stock of the
Company (duly endorsed or with duly executed stock powers attached), which shall
be valued at its Fair Market Value on the day of exercise of the option, or
other property deemed appropriate by the Committee; and, provided further, that,
subject to Section 422 of the Code, so-called cashless exercises as permitted
under applicable rules and
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regulations of the Securities and Exchange Commission and the Federal Reserve
Board shall be permitted in the discretion of the Committee. Without limiting
the Committee's discretion in this regard, consecutive book entry
stock-for-stock exercises of options (or "pyramiding") also are permitted in the
Committee's discretion.
Irrespective of the form of payment, the delivery of shares issuable
upon the exercise of an option shall be conditioned upon payment by the optionee
to the Company of amounts sufficient to enable the Company to pay all federal,
state, and local withholding taxes resulting, in the Company's judgment, from
the exercise. In the discretion of the Committee, such payment to the Company
may be effected through (i) the Company's withholding from the number of shares
of Common Stock that would otherwise be delivered to the optionee by the Company
on exercise of the option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of exercise) to
the aggregate withholding taxes, (ii) payment by the optionee to the Company of
the aggregate withholding taxes in cash, (iii) withholding by the Company from
other amounts contemporaneously owed by the Company to the optionee, or (iv) any
combination of these three methods, as determined by the Committee in its
discretion.
2.2 Option Period.
-------------
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 30
days following a Termination of Employment (as defined in Section 3.2 hereof)
for any reason other than death or disability, or six months following a
Termination of Employment for disability or following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of this
Section 2.2, in no event shall any option granted under the Plan be exercised
after the expiration date of such option set forth in the applicable Stock
Option Agreement.
2.3 Exercise of Options.
-------------------
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
if the holder of an option shall not in any given installment period purchase
all of the shares which such holder is entitled to purchase in such installment
period, such holder's right to purchase any shares not purchased in such
installment period shall continue until the expiration or sooner termination of
such holder's
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option. The Committee may, at any time after grant of the option and from time
to time, increase the number of shares purchasable in any installment, subject
to the total number of shares subject to the option and the limitations set
forth in Section 2.5. At any time and from time to time prior to the time when
any exercisable option or exercisable portion thereof becomes unexercisable
under the Plan or the applicable Stock Option Agreement, such option or portion
thereof may be exercised in whole or in part; provided, however, that the
Committee may, by the terms of the option, require any partial exercise to be
with respect to a specified minimum number of shares. No option or installment
thereof shall be exercisable except with respect to whole shares. Fractional
share interests shall be disregarded, except that they may be accumulated as
provided above and except that if such a fractional share interest constitutes
the total shares of Common Stock remaining available for purchase under an
option at the time of exercise, the optionee shall be entitled to receive on
exercise a certified or bank cashier's check in an amount equal to the Fair
Market Value of such fractional share of stock.
2.4 Transferability of Options.
---------------------------
Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined by the Code), and shall be exercisable
during the optionee's lifetime only by the optionee or by his or her guardian or
legal representative. More particularly, but without limiting the generality of
the immediately preceding sentence, an option may not be assigned, transferred
(except as provided in the preceding sentence), pledged or hypothecated (whether
by operation of law or otherwise), and shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of any option contrary to the provisions of
the Plan and the applicable Stock Option Agreement, and any levy of any
attachment or similar process upon an option, shall be null and void, and
otherwise without effect, and the Committee may, in its sole discretion, upon
the happening of any such event, terminate such option forthwith.
2.5 Limitation on Exercise of Incentive Stock Options.
-------------------------------------------------
To the extent that the aggregate Fair Market Value (determined on the
date of grant as provided in Section 2.1 above) of the Common Stock with respect
to which Incentive Stock Options granted hereunder (together with all other
Incentive Stock Option plans of the Company) are exercisable for the first time
by an optionee in any calendar year under the Plan exceeds $100,000, such
options granted hereunder shall be treated as Nonstatutory Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted.
2.6 Disqualifying Dispositions of Incentive Stock Options.
-----------------------------------------------------
If Common Stock acquired upon exercise of any Incentive Stock Option is
disposed of in a disposition that, under Section 422 of the Code, disqualifies
the option holder from the application of Section 421(a) of the Code, the holder
of the Common Stock immediately before
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the disposition shall comply with any requirements imposed by the Company in
order to enable the Company to secure the related income tax deduction to which
it is entitled in such event.
