As filed with the Securities and Exchange Commission on January 28, 1997
Registration No. 333-15127
------------------------------------------------------------------------------
AMENDMENT NO. 1
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
Common Stock, $.001
par value (3) 1,150,000 $5.00 $5,750,000 $1,742.42
Redeemable Common
Stock Purchase
Warrants (4) 1,150,000 $.10 $ 115,000 $34.85
Common Stock (5) 1,150,000 $6.00 $6,900,000 $2,090.91
Underwriter's
Warrants (6) 100,000 $.001 $ 100 -- (7)
Common Stock (8) 100,000 $5.00 $500,000 $151.51
Redeemable Common
Stock Purchase
Warrants (9) 100,000 $.001 $100 $.03
Common Stock (10) 100,000 $6.00 $600,000 $181.81
Common Stock (11) 2,034,247 $5.00 $10,171,235 $3,082.19
Redeemable Common
Stock Purchase
Warrants (12) 555,500 $.10 $55,550 $16.83
TOTAL
REGISTRATION FEE $7,300.55 (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) Includes 150,000 shares of Common Stock subject to the Underwriter's over-
allotment option.
(4) Includes 150,000 Redeemable Common Stock Purchase Warrants subject to the
Underwriter's over-allotment option.
(5) 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.
(6) To be issued to the Underwriter, entitling the Underwriter to purchase up
to 100,000 Shares of Common Stock and/or 100,000 Redeemable Common Stock
Purchase Warrants.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon the exercise of the Underwriter's Warrants.
(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) Includes (i) 1,478,747 shares of Common Stock owned by Selling
Securityholders; and (ii) 555,500 shares of Common Stock underlying
Redeemable Common Stock Purchase Warrants owned by Selling
Securityholders.
(12) Consists of Redeemable Common Stock Purchase Warrants registered on behalf
of Selling Securityholders.
(13) Of such sum, $7,042.05 was paid upon filing of the original Registration
Statement.
[/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 shares of Common Stock, 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 _____, 1997
SUBJECT TO COMPLETION
AZUREL LTD.
1,000,000 Shares of Common Stock, $.001 par value
1,000,000 Redeemable Common Stock Purchase Warrants
Azurel Ltd. (the "Company") hereby offers 1,000,000 shares of common
stock, par value $.001 per share (the "Common Stock"), and 1,000,000 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, if traded on
the National Association of Securities Dealers Automated Quotation System
SmallCap Market ("NASDAQ"), or the last sales price per share if listed on a
national exchange, 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
Exercise Price 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 any 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 NASDAQ for inclusion of the Securities for trading on the Small
Cap Market. 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 this Offering, the Company is registering 1,478,747
shares of Common Stock (the "Selling Securityholders' Shares"), 555,500 Warrants
(the "Selling Securityholders' Warrants") and 555,500 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' Shares, 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 ranging from three months to two
years following the completion of the Offering. The Company will not receive any
of the proceeds from the sale of the Selling Securityholders' Shares, the
Selling Securityholders' Warrants, or the Selling Securityholders' Warrant
Shares, but will receive proceeds from the exercise 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
<PAGE>
"DILUTION" COMMENCING ON PAGES 15 AND 27, 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.
<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 $153,000 ($175,950
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 100,000 shares of Common Stock and/or 100,000 Redeemable
Warrants at a price of $____ per share and $___ per Redeemable Warrant
[150% of initial public offering price of Common Stock and Redeemable
Warrants]. In addition, the Company has agreed to pay to the
Underwriter a warrant solicitation fee of 5% 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 the Underwriter's non-accountable expense allowance
or other expenses of this Offering (estimated at $350,000) 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 150,000 additional
shares of Common Stock and/or 150,000 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.
[/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
2
<PAGE>
[MARKETING DISPLAY]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AND/OR THE REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
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."
THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS EXAMINED BY ITS INDEPENDENT AUDITORS.
IN ADDITION, THE COMPANY MAY FURNISH TO ITS STOCKHOLDERS QUARTERLY OR SEMI-
ANNUAL REPORTS CONTAINING UNAUDITED FINANCIAL INFORMATION AND SUCH OTHER
INTERIM REPORTS AS THE COMPANY MAY DETERMINE.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety, 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. 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 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. 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 product 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, an original unisex
fragrance and related grooming products 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. The
Company anticipates retail sales of this line to commence in the spring 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 first quarter of 1997 and that retail sales of the Members Only
line will commence by the fall of 1997. 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, no sales of Branded Products have been made. The Company
is having discussions with distributors relating to distribution of the
Company's Branded Products in France and the Middle East. The Company has had
discussions with other potential foreign distributors, but no orders have yet
been received. 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 the consumer, 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>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company (1) 1,000,000 shares of Common Stock and
1,000,000 Redeemable Warrants
Offering Price Common Stock - $_______ per share
Redeemable Warrants - $_______ per warrant
Common Stock Outstanding Before 3,878,747
the Offering (2)
Common Stock Outstanding After the 5,058,747
Offering (2)(3)
Redeemable Warrants Outstanding 1,000,000
After the Offering (4)
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, at a price of $.10 per
Redeemable Warrant, provided that
the closing bid price of the Common
Stock on NASDAQ 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 $892,000
to related parties, marketing, to
purchase inventory and equipment, to
pay accrued expenses, including an
aggregate of approximately $190,500
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) 1,478,747 shares of Common Stock and 555,500
shares of Common Stock issuable upon exercise of Redeemable Warrants being
offered concurrently with this Offering by the Selling Securityholders
pursuant to the Selling Securityholders' Prospectus and (ii) up to an
additional 150,000 shares of Common Stock and 150,000 Redeemable Warrants
issuable upon exercise of the Underwriter's Over-Allotment Option. See
"Concurrent Registration of Securities."
(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) 270,000 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements or (iii) 555,500
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 150,000 shares of Common Stock
and 150,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 150,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,000,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants; (iv) up to 100,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants or (v) up to 100,000 shares of
Common Stock issuable upon exercise of the Redeemable Warrants included
in the Underwriter's Warrants. Includes (i) 1,000,000 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) 150,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option, (ii) 100,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants or (iii)
555,500 Redeemable Warrants being offered concurrently with this
Offering by the Selling Securityholders pursuant to a Selling
Securityholders' Prospectus. See "Underwriting" and "Concurrent
Registration of Securities."
(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 OF FINANCIAL INFORMATION
The following sets forth summary financial information regarding Azurel
and the four companies comprising the Private Label Group. The pro forma summary
financial information includes adjustments to reflect the acquisition of Scent
Overnight.
AZUREL
The summary financial information as of December 31, 1995, September 30,
1996 and 1995 and for the period June 26, 1995 (inception) to December 31, 1995
and the nine months ended September 30, 1996 and the period June 26, 1995
(inception) to September 30, 1995, has been abstracted from the financial
statements of the Company included elsewhere herein (audited, with the exception
of the nine months ended September 30, 1996 and the period June 26, 1995
(inception) to September 30, 1995, and all of the pro forma information).
<TABLE>
Historical Pro forma (1)
------------------------------------------- ----------------------------------------------
For the Period
June 26, For the Period For the Period For the Period
1995 June 26, 1995 June 26, 1995 June 26, 1995
(inception) Nine Months (inception) (inception) Nine Months (inception)
through ended through through ended through
December 31, September September December 31, September 30, September 30,
1995 30, 1996 (2) 30, 1995 1995 1996 1995
----------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars and outstanding shares in thousands, except per share data)
Statement of Operation Data:
Net Sales............ $ - $ 968 $ - $ 8,413 $ 7,678 $ 6,285
Cost of goods sold... - 765 - 6,628 6,065 4,965
Net Income (Loss).... (288) (995) (127) (1,175) (1,373) (639)
Net Income (Loss)
per share............ (0.12) (0.27) (0.05) (0.48) (0.37) (0.27)
Number of Shares
used in
Computation.......... 2,450 3,669 2,381 2,450 3,669 2,381
Balance Sheet Data:
Current Assets....... 276 $ 3,164 $ 5,842
Total Assets......... 351 7,253 10,648
Current Liabilities.. 403 2,990 1,815
Long term debt....... 396 3,597 3,497
Stockholders'
Equity(Deficiency) (448) 665 5,335
Working Capital
(Deficit) (127) 174 4,027
Accumulated Deficit (513) (1,509) (1,901)
<FN>
(1) See "Notes To Unaudited Pro Forma Financial Statements" for description of
pro forma adjustments.
(2) Includes the results of operations of the Private Label Group for the period
August 22, 1996 to September 30, 1996.
</FN>
</TABLE>
9
<PAGE>
PRIVATE LABEL GROUP
The summary financial information as of December 31, 1995 and September
30, 1996 and for the years ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996 and 1995, has been abstracted from the financial
statements of the Private Label Group included elsewhere herein (audited, with
the exception of the nine months ended September 30, 1996 and 1995).
<TABLE>
Historical
---------------------------------------------------------------------
Years ended December 31, Nine months ended September 30,
--------------------------------- -------------------------------
<S> <C> <C> <C> <C>
1995 1994 1996 (3) 1995
--------------- -------------- ------------- --------------
(Dollars in thousands)
Statement of Operation Data:
Net Sales.................... $ 8,413 $ 9,745 $ 7,678 $ 6,285
Cost of goods sold........... 6,628 7,650 6,065 4,965
Net Income (Loss)............ (516) (290) (76) (248)
Balance Sheet Data:
Current Assets............... $ 2,598 $ 2,988
Total Assets................. 3,157 3,785
Current Liabilities.......... 2,519 2,672
Long term debt............... 1,566 2,116
Stockholders' Equity (Deficiency). (927) (1,003)
<FN>
(3) These financial statements only reflect the results of operations of the
Private Label Group and do not include transactions related to the
acquisition of the Private Label Group by Azurel.
</FN>
</TABLE>
10
<PAGE>
<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 the Scent 123's
operations. The financial statements of the Private Label Group for the years
ended December 31, 1995 and 1994 and for the nine months ended September 30,
1996 and 1995 (unaudited) included elsewhere in this Prospectus reflect the
results of operations under prior management and not under the management of
the Company. Therefore, 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, 1995 and 1994, and the Company anticipates losses for the year
ended December 31, 1996. As at September 30, 1996, the Company had an
accumulated deficit (unaudited) of $1,508,529. 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. In addition, the Company, as
of September 30, 1996, had a deficit in stockholders equity of $1,002,965. In
connection with the audit of Azurel's and Private Label Group's respective
financial statements as of December 31, 1995, 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
11
<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 September 30, 1996 is approximately
$4,788,000. 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 could lose
its ownership of the Private Label Group which would have a material
adverse effect on the Company. See "Certain Transactions."
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 $448,000) 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 $230,000) 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 $275,000 of accrued expenses, which includes accrued
consulting fees totalling approximately $190,500 as of September 30, 1996,
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 $57,000, $44,000, $53,500 and $36,000, respectively.
See "Use of Proceeds" and "Certain Transactions."
Dependence Upon Key Customers. Approximately 21% and 14% of Private
Label Group's revenues for the year ended December 31, 1995 were derived from
two major customers. For the year ended December 31, 1994, approximately 17% and
12% of Private Label Group's revenues were derived from the same two major
customers. For these periods, revenues of the Private Label Group represent all
of the Company's revenues. For the nine months ended September 30, 1995 and
1996, these two major customers accounted for 37.1% and 34.5%, respectively, of
the Company's revenue. 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. Michael J. Assante, President of Private Label
Group, is the sole officer, director and shareholder of The Contemporary
Cosmetic Group, Inc. ("Contemporary"), a company that leases space at the
Facility from the Company. 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. In addition, Contemporary subleases 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."
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 and (v) the successful
performance of the Company's advertising and fulfillment firms engaged to assist
the Company in selling the Distributed Fragrances. 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 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 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 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.
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.
Upon completion of the Offering and upon completion of the Concurrent Offering
Tusany Investment and Trade, S.A. ("Tusany") will own approximately 24.7% and
30.8%, respectively, 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 17.6% of the
oustanding 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. See "Principal Stockholders."
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 $4.71 per share or approximately 94%
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 Broad
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, employees and
agents 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.
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 1,478,747 Selling
Securityholders' Shares, 555,500 Selling Securityholders' Warrants and 555,500
Selling Securityholders' Warrant Shares. The Selling Securityholders have
entered into agreements with the Underwriter not to sell their shares of Common
Stock for a period ranging from six months to two years, or 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 2,580,000 shares of Common Stock outstanding
that are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act after giving effect to the registration of
the Selling Securityholers' Shares. In general, under Rule 144, a person who
has satisfied a two-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 three-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 3,165,753 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 and (iv) 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
pursuant to the Company's 1997 Plan, it will not issue any securities,
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."
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.
16
<PAGE>
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, developments or
disputes concerning, among other things, 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 maintenance criteria which if adopted would make it more
difficult for a company to maintain its listing. If the Company is 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 maintenance criteria requirements, or its Common Stock falls
below the minimum bid price of $3.00 per share for the initial quotation,
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 or the Company's having $2,000,000 in stockholders' equity, 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. Securities are exempt from this rule if the market price is at least
$5.00 per share.
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 of at
least $2,000,000, if such issuer has been in continuous operation for less than
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 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 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 Securities in the
over-the-counter market where they are 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.
Unless granted an exemption by the Commission from Rule 10b-6 under the Exchange
Act, the Underwriter will be prohibited from engaging in any market-making
activity or solicited brokerage activities with regard to the Securities during
the period beginning nine business days prior to the commencement of any such
solicitation and ending on the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee for the exercise of the Redeemable
Warrants following such solicitation. As a result, the Underwriter and
solicitation broker/dealers may be unable to continue to make a market in the
Securities during certain periods while the exercise of Redeemable Warrants is
being solicited. Such a limitation, while in effect, could impair the liquidity
and market price of the 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 100,000 shares of Common Stock and/or 100,000 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 September 30, 1996 the Company had a pro forma net tangible book
value (deficit) of approximately ($2,520,000) or ($.65) per share which includes
adjustments to reflect the transactions occurring after September 30, 1996 as
described in Note 3 of the "Notes to Unaudited Pro Forma Financial Statements".
The net tangible book value subsequent to September 30, 1996 which
gives effect to the issuance of Common Stock and Redeemable Warrants offered
hereby and the receipt of the net proceeds therefrom, the pro forma tangible
book value at September 30, 1996 would have been $1,468,000 or $.29 per share.
This represents an immediate increase in net tangible book value of $.94 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 $4.71 per
share to new investors (based on an assumed offering price of $5.00 per share
of Common Stock and $.10 per Rdeemable Warrant). "Dilution" is the difference
between the initial public offering price and the proforma net tangible book
value per share.
The following table illustrates the per share dilution to the new
investors as of September 30, 1996:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock................ $5.00
Deficit pro forma net tangible book value per share
before the Offering............................................ ($0.65)
Increase attributable to new investors......................... $0.94
--------
Pro forma net tangible book value per share after the
Offering....................................................... $0.29
------
Dilution to new investors...................................... $4.71
======
</TABLE>
The above table assumes no exercise or conversion of
outstanding options, warrants and debt. To the extent that
stock options or warrants are exercised at prices below the
the public offering price per share, there will be further
dilution to new investors. See "Risk Factors,"
"Certain Transactions" and "Underwriting."
21
<PAGE>
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>
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
<S> <C> <C> <C> <C> <C>
Existing
Stockholders.... 4,058,727 (1) 80.2% $ 1,500,000 23.1% $0.37
New Investors... 1,000,000 19.8% 5,000,000 76.9% $5.00
------------- --------------- --------------- ----------------
5,058,727 100.0% $ 6,500,000 100.0%
============= =============== =============== ================
<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."
</FN>
</TABLE>
22
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
September 30, 1996; 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 $4,087,000, and
transactions subsequent to September 30, 1996 that have a material impact on the
financial statements. See "Notes To Unaudited Pro Forma Financial Statements"
and "Use Of Proceeds."
<TABLE>
Historical As Adjusted (1) (2)
(In thousands) (In thousands)
<S> <C> <C>
Current maturities of long term debt................. $ 935 $ 148
----------------- ---------------
Long-term debt, less current portion................. 3,597 3,497
----------------- ---------------
Stockholders' Equity:
Common Stock, $.001 par value, authorized
10,000,000 shares; 3,668,727 issued and
outstanding; 5,058,727 shares issued and
outstanding as adjusted............................... 4 5
Additional paid- in capital........................... 2,172 7,233
Accumulated deficit................................... (1,509) (1,901)
---------------- ---------------
667 5,337
Less: stock subscriptions receivable.................. (2) (2)
----------------- ---------------
Total Stockholders' Equity .......................... 665 5,335
----------------- ---------------
Total Capitalization.................................. $ 5,197 $ 8,980
================= ===============
23
<PAGE>
<FN>
(1) Does not include: (i) 1,000,000 shares Common Stock issuable upon
exercise of the Warrants offered hereby (ii) 200,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants and
purchase warrants included therein; (iii) 750,000 shares of Common
Stock issuable upon exercise of options available for grant under the
1997 Option Plan; (iv) 325,500 shares of Common Stock reserved for
issuance pursuant to warrants issued in connection with financing and
consulting agreements; and (v) 500,000 shares reserved for warrants
from private placements.
(2) Includes all adjustments described in the "Notes To Unaudited Pro Forma
Financial Statements."
