SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ____)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
AZUREL LTD.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
AZUREL LTD.
509 MADISON AVENUE
NEW YORK, NEW YORK 10022
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 9, 1998
TO THE STOCKHOLDERS OF AZUREL LTD.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Azurel Ltd.
(the "Company") will be held at the offices of Gersten, Savage, Kaplowitz &
Fredericks, LLP, 101 East 52nd Street, 9th Floor, New York, New York 10022 on
December 9, 1998, at 10:00 A.M., local time for the following purposes:
1. To vote upon the ratification of the issuance of shares of the
Company's Common Stock upon conversion of its Series A
Convertible Preferred Stock;
2. To vote upon a proposal to increase the number of shares of
Common Stock authorized for issuance under the Company's 1997
Stock Option Plan to 1,750,000 from 750,000; and
3. To transact such other business as may properly come before
the meeting and any continuations and adjournments thereof.
Stockholders of record at the close of business on October 15, 1998 are entitled
to notice of and to vote at the meeting.
In order to ensure a quorum, it is important that Stockholders representing a
majority of the total number of shares issued and outstanding and entitled to
vote, be present in person or represented by their proxies. Therefore, whether
you expect to attend the meeting in person or not, please sign, fill out, date
and return the enclosed proxy in the self-addressed, postage-paid envelope also
enclosed. If you attend the meeting and prefer to vote in person, you can revoke
your proxy.
In addition, please note that abstentions and broker non-votes are each included
in the determination of the number of shares present and voting, for purposes of
determining the presence or absence of a quorum for the transaction of business.
Neither abstentions nor broker non-votes are counted as voted either for or
against a proposal.
October 23, 1998
By Order of the Board of Directors
Gerard Semhon
Chairman of the Board of Directors
<PAGE>
AZUREL LTD.
509 MADISON AVENUE
NEW YORK, NEW YORK 10022
----------------
PROXY STATEMENT
----------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 10:00 A.M., DECEMBER 9, 1998
This Proxy Statement is being furnished in connection with the
solicitation by the Board of Directors of Azurel Ltd.(herein called the
"Company") for use at a Special Meeting of Stockholders of the Company to be
held at the offices of Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East
52nd Street, 9th Floor, New York, New York 10022 on December 9, 1998, at 10:00
A.M. local time, and at any continuation and adjournment thereof. Anyone giving
a proxy may revoke it at any time before it is exercised by giving the Chairman
of the Board of Directors of the Company written notice of the revocation, by
submitting a proxy bearing a later date or by attending the meeting and voting.
This statement, the accompanying Notice of Meeting and form of proxy have been
first sent to the Stockholders on or about October 26, 1998.
In addition, please note that abstentions and broker non-votes are each
included in the determination of the number of shares present and voting, for
purposes of determining the presence or absence of a quorum for the transaction
of business. Neither abstentions nor broker non- votes are counted as voted
either for or against a proposal.
All properly executed, unrevoked proxies on the enclosed form, which
are received in time will be voted in accordance with the shareholder's
directions, and unless contrary directions are given, will be voted for the
ratification of the issuance of shares of the Company's Common Stock upon
conversion of its Series A Convertible Preferred Stock and for the amendment to
the Company's 1997 Stock Option Plan as described below.
OWNERSHIP OF SECURITIES
Only Stockholders of record at the close of business on October 15,
1998, the date fixed by the Board of Directors in accordance with the Company's
By-Laws, are entitled to vote at the meeting. As of September 29, 1998, there
were issued and outstanding 5,318,745 shares of Common Stock.
Each outstanding share is entitled to one vote on all matters properly
coming before the meeting. A majority of the shares of the outstanding Common
Stock is necessary to constitute a quorum for the meeting.
THIS PROXY STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS PROXY STATEMENT.
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<PAGE>
PROPOSAL 1
RATIFICATION OF ISSUANCE OF SHARES OF THE
COMPANY'S COMMON STOCK
During the second and third quarters of 1998, the Company met with
several lenders and equity investors seeking sources of capital to finance the
operations of Ben Rickert Corp., its wholly-owned subsidiary which acquired all
of the assets of Ben Rickert, Inc., a soap and fragrance manufacturer. On August
12, 1998, the Company issued 1,500 shares of Series A Convertible Preferred
Stock ("Preferred Stock") and warrants to purchase up to 562,500 shares of
Common Stock at an exercise price of $1.96 ("Warrants"). Accordingly, on August
12, 1998, the Company issued 1,500 shares of Preferred Stock and Warrants to
purchase up to 562,500 shares of Common Stock. The rights, preferences and
privileges of the Preferred Stock are set forth in a Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock
("Series A Certificate"), as filed with the Secretary of State of the State of
Delaware. The Series A Certificate is annexed as Appendix A to this Proxy
Statement and the following summary of the terms of the Preferred Stock is
qualified in its entirety by reference to the Series A Certificate. The terms of
the Preferred Stock and the Warrants were determined by the Company's Board of
Directors.
Pursuant to the terms of the Securities Purchase Agreement dated August
12, 1998 (the "Securities Purchase Agreement") among the Company, Zanett
Lombardier, Ltd., Goldman Sachs Performance Partners, L.P. and Goldman Sachs
Performance Partners (Offshore), L.P. ("Purchasers"), the Purchasers may
purchase up to an additional 3,000 shares of Preferred Stock and 1,125,000
warrants on the same terms and conditions as set forth above, between February
12, 1999 and August 11, 2000.
Under the registration rights agreement dated August 12, 1998, the
Company has granted each holder of Preferred Stock and Warrants registration
rights, whereby the Company is obligated to file a registration statement with
the Securities and Exchange Commission ("SEC") and cause such registration
statement to be declared effective by the SEC within 120 days from August 12,
1998, covering the resale of at least 4,600,000 shares of Common Stock.
Each share of Preferred Stock is convertible at the option of the
holder into the number of shares of Common Stock determined by dividing the
initial purchase price of $1,000 by the "Conversion Price", which is the lesser
of (a) the Fixed Conversion Price (which initially is $2.00) and (b) the average
of the three lowest closing bid prices for the Common Stock during the twenty
consecutive trading days immediately preceding the conversion multiplied by 0.75
the "Conversion Percentage."
If the Company has been properly notified of a conversion of Preferred
Stock and fails to issue shares of Common Stock pursuant to the terms of the
Series A Certificate, the holders may force the Company to redeem for cash such
shares of Preferred Stock.
The Preferred Stock ranks prior to the Common Stock and any class or
series of capital stock created after creation of the Preferred Stock. The
Preferred Stock has no voting rights except as otherwise provided by the
Delaware General Corporation Law.
In connection with the sale of the Preferred Stock, the Company is
seeking ratification by its stockholders of the issuance of the shares of Common
Stock upon conversion of the Preferred Stock. The Nasdaq Stock Market has a rule
which requires stockholder approval in the case of the issuance of securities
convertible into Common Stock at a price less than the greater of book value or
market value which equals 20% or more of the Company's outstanding Common Stock.
Failure to comply with the foregoing rule may result in the delisting of the
Company's Common Stock and Warrants from the Nasdaq SmallCap Market.
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<PAGE>
In reaching its determination to approve the sale of its Preferred
Stock, including the issuance of the shares of Common Stock upon conversion
thereof, the Board considered, among other things: the inability to secure
alternative financing on more favorable terms and the need to move quickly to
finance the operations of Ben Rickert Corp. Upon consideration of such factors
the Board determined that, notwithstanding the substantial potential dilutive
impact on the holders of Common Stock, the sale of the Preferred Stock,
including the issuance of the shares of Common Stock upon conversion thereof,
was in the best interest of the Company and its stockholders.
Whether or not Proposal 1 is approved by the Company's stockholders,
stockholders will not have any right to demand an appraisal of the fair value of
their shares pursuant to Delaware General Corporate Law.