2.7 Certain Timing Requirements.
----------------------------
At the discretion of the Committee, shares of Common Stock issuable to
the optionee upon exercise of an option may be used to satisfy the option
exercise price or the tax withholding consequences of such exercise, in the case
of persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
optionee to use shares of Common Stock issuable to the optionee upon exercise of
the option to pay all or part of the option price or the withholding taxes made
at least six months prior to the payment of such option price or withholding
taxes.
2.8 No Effect on Employment.
------------------------
Nothing in the Plan or in any Stock Option Agreement hereunder shall
confer upon any optionee any right to continue in the employ of the Company, any
Parent Corporation or any Subsidiary or shall interfere with or restrict in any
way the rights of the Company, its Parent Corporation and its Subsidiaries,
which are hereby expressly reserved, to discharge any optionee at any time for
any reason whatsoever, with or without cause.
For purposes of the Plan, "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. For purposes of the Plan, "Subsidiary" shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. OTHER PROVISIONS
3.1 Sick Leave and Leaves of Absence.
--------------------------------
Unless otherwise provided in the Stock Option Agreement, and to the
extent permitted by Section 422 of the Code, an optionee's employment shall not
be deemed to terminate by reason of sick leave, military leave or other leave of
absence approved by the Company if the period of any such leave does not exceed
a period approved by the Company, or, if longer, if the optionee's right to
reemployment by the Company is guaranteed either contractually or by statute. A
Stock Option Agreement may contain such additional or different provisions with
respect to leave of
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absence as the Committee may approve, either at the time of grant of an
option or at a later time.
3.2 Termination of Employment.
-------------------------
For purposes of the Plan "Termination of Employment," shall mean the
time when the employee-employer relationship between the optionee and the
Company, any Subsidiary or any Parent Corporation is terminated for any reason,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an optionee by
the Company, any Subsidiary or any Parent Corporation, (ii) at the discretion of
the Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company, a Subsidiary or any Parent Corporation
with the former employee. Subject to Section 3.1, the Committee, in its absolute
discretion, shall determine the affect of all matters and questions relating to
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, a leave of absence or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that such leave of absence or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then-applicable regulations
and revenue rulings under said Section.
3.3 Issuance of Stock Certificates.
------------------------------
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
3.4 Terms and Conditions of Options.
-------------------------------
Each option granted under the Plan shall be evidenced by a written
Stock Option Agreement ("Stock Option Agreement") between the option holder and
the Company providing that the option is subject to the terms and conditions of
the Plan and to such other terms and conditions not inconsistent therewith as
the Committee may deem appropriate in each case.
3.5 Adjustments Upon Changes in Capitalization; Merger
and Consolidation.
--------------------------------------------------
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an
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appropriate adjustment shall be made by the Committee in the number and kind of
shares as to which options may be granted. In the event of such a change or
exchange, other than for shares or securities of another corporation or by
reason of reorganization, the Committee shall also make a corresponding
adjustment changing the number or kind of shares and the exercise price per
share allocated to unexercised options or portions thereof, which shall have
been granted prior to any such change, shall likewise be made. Any such
adjustment, however, shall be made without change in the total price applicable
to the unexercised portion of the option (except for any change in the aggregate
price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under this Section 3.5 of the type described above
is made to an Incentive Stock Option, the adjustment will be made in a manner
which will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.
In connection with the dissolution or liquidation of the Company or a
partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
a security of another entity, a sale of more than 50% of the Company's assets,
or a similar event that the Committee determines, in its discretion, would
materially alter the structure of the Company or its ownership, the Committee,
upon 30 days prior written notice to the option holders, may, in its discretion,
do one or more of the following: (i) shorten the period during which options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices, or (iv) cancel options upon payment to the option
holders in cash, with respect to each option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), of any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the Committee
may, in considering the advisability or the terms and conditions of any
acceleration of the exercisability of any option pursuant to this Section 3.5,
take into account the penalties that may result directly or indirectly from such
acceleration to either the Company or the option holder, or both, under Section
280G of the Code, and may decide to limit such acceleration to the extent
necessary to avoid or mitigate such penalties or their effects.