</FN>
</TABLE>
24
<PAGE>
USE OF PROCEEDS
Assuming the sale of the securities offered hereby (based on an assumed
offering price of $5.00 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 $4,087,000
(4,752,550 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) $1,540,500 37.7%
Marketing (2) $ 800,000 19.6%
Inventory (3) $1,000,000 24.5%
Equipment (4) $ 450,000 11.0%
Working Capital and General Corporate Purposes $ 296,500 7.2%
---------- -----
Total . . . . . . . . . . . . . $4,087,000 100%
========== =====
<FN>
(1) Represents (i) installments of principal and interest (estimated at
$448,000) due, on the earlier of the date on which this Offering is
consummated or March 1, 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 $230,000) 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
$513,000) due under promissory notes aggregating $500,000 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 $275,000 of accrued expenses and consulting fees,
which includes accrued consulting fees totalling approximately
$190,500 as of September 30, 1996, for consulting services rendered by
Messrs. Semhon, Bezas, Bell and Christakos in the amounts of
approximately $57,000, $44,000, $53,500, and $36,000, 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 and 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 foregoing represents the Company's current estimate of the
allocation of the net proceeds of the Offering based upon certain assumptions
relating to the costs associated with the implementation of the Company's
proposed business operations. Future events, including problems, delays,
expenses and complications frequently encountered by companies which seek to
introduce new products to existing or new markets as well as changes in economic
conditions, regulatory or competitive conditions, and the success of the
Company's marketing activities, may make shifts in the allocation of funds
necessary or desirable. Should the Company consummate an acquisition, although
no acquisition has been identified and there are no negotiations relating to
any acquisition pending, the use of proceeds may be reallocated. There can be
no assurance that the Company's estimates will prove to be accurate or that
unforeseen expenses will not be incurred.
The Company believes that the net proceeds of this Offering will
satisfy the Company's capital requirements for at least twelve months. 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>
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AZUREL LTD. AND SUBSIDIARIES (the Private Label Group)
General
In August 1996, Azurel acquired the stock of the Private Label Group.
The discussion below compares the pro forma 1996 interim period to the pro forma
1995 interim period which assumes the acquisition of the Private Label Group on
January 1, 1996 and 1995.
The following discussion and analysis should be read together with the
financial statements and notes for Azurel and the 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>
Pro forma
Nine months ended September 30,
<S> <C> <C>
1996 1995
------------------ ----------------
Net sales........................... 100.0 % 100.0 %
Cost of Sales....................... 79.0 79.0
------------------ ------------------
Gross profit........................ 21.0 21.0
Selling, general and
administrative expenses............. 27.3 24.7
Amortization expenses............... 1.9 2.3
------------------ ----------------
Operating (loss).................. (8.2) (6.0)
Interest expense.................. 9.7 4.1
------------------ ----------------
Net (loss)............................ (17.9) % (10.1) %
================== =================
</TABLE>
Pro forma nine months ended September 30, 1996 (the "1996 Interim
Period") compared to the pro forma nine months ended September 30, 1995 (the
"1995 Interim Period")
Net sales for the nine months ended September 30, 1996 increased by
$1,392,685, or approximately 22%, from the comparable period of the 1995 Interim
Period. The increase is
28
<PAGE>
attributable primarily to an expansion of the Private Label Group's customer
base. In addition, a significant new customer provided sales of approximately
$446,000 in the 1996 Interim Period. Sales to the Private Label Group's two
largest customers in the nine months ended September 30, 1996 accounted for
37.1% of net sales, as compared to 34.5% attributable to these same two
customers in the nine months ended September 30, 1995. The largest customer in
the 1996 Interim Period accounted for 25.3% of net sales in that period as
compared to 21.6% in the 1995 Interim period.
Although the Private Label Group successfully obtained new customers
and increased sales to existing customers in the 1996 Interim Period, there can
be no assurance that the Private Label Group will continue to increase its sales
to such customers or obtain significant new customers in future periods.
Cost of sales for the 1996 Interim Period were $6,065,231, or 79% of
net sales, as compared to $4,965,000, or 79% of net sales, for the 1995 Interim
Period. Although the Private Label Group experienced slightly higher material
and labor costs, the Private Label Group was able to maintain the gross profit
percentage through a favorable product mix experienced during the third quarter.
Selling, general and administrative expenses for the 1996 Interim
Period were $2,097,431 as compared to $1,551,237 for the comparable 1995 Interim
Period, representing an increase of $546,194, or approximately 35.2%. As a
percentage of net sales, these expenses increased from 24.7% in the 1995 Interim
Period to 27.3% in the current period. The increase in this ratio is primarily
attributable to the increase in consulting fees and office salaries. Consulting
fees for the 1996 Interim Period were $436,924 as compared to $103,405,
representing an increase of $333,519. Consulting fees relate to services
provided to the Company regarding the development of its product lines. Such
expenses increased in the relevant time periods as a result of increased
activity in the development of product and marketing strategies. Office salaries
increased in the 1996 Interim Period by approximately $45,060 as compared to
the 1995 Interim Period.
Interest expense increased from $262,205 in the 1995 Interim Period to
$743,402 in the 1996 Interim Period. The increase is attributable to higher
rates on increased borrowings under the Private Label Group's revolving credit
facility and increased borrowings outstanding for a greater portion of the 1996
Interim Period compared to the 1995 Interim Period and to an increase in
amortization in the 1996 Interim Period of debt discounts of $217,169 compared
to no amortization in the 1995 Interim Period.
29
<PAGE>
AZUREL
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. The following
discussion relates to Azurel's operations prior to any acquisitions.
The discussion below for Azurel compares the 1996 Interim Period to the
1995 Interim Period, as such terms are defined below. Because Azurel was formed
in June 1995, full year comparisons are not possible. Considering Azurel's
developmental stage, the comparison of Interim Periods was deemed the most
meaningful disclosure available.
Results of Operations
Nine months ended September 30, 1996 (the "1996 Interim Period")
compared to the period of June 26, 1995 (inception) to December 31, 1995 (the
"1995 Interim Period")
There were no revenues in both the 1996 and the 1995 Interim Periods,
as Azurel's principal operating activities consisted of (i) performing due
diligence procedures regarding the planned acquisition of the Private Label
Group, (ii) developing various new product lines and (iii) refining the Scent
123 test market and national roll-out planned for the first quarter of 1998.
Although there were no revenues in the 1996 Interim Period, Azurel
solicited approximately $250,000 in sales orders, which Azurel anticipates will
be filled in the first quarter of 1997.
General and administrative expenses were $259,637 in the 1995 Interim
Period, as compared to $586,895 in the 1996 Interim Period. This represents an
increase of $327,258 or approximately 126%, due partially to increased
consulting and professional fees. Consulting fees increased from $183,038 in the
1995 Interim Period to $336,874 in the 1996 Interim Period, an increase of
$153,836 or approximately 84%. Consulting fees relate to services provided to
the Company regarding the development of its product lines. Such expenses
increased in the relevant time periods as a result of increased activity in the
development of product and marketing strategies. Professional fees (including
legal fees) increased from $1,750 in the 1995 Interim Period to $43,131 in the
1996 Interim Period due to services in connection with the Company's expanded
activities in the 1996 Interim Period.
Interest expenses increased from $28,369 in the 1995 Interim Period to
$449,309 in the 1996 Interim Period. This increase of $420,940 relates to
increased borrowings outstanding for a greater
30
<PAGE>
portion of the 1996 Interim Period as compared to the 1995 Interim Period and to
an increase in amortization in the 1996 Interim Period of debt discounts in the
aggregate amount of $217,169 compared to amortization of $10,810 in the 1995
Interim Period.
Liquidity and Capital Resources
From inception to date, the Azurel's operations have been
funded by a combination of debt and equity financings.
Debt Financing
Azurel borrowed an aggregate of $528,750 in the 1995 Interim
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 Interim Period, the Company borrowed an additional
aggregate amount of $780,000 from various lenders. 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 $667,454 (including principal and interest) elected to
convert such loans into 438,730 shares of Common Stock.
Azurel repaid loans aggregating $563,767 in the 1996 Interim
Period.
Equity Financing
Azurel sold 750,000 shares of Common Stock at $2.00 per share from
February through July 1996. In the 1996 Interim Period, the Company had net
proceeds of $1,283,900 from these sales.
Utilization of Proceeds
Proceeds of the aforementioned financings were utilized from
inception to date to (i) finance operations (approximately $512,000), (ii)
advance funds to the Private Label Group ($830,000), (iii) fund increases to
other assets, furniture and equipment and deferred registration costs ($89,000),
(iv) fund advances to certain stockholders ($184,000) and (v) fund deferred
finance costs ($70,000).
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 the 1996
Interim 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.
31
<PAGE>
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.
32
<PAGE>
THE PRIVATE LABEL GROUP
General
The Private Label Group develops, manufactures, packages and sells
cosmetics principally to major cosmetic companies for sale by each customer
under the customer's own brand name.
The following discussion and analysis should be read together with the
combined financial statements and notes thereto 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 combined
statements of operations.
<TABLE>
Year ended December 31,
<S> <C> <C>
1995 1994
---------------- ------------------
Net sales........................ 100% 100%
Cost of Sales.................... 78.8 78.5
----------------- ------------------
Gross profit..................... 21.2 21.5
Selling, general and
administrative expenses.......... 25.0 19.9
----------------- ------------------
Operating income................. (3.8) 1.6
Other expense.................... 2.3 4.6
----------------- ------------------
Net income (loss) (6.1)% (3.0)%
================= ==================
</TABLE>
1995 Compared to 1994
Net sales for 1995 decreased by $1,331,353, or 13.7%, as compared to
1994. The decrease is attributable primarily to restrictions imposed by the
Private Label Group's previous asset based lender, which reduced the
availability of inventory and adversely affected the Private Label Group's
ability to supply finished products to its customers. As a result of the Private
Label Group's refinancing its revolving credit facility in 1996 (see Note 8 to
the Private Label Group's financial statements), management believes that the
restrictions imposed under the previous agreement have been significantly
alleviated and product financing will not be a hindrance to order fulfillment in
subsequent periods.
Cost of sales for 1995 decreased by $1,022,263, or 13.4%, from 1994. As
a percentage of net sales, cost of sales increased from 78.5% in 1994 to 78.8%
in 1995. The increase in cost of sales
33
<PAGE>
as a percentage of net sales is attributable primarily to the allocation of the
fixed costs associated with the Private Label Group's manufacturing operations
over a smaller revenue base.
Selling, general and administrative expenses for 1995 increased by
$168,725, or 8.7%, from 1994. As a percentage of net sales, these expenses
increased from 19.9% in 1994 to 25.0% in 1995, because of the decrease in sales
discussed above. The increase in the dollar amount of these expenses is
attributable primarily to an increase in management personnel, selling and
promotional expenses and professional and consulting fees.
The Private Label Group recognized no income tax benefit in either year
as a result of the uncertainty regarding the realization of net operating loss
carryforward benefits.
Liquidity and Capital Resources
In the 1996 Interim Period, the Private Label Group expended $835,732
on operating activities. This is attributable to the loss from operations in the
period of $75,795, the payment of accrued litigation settlement costs in the
amount of $257,000, an increase in receivables in the period amounting to
$451,399, as well as a decline in accounts payable and payroll taxes payable,
offset by depreciation charges of $188,685. Cash utilized for the purchase of
equipment was $120,178.
The Private Label Group financed its operating and capital expenditure
requirements through additional borrowings from Azurel in the 1996 Interim
Period ($650,000), as well as increased borrowings on its revolving credit
facility, which was renegotiated with a new lender during the 1996 Interim
Period. Pursuant to the financing agreement with the new lender, the new
lender granted to the Private Label Group an uncommited line of credit of
$2,000,000 secured by a lien on the Private Label Group's accounts receivable,
machinery and equipment, intangibles and inventory. The agreement provides for
cross corporate guarantees among the members of the Private Label Group and by
the Company. Pursuant to the security agreement, the financing agreement shall
have a two year term and renewal from year to year unless and until terminated
pursuant to its terms. Monthly installments of $10,150 are required
under this agreement and the remaining amount due is February 1998. See Azurel's
Management's Discussion and Analysis and the Private Label Group's notes to the
historical financial statements for additional information.
Going Concern
The Private Label Group's financial statements have been presented on a
basis that it is a going concern. Due to significant losses incurred in 1995 and
1994, the accountants have an explanatory paragraph stating that the Private
Label Group's continued existence depends upon its ability to become profitable
and obtain additional equity and/or debt financing of which no assurance can be
given. Since the preparation of the financial statements, the Private Label
Group was acquired by Azurel. See Azurel's Management's Discussion and Analysis
for further discussion.
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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. 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.
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"). 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 product 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. 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, 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, an original unisex
fragrance line and related grooming products 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. The Company anticipates retail sales of this line to commence in the
spring 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 through its own sales personnel. 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, no sales of Branded Products have been made. The
Company is having discussions with distributors relating to distribution of the
Company's Branded Products in France and the Middle East. The Company has had
discussions with other potential foreign distributors, but no orders have yet
been received. 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 outer
wear, 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 to pay a royalty of five
percent of net sales, subject to minimum annual 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 first quarter of 1997 and that retail sales of the Members Only
line will commence by the fall of 1997.
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 the consumer, 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 requisite 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 method of competition in the
sale of Branded Products is 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 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" 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
such 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 assurances can be given that the amount of
the Company's present coverage will prove to be adequate.
Major Customers and Suppliers
Approximately 21% and 14% of the Company's revenues derived from
manufacturing activities was derived from two major customers for the year ended
December 31, 1995. For the year ended December 31, 1994, approximately 17% and
12% of the Company's revenue was derived from the same two major customers.
For the nine months ended September 30, 1995 and 1996, these two major customers
accounted for 37.1% and 34.5%, respectively, of the Company's revenue. 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 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 September 30, 1996 the Private Label Group's backlog of orders believed by
the Company to be firm was approximately $2,950,000 and at September 30, 1995
the amount of such orders was approximately $3,100,000. The Company expects that
approximately 80% 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."
The Company subleases approximately 10,000 square feet of the Facility
to Contemporary, a related party on a month-to-month basis for approximately
$6,500 per month under an oral 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.
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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 this 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) 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 and will devote their
full business time to the affairs of the Company. 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 th 1997 Plan. See "Use of Proceeds" and "Certain Transactions."
The Board of Directors has not established any committees, however,
upon 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:
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Gerard Semhon has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception. 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 $100,000 for the years ended
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C>
Annual Compensation
Payouts
Name and
Principal
Position Year Salary ($) 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 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 a car allowance and the right to participate
in welfare plans adopted by the Company and to enjoy medical, dental and
disability 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 of 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
Prior to the effective date of this Prospectus, the Board of Directors
adopted, and stockholders 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
meeting 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 ISO 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 and
Indemnifications
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, the By-laws of the Company provide that the Company is required to
indemnify its officers and directors, 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% 6.7%
Constantine Bezas 195,634 195,634 5% 3.9%
Joseph Truitt Bell 146,233 146,233 3.8% 2.9%
Van Christakos 110,933 110,933 2.9% 2.2%
Tusany Investment &
Trade S.A. 1,559,355 (5) 1,250,000 40.2% 24.7%
c/o Morgan and Morgan Trust Co.
Pasea Estate, P.O. Box 3149
Roadtown, Tortola BVI
Michael J. Assante 0 170,000 (6) 0 3.7%
Fred Kassner 250,000 (7) 0 6.4% 0
69 Spring Street
Ramsey, NJ 07446
Robert E. Lee 425,000 (8) 200,000 11.0% 4.0%
465 West Saddle River Road
Upper Saddle River, NJ 07458
Liam Development 210,000 (9) 210,000 5.4% 4.2%
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) 683,400 853,400 17.6% 16.9%
<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) Assumes the sale of each Selling Securityholder of the securities owned
by such Selling Securityholder and registered in the Concurrent Offering.
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) 1,000,000 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) Includes 309,355 shares of Common Stock registered in the Concurrent
Offering, but does not include shares underlying 50,000 Redeemable
Warrants registered in the Concurrent Offering. Assuming no sale by such
Selling Securityholder of the securities owned by such Selling
Securityholder and registered in the Concurrent Offering, after the
Offering, the percent ownership would be 30.8%. See "Concurrent
Registration of Securities."
(6) 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."
(7) Represents shares of Common Stock registered in the Concurrent Offering.
Assuming no sale by such Selling Securityholder of the securities owned
by such Selling Securityholder and registered in the Concurrent Offering,
after the Offering, the percent ownership would be 4.9%.
See "Concurrent Registration of Securities."
(8) Includes (i) 25,000 shares of Common Stock registered in the Concurrent
Offering and 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. Assuming no sale by such Selling Securityholder of the securities
owned by such Selling Securityholder and registered in the Concurrent
Offering, after the Offering, the percent ownership would be 4.4%. 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. 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
10 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 March 1, 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 March 1, 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."
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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 10,000,000 shares of Common Stock,
$.001 par value per share. As of the date of this Prospectus, prior to giving
effect to the shares to be issued in this offering, there are 3,878,747 shares
of Common Stock outstanding and held by 50 stockholders of record. 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 average closing bid
price per share of the Common Stock (if the Common Stock is then traded on a
national securities exchange or NASDAQ) 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."
Registration Rights
The Company is registering 1,478,747 shares of Common Stock and 555,500
Redeemable Warrants in the Concurrent Offering of behalf of the Selling
Securityholders, which securities were issued in connection with private
placements, consulting agreements and certain financings. The securities
offered in the Concurrent Offering are being registered pursuant to the
exercise of piggback registration rights granted by the Company. 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
5,058,747 shares of Common Stock and 1,000,000 Redeemable Warrants (5,208,747
shares of Common Stock, and 1,450,000 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
the 1,478,747 shares of Common Stock and 555,500 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").
The remaining 2,580,000 shares are 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 through October, 1998. 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 two years 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 presently is not and 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 three 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 that substantial amounts of
restricted shares may be resold in the public market may adversely affect
prevailing market prices for the shares 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 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 150,000 shares of
Common Stock and/or 150,000 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; or (v) the solicitation of exercise of the Redeemable Warrants was
in violation of Rule 10b-6 promulgated under the Exchange Act.
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. Notwithstanding these lock-up agreements,
such persons may make intra-family transfers. 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 100,000 shares of Common Stock and/or 100,000 Redeemable
Warrants (the "Underwriter's 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 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 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 five
private securities offerings conducted between December 1995 and January 1997,
for which the Placement Agent received commissions and expenses aggregating
approximately $365,000. 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
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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.
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CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, 1,478,747 "Selling Securityholders'
Shares), 555,500 Warrants (the "Selling Securityholders' Warrants") and 555,500
shares underlying the Selling Securityholders' 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' Shares, 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' Shares and/or the
Selling Securityholders' Warrants and the Selling Securityholders' Warrant
Shares for a period ranging from three months to two years 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' Shares, 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, 1994
and 1995 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. The information for the interim periods ended June 30,
1995 and 1996 is unaudited but in the opinion of management, includes all
adjustments considered necessary for the fair presentation of the results. All
adjustments made in the interim financial statements are of a normal recurring
nature. The unaudited results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year.