STOCKHOLDER VOTE REQUIRED
The affirmative vote of the majority of the shares present in person or
represented by proxy at the Special Meeting of Stockholders is required to
approve the proposal to remove the restriction on the number of shares of Common
Stock issuable in connection with Series A Convertible Preferred Stock and on
exercise of the Warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL TO
ELIMINATE THE RESTRICTION ON THE NUMBER OF SHARES
ISSUABLE IN CONNECTION WITH THE SERIES A CONVERTIBLE
PREFERRED STOCK AND UPON EXERCISE OF THE WARRANTS.
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<PAGE>
PROPOSAL 2
TO AMEND AZUREL LTD.'S 1997 STOCK OPTION PLAN.
In March 1997, the Company established the 1997 Stock Option Plan
("1997 Plan") pursuant to which options may be granted to the Company's
officers, employees, non-employee directors, consultants and advisors for the
purchase of shares of Common Stock. In October 1998, the Board of Directors of
the Company amended the 1997 Plan, subject to stockholder approval, to increase
the number of shares of Common Stock that may be issued upon options granted
under the 1997 Plan from 750,000 to 1,750,000, subject to adjustment to reflect
any stock dividend, stock split, recapitalization, or the like, of or by the
Company. At the Special Meeting, stockholders are being asked to approve such
amendment. Management intends for all options granted under the 1997 Plan to
conform with the provisions of Rule 16b-3 under the Securities and Exchange Act
of 1934.
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 Committee, but
shall not be less than 85% of the fair market value of the Common Stock on the
date of grant. Notwithstanding the foregoing, the exercise price of any option
granted on or after the effective date of the registration of any class of
equity security of the Company pursuant to Section 12 of the Exchange Act, and
prior to six months after the termination of such registration, may be no less
than 100% of the fair market value per share on the date of the grant. The Board
or the Committee shall provide, in each stock option agreement, when the term of
the option subject to such agreement expires and the date when it becomes
exercisable, but in no event will an option granted under the 1997 Plan be
exercisable after the expiration of ten years from the date it is granted.
Options may not be transferred during the lifetime of an option holder and are
only exercisable during the optionee's lifetime only by the optionee or by his
or her guardian or legal representative. The 1997 Plan shall terminate
automatically as of the close of business on the day preceding the 10th
anniversary date of its adoption, subject to earlier termination.
To the extent Fair Market Value, as defined in the Code, of Common Stock
with respect to which Incentive Stock Options granted hereunder are exercisable
for the first time by an optionee in any calendar year exceeds $100,000, such
options granted shall be treated as NQSO's to the extent required by Section 422
of the Code.
If the outstanding shares of Common Stock are changed by reason of an
adjustment to the capitalization of the Company or as a result of a merger or
consolidation, an appropriate adjustment shall be made by the Board or the
Committee in the number, kind and price of shares as to which options may be
granted and exercised.
Subject to the provisions of the 1997 Plan, the Board of Directors or
the Committee has the authority to determine the individuals to whom stock
options are to be granted, the number of shares to be covered by each option,
the exercise price, the type of option, the option period, the restrictions, if
any, on the exercise of the option, the terms for payment of the option price
and all other terms and provisions of such options (which need not be
identical). Payments by holders of options, upon exercise of an option, may be
made (as
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<PAGE>
determined by the Board or the Committee) in cash or such other form of payment
as may be permitted under the 1997 Plan, including without limitation, by
promissory note or by delivery of shares of Common Stock.
Upon approval of the amendment to the 1997 Stock Option Plan the
Company intends to grant an aggregate of 682,362 options to employees. Persons
receiving options pursuant to the Amended 1997 Stock Option Plan will receive
one share of the Company's common stock for each option exercised. Each of the
682,362 options being granted are exercisable at $2.125 until October 1, 2003.
On October 2 , 1998 the last sale price per share of the Company's common stock
was $0.875. Each of the 682,362 options granted hereunder are incentive stock
options and will receive tax treatment as such in accordance with the Internal
Revenue Code of 1986, as amended. Kit Calligaro and Doug Rickert will each
receive 301,176 options or an aggregate of 60.2% of the additional options and
80,010 options will be granted to other employees, none of which are executive
officers, directors, nominees for director or associates thereof.
STOCKHOLDER VOTE REQUIRED
The affirmative vote of the majority of the shares present in person or
represented by proxy at the Special Meeting of Stockholders is required to
approve the proposed amendment to the 1997 Stock Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR AN AMENDMENT TO THE
COMPANY'S 1997 STOCK OPTION PLAN.
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation for services
rendered in all capacities to the Company, for the year ended December 31, 1997
(referred to as "1997" in this table), the year ended December 31, 1996
(referred to as "1996" in this table) and the year ended December 31, 1995
(referred to as "1995" in this table) paid to the Company's Chief Executive
Officer. There was one other executive officer or other person whose
compensation at the end of the above 1997, 1996 and 1995 years whose total
compensation exceeded $100,000 per annum.
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND PRINCIPAL STOCK COMPEN-
POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS SATION
- -------- ---- ------ ----- ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Gerard Semhon 1997 $ 92,689 -0- -0- -0- $ 400
Chairman, Chief 1996 $ 95,648 -0- -0- -0- -0-
Executive Officer (1) 1995 $ 48,000 -0- -0- -0- -0-
Michael J. Assante 1997 $195,000 $75,851 -0- -0- $20,196
President, Private 1996 $245,192 -0- -0- -0- -0-
Label Group (2) 1995 $250,000 -0- -0- -0- -0-
<FN>
- ------------
(1) During the years ended December 31, 1995 and 1996, Mr. Semhon
earned such amounts for
</FN>
</TABLE>
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<PAGE>
consulting services rendered to the Company, of which approximately $28,500
and $67,500, respectively, was accrued but not paid. Mr. Semhon's "other
compensation" for 1997 relates to a car allowance.
(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. Mr. Assante's "other compensation" for 1997 relates to a $12,000
car allowance and $8,196 for life insurance premiums paid by the Company.
During 1997, the Company granted 50,000 stock options to Frank
DeSimone, its Chief Financial Officer. The Company does not have any long-term
incentive plans for compensating its executive officers.
EMPLOYMENT AGREEMENTS
On July 31, 1997, the Company entered into a three year employment
agreement 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, $135,000 as of August 1, 1998,
and bonuses as determined by the Board of Directors. The employment agreement
entitles Mr. Semhon to an annual car allowance of $9,600 and the right to
participate in welfare plans adopted by the Company and to enjoy medical, dental
and disability insurance benefits and life insurance benefits under policies
obtained by the Company for such purposes. 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.
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 two companies that comprise the Private
Label Group. Mr. Assante will receive a base annual salary of $195,000, $250,000
as of January 1, 1998 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.
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<PAGE>
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 received a
monthly consulting fee of $1,500 for each of the first 12 months following the
closing of the acquisition and receives $1,500 for each of the 36 months
thereafter.
The Company, in November 1996, entered into a two year consulting
agreement with Metco pursuant to which Metco provided 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.
EMPLOYEE PENSION PLAN
The Company does not currently have an employee pension plan.
PERFORMANCE OPTIONS
The Company did not grant any performance options during the year ended
December 31, 1997.
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<PAGE>
OTHER MATTERS
The Board of Directors does not know of any matters other than those
referred to in the Notice of Meeting which will be presented for consideration
at the meeting. However, it is possible that certain proposals may be raised at
the meeting by one or more Stockholders. In such case, or if any other matter
should properly come before the meeting, it is the intention of the person named
in the accompanying proxy to vote such proxy in accordance with his or her best
judgment.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by the Company.
Solicitations may be made by mail, personal interview, telephone, and telegram
by directors, officers and employees of the Company. The Company will reimburse
banks, brokerage firms, other custodians, nominees and fiduciaries for
reasonable expenses incurred in sending proxy material to beneficial owners of
the Company's capital stock.
STOCKHOLDER PROPOSALS
In order to be included in the proxy materials for the Company's next
Annual Meeting of Stockholders, stockholder proposals must be received by the
Company on or before April 1, 1999.
ANNUAL AND QUARTERLY REPORTS TO THE SECURITIES AND
EXCHANGE COMMISSION
The Annual Report on Form 10-KSB for the year ended December 31, 1997,
as filed with the Securities and Exchange Commission, will be made available to
Stockholders free of charge by writing to Azurel Ltd., 509 Madison Avenue, New
York, New York 10022, Attention: Corporate Secretary.
