UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to --------------
Commission file number: 333-15127
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AZUREL LTD. AND SUBSIDIARIES
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3842844
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
509 MADISON AVENUE, NEW YORK, NY
-------------------------------------------------------
10022 (Address of principal executive office) (Zip Code)
(212) 317- 0712
-------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of May 12, 1998 was 5,293,745 shares.
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
INDEX
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Page
Number
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3-4
Notes to Financial Statements 5
Item 2 - Management's Discussion and Analysis or
Plan of Operation 6-7
PART II - OTHER INFORMATION 8
Item 6 - Exhibits and reports on Form 8-K 8
SIGNATURE 9
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- --------------
(Unaudited)
ASSETS
-------
CURRENT ASSETS:
<S> <C> <C>
Cash $ -- $ 414,731
Restricted cash -- 290,521
Accounts receivable, net of allowance for
doubtful accounts of $60,000 1,744,015 1,985,232
Inventories 1,847,050 1,882,807
Prepaid expenses and other current assets 251,726 262,886
Due from stockholders and related parties 232,921 232,921
----------- -----------
TOTAL CURRENT ASSETS 4,075,712 5,069,098
FURNITURE AND EQUIPMENT 1,489,101 1,462,580
----------- -----------
INTANGIBLES 3,080,500 3,137,248
----------- -----------
OTHER ASSETS
Due from related party 106,000 135,000
Deferred financing costs 35,700 35,700
----------- -----------
141,700 170,700
$ 8,787,013 $ 9,839,626
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 1,075,911 $ 1,133,393
Accounts payable 677,327 819,514
Accrued expenses and other liabilities 330,871 436,899
Customer advances 55,960 104,145
Current portion of long-term debt 652,333 634,294
Due to related parties 154,574 269,916
----------- -----------
TOTAL CURRENT LIABILITIES 2,946,976 3,398,161
----------- -----------
LONG-TERM DEBT 1,444,706 1,623,757
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized
1,000,000, none issued or outstanding -- --
Common stock, $.001 par value, authorized
24,000,000 shares, issued and outstanding
5,293,745 shares 5,294 5,294
Additional paid-in-capital 7,438,001 7,438,001
Accumulated deficit (3,032,207) (2,609,830)
Cumulative translation adjustment (13,582) (13,582)
Stock subscription receivable (2,175) (2,175)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,395,331 4,817,708
----------- -----------
$ 8,787,013 $ 9,839,626
=========== ===========
</TABLE>
See notes to financial statements.
-1-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Three Months ended Mar. 31,
---------------------------
1998 1997
---- ----
(Unaudited)
NET SALES $ 2,989,289 $ 2,733,182
COST OF GOODS SOLD 2,133,359 2,107,510
-------------- -------------
GROSS PROFIT 855,930 625,672
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,179,442 959,628
-------------- -------------
LOSS FROM OPERATIONS (323,512) ( 333,956)
INTEREST EXPENSE 98,865 131,189
NET LOSS $ (422,377) $ (465,145)
=============== ==============
NET LOSS PER COMMON SHARE,
BASIC AND ASSUMING DILUTION $ (0.$8) $ (0.12)
=============== ==============
WEIGHTED AVERAGE COMMON SHARES 5,293,745 3,878,747
=============== ==============
See notes to financial statements.
-2-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended Mar. 31
--------------------------
1998 1997
----- -----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(422,377) $(465,145)
--------- ---------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 83,363 43,767
Amortization 50,610 40,527
Amortization of deferred financing
costs -- 14,189
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable 241,217 (117,267)
Decrease (increase) in inventories 35,757 (83,645)
Decrease in prepaid expenses and
other 11,160 1,495
Decrease in other assets 35,138 36,496
(Decrease) increase in accounts
payable and accrued expenses (278,289) 269,133
(Decrease) increase in customer advances (48,185) --
(Decrease) increase in related party
loans (115,342) --
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (406,948) (260,450)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipement (109,884) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (109,884) --
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in cash overdraft 30,074 (10,635)
(Increase) decrease in restricted cash 290,521 --
(Increase) decrease in deferred
financing costs -- (30,369)
(Increase) decrease in deferred
registration costs -- (5,585)
(Decrease) increase in long-term debt (39,396) 424,000
(Decrease) in capital lease obligations (47) (3,941)
Payment of long-term debt (179,051) (48,304)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102,101 325,166
--------- ---------
NET (DECREASE) INCREASE IN CASH (414,731) 64,716
CASH, beginning of period 414,731 --
--------- ---------
CASH, end of period $ -- $ 64,716
========= =========
See notes to financial statements.
-3-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended Mar. 31
1998 1997
---- ----
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for Interest $ 108,835 $ 52,727
============ ==========
See notes to financial statements.
-4-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements as of March 31, 1998
have not been audited by independent auditors, but in the opinion of
management, such unaudited statements include all adjustments
consisting of normal recurring accruals necessary for a fair
presentation of the financial position, the results of operations and
cash flows for the three months ended March 31, 1998.
The consolidated financial statements should be read in conjunction
with the financial statements and related notes concerning the
Company's accounting policies and other matters contained in the
Company's annual report on Form 10-KSB. The results for the three
months ended March 31, 1998 are not necessarily indicative of the
results expected for the full year ending December 31, 1998. Certain
prior year amounts have been reclassified to conform with the current
year's presentation.