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.
Except for material contracts or portions thereof accorded confidential
treatment, all registration statements are available for public inspection (and
copying at prescribed rates), during business hours, at the principal office of
the Commission in Washington, D.C. 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).
65
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-19
Combined Balance Sheets .................................. F-20
Combined Statements of Operations ........................ F-21
Combined Statements of Changes in Stockholders' Deficit .. F-22
Combined Statements of Cash Flows ........................ F-23
Notes to Combined Financial Statements ................... F-24
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Balance Sheet - September 30, 1996 ............. F-31
Pro Forma Statement of Operations - Nine Months Ended Sept F-32
Pro Forma Statement of Operations - Year Ended December 31 F-33
Notes to Unaudited Pro Forma Financial Statements ........ F-34
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Azurel Ltd.
We have audited the accompanying balance sheet of Azurel Ltd. as of
December 31, 1995 and the related statements of operations, changes in
stockholders' deficit and cash flows 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. as of
December 31, 1995 and the results of its operations and its cash flows 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. will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred significant net losses 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-2
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ - $ 3,581
Accounts receivable, net of allowance for doubtful
account of $14,000 and $15,000, respectively 1,570,919 -
Inventories 1,095,696 -
Prepaid expenses 33,379 -
Due from stockholders and related parties 464,126 92,380
Due from the Private Label Group - 180,000
------------- -------------
TOTAL CURRENT ASSETS 3,164,120 275,961
FURNITURE AND EQUIPMENT 542,191 -
RESTRICTED CASH 334,461 -
DEFERRED FINANCING COSTS 33,360 70,208
DEFERRED REGISTRATION COSTS 15,000 4,000
GOODWILL 3,086,167 -
OTHER ASSETS 77,434 490
------------- -------------
$ 7,252,733 $ 350,659
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ 110,599 $ -
Accounts payable 736,616 -
Accrued expenses 1,052,257 143,130
Customer advances 155,142 -
Current portion of long-term debt 909,143 259,975
Current portion of capital lease obligations 26,214 -
--------- ----------
TOTAL CURRENT LIABILITIES 2,989,971 403,105
LONG-TERM DEBT 3,574,770 395,951
CAPITAL LEASE OBLIGATIONS 22,628 -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.001 per share,
10,000,000 shares authorized 3,669 2,450
Additional paid-in capital 2,172,399 64,734
Accumulated deficit (1,508,529) (513,406)
---------- ----------
667,539 (446,222)
Less stock subscriptions receivable (2,175) (2,175)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 665,364 (448,397)
---------- -----------
$ 7,252,733 $ 350,659
============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Nine months June 26, 1995 June 26, 1995
ended (Inception) to (Inception) to
September 30, September 30, December 31,
1996 1995 1995
------------------ ----------------- -----------------
(Unaudited) (Unaudited)
NET SALES $ 968,050 $ - $ -
COST OF GOODS OF SOLD 764,759 - -
-------------- ------------ -------------
GROSS PROFIT 203,291 - -
GENERAL AND ADMINISTRATIVE EXPENSES 733,292 125,295 259,637
--------------- ------------ -------------
(LOSS) BEFORE INTEREST EXPENSE (530,001) (125,295) (259,637)
INTEREST EXPENSE 465,122 1,435 28,369
---------------- ------------- --------------
NET (LOSS) $ (995,123) $ (126,730) $ (288,006)
================ ============== ==============
</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>
Common Stock Total
---------------------------- 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 issued 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 228,727 229 432,910 - - 433,139
Stock options issued for services - - 37,500 - - 37,500
Net (loss), nine months ended
September 30, 1996 (unaudited) - - - (995,123) - (995,123)
----------- --------- ---------- ------------- ------------ ------------
Balance - September 30, 1996 (unaudited) $ 3,668,727 $ 3,669 $ 2,172,399 $ (1,508,529) $ (2,175) $ 665,364
=========== ============ ========= ============= ============= ===========
</TABLE>
See Notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Nine months June 26, 1995 June 26, 1995
ended (Inception) to (Inception) to
September 30, September 30, December 31,
1996 1995 1995
--------------- ------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (995,123) $ (126,730) $ (288,006)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation 16,629 - -
Amortization of goodwill 12,913 - -
Amortization of discount on notes payable 217,169 - 10,810
Stock options issued for services 37,500 - -
Stock issued for penalty 50,000 - -
Interest converted into stock 29,994 - -
Stock issued for services 120,000 125 125
Changes in assets and liabilities:
Increase in accounts receivable (20,823) - -
Decrease in inventories 69,601 - -
Decrease in prepaid expenses 273 - -
Decrease in accounts payable (30,298) - -
Increase in accrued expenses 66,722 65,902 127,730
------------------ ------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES (425,443) (60,703) (149,341)
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (28,954) - -
Cash paid in acquisition of Private Label Group (215,059) - -
Increase in other assets (41,311) - (490)
------------------ ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (285,324) - (490)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (84,461) - -
Decrease in cash overdraft (40,776) - -
Increase in due from stockholders and related parties (86,110) (91,000) (92,380)
Increase in due from the Private Label Group (650,000) - (180,000)
(Increase) decrease in deferred financing costs 36,848 (23,675) (70,208)
Increase in deferred registration costs (11,000) - (4,000)
Payment of capital lease obligations (1,585) - -
Proceeds from long-term debt 848,492 191,250 528,750
Payment of long-term debt (563,767) (13,630) (28,750)
Costs incurred in connection with stock issuance (240,455) - -
Issuance of common stock 1,500,000 - -
----------------- ------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 707,186 62,945 153,412
------------------ ------------------ ------------------
NET INCREASE (DECREASE) IN CASH (3,581) 2,242 3,581
CASH AT BEGINNING OF PERIOD 3,581 - -
------------------ ------------------ ------------------
CASH AT END OF PERIOD $ - $ 2,242 $ 3,581
================== ================== ==================
See notes to financial statements
F-6
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months June 26, 1995 June 26, 1995
ended (Inception) to (Inception) to
September 30, September 30, December 31,
1996 1995 1995
------------------ ------------------ ------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 22,879 $ - $ -
================ =============== ==============
Taxes $ - $ - $ -
===-============ =============== ==============
Non cash activities:
Issuance of common stock through long-term debt $ 163,095 $ 81 $ 64,884
================ ================ ==============
Issuance of common stock through stock
subscriptions receivable $ - $ 2,175 $ 2,175
================ ================ ==============
Issuance of common stock in connection with
acquisition of Private Label $ 21,250 $ - $ -
================ ================ ==============
Conversion of debt to common stock $ 457,494 $ - $ -
================ ================ ==============
Distribution through assumption of long
term-debt $ - $ 225,400 $ 225,400
================ ================= ==============
Purchase of equipment through capital lease
obligations $ 11,304 $ - $ -
================ ================= ==============
Assumption of debt in connection with
acquisition of Private Label $ 1,805,813 $ - $ -
================ ================= ==============
Goodwill with acquisition of Private Label $ 1,056,958 $ - $ -
================ ================= ==============
Stock issued for services $ 120,000 $ 125 $ 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 nine months ended
September 30, 1996 and from June 26, 1995 (Inception) to September 30,
1995 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 financial
statements. The results of operations for the nine months ended
September 30, 1996 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 POLICES
a. Principles of consolidation - The unaudited financial
statements for the nine months ended September 30, 1996
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. Furniture and equipment - Furniture and equipment are stated
at cost and depreciated using the straight-line method over
the estimated useful lives of the assets.
d. 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.
e. Deferred financing costs - Deferred financing costs will be
charged to interest expense over the term of the respective
` loans.
F-8
<PAGE>
f. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables, and
accrued expenses approximate fair value based on the
short-term maturity of these instruments.
g. 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.
h. Stock based compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25,
"Accounting For Stock Issued To Employees." In accordance
with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock-Based Compensation," the Company intends
to adopt the pro forma disclosure requirements of Statement
No. 123 in fiscal 1997.
i. Inventories - Inventories are recorded at the lower of cost
or market. Cost was determined using the average cost method.
j. Goodwill - Goodwill resulting from the acquisition of the
Private Label Group represents the remaining unamortized value
of the excess of the acquisition costs 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 portion
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, 1995 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. DUE FROM STOCKHOLDERS
As of December 31, 1995, the Company is owed $92,380 from stockholders
representing short term non-interest bearing advances.
5. DUE FROM THE PRIVATE LABEL GROUP
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 10 b. and c.). In August 1996, the Company
advanced the Private Label Group an additional $150,000 for working
capital. At September 30, 1996 these intercompany transactions were
eliminated.
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<S> <C>
December 31,
1995
----------------
Notes payable to bridge lenders, bearing interest at
12%, payable through June 1997 (a) $ 195,951
Note payable, bearing interest at 10%, due in June
1996, secured by a pledge of 200,000 shares of
common stock (a) 49,975
Note payable, bearing interest at 8%, due at the
earlier of a public offering or December 31, 1996 210,000
Note payable, bearing interest at 10%, due October
1997 200,000
---------------
655,926
Less current portion 259,975
---------------
$ 395,951
===============
</TABLE>
(a) In accordance with Accounting Principles Board Opinion No. 14 the price
paid for the note payable and bridge financing has been allocated
between the equity and debt securities included in such units based
upon their relative estimated fair values. The difference between the
face amount and the allocated value of the debt has been recorded as a
discount on the
F-10
<PAGE>
notes payable. Such discount, totaling $54,074 at December 31, 1995, is
being amortized as additional interest expense over the terms of the
notes. In April and July 1996, the notes were repaid from the proceeds
of the sale of the Company's common stock or converted into common
stock. At that time, the remaining unamortized discount was immediately
charged to expense.
7. 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.
b. In September through December 1995, 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) 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, the notes
were repaid or converted into common stock.
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 from Scent in the
principal amount of $210,000 plus accrued interest of
$15,400 which was recorded as a stockholder distribution.
The note bears interest at the rate of 8% per annum and is
due 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 bears interest at the
rate of 10% per annum and is 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-11
<PAGE>
f. 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 January
1999. 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.
g. 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.
h. 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.
These shares were valued at $125,000. In April and July
1996, the notes were repaid or converted into common stock.
i. In February 1996, the Private Label Group entered into a two
year loan agreement with Finova Financial Corporation
("Finova"). Pursuant to the agreement, the uncommitted
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 Michael J. Assante, his spouse and the Company.
The agreement also provides for cross-corporate guarantees
among the members of the Private Label Group. Monthly
installments of $10,150 are due on the last day of each month
with the remaining balance due in February 1998.
j. 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.
k. In August through October 1996, the Company completed a
$300,000 private placement of 12 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.
F-12
<PAGE>
l. 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 consumption of a public offering. The
note was paid in full in September 1996.
m. 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. The promissory
note was extended to the earlier of February 1, 1997 or upon
the effective date of a public offering. As consideration
for extension of the note the Company granted the lender a
warrant to purchase up to 55,500 shares of common stock at
$4.80 per share which expires in November 2000.
n. In 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 price.
8. STOCKHOLDERS' DEFICIT
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.
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-13
<PAGE>
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 January 1999. 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, 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-14
<PAGE>
9. 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, 1995, the Company
had net deferred tax assets of $100,000. 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):
Net operating loss carryforward $ 100,000
Valuation allowance (100,000)
--------------------
Net deferred tax asset recorded $ -
====================
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes as follows:
December 31,
1995
--------------------
Income tax computed at statutory rate $ 100,000
Tax benefit not recognized (100,000)
--------------------
Provision for income taxes (benefit) $ -
====================
The Company has net operating loss carryforwards for tax purposes
totaling $272,000 at December 31, 1995 expiring in the year 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.
F-15
<PAGE>
10. COMMITMENTS
a. In June 1995, the Company entered into a consulting agreement
where the consultant is to receive shares of the Company's
common stock over a 12 month period.
b. 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.
c. In February 1996, the Company advanced the Private Label Group
$250,000 to pay a portion of a jury award rendered in a
legal proceeding.
d. The Company had a month to month lease for office space
through April 1996. In April 1996, the Company signed a
non-cancelable lease for new office space which expires in
April 2001 and requires annual minimum lease payments of
$74,511 plus rent escalations.
e. 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.
f. In July 1996, the Company entered into a three year employment
agreement with the sole stockholder ("Stockholder") of the
Private Label Group which becomes effective upon the closing
of the stock purchase and sale agreement between the Private
Label Group and the Company. 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.
g. 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 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.
F-16
<PAGE>
h. 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.
11. 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 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 has been accounted for under the purchase
method of accounting with the excess of the purchase price
over net assets acquired allocated to goodwill. The results of
operations for the period August 22, 1996 to September 30,
1996 are included in the accompanying consolidated financial
statements for the nine months ended September 30, 1996.
The following schedule combines the audited pro forma results
of operations of the Company for the period June 26, 1995
(inception) through December 31, 1995 and the Private Label
Group for the year ended December 31, 1995 as if the
acquisition had occurred on January 1, 1995 and includes such
adjustments which are directly attributable to the
acquisitions. 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>
Year Ended
December 31, 1995
---------------------------
Net sales $ 8,413,225
Net loss (1,175,440)
Net loss per share (0.48)
Shares used in computation 2,450,000
</TABLE>
F-17
<PAGE>
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 upon the closing
of the Company's initial public offering, 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 (see Note 7 d.).
The acquisition will be 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 is considered a stockholder distribution to the
majority stockholder. Scent had no operations during the year
ended December 31, 1995.
F-18
<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 years ended December 31, 1995 and 1994. 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 years ended December
31, 1995 and 1994 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 years ended December
31, 1995 and 1994 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-19
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
September 30, December 31,
1996 1995
--------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
account of $15,000 and $15,000, respectively $ 1,579,319 $ 1,127,920
Inventories 1,095,696 1,108,696
Prepaid insurance and taxes 33,652 33,452
Due from related parties 279,646 327,512
--------------- -----------------
TOTAL CURRENT ASSETS 2,988,313 2,597,580
MACHINERY AND EQUIPMENT 511,409 521,375
RESTRICTED CASH 250,000 -
OTHER ASSETS 35,633 38,303
--------------- -----------------
$ 3,785,355 $ 3,157,258
=============== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 112,193 $ 30,711
Accounts payable 703,535 958,255
Accrued expenses 377,696 297,533
Accrued payroll taxes and penalties 355,936 420,045
Accrued lawsuit settlement - 257,000
Customer advances 155,142 113,628
Advances by Azurel Ltd. 830,000 180,000
Current portion of long-term debt 121,800 168,786
Current portion of capital lease obligations 16,027 92,651
--------------- -----------------
TOTAL CURRENT LIABILITIES 2,672,329 2,518,609
LONG-TERM LIABILITIES:
Long-term debt 2,093,363 1,462,574
Capital lease obligations 22,628 103,245
--------------- -----------------
TOTAL LONG-TERM LIABILITIES 2,115,991 1,565,819
STOCKHOLDERS' DEFICIT:
Common stock 59,223 59,223
Accumulated deficit (306,438) (230,643)
Treasury stock (755,750) (755,750)
--------------- -----------------
TOTAL STOCKHOLDERS' DEFICIT (1,002,965) (927,170)
--------------- -----------------
$ 3,785,355 $ 3,157,258
============== ================
</TABLE>
See notes to combined financial statements
F-20
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
Nine Months Nine Months
Ended Ended
September 30, September 30, Year Ended December 31,
----------------------------
1996 1995 1995 1994
-------------- ----------------- --------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 7,677,508 $ 6,284,823 $ 8,413,225 $ 9,744,578
COST OF GOODS SOLD 6,065,231 4,965,009 6,627,898 7,650,161
---------------- ----------------- --------------- ----------------
GROSS PROFIT 1,612,277 1,319,814 1,785,327 2,094,417
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,510,536 1,425,942 2,103,320 1,934,595
---------------- ----------------- --------------- ----------------
INCOME (LOSS) FROM OPERATIONS 101,741 (106,128) (317,993) 159,822
OTHER EXPENSES
Lawsuit settlement - - - (257,000)
Interest expense (177,536) (142,054) (197,663) (192,607)
---------------- ---------------- --------------- ----------------
(177,536) (142,054) (197,663) (449,607)
---------------- ----------------- --------------- ----------------
NET (LOSS) $ (75,795) $ (248,182) $ (515,656) $ (289,785)
================ ================= =============== ================
</TABLE>
See notes to financial statements
F-21
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<S> <C> <C> <C> <C> <C> <C>
Private Label Fashion P.L.C.
Cosmetics, Inc. Laboratories, Inc. Specialties, Inc.