By Order of the Board of
Directors of Azurel Ltd.
Gerard Semhon
Chairman of the Board of Directors
October 23, 1998
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
THREE MONTHS ENDED MARCH 31, 1998
Consolidated Balance Sheet F-16
Consolidated Statements of Operations F-17
Consolidated Statements of Cash Flows F-18
Consolidated Statements of Cash Flows F-19
Notes to Financial Statements F-20
THREE MONTHS ENDED JULY 31, 1998
Ben Rickert, Inc. Balance Sheet F-21
Ben Rickert, Inc. Statement of Operations and Retained Earnings F-22
Ben Rickert, Inc. Statement of Cash Flows F-23
Ben Rickert, Inc. Notes to Financial Statements F-24
Ben Rickert, Inc. Balance Sheet (Unaudited) F-28
Ben Rickert, Inc. Statement of Operations and Retainted Earnings
(Unaudited) F-29
Ben Rickert, Inc. Statement of Cash Flows (Unaudited) F-30
AZUREL LTD. AND SUBSIDIARIES/BEN RICKERT, INC. UNAUDITED PRO-FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-32
Consolidated Statement of Operations F-33
Consolidated Statement of Operations Year Ended December 31, 1997 F-34
Notes to Unaudited Pro-forma Condensed
Consolidated Financial Statements F-35
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<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Azurel Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Azurel
Ltd. and Subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Azurel Ltd. And Subsidiaries' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 consolidated financial position of Azurel
Ltd. and Subsidiaries as of December 31, 1997 and the results of its
consolidated operations, stockholders' equity and its consolidated cash flows
for each of the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
/s/ Feldman Radin & Co., P.C.
Feldman Radin & Co., P.C.
Certified Public Accountants
February 20, 1998
New York, New York
F-1
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
CURRENT ASSETS:
Cash $ 414,731
Restricted cash 290,521
Accounts receivable net of allowance for doubtful
accounts of $60,000 1,985,232
Inventories 1,882,807
Due from related parties 232,921
Prepaid expenses and other current assets 262,886
-----------
TOTAL CURRENT ASSETS 5,069,098
-----------
FURNITURE AND EQUIPMENT 1,462,580
-----------
INTANGIBLES 3,137,248
-----------
OTHER ASSETS:
Due from related party 135,000
Deferred financing costs 35,700
-----------
170,700
$ 9,839,626
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,133,393
Accounts payable 819,514
Accrued expenses and other liabilities 436,899
Customer advances 104,145
Current portion of long term debt 634,294
Due to related parties 269,916
-----------
TOTAL CURRENT LIABILITIES 3,398,161
-----------
LONG TERM DEBT 1,623,757
-----------
STOCKHOLDERS' EQUITY:
Preferred stock - par value $.001 per share
1,000,000 shares authorized; issued and outst -
Common stock, par value $.001 per share;
24,000,000 authorized; 5,293,745 issued
and outstanding 5,294
Additional paid in capital 7,438,001
Accumulated deficit (2,609,830)
Cumulative translation adjustment (13,582)
Stock subscription receivable (2,175)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,817,708
-----------
$ 9,839,626
===========
See notes to financial statements
F-2
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
NET SALES $ 12,481,556 $ 3,745,336
COST OF GOODS SOLD 8,607,759 2,870,888
------------ -----------
GROSS PROFIT 3,873,797 874,448
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,896,990 1,652,240
------------ -----------
LOSS FROM OPERATIONS (23,193) (777,792)
INTEREST EXPENSE 475,310 595,129
------------ -----------
NET LOSS $ (498,503) $(1,372,921)
============ ===========
LOSS PER COMMON SHARE $ (0.11) $ (0.42)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,468,325 3,287,759
============ ===========
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK ADDITIONAL STOCK CUMULATIVE TOTAL
NUMBER OF PAID-IN ACCUMULATED SUBSCRIPTIONS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE ADJUSTMENT EQUITY
------ ------ ------- ------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 2,450,000 $2,450 $ 64,734 $ (513,406) $(2,175) $ -- $ (448,397)
Stock issued in connection with
bridge financing 125,000 125 124,875 -- -- -- 125,000
Sale of common stock 750,000 750 1,283,150 -- -- -- 1,283,900
Stock issued for services 60,000 60 119,940 -- -- -- 120,000
Stock issued in connection with acquisition 5,000 5 21,245 -- -- -- 21,250
Stock issued in connection with a penalty 25,000 25 49,975 -- -- -- 50,000
Stock issued in connection with a loan 25,000 25 38,070 -- -- -- 38,095
Conversion of debt to common stock 438,747 439 642,701 -- -- -- 643,140
Stock options issued for services -- -- 37,500 -- -- -- 37,500
Distribution -- -- -- (225,000) -- -- (225,000)
Net loss -- -- -- (1,372,921) -- -- (1,372,921)
--------- ------ ----------- ----------- ------- -------- -----------
Balance - December 31, 1996 3,878,747 3,879 2,382,190 (2,111,327) (2,175) -- 272,567
Sale of common stock - initial
public offering 1,200,000 1,200 5,536,810 -- -- -- 5,538,010
Expenses associated with initial
public offering -- -- (1,373,278) -- -- -- (1,373,278)
Stock issued to shareholders as additional 199,998 200 892,294 -- -- -- 892,494
Stock issued for legal services 15,000 15 (15) -- -- -- --
Cumulative effect of foreign currency -- -- -- -- -- (13,582) (13,582)
translation
Net loss -- -- -- (498,503) -- -- (498,503)
--------- ------ ----------- ----------- ------- -------- -----------
Balance December 31, 1997 5,293,745 $5,294 $ 7,438,001 $(2,609,830) $(2,175) $(13,582) $ 4,817,708
========= ====== =========== =========== ======= ======== ===========
</TABLE>
See notes to financial statements.
F-4
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (498,503) $(1,372,921)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 224,789 57,384
Amortization 202,025 397,432
Other -- 237,494
Changes in assets and liabilities, net of effect of acquisition:
(Increase) decrease in accounts receivable (444,027) 34,613
(Increase) decrease in inventories (641,298) 249,265
(Increase) decrease in prepaid expenses and other
current assets (142,925) (59,736)
(Increase) decrease in other assets 217,845 (276,721)
Increase (decrease) in accounts payable and accrued expenses (1,302,005) 684,173
Increase (decrease) in customers advances 46,385 (97,382)
Increase (decrease) in related party loans 343,154 (767,700)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,994,560) (914,099)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (57,556) (665,107)
Purchase of property and equipment (286,193) (87,411)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (343,749) (752,518)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash overdraft (10,635) 10,635
Increase in restricted cash (21,790) (7,304)
Decrease (Increase) in long-term debt (1,349,426) 411,680
Decrease in capital lease obligations (16,259) (11,520)
Net proceeds from stock issuance 4,164,732 1,259,545
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,766,622 1,663,036
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (13,582) --
NET INCREASE (DECREASE IN CASH) 414,731 (3,581)
CASH AT BEGINNING OF YEAR -- 3,581
----------- -----------
CASH AT END OF YEAR $ 414,731 $ --
=========== ===========
See notes to financial statements.
F-5
<PAGE>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ---- ----
INFORMATION:
Cash paid for interest $ 231,656 $ 259,083
Cash paid for income taxes $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Additional stock issued to shareholder as compe $ 892,494 $ --
=========== ===========
Note issued for the acquisition of Cambridge Bu $ 121,012 $ --
=========== ===========
Issuance of common stock through conversion of $ -- $ 163,095
Issuance of common stock in connection with acq $ -- $ 21,250
=========== ===========
Conversion of debt to common stock $ -- $ 637,500
=========== ===========
Distribution through assumption of long-term de $ -- $ 225,000
=========== ===========
Purchase of equipment through capital lease $ -- $ 11,304
=========== ===========
Assumption of debt in connection with acquisiti $ -- $ 1,758,750
=========== ===========
Stock issued for services $ -- $ 170,000
=========== ===========
</TABLE>
F-6
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT EVENTS
-----------------------------------
Azurel Ltd. (the "Company") was incorporated in Delaware on June 26,
1995. In July 1996, the Company formed a subsidiary, Scent 123, Inc.
and subsequently acquired the assets of Scent Overnight, Inc., an
overnight delivery service of men's cologne and women's fragrances.