No fractional share of Common Stock shall be issued under the Plan on
account of any adjustment under this Section 3.5.
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3.6 Rights of Participants and Beneficiaries.
----------------------------------------
The Company shall pay all amounts payable hereunder only to the option
holder or beneficiaries entitled thereto pursuant to the Plan. The Company shall
not be liable for the debts, contracts or engagements of any optionee or his or
her beneficiaries, and rights to cash payments under the Plan may not be taken
in execution by attachment or garnishment, or by any other legal or equitable
proceeding while in the hands of the Company.
3.7 Government Regulations.
----------------------
The Plan, and the grant and exercise of options and the issuance and
delivery of shares of Common Stock under options granted hereunder, shall be
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law) and
federal margin requirements and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and options granted hereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
3.8 Amendment and Termination.
-------------------------
The Board or the Committee may at any time suspend, amend or terminate
the Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
3.9 Time of Grant And Exercise of Option.
------------------------------------
An option shall be deemed to be exercised when the Secretary of the
Company receives written notice from an option holder of such exercise, payment
of the exercise price determined pursuant to Section 2.1 of the Plan and set
forth in the Stock Option Agreement, and all representations, indemnifications
and documents reasonably requested by the Committee.
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3.10 Privileges of Stock Ownership; Non-Distributive Intent; Reports
to Option Holders.
---------------------------------------------------------------
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.
3.11 Legending Share Certificates.
----------------------------
In order to enforce any restrictions imposed upon Common Stock issued
upon exercise of an option granted under the Plan or to which such Common Stock
may be subject, the Committee may cause a legend or legends to be placed on any
share certificates representing such Common Stock, which legend or legends shall
make appropriate reference to such restrictions, including, but not limited to,
a restriction against sale of such Common Stock for any period of time as may be
required by applicable laws or regulations. If any restriction with respect to
which a legend was placed on any certificate ceases to apply to Common Stock
represented by such certificate, the owner of the Common Stock represented by
such certificate may require the Company to cause the issuance of a new
certificate not bearing the legend.
Additionally, and not by way of limitation, the Committee may impose
such restrictions on any Common Stock issued pursuant to the Plan as it may deem
advisable, including, without limitation, restrictions under the requirements of
any stock exchange upon which Common Stock is then traded.
3.12 Use of Proceeds.
---------------
Proceeds realized pursuant to the exercise of options under the Plan
shall constitute general funds of the Company.
3.13 Changes in Capital Structure; No Impediment to
Corporate Transactions.
----------------------------------------------
The existence of outstanding options under the Plan shall not affect
the Company's right to effect adjustments, recapitalizations, reorganizations or
other changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds,
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debentures, preferred or prior preference stock ahead of or affecting Common
Stock, the dissolution or liquidation of the Company's or any other
corporation's assets or business, or any other corporate act, whether similar to
the events described above or otherwise.
3.14 Effective Date of the Plan.
---------------------------
The Plan shall be effective as of the date of its approval by the
stockholders of the Company within twelve months after the date of the Board's
initial adoption of the Plan. Options may be granted but not exercised prior to
stockholder approval of the Plan. If any options are so granted and stockholder
approval shall not have been obtained within twelve months of the date of
adoption of this Plan by the Board of Directors, such options shall terminate
retroactively as of the date they were granted.
3.15 Termination.
-----------
The Plan shall terminate automatically as of the close of business on
the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
3.16 No Effect on Other Plans.
------------------------
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Subsidiary or any Parent
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company (i) to establish any other forms of incentives or compensation for
employees of the Company, any Subsidiary or any Parent Corporation or (ii) to
grant or assume options or other rights otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
* * *
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AZUREL LTD.
1997 STOCK OPTION PLAN
As adopted May 1, 1997
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement on Form SB-2 of our report dated March 7, 1997,
relating to the financial statement of Azurel Ltd. and Subsidiaries, which is
contained in that Prospectus. We also consent to the reference to our Firm under
the caption "Experts" in the Prospectus.
/s/ Feldman Radin & Co., P.C.
Feldman Radin & Co., P.C.
Certified Public Accountant
New York, New York
June 13, 1997