------------------------- ------------------------- -----------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- ----------
Balance - December 31, 1993................. 50 $ 46,623 49 $ 10,100 500 $ 500
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ---------
Balance - December 31, 1994................. 50 46,623 49 10,100 500 500
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ----------
Balance - December 31, 1995................. 50 46,623 49 10,100 500 500
Net loss, nine months ended
September 30, 1996 (unaudited) - - - - - -
----------- ----------- ----------- ----------- ----------- ----------
Balance - September 30, 1996 (unaudited) 50 $ 46,623 49 $ 10,100 500 $ 500
=========== =========== =========== =========== =========== ==========
Shares authorized, no par value 2,500 1,000 2,500
=========== =========== ===========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
International Cosmetics Retained
Group, Inc. Total Earnings Total
------------------------ Common (Accumulated Treasury Stockholders'
Shares Amount Stock Deficit) Stock (Deficit)
---------- ---------- -------- -------------- ----------- ------------
Balance - December 31, 1993................. 500 $ 2,000 $ 59,223 $ 574,798 $ (755,750) $ (121,729)
Net loss - - - (289,785) - (289,785)
---------- ---------- -------- ------------- ------------ ------------
Balance - December 31, 1994................. 500 2,000 59,223 285,013 (755,750) (411,514)
Net loss - - - (515,656) - (515,656)
---------- ---------- ---------- ---------------------------- -------------
Balance - December 31, 1995................. 500 2,000 59,223 (230,643) (755,750) (927,170)
Net loss, nine months ended
September 30, 1996 (unaudited) - - - (75,795) - (75,795)
---------- ---------- -------- ------------- ------------ -------------
Balance - September 30, 1996 (unaudited) 500 $ 2,000 $ 59,223 $ (306,438) $ (755,750) $ (1,002,965)
========== ========== ========== ============= ============ ==============
Shares authorized, no par value 1,000
</TABLE>
See notes to combined financial statements
F-22
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C> <C>
Nine Months Nine Months
Ended Ended
September 30, September 30, Year Ended December 31,
------------------------
1996 1995 1995 1994
--------------- ----------------- -------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (75,795) $ (248,182) $ (515,656) $ (289,785)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation 130,146 120,524 160,677 161,975
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (451,399) (216,055) 232,042 229,573
(Increase) decrease in inventories 13,000 17,305 (212,552) 242,021
(Increase) decrease in prepaid insurance and taxes (200) 1,570 2,085 (2,258)
(Increase) decrease in other assets 2,670 (4,325) (7,670) 22
Increase (decrease) in accounts payable (254,722) 30,547 76,779 (227,795)
Increase (decrease) in accrued expenses 80,163 46,295 110,939 35,390
Increase (decrease) in accrued payroll taxes (64,109) 216,835 384,696 (15,354)
Increase (decrease) in accrued lawsuit settlement (257,000) - - 257,000
Increase (decrease) in customer advances 41,514 (32,469) (9,254) (217,264)
--------------- -------------- ------------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (835,732) (67,955) 222,086 173,525
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (120,178) (28,130) (28,129) (119,728)
--------------- --------------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (120,178) (28,130) (28,129) (119,728)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (250,000) (36,414) - -
Payment of long-term debt 1,290,153) (75,000) (340,284) (195,394)
Proceeds from long-term debt 1,920,029 53,652 - 240,000
Payment of capital lease obligations (203,314) (73,081) (81,823) (59,233)
Decrease in due from related parties 47,866 52,954 64,411 17,846
Proceeds from advances by Azurel Ltd. 650,000 - 180,000 -
---------------- --------------- ------------ ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 874,428 (77,889) (177,696) 3,219
NET INCREASE (DECREASE) IN CASH (81,482) (173,974) 16,261 57,016
CASH OVERDRAFT AT BEGINNING OF PERIOD (30,711) (46,972) (46,972) (103,988)
---------------- ----------------- ------------- ----------
CASH OVERDRAFT AT END OF PERIOD $ (112,193) $ (220,946 $(30,711) $ (46,972)
================ ================= ============= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 113,320 $ 89,973 $ 207,789 $ 198,375
================ ================= ============= ==========
Taxes $ - $ - $ 1,679 8,198
================ ================= ============= ==========
Noncash activity:
Purchase of machinery through capital lease obligations $ - $ 64,000 $ 64,000 $ -
================ ================= ============= ==========
</TABLE>
See notes to combined financial statements
F-23
<PAGE>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
The combined financial statements and the related footnotes for the
nine months ended September 30, 1996 and 1995 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 financial statements. The results of
operations for the nine months ended September 30, 1996 are not
necessarily indicative of results that may be expected for the full
year.
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
F-24
<PAGE>
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 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
years ended December 31, 1995 and 1994 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-25
<PAGE>
5. TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Receipts from allocated
general and
Due from Trade accounts Consulting fee administrative expenses
affiliates receivable Sales to affiliates Year Ended Year Ended
December 31, December 31, Year Ended December 31, December 31, December 31, (c)
--------------------------- -----------------------
1995 (a) 1995 1995 1994 1995 1995 1994
-------------- ------------ ----------- --------- ------------- --------- ---------
D & A
Advertising
Corp. $ 2,833 $ - $ - $ - $ 10,000 $ - $ -
The
Contemporary
Cosmetic
Group, Inc. (b) 324,679 146,678 355,000 288,000 - 200,000 102,000
Rubigo
Cosmetics, Inc. - 22,562 166,000 441,000 - - -
-------------- ------------- ----------- --------- --------------- -------- -----------
$ 327,512 $ 169,240 $ 521,000 $729,000 $ 10,000 $ 200,000 $ 102,000
============== ============= =========== ========= =============== ========= ===========
<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-26
<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
uncommitted 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 Michael J. Assante, his spouse
and the Company. The Agreement also provides for cross-corporate
uarantees among the members of the Private Label Group. 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-27
<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-28
<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> <C>
December 31,
---------------------
1995 1994
---------- ----------
Income tax benefit computed at statutory rate $ (180,000) $ (101,000)
Tax benefit not recognized 180,000 101,000
---------- ----------
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-29
<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 and $470,000 for the years ended December
31, 1995 and 1994, respectively. 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.
For the year ended December 31, 1994, approximately 17% and 12% of the
Private Label Group's revenue was derived from the same two major
customers.
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-30
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET (UNAUDITED)
September 30,
1996 Adjustments
-------------------
Azurel Dr Cr As adjusted
--------------- -------- --------- --------------
ASSETS
<S> <C> <C> <C> <C>
Cash $ - g 34,950 j 263,072 $ 2,678,199
h 180,000 k 1,265,080
i 3,991,401
Accounts receivable 1,570,919 1,570,919
Due from stockholders and related parties 464,126 464,126
Due from the Private Label Group - -
Inventories 1,095,696 1,095,696
Prepaid expenses 33,379 33,379
---------------- --------------
Total current assets 3,164,120 5,842,319
Property and equipment 542,191 542,191
Restricted cash 334,461 334,461
Deferred costs 48,360 h 20,000 i 15,000 -
k 53,360
Goodwill 3,086,167 l 765,000 3,851,167
Other assets 77,434 77,434
---------------- --------------
$ 7,252,733 $ 10,647,572
================ ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Cash overdraft $ 110,599 i 110,599 $ -
Accounts payable 736,616 736,616
Accrued expenses 1,052,257 j 224,879 775,295
k 52,083
Customer advances 155,142 155,142
Advances by Azurel Ltd. - -
Current portion of long-term debt 909,143 f 210,000 d 225,000 121,800
k 1,037,293 g 34,950
h 200,000
Current portion of capital lease obligations 26,214 26,214
---------------- --------------
Total current liabilities 2,989,971 1,815,067
Long-term debt 3,574,770 k 100,000 3,474,770
Capital lease obligations 22,628 22,628
---------------- --------------
3,597,398 3,497,398
Stockholders' equity 665,364 d 225,000 f 210,000 5,335,107
j 38,193 i 4,087,000
k 129,064 l 765,000
--------------- ------------- ------------ ---------------
$ 7,252,733 7,118,462 7,118,462 $ 10,647,572
=============== ============= ============ ===============
</TABLE>
F-31
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements at
September 30, 1996 and for the nine months ended
September 30, 1996 is based on historical
financial data. These pro forma financial
statements are not necessarily indicative of the
results that will be achieved for future periods.
These pro forma financial statements should be
read in conjunction with the Company's financial
statements and the financial statements of the
Private Label Group included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Pro forma Statement of Operations (Unaudited)
Nine months
ended
September 30,
1996 Adjustments
-------------------------------------
Azurel Dr Cr As adjusted
------------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 968,050 c 6,709,458 $ 7,677,508
Cost of Sales 764,759 c 5,300,472 6,065,231
------------------ ----------------
Gross Profit 203,291 1,612,277
Selling, General and
Administrative Expenses 720,379 c 1,377,052 2,097,431
Amortization expense 12,913 a 131,990 144,903
------------------ ----------------
Income (Loss) From
Operation (530,001) (630,057)
------------------ ----------------
Other Expenses:
Interest Expense 465,122 b 101,369 743,402
c 161,723
e 15,188
------------------ ----------------
465,122 743,402
------------------ ----------------
Income (Loss) Before
Income Taxes (995,123) (1,373,459)
Provision for Income
Taxes - -
------------------ ----------------
Net Income (Loss) $ (995,123) $ (1,373,459)
================== ================
</TABLE>
F-32
<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 historical financial
data of the aforementioned companies, as
if the acquisition of the Private Label
Group had occurred at the beginning of the
fiscal year ended December 31, 1995 for
the statement of operations. These pro
forma financial statements are not
necessarily indicative of the results that
will be achieved for future periods. These
pro forma financial statements and the
notes thereto should be read in
conjunction with the Company's financial
statements and the financial statements 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
------- -------------- ---------- ---------------
Dr Cr As 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 - - - a 193,240 193,240
--------- -------------- ---------------- -------------
Income (Loss) From
Operation (259,637) (317,993) (577,630) (770,870)
----------- -------------- ---------------- -------------
Other Expenses:
Interest Expense 28,369 197,663 226,032 b 158,288 404,570
e 20,250
----------- -------------- ---------------- -------------
28,369 197,663 226,032 404,570
----------- --------------- ---------------- -------------
Income (Loss) Before
Income Taxes (288,006) (515,656) (803,662) (1,175,440)
Provision for Income
Taxes - - - -
------------ --------------- ---------------- -------------
Net Income (Loss) $(288,006) $ (515,656) $ (803,662) $ (1,175,440)
============ =============== ================ =============
</TABLE>
F-33
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) The unaudited pro forma balance sheet at September 30, 1996 and
statement of operations for the nine months ended September 30, 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) Purchase of Scent Overnight with a $225,000 promissory note
bearing interest at 9%. The Company also assumed a note of
$210,000 and $15,400 of accrued interest in September 1995
which is reflected in the historical financial statements.
(e) To record the interest on notes of $225,000 from the Scent
Overnight acquisition at 9% per annum.
(3) The following adjustments to the pro forma financial statements
described in (f) through (h) below reflect transactions post September
30, 1996 that have a material impact on the financial statements:
(f) The conversion of the principal of a $210,000 note to Common
Stock at $1.00 per share.
(g) Proceeds from a $55,500 promissory note which includes $49,950
in principal and $5,550 in prepaid interest with $15,000 paid
in December 1996.
(h) Proceeds of $200,000 from a private placement net of
commissions and fees of $20,000.
F-34
<PAGE>
(4) The following adjustments to the pro forma financial statements
described in (i) through (l) below reflect gross proceeds and
applications of the net proceeds of the Offering:
(i) The receipt of the gross proceeds of the Offering, $5,100,000,
less estimated costs of the Offering of approximately
$1,013,000, which includes, the Underwriter's discounts,
commissions and non-accountable expense allowance.
(j) Payment of consulting fees aggregating $263,072 from the
proceeds of the Offering.
(k) Payment of the following notes and interest: (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 under note assumption of $210,000 (v)
remaining principal and interest due under promissory note of
$55,500 and (vi) principal and interest due under promissory
notes aggregating $200,000.
(l) The issuance of 180,000 shares of the Company's Common Stock
valued at $765,000 (the approximated $5.00 quoted market price
per share less a 15% discount for restrictions on resale) from
the acquisition of the Private Label Group with the resulting
goodwill of $765,000.
F-35
<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 1,000,000 Shares of Common Stock and
in any jurisdiction where such offer 1,000,000 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........................
Summary of Financial
Information...........................
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...............
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]
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
AZUREL LTD.
1,478,747 Shares of Common Stock, $.001 par value
555,500 Redeemable Common Stock Purchase Warrants
This prospectus relates to 1,478,747 shares (the "Selling
Securityholders' Shares") of Common Stock, $.001 par value per share (the
"Common Stock") of Azurel Ltd. (the "Company"), which are being offered for sale
by certain selling securityholders (the "Selling Shareholders"). This prospectus
also relates to 555,500 Redeemable Warrants (the "Selling Securityholders'
Warrants") and the 555,500 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"); the
Selling Shareholders and Selling Warrantholders are referred to collectively
as the "Selling Securityholders." (The Selling Shareholders' Shares and Selling
Warrantholders Warrants are collectively referred to as the Securityholders'
Securities).
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 if traded on the National Association of Securities
Dealers Automated Quotation System SmallCap Market ("NASDAQ"), or the last sales
price per share if listed on a national exchange, 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 Shareholders may not sell or otherwise dispose of any of
the Selling Securityholders' Shares for a period of twenty-four (24) months
after the Effective Date without the prior written consent of the Underwriter.
as defined herein. The Selling Warrantholders may not sell or otherwise dispose
of any of the Selling Securityholders' Warrants for a period of between three
(3) months and twenty-four (24) 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' Securities by the Selling Securityholders 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' Securities. The Selling
Securityholders' Securities may be offered from time to time by the Selling
Securityholders, 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 Securityholders.
Usual and customary or specifically negotiated brokerage fees or commissions
may be paid by the Selling Securityholders, their pledgees and/or their
pledgees and/or their donees, in connection with sales of the Selling
Securityholders' Securities.
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 15 AND 27, RESPECTIVELY, OF THIS PROSPECTUS.
The Selling Securityholders, 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
Securityholders, their pledgees and/or their donees, any commissions paid to
broker-dealers and, if broker-dealers purchase any Selling Securityholders'
Securities as principals, any profits received by such broker-dealers on the
resale of the Selling Securityholders' Securities may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
profits realized by the Selling Securityholders, 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'
Securities 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 1,000,000 shares of Common
Stock and 1,000,000 Redeemable Warrants (without giving effect to the
Underwriter's over-allotment option to purchase an additional 150,000 shares
of Common Stock and/or 150,000 Redeemable Warrants (the "Over-Allotment
Option") was declared effective by the Securities and Exchange Commission. In
connection with the Offering of the Common Stock and Redeemable Warrants, the
Company granted the Underwriter warrants to purchase 100,000 shares of Common
Stock and/or 100,000 Redeemable Warrants (the "Underwriter's Warrant"). 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 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 (1) 1,478,747 shares of Common Stock and 555,500
Redeemable Warrants
Common Stock Outstanding Before 3,878,747
the Offering(2)
Common Stock Outstanding After the 5,058,747
Offering(2)(3)
Redeemable Warrants Outstanding 1,555,500
After the Offering(4)
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, at aprice of $.10 per Redeemable
Warrant, provided that the closing bid price
of the Common Stock on NASDAQ 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."
Use of Proceeds The Company intends to use the proceeds
received from the exercise of the Redeemable
Warrants, if any, for working capital.
<PAGE>
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
(1) Does not include (i) 1,000,000 shares of Common Stock, and (ii)
1,000,000 shares of Common stock issuable upon exercise of Redeemable
Warrants offered by the Company.
(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) 270,000 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements or (iii) 555,500
shares of Common Stock reserved for issuance pursuant to Redeemable
Warrants being offered hereby. See "Management - Stock Option Plan" and
"Certain Transactions."
(3) Does not include (i) up to an additional 150,000 shares of Common Stock
and 150,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 150,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,000,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants offered by the Company; (iv) up to 100,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants or (v) up to
100,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants included in the Underwriter's Warrants. Includes (i) 1,000,000
shares of Common Stock offered by the Company and (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. See "Description of Securities," "Underwriting,"
and "Certain Transactions."
(4) Does not include (i) 150,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option or (ii) 100,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants. Includes
1,000,000 Redeemable Warrants offered by the Company. 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."
<PAGE>
[Alternate Page for Selling Securityholder Prospectus]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has issued an aggregate of 1,478,747 shares of Common Stock
and 555,500 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 shares of Common Stock and Redeemable Warrants
may be effected form 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 Common Stock and 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 shares of Common Stock 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 shares of Common
Stock and 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 shares of Common Stock and
Redeemable Warrants as principals might be deemed to be underwriting discounts
and commissions under the Securities Act. The Selling Securityholders'
Securities 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 shares of
Common Stock and 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' Shares 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.
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
<PAGE>
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, Rules 10b-6 and 10b-7, 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' Shares
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
Vahik Babaian 50,000 0 50,000 0 0 0 0
David Edward Blockstein 12,500 0 12,500 0 0 0 0
Bola Business Ltd. 25,000 50,000 25,000 0 0 50,000 *
Richard J. Brown 12,500 0 12,500 0 0 0 0
Larry Bucsek 25,000 0 25,000 0 0 0 0
Anthony Cirillo IRA 7,500 0 7,500 0 0 0 0
Anthony Cirillo 5,000 0 5,000 0 0 0 0
David's Art, Inc. 25,000 0 25,000 0 0 0 0
John DeAngelis 0 50,000 0 50,000 0 0 0
Drew Dellinger 26,220 0 26,220 0 0 0 0
ETR & Associates, Inc.(3) 25,000 150,000 25,000 0 0 150,000 4%
Derek Ferguson 25,000 0 25,000 0 0 0 0
Jeffrey P. & Jacalyn K. Flack 25,000 0 25,000 0 0 0 0
Mark Frankel 25,000 0 25,000 0 0 0 0
Steven M. Frankel 25,000 0 25,000 0 0 0 0
Shelby Goldring 10,358 0 10,358 0 0 0 0
Ronald I. Harris 10,358 0 10,358 0 0 0 0
Angela James 0 50,000 0 50,000 0 0 0
Fred Kassner 250,000 0 250,000 0 0 0 0
William Kennedy 62,500 0 62,500 0 0 0 0
Robert E. Lee(3) 0 55,500 0 55,500 0 0 4%
Leona Financial Ventures, Inc. 25,000 0 25,000 0 0 0 0
Bruce Levenbrook 10,358 0 10,358 0 0 0 0
Leventhal, Paget LLC 25,000 0 25,000 0 0 0 0
Ronald S. Mack IRA 10,321 0 10,321 0 0 0 0
Metco Investors LLC (3) 150,000 75,000 150,000 25,000 0 50,000 4%
Michalaur International (4) 18,750 50,000 0 50,000 18,750 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 0 15,625 0 *
Betty Presley 26,216 0 26,216 0 0 0 0
Wayne Robbins 26,220 0 26,220 0 0 0 0
Robert J. Roehrich 25,000 0 25,000 0 0 0 0
Alan J. Rubin 25,000 0 25,000 0 0 0 0
David E. Ruggieri 50,000 0 50,000 0 0 0 0
John J. Scamardella 0 100,000 0 100,000 0 0 0
<PAGE>
Robert J. Stein 12,500 0 12,500 0 0 0 0
Tusany Investment &
Trade S.A. (4) 1,559,355 50,000 309,355 50,000 1,250,000 0 24.7%
Woodward Partners (3) 50,000 0 50,000 0 0 0 4%
Wolfe Financial Group, Inc. DIP 73,750 0 73,750 0 0 0 0
Louis D. Zachau 13,091 0 13,091 0 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 th
Underwriter in other transactions, and may so act in the future.