The Company intends to market and develop original cosmetic and
fragrance lines. At year end, no significant operations had
commenced.
In August 1996, Azurel, Ltd. purchased all of the outstanding common
stock of Private Label Cosmetics, Inc. and affiliates ("Private Label
Group") for cash, notes and common stock aggregating $2,782,500 plus
acquisition costs of $285,000. The Private Label Group is located in
New Jersey and manufactures cosmetics for sale to major cosmetic
companies.
In August 1997, the Company sold 1,200,000 units consisting of
1,200,000 shares of common stock and an equal number of common stock
purchase warrants in an initial public offering. The Company received
gross proceeds before underwriter discounts and offering expenses of
$5,538,000. Offering expenses were approximately $1,373,000.
The Company concurrently issued approximately 200,000 common shares
to a principal shareholder and a former shareholder as additional
consideration for machinery and equipment included in the Private
Label Group acquisition.
In October 1997, the Company acquired all of the outstanding shares
of Cambridge Business Services Corporation for $212,000 of which
$95,000 was paid at the closing and the balance in February 1998.
The Company opened a sales and distribution facility in France in the
latter part of 1997. Significant operations had not commenced at
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Principles of consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly owned subsidiaries. All material intercompany
transactions and balances 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 affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
F-7
<PAGE>
c. Inventories - Inventories are recorded at the lower of cost
or market. Cost was determined using the average cost
method.
d. Property and equipment - Property and equipment are stated
at cost and depreciated using the straight-line method over
the estimated useful lives of the assets.
e. Deferred registration costs - Deferred registration costs
were charged against additional paid-in capital upon
completion of the Company's public offering.
f. Deferred financing costs - Deferred financing costs are
charged to interest expense over the terms of the
respective loans.
g. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables,
accounts payable, and accrued expenses approximate fair
value based on the short-term maturity of these
instruments.
h. Income taxes - The Company accounts for income taxes under
the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for both the expected impact of
differences between the financial statements and tax basis
of assets and liabilities, and for the expected future tax
benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
i. Stock based compensation - The Company accounts for
employee stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." The
Company has adopted the proforma disclosure requirements of
Statement of Financial Accounting Standards No. 123,
"Accounting For Stock-Based Compensation."
j. Goodwill - Goodwill resulting from various acquisitions
represents the remaining unamortized value of the excess of
the purchase price over the fair value of the net assets
acquired. Goodwill is amortized on a straight line basis
over a period of 20 years.
k. Impairment of long - lived assets - The Company has adopted
Statement of Financial Accounting Standards No. 121,
"Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of" as of January 1, 1996.
Such adoption had no material effect on the financial
statements of the Company.
F-8
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
l. Earnings per share - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share". SFAS 128 is effective for financial statements
issued for interim and annual periods ending after December
15,1997; after the effective date, all prior period
earnings per share data are required to be restated. Net
Loss per common share is based on the weighted average
number of shares outstanding. Potential common shares
includable in the computation of fully diluted per share
results are not presented in the financial statements as
their effect would be anti-dilutive.
m. Foreign currency translation - The assets and liabilities
of the Company's foreign operation were translated into
U.S. dollars based on the current exchange rate at December
31, 1997 and at the weighted average rate for the statement
of operations for the period then ended.
3. INVENTORIES
-----------
Inventories at December 31, 1997 consisted of the following:
Raw Materials $ 874,304
Work In Process 828,115
Finished Goods 180,388
-----------------------
$ 1,882,807
=======================
4. RELATED PARTY TRANSACTIONS
--------------------------
Amounts due from related parties consist of loans and
advances to officers, shareholders and an affiliated entity. The
loans are interest-free and are as follows:
Loans to affiliate $ 332,279
Advances to officers/shareholders 35,642
-------------------------
367,921
Less loans to affiliate - non-current 135,000
-------------------------
$ 232,921
=========================
F-9
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Additionally, trade receivables included $308,840 due from affiliates
at December 31, 1997.
Private Label Group has an informal arrangement with an affiliate to
sublease part of its facilities at a cost of $86,000 per annum. Sales
in 1997 to two entities controlled by a principal shareholder were
$655,000.
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated years December 31,
of useful lives 1997
------------------------------ -----------------------------
<S> <C> <C>
Machinery and equipment held under
capital leases 5-7 years $ 41,478
Machinery and equipment 5-9.5 years 3,775,752
Leasehold improvements 15 years 211,498
-----------------------------
4,028,728
Less accumulated depreciation 2,566,148
-----------------------------
$ 1,462,580
=============================
</TABLE>
6. INTANGIBLE ASSETS:
------------------
Intangible assets result primarily from the acquisition of Private
Label Group and are as follows:
Estimated Useful Cost
Life
----------------------------- -----------------------
Formulae 15 Years $ 2,285,000
Customer List 19 Years 952,000
Goodwill 20 Years 164,265
-----------------------
3,401,265
Less: Accumulated Amortization 264,017
-----------------------
$ 3,137,248
========================
F-10
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. REVOLVING CREDIT FACILITY
-------------------------
In February 1998, the Company refinanced their borrowing arrangement
with Finova. 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.
8. LONG-TERM DEBT
--------------
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
December 31,
1997
------------------------
<S> <C>
Note payable - shareholder, payable in monthly installments of
$5,551 including interest at 6% per annum, through August 2003 $ 313,154
Note payable - shareholder, payable in semi-annual installments of
$9,219 plus interest at 9% per annum, through 2000. 55,314
Note payable - shareholder payable in semi-annual installments of
$184,375 plus interest at 9% per annum, through 2000. 1,106,250
Note payable - GE Capital Corp. - payable in monthly installments
of $16,667 plus interest at 11.3% per annum through 2001. The
note is secured by machinery and equipment. 783,333
-----------------
2,258,051
Less current portion 634,294
-----------------
$ 1,623,757
=================
</TABLE>
Notes payable to shareholders are unsecured.
Long-term debt maturities for the next five years are as follows:
1998 - $634,294; 1999 - $638,976; 2000 - $642,170; 2001 - $241,706;
2002 - $61,974.
F-11
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 carry forwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. At December 31, 1997, the Company
had net deferred tax assets of $1,331,000. 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:
Net operating loss carryforward $ 1,227,000
Accounts receivable allowance 24,000
Inventory allowance 80,000
Valuation allowance (1,331,000)
-----------------------------
Net deferred tax asset recorded $ -
=============================
The provision for income taxes for year ended December 31, 1997
differs from the amount computed applying the statutory federal
income tax rate to income before income taxes as follows:
Income tax benefit computed at statutory $ (199,000)
rate
Tax benefit not recognized 199,000
-----------------------
Provision for income taxes $ -
=======================
The Company has net operating loss carry forwards for tax
purposes totaling $3,068,000 at December 31, 1997 expiring
in the years 2008 to 2012. Approximately $952,000 of the
carry forwards 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 primarily 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-12
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK OPTION PLAN
-----------------
In March 1997 the Company adopted a stock option plan which provides
for grants to officers and other employees, directors, consultants and other
persons who perform significant services for the Company. The exercise price of
each option may not be less than 100% of the fair market value of the common
stock at the time of the grant. Options to acquire up to 750,000 shares may be
granted under the plan.
As of December 31, 1997, 130,750 options were outstanding, of which
129,000 were exercisable at $4.25 per share and 1,750 were exercisable at $4.375
per share. No options were exercised as of December 31, 1997.
Pro-forma information regarding net loss and loss per share is
presented below as if the Company had accounted for its employee stock options
under the fair value method; such pro forma information is not necessarily
representative of the effect on reported net loss for future years due to the
vesting period of the stock options and the fair value of additional stock
options in future years.