2. REVOLVING CREDIT FACILITY
-------------------------
On February 6, 1998, the Company refinanced their borrowing arrangement
with Finova Capital Corporation. The line of credit was increased to
$3,500,000 and bears interest at 2.5% per annum above the existing
prime rate. Borrowings are secured by trade receivables, inventories
and a second lien on machinery and equipment. The agreement expires in
February 2000.
3. EQUIPMENT FINANCING
-------------------
On March 17, 1998, the Company entered into an agreement with The CIT
Group for financing of machinery and equipment purchases. The total
financing will be $260,000 at approximately 10.5% over a 60 month
period.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
- -----------------------------------------------
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1997.
FOR THE THREE MONTHS ENDED MARCH 31, 1998
- -----------------------------------------
Azurel, through its wholly-owned subsidiaries, manufactures, markets, and sells
private label cosmetics, fragrances and skincare products. Prior to the
completion of the acquisitions of the subsidiaries, Azurel focused its
operations on negotiating and consummating such acquisitions and developing and
implementing marketing strategies for its Branded Products.
In August 1996, Azurel acquired the stock of Private Label Group (PLC), and in
October 1996, Azurel acquired the stock of Scent Overnight (currently Scent
1-2-3).
RESULTS OF OPERATIONS.
- ----------------------
Total revenues for the three months ended March 31, 1998 were $2,989,289
compared to $2,733,182 for the three months ended March 31, 1997. This increase
is attributable to an increase in sales at the company's Azurel Marketing
division.
Cost of sales was $2,133,359 and $2,107,510 for the three months ended March 31,
1998 and the three months ended March 31, 1997, respectively. Gross profit as a
percentage of revenue was 28.6% for the three months ended March 31, 1998 and
22.9% for the three months ended March 31, 1997. The improvement in gross profit
percentage in the quarter ended March 31, 1998 was due to, a more profitable
product mix, operating efficiencies and improved cost controls.
Selling, general and administrative expenses for the three months ended March
31, 1998 and the three months ended March 31, 1997 were $1,179,442 and $959,628,
respectively. The increase in selling, general and administrative expenses was
due primarily to expenses associated with the Azurel division, including salary,
product development and marketing costs.
For the three months ended March 31, 1998 and the three months ended March 31,
1997, the Company's net income included non-cash expenses of $133,973 and
$98,483, respectively. Such expense was incurred principally as a result of
depreciation and amortization of assets acquired with the acquisition of PLC.
Interest expense was $98,865 for the three months ended March 31, 1998 and
$131,189 for the three months ended March 31, 1997. This represents interest
expense incurred for normal PLC operations. The decrease is attributable to debt
reductions due to funds obtained from the initial public offering in August
1997.
-6-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has funded its operations to date primarily through a combination of
debt and equity financings. In August 1997, Azurel completed its initial public
offering of 1,200,000 shares of common stock and 1,200,000 common stock purchase
warrants which resulted in approximately $4,800,000 to the Company.
In December 1997, the company secured a four year term loan of $800,000 at 11.3%
with GE Capital. This loan is secured by the Company's machinery and equipment.
In February 1998, the Company secured a revolving line of credit in the amount
of $3,500,000 with Finova Capital Corporation until February 2000. This line of
credit bears an interest rate of 2.5% above the prime rate and is secured by the
Company's receivables, inventory and a second lien on machinery and equipment.
In March 1998, the Company secured a 5 year term loan of $260,000 at a rate of
approximately 10.5% with The CIT Group which is secured by new equipment and
machinery.
Cash used in operations for the first quarter 1998 was $406,948 as compared to
$260,450 for the first quarter 1997. The increase was due primarily to losses
before depreciation and amortization of $288,404, the payment of the second and
last installments of the amount due for the purchase of Cambridge Business
Services, the continued reduction in accounts payable and accrued expenses,
partially offset by a reduction in accounts receivable.
For the three months ended March 31, 1998, the Company used cash provided by the
CIT loan to purchase machinery and equipment in the amount of $109,884.
Cash provided through financing activities for the first quarter 1998 was
$102,101 as compared to $325,166 for the first quarter 1997. The decrease was
primarily attributable to the semi-annual payment of the note to the previous
owners of PLC offset by the release of restricted funds held by Finova Capital
Corporation as security against the revolving line of credit.
Cash availability as of March 31, 1998, against the Finova revolving line of
credit was approximately $235,000. Management believes that the current lines of
credit with Finova Capital Corporation, GE Capital and The CIT Group are
sufficient to support the working capital needs of the company, however, the
company is considering a small private placement to support future expansion.
-7-
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a.) EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
-8-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AZUREL LTD. AND SUBSIDIARIES
/S/ GERARD SEMHON
-----------------------
Gerard Semhon
Chief Executive Officer
/S/ FRANK DESIMONE
------------------------
Frank Desimone
Chief Financial Officer
Dated : May 20, 1998
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,804,015
<ALLOWANCES> 60,000
<INVENTORY> 1,847,050
<CURRENT-ASSETS> 4,075,712
<PP&E> 4,206,534
<DEPRECIATION> 2,717,433
<TOTAL-ASSETS> 8,787,013
<CURRENT-LIABILITIES> 2,946,976
<BONDS> 1,444,706
<COMMON> 5,294
0
0
<OTHER-SE> 4,390,037
<TOTAL-LIABILITY-AND-EQUITY> 8,787,013
<SALES> 2,989,289
<TOTAL-REVENUES> 2,989,289
<CGS> 2,133,359
<TOTAL-COSTS> 2,133,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,865
<INCOME-PRETAX> (422,377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (422,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (422,377)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