EXPERTS
The audited financial statements for the years ended December 31, 1994
and 1995 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. The information for the interim periods ended June 30,
1995 and 1996 is unaudited but in the opinion of management, includes all
adjustments considered necessary for the fair presentation of the results. All
adjustments made in the interim financial statements are of a normal recurring
nature. The unaudited results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year.
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.
Except for material contracts or portions thereof accorded confidential
treatment, all registration statements are available for public inspection (and
copying at prescribed rates), during business hours, at the principal office
of the Commission in Washington, D.C. 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).
<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 1,478,747 Shares of Common Stock and
offer or solicitation to any person 555,500 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........................
Summary of Financial
Information...........................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations........................ PROSPECTUS
Business...............................
Management.............................
Principal Stockholders.................
Certain Transactions...................
Description of Securities..............
Underwriting...........................
Concurrent Registration of
Securities............................
Legal Matters..........................
Experts................................ _____________ , 1997
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...................................................$7,500*
NASD Filing Fee.........................................................3,000*
NASDAQ Filing Fee......................................................10,000*
Printing and Engraving Expenses........................................50,000*
Legal Fees and Expenses (other than blue sky).........................120,000*
Accounting Fees and Expenses..........................................110,000*
Blue Sky Fees and Expenses.............................................35,000*
Transfer Agent and Registrar Fees and Expenses..........................4,500*
Miscellaneous..........................................................10,000*
TOTAL.......................................................$350,000*
*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
10 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 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 $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 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 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>
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* By-Laws 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.
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).
27.0 Financial Data Schedule
* Previously filed.
** To be filed by amendment.
*** Exempt from filing because Registrant received a harship exemption.
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.
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 January 26, 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 January 26, 1997
Gerard Semhon Chairman of the Board (Principal
Executive Officer, Principal
Financial and Accounting Officer)
/s/ Constantine Bezas President and Director January 26, 1997
Constantine Bezas
/s/ Joseph Truitt Bell Executive Vice President and Director January 26, 1997
Joseph Truitt Bell
/s/ Van Christakos Secretary, Treasurer and Director January 26, 1997
Van Christakos
EXHIBIT 10.9
<PAGE>
PROMISSORY NOTE
$1,675,000 Date: August 22, 1996
FOR VALUE RECEIVED, the undersigned (the "Maker") does hereby promise
to pay to Michael J. Assante at 10 Surrey Lane, Mahwah, New Jersey 07430 (the
"Holder"), or at such other place as may be designated in writing from time to
time by the Holder, the principal sum of One Million Six Hundred Seventy-Five
Thousand Dollars ($1,675,000), plus interest at the rate of nine percent (9%)
per annum, with principal and interest payable in nine installments on the
following schedule (the "Payments):
1 $150,000 principal plus accrued but unpaid interest on the
date, if any, that a public offering of Maker's common stock
is consummated or January 1, 1997, whichever is earlier;
2 $209,375 principal plus accrued but unpaid interest three
calendar months after the preceding Payment;
3 $209,375 principal plus accrued but unpaid interest six
calendar months after the preceding Payment; and
4-9 six Payments, each of $184,37 principal plus accrued but
unpaid interest, each payable six calendar months after the
preceding Payment.
Interest and principal may be prepaid at any time and in any
amount with no penalty.
The occurrence of any of the following events with respect to
Maker shall constitute an event of default (each an "Event of Default") which
shall cause the entire principal amount of the Note and accrued interest, if
any, to become immediately due and payable without the necessity for any demand
on Maker:
(a) If Maker shall fail to make the Payments and said
failure is not cured within 30 days after written notice
thereof by Holder to Maker; or
(b) If Maker shall make an assignment for the benefit
of creditors, or file a voluntary petition under the
Bankruptcy Code, as amended, or any other federal or state
insolvency aw, or apply for or consent to the appointment of
a receiver, trustee or custodian of all or part of his
property, which assignment, petition or appointment remains
<PAGE>
outstanding for more than 90 days; or
(c) If an involuntary petition shall be filed against
the Maker under the Bankruptcy Code, as amended, or if a
proceeding shall be commenced against Maker seeking the
appointment of a trustee, receiver or custodian of all or part
of Maker's property, which petition or proceeding shall remain
undismissed for more than 90 days.
Failure to exercise the Holder's rights hereunder shall not
constitute a waiver of the right to exercise same in the event of any subsequent
default.
Maker will reimburse Holder, upon demand, for all costs and
expenses incurred in connection with the collection and/or enforcement of this
Note (including reasonable attorneys' fees and expenses), whether or not suit is
actually instituted.
This Note is subject to the terms and conditions of a certain
Stock Purchase and Sale Agreement, dated as of July 17, 1996 among Maker, Holder
and others the terms of which are incorporated herein by reference and of a
certain Stock Pledge Agreement dated as of the date hereof between Maker and
Holder, the terms of which are incorporated herein by reference and of a certain
Escrow Agreement dated as of the date hereof among Maker, Holder and Gersten,
Savage, Kaplowitz & Curtin, LLP, the terms of which are incorporated herein by
reference.
This Note shall be construed in ccordance with and governed
by the laws of the state of New York, without regard to its conflicts of laws
principals.
This Note may not be modified, terminated or discharged, nor
shall any waiver hereunder be effective unless in writing signed by the party
against whom the same is asserted.
AZUREL LTD.
/s/ Gerard Semhon
By: Gerard Semhon
Title: Chairman
EXHIBIT 10.10
<PAGE>
PROMISSORY NOTE
$83,750 Date: August 22, 1996
FOR VALUE RECEIVED, the undersigned (the "Maker") does hereby
promise to pay to Louis DiVita at 4717 Higel Avenue, Sarasota, Florida 34242
(the "Holder"), or at such other place as may be designated in writing from time
to time by the Holder, the principal sum of Eighty- Three Thousand Seven Hundred
Fifty Dollars ($83,750), plus interest at the rate of nine percent (9%) per
annum, with principal and interest payable in nine installments on the following
schedule (the "Payments"):
1 $7,500 principal plus accrued but unpaid interest on
the date, if any, that a public offering of Maker's
common stock is consummated or January 1, 1997,
whichever is earlier;
2 $10,468 principal plus accrued but unpaid interest three
calendar months after the preceding Payment;
3 $10,468 principal plus accrued but unpaid interest six
calendar months after the preceding Payment; and
4-9 six Payments, each of $9,219 principal plus accrued
but unpaid interest, each payable six calendar months
after the preceding Payment.
Interest and principal may be prepaid at any time and in any
amount with no penalty.
The occurrence of any of the following events with respect to
Maker shall constitute an event of default (each an "Event of Default") which
shall cause the entire principal amount of the Note and accrued interest, if
any, to become immediately due and payable without the necessity for any demand
on Maker:
(a) If Maker shall fail to make the Payments and said
failure is not cured within 30 days after written notice
thereof by Holder to Maker; or
(b) If Maker shall make an assignment for the benefit
of creditors, or file a voluntary petition under the
Bankruptcy Code, as amended, or any other federal or state
insolvency law, or apply for or
<PAGE>
consent to the appointment or a receiver, trustee or
custodian of all or part of his property, which assignment,
petition or appointment remains outstanding for more
than 90 days; or
(c) If an involuntary petition shall be filed
against the Maker under the Bankruptcy Code, as amended, or
if a proceeding shall be commenced against Maker seeking the
appointment of a trustee, receiver or custodian of all or
part of Maker's property, which petition or proceeding shall
remain undismissed for more than 90 days.
Failure to exercise the Holder's rights hereunder shall not
constitute a waiver of the right to exercise same in the event of any subsequent
default.
Maker will reimburse Holder, upon demand, for all costs and
expenses incurred in connection with the collection and/or enforcement of this
Note (including reasonable attorneys' fees and expenses), whether or not suit is
actually instituted.
This Note is subject to the terms and conditions of a certain
Stock Purchase and Sale Agreement, dated as of July 17, 1996 among Maker,
Michael J. Assante and others the terms of which are incorporated herein by
reference.
This Note shall be construed in accordance with and governed
by the laws of the state of New York, without regard to its conflicts of laws
principals.
This Note may not be modified, terminated or discharged, nor
shall any waiver hereunder be effective unless in writing signed by the party
against whom the same is asserted.
AZUREL LTD.
/s/ Gerard Semhon
By: Gerard Semhon
Title: Chairman
EXHIBIT 10.11
<PAGE>
CONSULTING SERVICES AGREEMENT
AGREEMENT made this 12th day of August, 1993, by and between LOUIS DI
VITA, hereinafter referred to as "CONSULTANT", residing at 679 Red Oak Lane,
Kinnelon, New Jersey 07405; 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, all New Jersey Corporations, hereinafter
collectively referred to as the "CORPORATIONS", with their principal place of
business at 20-10 Maple Avenue, Fair Lawn, New Jersey 07410;
W I T N E S S E T H:
WHEREAS, the CORPORATIONS require certain services of CONSULTANT in
WHEREAS, the CONSULTANT has special knowledge of those requirements
and of the computer systems necessary to the operations of the CORPORATIONS;
and
WHEREAS, the CORPORATIONS wish to retain the CONSULTANT's services in
an advisory and consultative role as hereinafter described; and
WHEREAS, CONSULTANT agrees to render services to the CORPORATIONS as
hereinafter described.
NOW, THEREFORE, in consideration of the mutual promises of the parties,
it is agreed as follows:
I. NATURE OF RELATIONSHIP
The CONSULTANT will perform consulting and advisory services to the
CORPORATIONS with respect to the latters' computer systems, including advising
as to the correction of systems and software problems, assisting in the update
of software, assisting in the training of other computer personnel and advising
on new computer services, products and software which may be of additional
<PAGE>
benefit to the CORPORATIONS.
II. TERM
The term of this Agreement shall be for a period of ten (10) years
commencing August 12, 1993 and ending August 12, 2003.
III. CONSULTING TIME AND LOCATION
The services and hours the CONSULTANT is to render to the CORPORATIONS
on any given date will be entirely with the CONSULTANT's discretion and control
and may be rendered at or from such offices as the CONSULTANT may maintain.
CONSULTANT agrees, however, that he shall be available to the CORPORATIONS at
all times during the term hereof during normal working hours (to consist of 8
A.M. to 6 P.M. Eastern time, Mondays through Fridays) by computer contact via
use of modems, as well as by telephone (and beeper) contact for both routine
consulting and emergencies.
IV. PAYMENT FOR CONSULTING SERVICES
The CORPORATIONS (or any one of them, as the CORPORATIONS in their sole
discretion shall determine) shall pay the CONSULTANT for all his services
hereunder total fees in the amount of One Million Three Hundred Thirty-four
Thousand ($1,334,000.00) Dollars in one hundred twenty (120) equal consecutive
monthly installments of Eleven Thousand One Hundred Sixteen and 66/100
($11,116.66) Dollars each, commencing on September 12, 1993 and on the 12th day
of each month thereafter through to and including August 12, 2003. Consultant
shall also have the right to use and sell software programs of the CORPORATIONS
provided that any such use or sale does not impair any right or economic
interests of the CORPORATIONS.
V. TERMINATION OF AGREEMENT
Neither party will have the right to terminate this Agreement, except
upon such further written terms and conditions as the parties may mutually agree
upon. This Agreement shall, however, terminate upon the death of CONSULTANT
during the term hereof.
<PAGE>
VI. STATUS OF CONSULTANT
This Agreement calls for the performance of the services of the
CONSULTANT as an independent contractor and CONSULTANT will not be considered
an employee of the CORPORATIONS for any purpose during the term hereof, nor
shall the CONSULTANT have the right to act as agent for the CORPORATIONS in
any capacity.
VII. NOTICES
Any notices hereunder shall be sent in writing, registered or certified
mail, return receipt requested, to the addressee thereof, as the address set
forth above or to such other address as a party in writing may direct.
VIII. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement between
them with respect to the subject hereof and cannot be amended, modified or
supplemented in any respect except by a contemporaneous or subsequent written
agreement entered into by both parties.
IX. VALIDITY OF PROVISION
The invalidity or unenforceability of any provision of this Agreement
shall in no way effect the validity or enforceability of any other provision
hereof.
X. APPLICABLE LAW
This Agreement shall be governed by the laws of the State of New Jersey
without giving effect to principles of conflict of law.
XI BINDING EFFECT
This Agreement shall binding upon the parties hereto and shall inure to
their benefit and that of the CORPORATIONS' successors and assigns to the
fullest extent permitted by law. This Agreement may not be assigned by
CONSULTANT except to a Corporation of which he is a principal shareholder and
upon written notice to the CORPORATIONS, and any other purported assignment of
same by CONSULTANT shall be null and void.
Witnessed by or attested to
/s/ James A. Russo, Esq. /s/ Louis Di Vita
James A. Russo, Esq. LOUIS DI VITA
<PAGE>
PRIVATE LABEL COSMETICS, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
PLC SPECIALTIES, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
FASHION LABORATORIES, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
CONTEMPORARY COSMETIC GROUP,
INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
INTERNATIONAL COSMETIC GROUP,
INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
D.A. ADVERTISING GROUP INTER-
NATIONAL, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, Pres.
INTRA-AFRICA CORPORATION
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Ass't Secretary Michael J. Assante, Vice
Pres.
<PAGE>
CERTIFIED TO BE A TRUE COPY
---------------------------
PROMISSORY NOTE
$500,000.00 August 12, 1993
Hackensack, New Jersey
FOR VALUE RECEIVED, the ndersigned promises to pay to the order of
LOUIS DI VITA, at 679 Red Oak Lane, Kinnelon, New Jersey 07405, or to such other
address as the holder hereof may direct, the principal sum of FIVE HUNDRED
THOUSAND AND NO/100 ($500,000.00) DOLLARS, together with interest thereon from
the date hereof at the rate of Six (6.00%) percent per annum, payable in equal
monthly installments of principal and interest in the amount of FIVE THOUSAND
FIVE HUNDRED FIFTY-ONE AND 02/100 DOLLARS $5,551.02) commencing on September 12,
1993 and continuing on the twelfth (12th) day of each and every month thereafter
until August 12, 2003, at which time the entire unpaid principal balance and any
accrued interest under this Note shall be due and payable in full.
Each of the monthly payments under this Note, when paid, shall be
applied first to the payment of interest accrued on the unpaid principal, and
the balance thereof, if any, toward the reduction of principal. Interest shall
accrue to the date of payment in full of this Note. The Undersigned shall have
the right to make prepayment of the within indebtedness, in whole or in part,
only with the written consent of the holder hereof. All payments hereunder shall
be payable in lawful money of the United States which shall be legal tender for
public and private debts at the time of payment.
All the terms and conditions of a certain Stock Redemption Agreement
dated August 12, 1993, by and between the Undersigned and LOUIS DI VITA, among
other parties, as same may be modified and amended from time to time by the
parties thereto, are incorporated herein as though fully set forth at length,
and the Undersigned acknowledges the delivery and execution of such Agreement.
<PAGE>
And it is hereby expressly understood and agreed that should the
Undersigned fail to make payment of any installment of principal and interest
hereinbefore provided when due and shall additionally fail to cure such
default within thirty (30) days after receipt of written notice of same, or
should any other default occur as defined in the covenants and conditions of
the said Stock Redemption Agreement dated August 12, 1993, the same shall
constitute a default hereunder, and the balance of said principal sum, with
all accrued interest thereon, shall at the option of the holder of this Note,
become immediately due and payable.
The Undersigned and all other parties who may at any time be liable
hereon in any capacity, jointly and severally, waive presentment, demand for
payment, protest and notice of dishonor of this Note, and agree to any all costs
of collection when incurred, including reasonable attorneys' fees whether
incurred with or without litigation, and to perform and comply with each of the
covenants and conditions, provisions and agreements of the Undersigned contained
in every instrument evidencing or securing the indebtedness or given
collaterally herewith.
This note shall be construed according to the laws of the State of New
Jersey.
PRIVATE LABEL COSMETICS, INC.
ATTEST:
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, President
PLC SPECIALTIES, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, President
FASHION LABORATORIES, INC.
/s/ Ronald Brady By: /s/ Michael J. Assante
Ronald Brady, Secretary Michael J. Assante, President
EXHIBIT 10.12
<PAGE>
SECURITY AGREEMENT
(ACCOUNTS RECEIVABLE
INVENTORY AND EQUIPMENT)
BETWEEN
FINOVA CAPITAL CORPORATION
111 WEST 40TH STREET
NEW YORK, NEW YORK 10018
AND
PRIVATE LABEL COSMETICS, INC.
FASHION LABORATORIES, INC.
P.L.C. SPECIALTIES, INC. and
INTERNATIONAL COSMETIC GROUP, INC.
20-10 MAPLE AVENUE
FAIRLAWN, NJ 07410
<PAGE>
This Security Agreement, made and entered into in New York,
New York, this 16th day of February, 1996, by and among PRIVATE LABEL COSMETICS,
INC. ("Private Label"), P.L.C. Specialties, Inc. ("P.L.C"), International
Cosmetic Group, Inc. ("International"), each a corporation existing under and by
virtue of the laws of the State of New Jersey, and FASHION LABORATORIES, INC.
("Fashion"), a corporation existing under and by virtue of the laws of the State
of Delaware, each with their respective principal place of business located at
20-10 Maple Avenue, Fairlawn, NJ 07410 (Private Label, P.L.C., International and
Fashion, hereinafter shall individually and collectively be referred to as
"Borrower") and FINOVA CAPITAL CORPORATION, a Delaware corporation, with a place
of business located at 111 West 40th Street, New York, New York 10018
("FINOVA"). This Agreement sets forth the terms and conditions upon which FINOVA
may, in its sole and absolute discretion, make loans, advances and other
financial accommodations to or for the benefit of Borrower upon the security
referred to herein.