Had compensation cost for the Company's stock option plan been
determined based on fair value at the grant date, the Company's pro-forma net
loss for the year ended December 31, 1997 would have been $780,000 or $0.17 per
share.
The weighted average fair value of the options granted during the
year ended December 31, 1997 are estimated as $2.17 on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for the year ended December 31, 1997: expected dividend yield of 0%, expected
volatility of 50%, risk free interest rate of 5.7% and estimated life of five
years.
11. REDEEMABLE COMMON STOCK PURCHASE WARRANTS
-----------------------------------------
The Company issued 1,200,000 warrants in connection with the initial
public offering of its common stock. Each warrant entitles its holder
to purchase one share of Common Stock at an exercise price of $4.50
per share. The warrants are exercisable commencing July 30, 1998 and
expire in July 2002. The warrants are redeemable by the company at a
price of $.10 each commencing July 30, 1998 and thereafter up to
their expiration. The Company additionally issued 120,000 redeemable
warrants to the underwriter for $18,000. Such warrants are
exercisable for four years commencing July 30, 1998 at a price equal
to 150% of the initial public offering price of the Common Stock and
Redeemable Warrants. The Company has reserved 1,320,000 shares of
common stock for issuance upon exercise of the warrants.
12. PREFERRED STOCK
---------------
The Company is authorized to issue preferred stock with such
designations, rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or
other rights. The Company has no preferred stock outstanding at
December 31, 1997.
13. LEASES
------
The Company is obligated under a lease for its operating facilities
in New Jersey for annual rentals ranging from $475,000 to $529,000
through August 31, 2002. The Company sub-lets part of its premises to
F-13
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
a related party for an annual rental of $86,000. The Company is
further obligated under a lease for its administrative facility in
New York City for annual rentals of $74,512 through April 2001. The
lease for the Company's subsidiary, Cambridge Business Services,
requires monthly payments of $3,000. The payments are adjusted
annually for inflation.
Total rent expense for the year ended December 31, 1997 was
$574,000 and for the four months ended December 31, 1996 rent
expense was $212,000.
Future minimum rental payments under non cancelable leases as of
December 31, 1997 were as follows: 1998 - $557,000; 1999 -
$573,000; 2000 - $589,000; 2001 - $605,000; 2002 - $361,512.
14. SIGNIFICANT CUSTOMERS
---------------------
During the year ended December 31, 1997, one customer accounted for
19% and another accounted for 10% of the total sales.
15. COMMITMENTS
-----------
a. 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 aggregate minimum
royalties of $1,225,000 through September 2001. The Company is
currently in negotiations to terminate this contract. Management
believes that any potential settlement will not be material to the
Company.
b. In October 1997, the Company entered into a license agreement with
the owner of the "Hang-Ten" trademark. The agreement grants the
Company the exclusive right to manufacture and distribute cosmetics
and other items under the "Hang-Ten" mark. The agreement which
expires in December 2003, requires the Company to pay aggregate
minimum royalties of $563,000 through December 2003.
c. The Company has a three year employment agreement with an officer
for a base salary of $195,000 which expires in August 1999. The
officer has an option to renew the agreement for an additional two
years. Additionally, the officer will receive a bonus equal to 10%
of the Private Label Group's annual profits, as defined, in excess
of $500,000 for the years ending December 31, 1997, 1998 and 1999.
F-14
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
d. The Company is obligated under a consulting agreement with a former
officer for monthly payments of $11,117 through August 2003.
e. The Company is obligated under a three year employment agreement
with its chief executive officer commencing July 30, 1997. The
officer will receive an annual salary of $95,000 plus bonuses as
determined by the Board of Directors.
F-15
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
Consolidated Balance Sheet
<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.
F-16
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months ended Mar. 31,
---------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
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
=============== ==============
</TABLE>
See notes to financial statements.
F-17
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Mar. 31
--------------------------
1998 1997
----- -----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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
========= =========
</TABLE>
See notes to financial statements.
F-18
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Mar. 31
1998 1997
---- ----
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid for Interest $ 108,835 $ 52,727
============ ==========
</TABLE>
See notes to financial statements.
F-19
<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.
F-20
<PAGE>
THREE MONTHS ENDED JULY 31, 1998
------------------
BEN RICKERT, INC.
-----------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
April 30,
-----------------------------
1998 1997
------------- -------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 44,629 $ 42,409
Accounts receivable net of allowance for doubtful
accounts of $10,000 in 1998 and $15,000 in 1997 633,672 852601
Inventory 3,910,590 3,349,031
Prepaid expenses and other current assets 386,974 368,991
------------- -------------
Total current assets 4,975,865 4,613,032
PLANT AND EQUIPMENT- NET: 572,190 622,105
------------- -------------
$ 5,548,055 $ 5,235,137
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Note payable - bank $ 3,920,763 $ 2,114,580
Accounts payable 1,360,864 944,589
Payroll taxes payable 43,683 54,862
Accrued liabilities 65,006 57,122
------------- -------------
Total current liabilities 5,390,316 3,171,153
------------- -------------
SHAREHOLDER'S LOAN 1,021,292 1,017,292
COMMITMENTS AND CONTINGENT LIABILITIES 0 0
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value
150 shares issued and outstanding 5,000 5,000
Additional paid in capital 825,000 0
Retained earnings (deficit) (1,693,553) 1,041,692
------------- -------------
Total stockholders' equity (deficit) (863,553) 1,046,692
------------- -------------
$ 5,548,055 $ 5,235,137
</TABLE>
See notes to financial statements
F-21
<PAGE>
BEN RICKERT, INC.
-----------------
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
---------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 10,856,515 $ 13,235,034
Cost of Goods sold 8,686,742 9,085,489
------------ ------------
GROSS PROFIT 2,169,773 4,149,545
------------ ------------
OPERATING EXPENSES:
Selling 2,609,468 2,665,932
Shipping 646,069 821,056
General and administrative 1,246,709 1,036,763
------------ ------------
Total operating expenses 4,502,246 4,523,751
------------ ------------
OPERATING INCOME (LOSS) (2,332,473) (374,206)
OTHER INCOME (EXPENSE):
Interest (402,772) (322,326)
Miscellaneous 0 (19,020)
------------ ------------
NET LOSS (2,735,245) (715,552)
Corporate Sub-Chapter S Distribution 0 (50,239)
Retained earnings, beginning of year 1,041,692 1,807,483
------------ ------------
RETAINED EARNINGS (DEFICIT), END OF YEAR $ (1,693,553) $1,041,692
============ ============
</TABLE>
See notes to financial statements
F-22
<PAGE>
BEN RICKERT, INC.
-----------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Year ended April 30,
-----------------------------
1998 1997
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,735,245) $ (715,552)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 92,431 146,599
Loss on sale of fixed assets 19,322
Change in assets and liabilities
(Increase) decrease in accounts receivable 218,929 (395,576)
(Increase) in inventory (561,559) (185,717)
(Increase) in prepaid expenses and
other current assets (17,983) (211,877)
Increase in accounts payable 416,275 13,988
(Decrease) in wages payable 0 (237,915)
Increase (decrease) in payroll taxes payable (11,179) 8,466
Increase (decrease) in accrued liabilities 7,884 (64,036)
------------ ----------
NET CASH USED IN OPERATING ACTIVITIES (2,590,447) (1,622,298)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed asset (42,516) (126,851)
Sale of fixed asset 0 2,306
Corporate Sub-Chapter S distribution 0 (50,239)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (42,516) (174,784)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 1,806,183 1,581,566
Increase in paid in capital 825,000 0
Increase (Decrease) in shareholder loan 4,000 221,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,635,183 1,802,566
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,220 5,484
CASH AND CASH EQUIVALENTS, beginning of year 42,409 36,925
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 44,629 $ 42,409
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for interest $ 386,533 $ 322,326
=========== ===========
Cash paid during the year for income taxes $ 0 $ 0
=========== ===========
</TABLE>
See notes to financial statements
F-23
<PAGE>
BEN RICKERT, INC.