Section 1. DEFINED TERMS
1.1 All terms used herein which are defined in Article 1 or
Article 9 of the Uniform Commercial Code (the "UCC") shall have the same meaning
as given therein unless otherwise defined in this Agreement. All references to
the plural shall also mean the singular.
1.2 "Account" or "Accounts" shall mean all of Borrower's
present and hereafter created accounts receivable, contract rights, general
intangibles, security deposits, trade styles, trademarks, chattel paper, notes,
drafts, acceptances, leases, lease payments, rents, tax refunds, options to
purchase real or personal property, securities, stock options, customer lists,
insurance claims, patents, patent applications, documents, instruments,
copyrights, claims, and any other choses in action, as such terms may be defined
in the UCC, including, without limitation, all obligations for the payment of
money arising out of Borrower's sale, lease or other disposition of goods or
other property or Borrower's rendition of services, and to all of Borrower's
merchandise which is represented thereby whether delivered or undelivered, and
to all proceeds thereof including, but not limited to, the proceeds of any
insurance thereon whether or not specifically assigned to FINOVA.
1.3 "Account Debtor" shall mean each debtor or obligor in
any way obligated on or in connection with any Account.
1.4 "Collateral" shall have the meaning set forth in
Section 4.1 hereof.
1.5 "Costs and Expenses" shall include, but not be limited
to commissions, fees, appraisal fees, taxes, title insurance premiums, internal
and external audit expenses for routine and non-routine audits, field
examination expenses, filing, recording and search expenses, reasonable
attorney's fees and disbursements (as may be incurred with respect to the
effectuation of this Agreement or any claim of any nature or litigation
whatsoever arising out of or as a result of the interpretation of this
Agreement or the financing provided for hereunder, including, but not limited
to, all fees and expenses for the service and filing of papers, premiums
2
<PAGE>
on bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers
and others, travel expenses and all court costs and collection charges),
Facility Fees (as defined herein), postage, wire transfer fees, check dishonor
fees and other out of pocket expenses arising out of or relating to the
negotiations, preparation, consummation, administration and enforcement of this
Agreement or any other agreement between Borrower and FINOVA including, but not
limited to any guaranty of the Obligations (as defined herein).
1.6 "Default Rate of Interest" shall have the meaning set
forth in Section 3.2 hereof.
1.7 "Eligible Accounts" shall mean Accounts created by
Borrower in the ordinary course of its business arising out of its sale of
goods or rendition of services, which are and at all times shall continue to be
acceptable to FINOVA in its sole and absolute discretion. Standards of
eligibility may be fixed and revised from time to time solely by FINOVA in its
exclusive judgment. In determining eligibility, FINOVA may, but need not, rely
on agings, reports and schedules of Accounts furnished by Borrower but reliance
by FINOVA thereon from time to time shall not be deemed to limit its right to
revise standards of eligibility at any time without notice as to both Borrower's
present and future Accounts.
1.8 "Events of Default" shall have the meaning set forth in
Section 8.1 hereof.
1.9 "Facility Fee" shall have the meaning set forth in
Section 3.4 hereof.
1.10 "Line of Credit" as used herein is solely for the
purpose of computing the Facility Fee and does not represent any amount or
amounts available for borrowing purposes nor any limit as to the amount or
amounts available for borrowing purposes, each of which shall be determined at
FINOVA's sole and absolute discretion. Subject to the preceding sentence,
Borrower's Line of Credit is $2,000,000.
1.11 "Net Amount of Eligible Accounts" shall mean the gross
amount of Eligible Accounts less sales, excise or similar taxes, and less
returns, discounts, claims, credits, reserves (as determined by FINOVA in its
sole discretion) and allowances of any nature at any time issued, owing,
granted, outstanding, available or claimed.
1.12 "Obligations" shall mean any and all loans, advances,
accommodations, indebtedness, liabilities, Costs and Expenses and all
obligations of every kind and nature owing by Borrower to FINOVA, however
evidenced, whether as principal, guarantor or otherwise, whether arising under
this Agreement, any supplement hereto, or otherwise, whether now existing or
hereafter arising, whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, original, renewed, modified or extended, and whether
arising directly or acquired from others (including, without limitation,
wherever applicable, FINOVA's participation or interests in Borrower's
obligations to others) and including, without limitation, FINOVA's charges, of
whatever nature, commissions, interest, expenses, costs and attorneys' fees, all
of which are chargeable to
3
<PAGE>
Borrower in connection with any of the foregoing.
1.13 "Records" shall have the meaning set forth in
Section 4.1(f) hereof.
1.14 "Renewal Date" shall have the meaning set forth in
Section 9.1 hereof.
1.15 "Service Fee" shall have the meaning set forth in
Section 3.4 hereof.
Section 2. LOANS AND ADVANCES
2.1 FINOVA shall from time to time, in its sole and absolute
discretion, make loans, advances and other financial accommodations to or for
the benefit of Borrower of up to: (a) 80% of the Net Amount of Eligible Accounts
(or such greater or lesser percentage thereof as FINOVA shall, in its sole and
absolute discretion determine); (b) 50% of eligible raw inventory up to an
amount not exceeding $214,500 (as determined by FINOVA in its sole and absolute
discretion and price at the lower of cost or market); and (c) $606,900 (the "M &
E Advance"). The M & E Advance shall be repaid to FINOVA in installments in the
amount of $10,150 per month commencing on the last day of the month in which
this Agreement is executed and delivered to FINOVA and continuing on the last
day of each month thereafter for twenty-three (23) months at which time the
entire balance of the M & E Advance shall be paid to FINOVA. Notwithstanding the
foregoing, FINOVA shall have the right at any time to demand and receive the
immediate repayment of the entire balance of the M & E Advance in the event (a)
of any default or termination under this Agreement; (b) of any reduction in the
value of the Borrower's machinery and equipment; or (c) that FINOVA, in its sole
and absolute discretion, shall consider the M & E Advance insecure.
2.2 All Obligations shall be charged to an account in the
Borrower's name as maintained on FINOVA's books. FINOVA shall render to the
Borrower a monthly statement of its account which statement shall be deemed
correct, accepted by, and conclusively binding upon Borrower as an account
stated, except to the extent that Borrower shall deliver to FINOVA written
notice of any exceptions thereto within thirty (30) days after the date such
statement is rendered.
2.3 All principal, interest, fees, commissions, charges, Costs
and Expenses incurred with or in respect of this Agreement or any supplement or
amendment hereto (all of which shall be cumulative and not exclusive) and any
and all Obligations shall be charged as an advance to Borrower's account as
maintained by FINOVA.
2.4 All Obligations shall be payable at FINOVA's office
specified above or at such other place as FINOVA may hereafter designate from
time to time. If requested, Borrower shall execute and deliver to FINOVA one or
more promissory notes in form and substance satisfactory to FINOVA to further
evidence the Obligations.
Section 3. INTEREST AND FACILITY FEES
4
<PAGE>
3.1 FINOVA is authorized to charge the Borrower's loan
account as an advance on the first day of each month as follows: (a) all Costs
and Expenses; and (b) interest on Borrower's monthly average loan balance of not
less than $500,000. Interest shall be payable by Borrower to FINOVA at the per
annum Prime Rate (the "Prime Rate") plus 3% (the "Interest Rate"). As used
herein the term "Prime Rate" shall be deemed to mean the prime commercial rate
charged by Citibank, N.A., in effect on the date hereof (whether or not such
rate is the lowest rate available at such bank) and as same may be adjusted
upwards and downwards from time to time. The Interest Rate shall never be less
than six (6%) percent per annum nor greater than the highest rate permitted by
law. Any change in the Interest Rate shall become effective on the first day of
the month following the month in which the Prime Rate shall have been increased
or decreased, as the case may be. The Interest Rate shall be calculated based on
a three hundred sixty (360) day year for the actual number of days elapsed and
shall be charged to Borrower on all obligations. All interest charged or
chargeable to Borrower shall be deemed as an additional advance and shall become
part of the Obligations.
3.2 Borrower agrees that upon the occurrence of any Event of
Default (whether caused by the Borrower, an Account Debtor or others), the
Interest Rate on all Obligations shall immediately convert to the rate of 1/15th
of 1% per day (the "Default Rate of Interest") and all interest accruing
hereunder together with all Obligations shall thereafter be payable upon demand.
3.3 In no event shall the Interest Rate or the Default Rate
of Interest exceed the highest rate permitted under any applicable law or
regulation. If any part or provision of this Agreement is in contravention of
any such law or regulation such part or provision shall be deemed amended to
conform thereto and any payments of interest made in excess of such highest rate
permitted, if any, shall deemed to be payments of principal Obligations to the
extent of such excess.
3.4 Upon the execution and delivery of this Agreement,
Borrower shall pay FINOVA a Facility Fee in the amount of 1% of the Line of
Credit extended by FINOVA to Borrower and upon each annual anniversary date of
this Agreement, Borrower shall pay FINOVA a Facility Fee in the amount of .5% of
the Line of Credit extended by FINOVA to Borrower, until such time as this
Agreement has been terminated in accordance with its terms. In addition,
Borrower shall pay FINOVA a monthly Service Fee in the amount of $1,000.00.
3.5 Borrower shall pay FINOVA an Audit Fee in the amount of
$600 per day for each auditor performing an examination of the Borrower's books
and records, such Audit Fee to be in addition to all other Costs and Expenses
incurred by FINOVA with regard to each such examination, all of which shall be
deemed part of the Obligations. Audit Fees in any contract year shall not exceed
the amount of $8,000, provided there is no default hereunder.
Section 4. GRANTING PROVISIONS
4.1. As security for the prompt performance, observance and
payment in full
5
<PAGE>
of all Obligations, Borrower hereby grants to FINOVA a continuing security
interest in, lien upon and right of set off against, and Borrower hereby
assigns, transfers, pledges and sets over to FINOVA the following (which,
together with any of Borrower's other property in which FINOVA may at any time
have a security interest or lien, whether pursuant to any supplement or
amendment hereto, or otherwise, all of which are herein collectively referred to
as the "Collateral"): (a) All of Borrower's present and future Accounts; (b) all
of Borrower's monies, securities and other property and the proceeds thereof,
now or hereafter held or received by, or in transit to, FINOVA from or for
Borrower, or for the account of Borrower, whether for safekeeping, pledge,
custody, transmission, collection or otherwise, and all of Borrower's deposits
(general or special) including, but not limited to security deposits, balances,
sums and credits with FINOVA at any time existing or with a third party for the
Borrower's account; (c) all of Borrower's present and future right, title and
interest, and all of Borrower's present and future rights, remedies, security
and liens, in, to and in respect of the Accounts and other Collateral,
including, without limitation, rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, guarantees or other contracts of suretyship with
respect to the Accounts, deposits or other security for the obligation of any
Account Debtor, and credit and other insurance; (d) all of Borrower's present
and future right, title and interest in, to and in respect of all goods relating
to, or which by sale have resulted in, Accounts including, without limitation,
all goods described in invoices, documents, contracts or instruments with
respect to, or otherwise representing or evidencing, any Accounts or other
Collateral, including without limitation, all returned, reclaimed or repossessed
goods; (e) all of Borrower's present and future deposit accounts; (f) all of
Borrower's present and future books, records, ledger cards, computer programs
(including all software and data contained in or by any computer whether in the
possession of the Borrower or any other party) and other property and general
intangibles evidencing or relating to the Accounts and any other Collateral or
any Account Debtor, together with the file cabinets, containers, tapes or disks,
in which the foregoing are stored ("Records'); (g) all of Borrower's presently
owned or hereafter acquired inventory; (h) all of Borrower's machinery and
equipment, whether presently owned or hereinafter acquired; (i) all other of
Borrower's present and future general intangibles of every kind and description,
including, without limitation, customer lists, stock options, patent, trademark
and copyright applications, trade names and trademarks, and the goodwill of the
business symbolized thereby, patents, copyrights, licenses and Federal, State
and local tax refund claims, leases, rents and insurance claims of all kinds;
and (j) all proceeds of the foregoing, in any form, including, without
limitation, all claims against third parties for loss or damage to or
destruction of any or all of the foregoing. The security interests granted
herein shall remain effective whether or not the Collateral covered thereby is
acceptable to FINOVA or deemed by it to be ineligible for the purposes of any
loans or advances contemplated under this Agreement.
4.2 Borrower shall deliver to FINOVA a duplicate and/or
original invoice, and all original documents evidencing the delivery of goods or
the performance of services with regard to each Account, including but not
limited to all original contracts, orders, invoices, bills of lading, warehouse
receipts, delivery tickets and shipping receipts, together with schedules
describing the Accounts and/or written confirmatory assignments to FINOVA of
each Account,
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in form and substance satisfactory to FINOVA and duly executed by Borrower,
together with such other information as FINOVA may request. In no event shall
the making (or the failure to make) of any schedule or assignment or the content
of any schedule or assignment or Borrower's failure to comply with the
provisions hereof be deemed or construed as a waiver, limitation or modification
of FINOVA's security interest in, lien upon and assignment of the Collateral or
Borrower's representations, warranties or covenants under this Agreement or any
supplement or amendment hereto.
Section 5. ENFORCEMENT OF RIGHTS IN AND TO COLLATERAL
5.1 Until Borrower's authority to do so is curtailed or
terminated at any time by FINOVA in its sole and absolute discretion, Borrower
shall (at Borrower's expense) collect on FINOVA's behalf as FINOVA's property
and in trust for FINOVA, and deliver to FINOVA in their original form on the
same date as the date of the actual receipt thereof, all checks, drafts, notes,
acceptances, cash, wire transfers and any other evidences of payment, applicable
to any assigned Account. Five (5) working days shall be allowed subsequent to
receipt by FINOVA of all Account Debtor or third party checks and two (2)
working days shall be allowed subsequent to receipt by FINOVA of wire transfer
by Account Debtors or third parties to permit bank clearance and collection.
5.2 FINOVA or FINOVA's representatives shall at all times
(upon reasonable notice unless FINOVA alleges a default hereunder) have free
access to and right of inspection of the Collateral and have full access to and
the right to examine and make copies of Borrower's Records, to confirm and
verify all Accounts, to perform general audits and to do whatever else FINOVA
deems necessary to protect FINOVA's interests. FINOVA may at any time remove
from Borrower's premises or require Borrower or its accountants or auditors to
deliver any Records to FINOVA. FINOVA may, at Borrower's cost and expense, use
any of Borrower's personnel, supplies, computer equipment (including all
computer programs, software and data) and space at Borrower's places of business
or at any other place as FINOVA may designate, as may be reasonably necessary
for the handling of collections.
5.3 Merchandise received in settlement of any assigned Account
shall be received in trust for, segregated and delivered to or for the account
of FINOVA. All returns of merchandise, credits, issued by Borrower, claims or
disputes of Account Debtors whether or not accepted by Borrower or given an
allowance of any nature shall be reported by Borrower to FINOVA at least weekly.
Each such report shall be accompanied by copies of all documentation provided to
Borrower in support of all merchandise returns, credits, claims and disputes.
Borrower shall immediately upon obtaining knowledge thereof report to FINOVA all
reclaimed, repossessed and returned goods, Account Debtor claims and any other
matter affecting the value, enforceability or collectability of Accounts. At
FINOVA's request, any goods reclaimed or repossessed by or returned to Borrower
will be set aside, marked with FINOVA's name and held by Borrower (at Borrower's
place of business or at such other place as FINOVA may designate) for FINOVA's
account and subject to FINOVA's security interest.
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5.4 All claims and disputes relating to Accounts shall be
adjusted within a reasonable time at Borrower's own cost and expense.
5.5 FINOVA is authorized and empowered upon alleging an Event
of Default, to compromise or extend the time for payment of any Account, for
such amounts and upon such terms as FINOVA may in its sole discretion determine,
and to accept the return of the merchandise represented by any Account, all
without notice to or consent by Borrower, and without discharging or affecting
Borrower's obligations hereunder to any extent and Borrower's will, upon demand,
pay to FINOVA the amount of any allowance given or authorized by FINOVA
hereunder. FINOVA shall have the right (in addition to its other rights
hereunder or otherwise), with or without the occurrence of an Event of Default
and without notice to Borrower, to appropriate, set off and apply to the payment
of any or all of the Obligations, any portion or all of the Collateral, in such
manner as FINOVA shall in FINOVA's sole discretion determine, to enforce payment
of any Collateral, to settle, compromise or release in whole or in part, any
amounts owing on any Collateral, to prosecute any action, suit or proceeding
with respect to the Collateral, to extend the time of payment of any and all
Collateral, to make allowances and adjustments with respect thereto, to issue
credits in FINOVA's or Borrower's name, to sell, assign and deliver the
Collateral (or any part thereof) at public or private sale, for cash, upon
credit or otherwise at FINOVA's sole option and discretion, and FINOVA may bid
or become purchaser at any such sale, free from any right of redemption which is
hereby expressly waived. Any public or private sale of the Collateral shall be
deemed reasonable to the extent Borrower shall have received written notice of
such sale at least five (5) days prior to its occurrence and shall not have
delivered written objection to FINOVA.
Section 6. REPRESENTATIONS AND WARRANTIES
Borrower hereby epresents, warrants and covenants to FINOVA
the following (which shall survive the execution and delivery of this
Agreement), the truth and accuracy of which, and continuing compliance with,
being a continuing condition of the making of all loans an advances hereunder by
FINOVA or under any supplement or amendment hereto:
6.1 Borrower is and shall be the owner of the Collateral free
and clear of all liens, security interests, claims and encumbrances of every
kind and nature, except in FINOVA's favor or as otherwise consented to in
writing by FINOVA, and Borrower shall indemnify and defend FINOVA from and
against all cost, loss and expense with regard to the same. None of Borrower's
Accounts nor any of its inventory has been previously sold or assigned to any
person, firm or corporation and will not be sold or assigned, other than to
FINOVA, at any time during the term of this Agreement without first obtaining
FINOVA's consent in writing. Borrower shall not execute any security agreement
or UCC financing statements in favor of any other party or borrow against the
security of any corporate asset, including but not limited to the Collateral,
without first obtaining FINOVA's consent in writing.
6.2 (a) Without first obtaining FINOVA's consent in
writing Borrower will not directly or indirectly sell, lease, transfer,
abandon or otherwise dispose of all or any portion
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of Borrower's property or assets except in the ordinary course of
business) or consolidate or merge with or into any other entity or permit any
other entity to consolidate or merge with or into Borrower.
(b) Borrower will preserve, renew and keep in full force and
effect Borrower's existence and good standing as a corporation and its rights
and franchises with respect thereto;
(c) Borrower will continue to engage in business of the same
type as Borrower is engaged as of the date hereof; and
(d) Borrower will give FINOVA thirty (30) days prior written
notice of any proposed change in Borrower's corporate name which notice shall
set forth the new name.
6.3 Borrower's Records and principal executive office are
maintained at the address referred to herein. Borrower shall not change such
location without FINOVA's prior written consent and prior to making any such
change, Borrower agrees to execute any additional financing statements or other
documents or notices which FINOVA may require.
6.4 Borrower shall maintain its shipping forms, invoices and
other related documents in a form satisfactory to FINOVA and shall maintain its
books, records and accounts in accordance with general accepted accounting
principles consistently applied. Borrower agrees to furnish FINOVA monthly with
accounts receivable agings, inventory reports (if requested by FINOVA), and
interim financial statements (including balance sheet, statement of income and
surplus account, and cash flow statement) hereafter collectively referred to as
("Interim Financial Statements"), and to furnish FINOVA at any time or from time
to time with such other information regarding Borrower's business affairs and
financial condition as FINOVA may reasonably request, including, without
limitation, cash flow and other projections, earnings forecasts, schedules,
agings, and reports. Borrower hereby irrevocably authorizes and directs all
accountants, auditors and any other third parties to deliver to FINOVA, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any kind or nature in their possession
and to disclose to FINOVA any information they may have regarding Borrower's
business affairs and financial condition. Borrower shall furnish FINOVA with
audited financial statements within ninety (90) days of the end of its fiscal
year end certified by independent public accountants selected by Borrower and as
to whom FINOVA has no objection. All financial statements and information shall
fairly present Borrower's financial condition and the results of Borrower's
operations for the periods in which the financial statements are furnished.
6.5 Each Account represents a valid and legally enforceable
indebtedness based upon a bona fide sale and delivery of goods or rendition of
services usually dealt in by Borrower in the ordinary course of its business
which has been finally accepted by the Account Debtor. Each Account is and will
be for a liquidated amount maturing as stated in the invoice rendered
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to the Account Debtor who is unconditionally liable to make payment at maturity
of the amount stated in each invoice, document or instrument evidencing the
Account in accordance with the terms thereof, without offset, defense,
deduction, counterclaim, discount or condition. Every assigned Account, and any
evidence of indebtedness with respect thereto shall be paid in full at maturity.
If any account is not paid in full at maturity, the amount of such unpaid
Account (whether in whole or in part) may be charged against and deducted from
any advance then or thereafter made by FINOVA to Borrower or, in the event
Borrower then has no borrowing availability, Borrower shall pay FINOVA, upon
demand, the full amount remaining unpaid thereon. Such payment or deduction
shall not constitute a reassignment, and FINOVA may retain the Account as
collateral for all Obligations of Borrower to FINOVA until the same have been
fully satisfied.
6.6 All statements made and all unpaid balances appearing in
the invoices, documents and instruments evidencing each Account are true and
correct and are in all respects what they purport to be and all signatures and
endorsements that appear thereon are genuine and all signatories and endorsers
have full capacity to contract. Each Account Debtor is solvent and financially
able to pay in full each Account when it matures. None of the transactions
underlying or giving rise to any Account shall violate any state or federal laws
or regulations, and all documents relating to the Accounts shall be legally
sufficient under such laws or regulations and shall be legally enforceable in
accordance with their terms and all recording, filing and other requirements of
giving public notice under any applicable law have been and shall be duly
complied with.
6.7 Borrower is solvent and will so remain. Borrower's
federal, state and local taxes of every kind and nature, including, but not
limited to employment taxes, are current, and there are no pending tax audits or
examinations with respect to Borrower's federal, state or local tax returns.
6.8 Borrower shall duly pay and discharge all taxes,
assessments, contributions and governmental charges upon or against it or its
properties or assets prior to the date on which penalties attach thereto.
Borrower shall be liable for all taxes and penalties imposed upon any
transaction under this Agreement or any supplemental or amendment hereto or
giving rise to the Accounts or any other Collateral or which FINOVA may be
required to withhold or pay for any reason. Borrower agrees to indemnify and
hold FINOVA harmless with respect thereto, and to repay to FINOVA on demand the
amount thereof, and until paid by Borrower such amounts shall be added to and
included in Borrower's Obligations.
6.9 There is no investigation by any state, federal or local
agency pending or threatened against Borrower and there is no action, suit,
proceeding or claim pending or threatened against Borrower or Borrower's assets
or goodwill or affecting any transactions contemplated by this Agreement, or any
supplement or amendment hereto, or any agreements, instruments or documents
delivered in connection herewith or therewith before any court, arbitrator, or
governmental or administrative body or agency which if adversely determined with
respect to Borrower would result in any material adverse change in Borrower's
business,
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properties, assets, goodwill or condition, financial or otherwise.
6.10 The execution, delivery and performance of this
Agreement, any supplement or amendment hereto, or any agreements, instruments
and documents executed and delivered in connection herewith, are within
Borrower's corporate powers, have been duly authorized, are not in contravention
of law or the terms of Borrower's charter, by-laws or other incorporation
papers, or of any indenture, agreement or undertaking to which Borrower is party
or by which Borrower is bound.
6.11 Borrower shall keep and maintain, at its sole cost and
expense, satisfactory and complete Records including records of all Accounts,
all payments received and credits granted thereon, and all other dealings
therewith. Upon the sale of goods or the rendering of services, Borrower shall
make appropriate entries in its books and records disclosing such assignments of
Accounts to FINOVA, and shall execute and deliver all papers and instrument, and
do all things necessary to effectuate this Agreement and facilitate the
collection of the Accounts. FINOVA is hereby vested with all of Borrower's
rights, securities and guarantees with respect to each Account, including the
right of stoppage in transit. Notwithstanding the failure of Borrower to execute
and deliver such written assignment as aforesaid, each Account created by
Borrower shall be deemed assigned to FINOVA and shall become its property.
6.12 If any Account Debtor of Borrower shall reject or return
any of the goods which created an assigned Account, Borrower shall promptly
deliver the same to FINOVA, or notify FINOVA and hold the same, separate and
apart from Borrower's stock, in trust for and subject to the order of FINOVA,
and FINOVA may take and sell the same, without notice, for such price and upon
such terms as it may, in its sole and absolute discretion, determine. Borrower
shall remain liable for any difference between the original invoice price and
the net proceeds of resale, after deducting any expenses incurred by FINOVA in
connection with such resale. Notwithstanding the foregoing, FINOVA may require
Borrower to pay to it the original invoice price of such rejected or returned
goods. In case any such goods shall be resold, the Account thereby created shall
be FINOVA's property and shall be deemed assigned hereunder.
6.13 All monies, Accounts and other property of Borrower which
may come into FINOVA's possession in any manner, and all sums to the credit of
Borrower may be retained by FINOVA and applied to Obligations or any of the
Borrower's obligations owing to FINOVA's parent, any of its subsidiaries or any
of its affiliates. Borrower's obligations as set forth in the preceding sentence
shall remain applicable and enforceable as against Borrower should FINOVA be
merged into or with any of the entity, including, but not limited to, its parent
corporation. Borrower absolutely and unconditionally guarantees and grants a
security interest to FINOVA in and to all of its Collateral to secure any and
all Obligations (including, but not limited to all obligations of any entity
which is a parent, subsidiary or affiliate of Borrower, whether arising under
this Agreement or otherwise, and whether or not then due and however created)
which Borrower may at any time owe to FINOVA or its parent, any of its
subsidiaries or any of its affiliates.
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6.14 FINOVA's agents and examiners shall have the right at any
time during business hours to review, inspect, examine, check and make copies of
extracts from Borrower's Records.
6.15 Borrower shall, at Borrower's expense, duly execute and
deliver, or shall cause to be duly executed and delivered, such further
agreements, instruments and documents, including, without limitation, additional
security agreements, mortgages, deeds of trust, deeds to secure debt, collateral
assignments, UCC financing statements or amendments and continuations thereof,
landlord's or mortgagee's waivers of liens and consents to the exercise by
FINOVA of all of its rights and remedies hereunder, under any supplement or
amendment hereto, or applicable law with respect to the Collateral. In addition,
Borrower shall do or cause to be done such further acts as may be necessary or
proper, in FINOVA's opinion, to evidence, perfect, maintain and enforce its
security interest and the priority thereof in and to the Collateral and to
otherwise effect the provisions and purposes of this Agreement or any supplement
or amendment hereto. Where permitted by law, Borrower hereby authorizes FINOVA
to execute and file one or more UCC financing statements covering the Collateral
signed only by FINOVA.
6.16 Borrower shall, at Borrower's expense, maintain insurance
covering the Collateral in such amounts and with such insurance companies as may
be acceptable to FINOVA in its sole and absolute discretion. Borrower shall have
FINOVA named a loss payee on all such insurance policies.
Section 7. ADDITIONAL POWERS
7.1 FINOVA shall have the right at any time in its sole and
absolute discretion: (a) to notify Account Debtors that Borrower's Accounts have
been assigned to and are payable to FINOVA; and (b) to collect any and all
Accounts directly in its own name and charge all of its collection costs and
expenses including, but not limited to, its legal expenses to the Borrower's
account as part of the Obligations.
7.2 Borrower hereby appoints FINOVA or FINOVA's designee as
Borrower's attorney-in-fact, at Borrower's own cost and expense, to exercise at
any time all or any of the following powers which, being coupled with an
interest, shall be irrevocable until all Obligations have been paid in full: (a)
upon FINOVA alleging an Event of Default hereunder to redirect, receive, open
and dispose of all mail addressed to Borrower and to notify postal authorities
to change the address for delivery thereof to such address as FINOVA may
designate; (b) to execute and file in Borrower's name financing statements and
amendments under the UCC; (c) to receive, take, endorse, assign, deliver, accept
and deposit, in FINOVA's or Borrower's name, any and all checks, notes, drafts,
acceptances, money orders, remittances or other evidences of payment of money or
Collateral which may come into FINOVA's possession; (d) to sign Borrower's name
on any drafts against Account Debtors, assignments and verifications of
Accounts; (e) to transmit to Account Debtors notice of FINOVA's interest therein
and to request from such Account Debtors at any time, in FINOVA's or Borrower's
name or that of FINOVA's designee, information concerning the Accounts and the
amounts owing thereon; (f) upon
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FINOVA alleging an Event of Default hereunder to notify Account Debtors to make
payment directly to FINOVA; (g) to take or bring, in FINOVA's or Borrower's
name, and in FINOVA's sole and absolute discretion all steps, actions, suits or
proceedings deemed necessary or desirable by FINOVA to effect collection of the
Collateral; and (h) to do all other acts and things necessary to carry out this
Agreement. Borrower hereby releases FINOVA and FINOVA's officers, employees and
designees, from all liability arising from any act or acts under this Agreement
or in furtherance thereof, whether by omission or commission, and whether based
upon any error of judgment or mistake of law or fact.
Section 8. EVENTS OF DEFAULT
8.1 All Obligations shall be, at FINOVA's option, immediately
8.2 In the event FINOVA seeks to take possession of all or any
portion of the Collateral by judicial process (including, but not limited to,
FINOVA obtaining an order of attachment, a temporary restraining order, a
preliminary or permanent injunction or otherwise) against the Borrower or with
regard to the Collateral, Borrower irrevocably waives: (a) the
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posting of any bond, surety or security with respect thereto which might
otherwise be required, (b) any demand for possession prior to the commencement
of any suit or action to recover the Collateral, and (c) any requirement that
FINOVA retain possession and not dispose of any Collateral until after trial or
final judgment.
8.3 Borrower agrees that the giving of five (5) days' notice
by FINOVA, sent by ordinary mail, postage prepaid, to Borrower's address set
forth herein, designating the place and time of any public sale or of the time
after which any private sale or other intended disposition of the Collateral is
to be made, shall be deemed to be reasonable notice thereof and Borrower waives
any other notice with respect thereto.
8.4 The net cash proceeds resulting from the exercise of any
of FINOVA's rights or remedies under this Agreement, under the UCC or otherwise,
shall be applied by FINOVA to the payment of the Obligations in such order as
FINOVA may elect, and Borrower shall remain liable to FINOVA for any deficiency.
Without limiting the generality of the foregoing, if FINOVA enters into any
credit transaction, directly or indirectly, in connection with the disposition
of any Collateral, FINOVA shall have the option, at any time, in FINOVA's sole
and absolute discretion, to reduce the Obligations by the amount of such credit
transaction or any part thereof or to defer the reduction thereof until actual
receipt by FINOVA of cash in connection therewith.
8.5 The enumeration of the foregoing rights and remedies is
not intended to be exclusive, and such rights and remedies are in addition to
and not by way of limitation of any other rights or remedies FINOVA may have
under the UCC or other applicable law. FINOVA shall have the right, in FINOVA's
sole and absolute discretion, to determine which rights and remedies, and in
which order any of the same, are to be exercised, and to determine which
Collateral is to be proceeded against and in which order, and the exercise of
any right or remedy shall not preclude the exercise of any others, all of which
shall be cumulative.
8.6 No act, failure or delay by FINOVA shall constitute a
waiver of any of its rights or remedies. No single or partial waiver by FINOVA
of any provision of this Agreement or any supplement or amendment hereto, or
breach or default thereunder, or of any right or remedy which FINOVA may have
shall operate as a waiver of any other provision, breach, default, right or
remedy or of the same provision, breach, default, right or remedy on a future
occasion.
8.7 Borrower waives presentment, notice of dishonor, protest
and notice of protest of all instruments included in or evidencing any of the
Obligations or the Collateral and any and all notices or demands whatsoever
(except as expressly provided herein). FINOVA may, at all times, proceed
directly against Borrower or any guarantor or endorser to enforce payment of the
Obligations and shall not be required to take any action of any kind to
preserve, collect or protect FINOVA's or Borrower's rights in the Collateral.
Section 9. MISCELLANEOUS
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9.1 This Agreement shall become effective upon acceptance by
FINOVA and shall continue in full force and effect for a term ending two (2)
years from the date hereof (the "Renewal Date") and from year to year
thereafter, unless and until terminated pursuant to the terms hereof. In
addition to FINOVA's right to declare this Agreement immediately terminated at
any time upon the occurrence of an Event of Default, either party may terminate
this Agreement on the Renewal date or on the anniversary of the Renewal Date in
any year by giving the other party at least sixty (60) days prior written notice
by registered or certified mail, return receipt requested. No termination of
this Agreement, however, shall relieve or discharge Borrower of Borrower's
duties, obligations and covenants hereunder until all Obligations have been paid
in full and FINOVA's continuing security interest in and to the Collateral shall
remain in effect until all such Obligations have been fully discharged.
9.2 If FINOVA terminates this Agreement upon the occurrence of
an Event of Default or if Borrower terminates this Agreement as to future
transactions other than on the Renewal Date or any anniversary of the Renewal
Date, in view of the impracticality and extreme difficulty in ascertaining
FINOVA's actual damages and by mutual agreement of the parties as to a
reasonable calculation of FINOVA's lost profits as a result thereof, Borrower
hereby agrees that it shall immediately pay to FINOVA by wire transfer,
certified check or bank cashier's check, Borrower's entire Obligations owing
thereunder, plus liquidated damages of an amount equal to 75% of FINOVA's
average monthly charges (inclusive of interest, Facility Fee, LC Fees, if any,
and all other Costs and Expenses, hereafter, the "Monthly Charges") for the six
month period preceding the date of FINOVA's receipt of Borrower's notice of
termination or from the date of this Agreement, whichever is less, multiplied by
the number of months remaining under this Agreement, but in no event less than
$500 per month of the then unexpired term thereof. Prior to its actual receipt
of payment as aforesaid, FINOVA shall be free to exercise, without limitation,
all of its rights under this Agreement or under any other agreement it may then
have with Borrower. Borrower's default of any provision under this Agreement may
be considered and construed at the sole option of FINOVA, as a termination of
this Agreement by Borrower. The liquidated damages provided for in this
paragraph 9.2 shall be deemed included in the Obligations and shall be presumed
to be the amount of damages sustained by FINOVA due to the Borrower's early
termination and Borrower agrees that such damages are reasonable and appropriate
under the circumstances currently existing. Notwithstanding anything to the
contrary contained herein, Borrower shall not be obligated to pay the liquidated
damages set forth in this paragraph 9.2 if after the first anniversary of this
Agreement Borrower transfers the financing set forth hereunder to another
division of FINOVA.
9.3 This Agreement, and any supplement or amendment hereto and
any agreements, instruments or documents delivered or to be delivered in
connection herewith, constitute the entire agreement and understanding between
FINOVA and Borrower concerning the subject matter hereof and thereof and as such
supersedes all other prior or contemporaneous agreements, understandings,
negotiations and discussions, representations, warranties, commitments, offers,
contracts, whether written or oral, all of which are merged into this Agreement.
FINOVA and the Borrower agree that neither party shall be bound by anything not
expressed herein, nor shall this Agreement be modified orally.
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9.4 All amendments to and modifications of this Agreement
shall be in writing and signed by Borrower and FINOVA, which requirement shall
not be modified by oral agreement or by course of conduct.
9.5 All notices, requests and demands to or upon the respect
parties hereto shall be deemed to have been duly given or made; (a) by hand or
by telecopier, immediately upon sending: (b) one day after posting if by Federal
Express, Express Mail or any other overnight delivery service; or (c) five days
after posting if by certified mail, return receipt requested. All notices,
requests and demands are to be given or made to the respective parties at the
addresses set forth herein or at such other addresses as either party may
designate in writing by notice in accordance with the provisions of this
paragraph.