------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. BUSINESS
--------
Ben Ricket, Inc. (the Company), is engaged in the sale and manufacture
of soap and other toileteries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------
A. INVENTORY - Merchandise inventories, consisting of finished goods and
---------
raw materials, are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
B. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
----------------------
Depreciation and amortization are computed by either the accelerated or
straight line methods over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the term of the
lease or the estimated useful life. Expenditures incurred for
maintenance and repairs are charged to expense whereas expenditures for
improvements are generally capitalized.
C. INCOME TAXES - The Company, with the consent of its stockholders,
------------
elected to be taxed as an S Corporation under the provisions of the
Internal Revenue Code and New Jersey State Tax Law which provides that,
in lieu of corporation income taxes, the stockholders are required to
report their proportionate share of the Company's taxable income
or loss on their personal tax returns. Other state and local taxes are
included in operating, general and administrative expenses.
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes".
D. FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS No. 107, "Disclosures About
-----------------------------------
Fair Value of Financial Instruments" requires disclosure about the fair
value of financial instruments. The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
payable, and accounts payable approximate fair value because of the
short-term maturity of these financial statements.
E. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
-----------------------------------------------------------
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F-24
<PAGE>
amounts of asserts and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F. RECENT ACCOUNTING PRONOUNCEMENT - In March 1995, the Financial
-------------------------------
Accounting Standards Board issued SFAS No. 121, "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be
disposed of". SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, and is
effective for financial statements for fiscal years beginning after
December 15, 1995. The Company has determined that the impact of
adopting this new standard would be immaterial..
3. PROPERTY AND EQUIPMENT
----------------------
Major classes of property and equipment are as follows: 1998 1997
Machinery and equipment $ 1,601,147 $ 1,601,147
Automobiles 54,478 181,735
Furniture, fixture and equipment 1,269,397 1,284,008
Leasehold improvements 591,294 499,112
------------ -----------
3,516,316 3,566,002
Accumulated depreciation (2,944,126) (2,943,897)
------------ -----------
$ 572,190 $ 622,105
============ ============
4. LINES OF CREDIT
---------------
The Company has a line of credit with a bank under a revolving loan
agreement which is secured by the Company's accounts receivable and
inventory. The maximum amount available under this loan agreement was
$8,000,000. The note bears interest at the bank's base rate. This line of
credit expires on May 31, 1998.
The agreement further states the declaration of dividends or
distribution of equity to the shareholders is limited to the earnings taxable
to the shareholders under the Sub-Chapter S election. Borrowings outstanding
under the Credit Agreement were $3,920,763 at April 30, 1998.
Outstanding letters of credit established to facilitate international
F-25
<PAGE>
merchandise purchases amounted to $34,000 and $105,000 at April 30, 1998 and
1997, respectively.
5. COMMITMENTS
-----------
The Company leases its operating and administrative facility from its
major stockholder at an annual rental of approximately $853,000 plus real
estate taxes. In addition, the Company leases operating equipment from its
stockholder at an annual rental of approximately $61,000.
Total rent expense charged to operations in 1998 and 1997 were $914,400
and $1,000,000, respectively
6. RELATED PARTY TRANSACTIONS
--------------------------
As discussed in Note 5, the Company leases its operating and
administrative facility and certain operating equipment, from its majority
shareholder.
Under the provision of the revolving loan agreement, the majority
shareholder, as guarantor, has agreed to subordinate its loan in the amount
of $1,425,000. This shareholder loan bears no defined repayment terms. The
subordinated debt is offset by prepaid rent and security deposits in the
amount of $403,708.
7. EMPLOYEE PROFIT-SHARING PLAN
----------------------------
The Company has a voluntary noncontributory profit-sharing plan which
complies with the Employee Retirement Income Security Act of 1974. There were
no contributions for the years ended April 30, 1998 and 1997.
8. MAJOR CUSTOMERS
---------------
The Company had sales to two major customers which amounted to
approximately 81% of the gross sales for the fiscal year ended April 30, 1998
and 58% of the gross sales for fiscal year ended April 30, 1997.
9. GOING CONCERN
-------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As indicated in
the financial statements, the Company experienced significant losses for the
years ended April 30, 1998 and 1997. Additionally, the Company
F-26
<PAGE>
has had significant cash shortfalls from operations.
Furthermore, the Company was in violation of covenants continued in its
loan agreement. In this regard, the Company had entered into a Forbearance
Amendment Agreement in February 1998 due to its inability to satisfy the
conditions of its loan agreement under which the bank agreed to forbear
action to May 31, 1998, without waiving any of its rights. The Company is
also experiencing cash flow problems as a result of the more stringent
borrowing requirements under the Forbearance and Amendment Agreement.
10 SUBSEQUENT EVENT
----------------
On July 31, 1998, Ben Rickert, Corp., a wholly-owned subsidiary of
Azurel, Ltd., a publicly traded company, acquired substantially all of the
assets of the Company from Summit Bank, the Company's secured lender, for a
purchase price of $1,500,000. Under the agreement, the $1,500,000, in cash
and a note, was paid directly to the bank. Immediately prior to the asset
sale, the Company surrendered its assets to the bank as a result of various
defaults existing under the Company's loan agreement with the bank. The
balance of approximately $2,100,000 owed under the loan agreement was assumed
by the stockholders.
F-27
<PAGE>
BEN RICKERT, INC.
-----------------
BALANCE SHEET
-------------
JULY 31, 1998
-------------
(Unaudited)
ASSETS
------
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 15,056
Accounts receivable- net 384,143
Inventory 3,103,930
Prepaid expenses and other current assets 54,919
-----------
Total current assets 3,558,048
PLANT AND EQUIPMENT- NET: 550,249
-----------
$ 4,108,297
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Note payable - bank $ 3,642,364
Accounts payable 1,361,301
Payroll taxes payable 88,467
Accrued liabilities 45,000
-----------
Total current liabilities 5,137,132
-----------
SHAREHOLDER'S LOAN 1,062,534
COMMITMENTS AND CONTINGENT LIABILITIES 0
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value
150 shares issued and outstanding 5,000
Additional paid in capital 825,000
Retained earnings (deficit) (2,921,369)
-----------
Total stockholders' equity (deficit) (2,091,369)
-----------
$ 4,108,297
===========
</TABLE>
F-28
<PAGE>
BEN RICKERT, INC.
-----------------
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
---------------------------------------------
THREE MONTHS ENDED JULY 31, 1998
--------------------------------
(Unaudited)
<TABLE>
<S> <C>
NET SALES $ 1,023,236
COST OF GOODS SOLD 1,447,831
-----------
GROSS PROFIT (424,595)
-----------
OPERATING EXPENSES:
Selling 425,879
Shipping 46,310
General and administrative 246,957
-----------
Total operating expenses 719,146
-----------
OPERATING INCOME (1,143,741)
OTHER INCOME (EXPENSE):
Interest (89,701)
Miscellaneous 5,626
-----------
NET LOSS (1,227,816)
Retained earnings (deficit), May 1, 1998 (1,693,553)
===========
Retained earnings (deficit), July 31, 1998 $(2,921,369)
===========
</TABLE>
F-29
<PAGE>
BEN RICKERT, INC.
-----------------
STATEMENT OF CASH FLOWS
-----------------------
THREE MONTHS ENDED JULY 31, 1998
--------------------------------
(Unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,227,816)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 21,941
Change in assets and liabilities
Decrease in accounts receivable 249,529
Decrease in inventory 806,660
Decrease in prepaid expenses and
other current assets 332,055
Increase in accounts payable 437
Increase in payroll taxes payable 44,784
(Decrease) in accrued liabilities (20,006)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 207,584
-----------
CASH FLOWS FROM INVESTING ACTIVITIES: 0
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 0
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in note payable (278,399)
Increase in shareholder loan 41,242
-----------
NET CASH USED IN FINANCING ACTIVITIES (237,157)
-----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS (29,573)
CASH AND CASH EQUIVALENTS, beginning of year 44,629
-----------
CASH AND CASH EQUIVALENTS, end of year $ 15,056
===========
</TABLE>
F-30
<PAGE>
AZUREL, LTD. AND SUBSIDIARIES/ BEN RICKERT, INC.
UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma condensed consolidated balance sheet
presents the pro-forma financial position of Azurel, Ltd. and Subsidiaries
(Azurel) at June 30, 1998, as if the acquisition of Ben Rickert, Inc. had been
made as of June 30, 1998.
The unaudited pro-forma condensed consolidated statements of operations
for the six months ended June 30, 1998 and the year ended December 31, 1997
reflect the combined results of Azurel and Ben Rickert, Inc. as if the
acquisition had occurred on January 1, 1997.
The unaudited pro-forma condensed consolidated statements of operations
do not necessarily represent actual results that would have been achieved had
the companies been together from January 1, 1997, nor may they be indicative of
future operations. These unaudited pro-forma condensed consolidated financial
statements should be read in conjunction with the historical financial
statements and notes thereto of the respective companies.
F-31
<PAGE>
AZUREL, LTD. AND SUBSIDIARIES/ BEN RICKERT, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Azurel, Ltd.
and Ben Rickert, Pro-Forma Adjustments
Subsidiaries Inc. --------------------------
06/30/98 07/31/98 Dr. Cr. Total
--------------- ------------ --------- ------- ---------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C>
Cash $ 39,656 $ 15,056 $ 0 $ 165,056 $ (110,344)
Accounts receivable- net 1,901,287 384,143 0 0 2,285,430
Inventories 2,255,919 3,103,930 0 0 5,359,849
Prepaid expenses and other current assets 206,856 54,919 0 54,919 206,856
Due from stockholders and related parties 155,167 0 0 0 155,167
------------ ------------ ------------
TOTAL CURRENT ASSETS 4,558,885 3,558,048 0 0 7,896,958
PROPERTY AND EQUIPMENT 1,657,842 550,249 0 550,249 1,657,842
INTANGIBLES 3,029,890 0 0 0 3,029,890
OTHER ASSETS 170,700 0 0 0 170,700
------------ ------------ ------------
$ 9,417,317 $ 4,108,297 0 0 $ 12,755,390
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 1,303,130 $ 0 $ 0 $ 0 $ 1,303,130
Notes payable 349,457 3,642,364 3,642,364 1,350,000 1,699,457
Accounts payable 1,186,287 1,361,301 1,361,301 0 1,186,287
Accrued expenses and other liabilities 258,571 129,709 129,709 800,000 1,058,571
Current portion of long-term debt 703,203 0 0 0 703,203
Due to related parties 119,933 45,000 0 0 164,933
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 3,920,581 5,178,374 0 0 6,115,581
------------ ------------ ------------
LONG-TERM DEBT 1,351,091 1,021,292 1,021,292 0 1,351,091
------------ ------------ ------------
EXCESS OF FAIR VALUE OF ACQUIRED ASSETS
OVER PRICE PAID 0 0 0 1,143,073 1,143,073
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 5,294 5,000 5,000 0 5,294
Additional paid-in-capital 7,438,001 825,000 825,000 0 7,438,001
Accumulated earnings (deficit) (3,281,893) (2,921,369) 0 2,921,369 (3,281,893)
Cumulative translation adjustment (13,582) 0 0 0 (13,582)
Stock subscription receivable (2,175) 0 0 0 (2,175)
------------ ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT 4,145,645 (2,091,369) 0 0 4,145,645
------------ ------------ ------------
$ 9,417,317 $ 4,108,297 $ 12,755,390
============ ============ ============
</TABLE>
See notes to pro-forma financial statements.
F-32
<PAGE>
AZUREL, LTD. AND SUBSIDIARIES/ BEN RICKERT, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Azurel, Ltd.
and Subsidiaries Ben Rickert, Inc.
Six months ended Six months Pro-Forma Adjustments
ended --------------------------
06/30/98 07/31/98 Dr. Cr. Total
--------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 6,291,351 $ 2,120,509 $ 0 $ 0 $ 8,411,860
COST OF GOODS SOLD 4,323,899 2,864,435 0 0 7,188,334
----------- ----------- -----------
GROSS PROFIT 1,967,452 (743,926) 0 0 1,223,526
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,462,605 1,321,887 0 0 3,784,492
AMORTIZATION OF DEFERRED CREDIT (INCOME) 0 0 0 120,000 (120,000)
----------- ----------- -----------
OPERATING INCOME (LOSS) (495,153) (2,065,813) 0 0 (2,440,966)
OTHER EXPENSES 176,910 182,853 0 91,695 268,068
----------- ----------- -----------
NET LOSS $ (672,063) $(2,248,666) $ 0 $ 211,695 $(2,709,034)
=========== =========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.13) $ (0.51)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,293,745 5,293,745
=========== ===========
</TABLE>
See notes to pro-forma financial statements.
F-33
<PAGE>
AZUREL, LTD. AND SUBSIDIARIES/ BEN RICKERT, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Azurel, Ltd. Pro-Forma Adjustments
------------------------
and Subsidiaries Ben Rickert, Inc. Dr. Cr. Total
--------------- ---------------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES $12,481,556 $11,348,766 $ 0 $ 0 $23,830,322
COST OF GOODS SOLD 8,607,759 9,295,559 0 0 17,903,318
----------- ----------- -----------
GROSS PROFIT 3,873,797 2,053,207 0 0 5,927,004
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,896,990 4,470,895 0 0 8,367,885
AMORTIZATION OF DEFERRED CREDIT (INCOME) 0 0 0 240,000 (240,000)
----------- ----------- -----------
OPERATING INCOME (LOSS) (23,193) (2,417,688) 0 0 (2,200,881)
OTHER EXPENSES 475,310 389,533 0 183,389 681,454
----------- ----------- -----------
NET LOSS $ (498,503) $(2,807,221) $ 0 $ 423,389 $(2,882,335)
=========== =========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.11) $ (0.62)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,468,325 4,648,325
=========== ===========
</TABLE>
See notes to pro-forma financial statements.
F-34
<PAGE>
AZUREL, LTD. AND SUBSIDIARIES/ BEN RICKERT, INC.
NOTES TO UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited pro-forma acquisition adjustment is included in the
accompanying unaudited pro-forma condensed consolidated balance sheet at June
30, 1998:
(1) To record the acquisition of certain assets of Ben Rickert, Inc. from
its lending bank (which foreclosed on the assets) by Azurel for
$150,000 in cash and a $1,350,000 note due on October 30, 1998.
Acquisition costs are estimated at $800,000. The excess of fair value
of assets acquired over price paid of approximately $1.7 million is
allocated first to reduce any long-term assets to zero, with the
remaining excess of approximately $1.1 million recorded as a deferred
credit, which is amortized into income over its estimated applicable
period of five years.
B. The following pro-forma adjustments is included in the accompanying unaudited
pro-forma condensed consolidated statements of operations for the year ended
December 31, 1997 and the six months ended June 30, 1998:
(1) To record a reduction of interest expense due to the reduced debt
level.
(2) To record amortization of the deferred credit resulting from the
acquisition over its estimated applicable period of five years.
F-35
<PAGE>
APPENDIX A
<PAGE>
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
AZUREL LTD.
Pursuant to Section 151 of the
Delaware General Corporation Law
Azurel Ltd., a corporation organized and existing under the laws of the
State of Delaware (the "CORPORATION"), hereby certifies that the following
resolutions were adopted by the Board of Directors of the Corporation pursuant
to the authority of the Board of Directors as required by Section 151 of the
Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD")
in accordance with the provisions of its Certificate of Incorporation and
Bylaws, each as amended through the date hereof, the Board of Directors hereby
authorizes a series of the Corporation=s previously authorized Preferred Stock,
par value $.001 per share (the "PREFERRED Stock"), and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions thereof as follows:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 4,500 shares of
Preferred Stock, is the Series A Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK") and the stated value shall be One Thousand U.S.
Dollars ($1,000.00) per share (the "STATED VALUE").
II. NO DIVIDENDS
The Series A Preferred Stock will bear no dividends, and the holders of
the Series A Preferred Stock shall not be entitled to receive dividends on the
Series A Preferred Stock.