9.6 Borrower and FINOVA each hereby waive all rights to a
trial by jury in any action or proceeding of any kind arising out of or relating
to this Agreement, any supplement or amendment hereto, the Obligations, the
Collateral or any such other transaction. Borrower hereby waives all of its
rights of set off and rights to interpose any defense and/or counterclaims in
the event of any litigation with respect to any matter connected with this
Agreement, any supplement or amendment hereto, the Obligations, the Collateral
or any other transaction between the parties. Borrower hereby irrevocably
consents and submits to the jurisdiction and venue of the Supreme Court of the
State of New York or the United States District Court for the Southern District
of New York in connection with any action or proceeding of any kind arising out
of or relating to this Agreement, any supplement hereto, the Obligations, the
Collateral or any such other transaction. Borrower agrees that any action
brought by it against FINOVA whether with regard to this Agreement or otherwise
shall be subject to the exclusive jurisdiction and venue of the Supreme Court of
the State of New York, County of New York or the United States District Court
for the Southern District of New York.
9.7 In any litigation brought by FINOVA, Borrower waives
personal service of any summons, complaint or other process and agrees that
service thereof may be made by certified or registered mail directed to Borrower
at Borrower's address set forth below and service so made shall be complete two
(2) days after the same shall have been posted. Within thirty (30) days after
such mailing, Borrower shall appear and answer such summons, complaint or other
process, failing which Borrower shall be deemed in default and judgement may be
entered by FINOVA against Borrower for the amount of the claim and for any other
relief requested therein.
9.8 This Agreement and all transactions hereunder are deemed
to be consummated in the State of New York and shall be governed by and
interpreted in accordance with the substantive and procedural laws of the State
of New York. If any part or provision of this Agreement shall be determined to
be invalid or in contravention of any applicable law or regulation of the
controlling jurisdiction, such part or provision shall be severed without
affecting the validity of any other part or provision of this Agreement.
9.9 Borrower hereby consents to and authorizes FINOVA to
issue appropriate
16
<PAGE>
press release and to cause a tombstone to be published announcing the
consummation of this transaction and the aggregate amount thereof.
9.10 This Agreement shall inure to and be binding upon the
parties hereto and their successors and assigns.
WITNESS: PRIVATE LABEL COSMETICS, INC.
/s/ Denise Assante By:/s/ Michael Assante
Denise Assante, Secretary Michael Assante, President
WITNESS: FASHION LABORATORIES, INC.
/s/ Denise Assante By:/s/ Michael Assante
Denise Assante, Secretary Michael Assante, President
WITNESS: P.L.C. SPECIALTIES, INC.
/s/ Denise Assante By:/s/ Michael Assante
Denise Assante, Secretary Michael Assante, President
WITNESS: INTERNATIONAL COSMETICS GROUP, INC.
/s/ Denise Assante By:/s/ Michael Assante
Denise Assante, Secretary Michael Assante, President
ACCEPTED:
FINOVA CAPITAL CORPORATION
---------------------------------
17
<PAGE>
GUARANTY
1. In consideration of and in order to induce FINOVA Capital
Corporation ("FINOVA"), its successors, endorsees or assigns to grant and
continue to grant such advances, loans or extensions of credit directly or
indirectly to PRIVATE LABEL COSMETICS, INC., FASHION LABORATORIES, INC., P.L.C.
SPECIALTIES, INC. and INTERNATIONAL COSMETIC GROUP, INC. (hereinafter, whether
one or more, called "Borrower") and to grant to Borrower such renewals,
extensions, forbearances, releases of collateral or other relinquishment of
legal rights as FINOVA may deem advisable, and for other good and valuable
consideration, receipt of which is hereby duly acknowledged, the undersigned
Guarantor(s) (hereinafter, whether one or more, call "Guarantor", who, if two or
more in number, shall be jointly and severally bound) for the undersigned
Guarantor and for their heirs and personal representatives, or successors, and
assigns of the undersigned Guarantor, hereby absolutely and unconditionally
guarantees to FINOVA, its successors, endorsees and assigns, the prompt and
unconditional payment when due (whether at maturity, by acceleration or
otherwise) and at all times thereafter of any and all obligations or liabilities
of every kind, nature and character (including all renewals, extensions and
modifications thereof) of Borrower to FINOVA, its successors, endorsees, or
assigns howsoever created or arising, whether or not represented by negotiable
instruments or other writings, whether now existing or hereafter incurred,
whether originally contracted with FINOVA or with another and assigned or
transferred to FINOVA or otherwise acquired by FINOVA, whether contracted by
Borrower alone or jointly with others, and whether absolute or contingent,
secured or unsecured, matured or unmatured, including but not limited to any and
all sums, late charges, disbursements, expenses, legal fees and any deficiency
upon enforcement of collateral, agreements and contracts in connection with all
of such obligations.
2. Undersigned Guarantor consents that without notice to or
further assent by undersigned Guarantor, the obligation of Borrower or of any
other party for the liability hereby guaranteed may be renewed, extended,
modified, prematured or released by FINOVA as it may deem advisable in its sole
and absolute discretion, and that any security or securities which FINOVA holds
may be exchanged, sold, released, or surrendered by it, as it may deem advisable
in its sole and absolute discretion, without impairing or affecting the
obligation of undersigned Guarantor hereunder.
3. Undersigned Guarantor waives any and all notice of the
acceptance of this guaranty, or of the creation, renewal or accrual of any
obligations or liability of Borrower to FINOVA, present or future, or of the
reliance of FINOVA upon this guaranty. Any and every obligation or liability of
Borrower to FINOVA herein described shall conclusively be presumed to have been
created, contracted or incurred in reliance upon this guaranty, and all dealings
between Borrower and FINOVA shall likewise be presumed to be in reliance upon
this guaranty. Undersigned Guarantor waives protest, presentment, demand for
payment, notice or default or non-payment and notice of dishonor to or upon
undersigned Guarantor, Borrower or any other
18
<PAGE>
party liable for any Borrower's obligations hereby granted.
4. This guaranty shall be construed as an absolute and
unconditional guaranty of payment without regard to the validity, regularity or
enforceability of any obligation or purported obligation of Borrower. FINOVA
shall have all of its remedies under this guaranty without being obliged to
resort first to any security or to any other remedy or remedies to enforce
payment or collection of the obligations hereby guaranteed and may pursue all or
any of its remedies at one or at different times. FINOVA is hereby given a
continuing lien for the purposes and security of this guaranty as well as for
any other obligation or liability (present or future, absolute or contingent,
due or not due) of undersigned Guarantor to FINOVA upon all property and
securities now or hereafter given unto or left in the possession or custody of
FINOVA for any purpose (including property left in safekeeping or custody), by
or for the account of any undersigned Guarantor, and also upon any deposits with
or any credit or claim of any undersigned Guarantor against FINOVA existing from
time to time. FINOVA is hereby authorized and empowered, upon the occurrence of
any of the events set forth in the next succeeding paragraph, to appropriate and
apply to the payment and extinguishment of the liability of undersigned
Guarantor any and all such monies, property, securities, deposits or credit
balances without demand, advertisement or notice, all of which are hereby
expressly waived.
5. Upon the default of Borrower or any undersigned Guarantor
with respect to any obligations or liabilities of either of them to FINOVA or in
the event Borrower or any undersigned Guarantor shall die or become insolvent or
make an assignment for the benefit of creditors, or if a petition in bankruptcy
be filed by or against Borrower or any undersigned Guarantor, or in the event of
the appointment of a receiver (either at law or in equity) of Borrower or of any
undersigned Guarantor, or in the event that a judgment is obtained or warrant of
attachment issued against Borrower or of any undersigned Guarantor, or in the
event that the financial or business condition of any of them shall so change as
in the opinion of FINOVA will materially impair its security or increase its
risk, all or any part of the obligations and liabilities of Borrower and/or of
undersigned Guarantor to FINOVA, whether direct or contingent, and of every kind
and description, shall, without notice or demand, become immediately due and
payable insofar as this guaranty is concerned, and shall be taken up forthwith
by undersigned Guarantor, and in any of such events, and whether or not the said
liabilities and obligations are due and payable, FINOVA may (in addition to, and
subject to its rights and remedies under the terms of any special contract with
Borrower), without demand of performance or advertisement or notice of intention
to sell or of time or place of sale, or to redeem, or other notice whatsoever to
undersigned Guarantor or to Borrower (all and each of which demands,
advertisements and notices being hereby expressly waived), sell any and all
collateral which it may hold for said obligations, or under this guaranty, in
one or more parcels, at public or private sale, at FINOVA's office or elsewhere,
at such prices as FINOVA may deem best, either for cash or credit, with the
right of FINOVA at any such sale, public or private, to purchase the whole or
any part of said collateral free from any right or equity of redemption, which
right or equity is hereby expressly waived. FINOVA may, in its uncontrolled
discretion, apply the net proceeds of such sale or sales to payment on account
of
19
<PAGE>
the obligations or liabilities of Borrower and undersigned Guarantor in such
manner and order of priority as FINOVA may, in its absolute and uncontrolled
discretion, elect. If, in the opinion of FINOVA, any collateral deposited
hereunder cannot be freely sold or disposed of at public or private sale
(because of any relationship between the owner and issuer thereof or otherwise),
FINOVA shall have the unqualified right (in addition to all other rights
hereunder) to sell the same, or any part thereof, to a purchaser or purchasers,
under investment letters, for a negotiated price or prices which, under such
circumstances, shall be deemed to be fair and equitable.
20
<PAGE>
6. Any stocks, bonds or other securities held by FINOVA hereunder may,
whether or not Borrower or undersigned Guarantor is in default, be registered
and held in the name of FINOVA or its nominee, and FINOVA or said nominee may
exercise all voting and corporate rights relating thereto as if the absolute
owner thereof.
7. The term "Borrower" as used herein shall include the individual or
individuals, association, partnership or corporation named herein as Borrower,
and (a) any successor individual or individuals, association, partnership or
corporation to which all or substantially all of the business or assets of said
Borrower shall have been transferred, (b) in the case of a partnership Borrower,
any new partnership which shall have been created by reason of the admission of
any new partner or partners therein and/or the dissolution of the existing
partnership by the death, resignation, or other withdrawal of any partner, and
(c) in the case of a corporate Borrower, any other corporation into or with
which said Borrower shall have been merged, consolidated, reorganized, purchased
or absorbed. The right of FINOVA to hold, deal with and dispose of the property
deposited by undersigned Guarantor hereunder, as herein provided, shall continue
unimpaired notwithstanding any invalidity or unenforceability of this guaranty
as against undersigned Guarantor personally.
8. FINOVA's books and records showing the account between
FINOVA and Borrower shall be admissible as evidence in any action or proceeding,
shall be binding upon the undersigned Guarantor for the purpose of establishing
the items therein set forth and shall constitute prima facie proof hereof.
FINOVA's monthly statements rendered to Borrower shall, to the extent to which
no written objection is made within thirty (30) days after the date thereof,
constitute an account stated between FINOVA and Borrower and be binding upon the
undersigned Guarantor.
9. The undersigned Guarantor waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which the undersigned Guarantor may now or hereafter have against
Borrower, or any person other than a coguarantor directly or contingently liable
for the obligations guaranteed hereunder, or against or with respect to the
Borrower's property (including without limitation, property collateralizing the
undersigned Guarantor's obligations to FINOVA) arising from the existence or
performance o this guaranty. In furtherance and not in limitation of the
preceding waiver, the undersigned Guarantor agrees that any payment to FINOVA by
the undersigned Guarantor pursuant to this guaranty shall be deemed a
contribution to the capital of the Borrower or other obligated party, and any
such payment shall not constitute the undersigned Guarantor a creditor of any
such party.
10. The undersigned Guarantor represents and warrants that
there is no existing indemnification agreement, whether qualified or
unqualified, between the undersigned and Borrower. The undersigned waives any
right he may otherwise have to seek a stay from any United States Bankruptcy
Court, in which Borrower may become a debtor, of any claim or cause of action
hereinafter asserted against the undersigned Guarantor on his guaranty, whether
in an action commenced against the undersigned as a guarantor prior to or
instituted following the
21
<PAGE>
filing a Chapter 11 petition by or against Borrower. The undersigned Guarantor
further acknowledges that this waiver hereinabove, is specifically provided to
FINOVA as an inducement to it to effect the financial accommodations provided by
FINOVA to Borrower.
11. This guaranty shall, without further reference, pass to,
and may be relied upon and enforced by, any successor or assignee of FINOVA and
any transferee or subsequent holder of any of said liabilities or obligations of
Borrower. This guaranty may be terminated (but only insofar as it may relate to
obligations of Borrower arising subsequent to such termination) upon written
notice to that effect delivered by undersigned Guarantor to an officer of
FINOVA, such termination to be effective only upon the execution by such officer
of a written receipt therefor, and in the event of such termination, undersigned
Guarantor and his or their respective executors, administrators or successors
and assigns shall nevertheless remain liable with respect to obligations
incurred or arising theretofore, and with respect to such obligations and any
renewals, extensions or other liabilities arising out of same, this guaranty
shall continue in full force and effect, and FINOVA shall have all the rights
herein provided for as if no such termination had occurred.
12. The undersigned Guarantor does hereby waive any an all
right to a trial by jury in any action or proceeding based hereon. This guaranty
and the rights and obligations of FINOVA and of the undersigned Guarantor shall
be governed and construed in accordance with the laws of the State of New York.
The undersigned Guarantor hereby consents to the jurisdiction of the Supreme
Court of the State of New York for a determination of any dispute connected with
this guaranty and authorizes the service of process on the undersigned Guarantor
by registered or certified mail sent to the undersigned Guarantor at the address
or addresses of the undersigned Guarantor, as the case may be as herein set
forth or as set forth on any record maintained by FINOVA. This guaranty cannot
be changed or terminated orally, shall be interpreted according to the laws of
the State of New York, shall be binding upon the heirs, executors,
administrators, successors and assigns of the undersigned Guarantor and shall
inure to the benefit of FINOVA's successors and assigns.
13. Guarantor agrees that, whenever an attorney is used to
obtain payment under or otherwise enforce this guaranty or to enforce, declare
or adjudicate any rights or obligations under this guaranty or with respect to
collateral, whether by legal proceeding or by any other means whatsoever,
FINOVA's reasonable attorney's fee plus costs and expenses shall be payable by
each Guarantor against whom this guaranty or any obligation or right hereunder
is sought to be enforced, declared or adjudicated. Guarantor, if more than one,
shall be jointly and severally bound and liable hereunder and if any of the
undersigned is a partnership, also the members thereof individually. FINOVA and
Guarantor, in any litigation (whether or not arising out of or relating to
obligations, liabilities or collateral security or any of the matters contained
in this guaranty) in which FINOVA and any of them shall be adverse parties,
waive trial by jury. In addition, Guarantor waives the performance of each and
every condition precedent to which Guarantor might otherwise be entitled by law.
FINOVA shall have the right to fill in any blank spaces left in this guaranty
(including the name of "Borrower"), to date this guaranty and to correct patent
errors therein.
22
<PAGE>
14. The Guarantor acknowledges that this guaranty and the
Guarantor's obligations under this guaranty are and shall at all times continue
to be absolute and unconditional in all respects and shall at all items be valid
and enforceable irrespective of any other agreements or circumstances of any
kind or nature whatsoever which might otherwise constitute a defense to this
guaranty and the obligations of the Guarantor under this guaranty or the
obligations of any other person or party (including, without limitation, the
Borrower) relating to this guaranty or the obligations of the Guarantor
hereunder or otherwise with respect to any transactions involving the Borrower
and FINOVA. This guaranty sets forth the entire agreement and understanding of
FINOVA and Guarantor and Guarantor absolutely, unconditionally and irrevocably
waives any and all right to assert any defense, set-off, counterclaim or
cross-claim of any nature whatsoever (including, but not limited to, fraud in
the inducement and commercial disposition of collateral of the Guarantor or
Borrower) with respect to this Guaranty or the obligations of the Guarantor
under this guaranty or the obligations of any other person or party (including,
without limitation, Borrower) relating to this guaranty or the obligations of
the Guarantor under this guaranty or otherwise with respect to any transactions
involving the Borrower and FINOVA in any action or proceeding brought by its
successors and assigns, to collect the Debt or any portion thereof, or to
enforce, the obligations of the Guarantor under this guaranty. The Guarantor
acknowledges that no oral or other agreement, understandings, representations or
warranties exists with respect to this guaranty or with respect to the
obligations of the Guarantor under this guaranty, except as specifically set
forth in this guaranty.
15. No executory agreement and no course of dealing between
undersigned Guarantor and FINOVA shall be effective to change or modify this
guaranty in whole or in part; nor shall any change, modification or waiver of
any rights or powers of FINOVA be valid or effective unless in writing or signed
by an authorized officer of FINOVA.
23
<PAGE>
IN WITNESS WHEREOF, the undersigned Guarantor has hereunto set
his hand and seal the day and year first above written.
WITNESS
/s/ Michael Assante
Michael Assante
10 Surrey Lane
Mahwah, NJ 07430
/s/ Denise Assante
Denise Assante
10 Surrey Lane
Mahwah, NJ 07430
24
EXHIBIT 23.1
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our
reports dated December 20, 1996, relating to the financial statements of
Azurel Ltd. and Private Label Cosmetics, Inc. and Affiliates for the periods
indicated in those reports and to references to our firm under the caption
"EXPERTS" in the accompanying Prospectus.
/s/ Feldman Radin & Co., P.C.
Feldman Radin & Co., P.C.
Certified Public Accountants
January 28, 1997
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AZUREL
LTD. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,584,919
<ALLOWANCES> (14,000)
<INVENTORY> 1,095,696
<CURRENT-ASSETS> 3,164,120
<PP&E> 2,911,027
<DEPRECIATION> (2,368,836)
<TOTAL-ASSETS> 7,252,733
<CURRENT-LIABILITIES> 2,989,971
<BONDS> 3,597,398
0
0
<COMMON> 3,669
<OTHER-SE> 661,695
<TOTAL-LIABILITY-AND-EQUITY> 7,252,733
<SALES> 968,050
<TOTAL-REVENUES> 968,050
<CGS> 764,759
<TOTAL-COSTS> 764,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465,122
<INCOME-PRETAX> (995,123)
<INCOME-TAX> 0
<INCOME-CONTINUING> (995,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (995,123)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> 0
</TABLE>