<PAGE>
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series A Preferred Stock. If Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "BLOOMBERG"), or if the foregoing does not apply, the last
reported bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
bid price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series A Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
B. "CONVERSION DATE" means, for any Conversion, the date on which the
notice of conversion in the form attached hereto (the "NOTICE OF CONVERSION") is
delivered by fax, as evidenced by a mechanically or electronically generated
confirmation thereof, (or delivered by other means resulting in notice) to the
Corporation on the Conversion Date indicated in the Notice of Conversion.
Notwithstanding the foregoing, if the Series A Preferred Stock is being
converted pursuant to the Required Conversion at Maturity (as defined below),
the Conversion Date shall be the Maturity Date (as defined below).
C. "CONVERSION PRICE" means the lower of the Fixed Conversion Price and
the Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
D. "FIXED CONVERSION PRICE" means (i) with respect to the shares of
Series A Preferred Stock issued at the First Closing (as defined in the
Securities Purchase Agreement) or in exchange therefor, $2.00 and (ii) with
respect to the shares of Series A Preferred Stock issued at the Second Closing
(as defined in the Securities Purchase Agreement) or in exchange therefor, the
Variable Conversion Price in effect on the date of the Second Closing. .
E. "ISSUANCE DATE" means the date of the closing under the Securities
Purchase Agreement by and among the Corporation and the purchasers named therein
(the "SECURITIES PURCHASE AGREEMENT") with respect to the initial issuance of
the Series A Preferred Stock.
F. "N" means the number of days from, but excluding, the Issuance Date.
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<PAGE>
G. "PREMIUM" means an amount equal to (P)x(N/365)x(1,000), where P
means:
IF THE CONVERSION DATE IS: THEN P IS:
-------------------------- ----------
Prior to the one year anniversary of 12%
the Issuance Date
On or after the one year anniversary of 14%
the Issuance Date and prior to
the two year anniversary of the Issuance Date
On or after the two year anniversary of 16%
the Issuance Date and prior to
the three year anniversary of the Issuance Date
On or after the three year anniversary of 18%
the Issuance Date and prior to the
four year anniversary of the Issuance Date
On or after the four year anniversary of the 20%
Issuance Date
H. "VARIABLE CONVERSION PRICE" means, as of any date of determination,
the amount obtained by multiplying 0.75 by the average of the three lowest
Closing Bid Prices for the Corporation's common stock, $.001 par value per share
(the "COMMON STOCK") during the 20 consecutive trading day period ending on the
trading day immediately preceding such date of determination (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such 20 trading day period), and shall be subject to
adjustment as provided herein.
IV. CONVERSION
A. CONVERSION AT THE OPTION OF THE HOLDER. Subject to the limitations
--------------------------------------
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series A Preferred Stock may, at any time and from time to time on or
after the Issuance Date, convert (an "OPTIONAL CONVERSION") each of its shares
of Series A Preferred Stock into a number of fully paid and nonassessable shares
of Common Stock determined in accordance with the following formula:
1,000 + THE PREMIUM
-------------------
CONVERSION PRICE
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<PAGE>
B. MECHANICS OF CONVERSION. In order to effect an Optional Conversion,
-----------------------
a holder shall: (x) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation or the transfer agent for the Common
Stock and (y) surrender or cause to be surrendered the original certificates
representing the Series A Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of the Notice of Conversion by fax from a holder, the
Corporation shall, within one business day, send, via fax, a confirmation (the
"NOTICE OF CONVERSION CONFIRMATION") to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to
deliver the Common Stock issuable upon such conversion and the name and
telephone number of a contact person at the Corporation regarding the
conversion. The Corporation shall not be obligated to issue shares of Common
Stock upon a conversion unless either the Preferred Stock Certificates are
delivered to the Corporation or the transfer agent as provided above, or the
holder notifies the Corporation or the transfer agent that such certificates
have been lost, stolen or destroyed and delivers the documentation to the
Corporation required by Article XIV.B hereof.
(i) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of
----------------------------------------
Preferred Stock Certificates from a holder of Series A Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, subject to the
Corporation=s redemption rights set forth in Article VIII.D, no later than the
later of (a) the third business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the case of lost,
stolen or destroyed certificates, after provision of documentation pursuant to
Article XIV.B) (the "DELIVERY PERIOD"), issue and deliver to the holder or its
nominee, (x) that number of shares of Common Stock issuable upon conversion of
such shares of Series A Preferred Stock being converted and (y) a certificate
representing the number of shares of Series A Preferred Stock not being
converted, if any. If the Corporation's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program, and
so long as the certificates therefor do not bear a legend and the holder thereof
is not then required to return such certificate for the placement of a legend
thereon, the Corporation may cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the holder by crediting the account
of the holder or its nominee with DTC through its Deposit Withdrawal Agent
Commission system ("DTC TRANSFER"). If the aforementioned conditions to a DTC
Transfer are not satisfied or a DTC Transfer is otherwise not effected, the
Corporation shall deliver to the holder physical certificates representing the
Common Stock issuable upon conversion. Further, a holder may instruct the
Corporation to deliver to the holder physical certificates representing the
Common Stock issuable upon conversion in lieu of delivering such shares by way
of DTC Transfer.
(ii) TAXES. The Corporation shall pay any and all taxes which may be
-----
imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of the Series A Preferred Stock.
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<PAGE>
(iii) NO FRACTIONAL SHARES. If any conversion of Series A Preferred
--------------------
Stock would result in the issuance of a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon conversion of the Series A Preferred Stock shall be the next
higher whole number of shares.
(iv) CONVERSION DISPUTES. In the case of any dispute with respect to
-------------------
a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above. If
such dispute involves the calculation of the Conversion Price, the Corporation
shall submit the disputed calculations to an independent outside accountant
reasonably acceptable to the holder of Series A Preferred Stock being converted
via facsimile at any time prior to the expiration of the Delivery Period. The
accountant, at the Corporation's sole expense, shall audit the calculations and
notify the Corporation and the holder of the results as soon as practicable
following the date it receives the disputed calculations. The accountant=s
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
C. LIMITATIONS ON CONVERSIONS. The conversion of shares of Series A
--------------------------
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) CAP AMOUNT. If, notwithstanding the representations and
----------
warranties of the Corporation contained in the Securities Purchase Agreement,
dated as of August 12, 1998, between the Corporation and the purchasers of the
Series A Preferred Stock named therein, the Corporation is prohibited by the
rules or regulations of any securities exchange or quotation system on which the
Common Stock is then listed or traded, from listing or issuing a number of
shares of Common Stock in excess of a prescribed amount (the "CAP AMOUNT")
without the approval of the Corporation's shareholders, then the Corporation
shall not be required to list or issue, as applicable, shares in excess of the
Cap Amount unless the Corporation has obtained the required approvals. The Cap
Amount which, as of the Issuance Date, shall be 1,060,000 shares, shall be
allocated pro rata to the holders of Series A Preferred Stock as provided in
Article XIV.C. In the event a holder of Series A Preferred Stock submits a
Notice of Conversion and the Corporation is prohibited from listing or issuing
shares of Common Stock to satisfy such Notice of Conversion as a result of the
operation of this subparagraph (i), such holder shall be entitled to the rights
set forth in Article VII hereof.
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<PAGE>
(ii) NO FIVE PERCENT HOLDERS. Unless a holder of shares of Series A
-----------------------
Preferred Stock delivers a waiver in accordance with the last sentence of this
subparagraph (ii), except in connection with a Required Conversion at Maturity
(as defined below), in no event shall a holder of shares of Series A Preferred
Stock be entitled to receive shares of Common Stock upon a conversion to the
extent that the sum of (x) the number of shares of Common Stock beneficially
owned by the holder and its affiliates (exclusive of shares issuable upon
conversion of the unconverted portion of the shares of Series A Preferred Stock
or the unexercised or unconverted portion of any other securities of the
Corporation (including, without limitation, the warrants (the "WARRANTS") issued
by the Corporation pursuant to the Securities Purchase Agreement) subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series A Preferred Stock with respect to which the
determination of this subparagraph is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of this subparagraph, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise
provided in clause (x) above. Except as provided in the immediately succeeding
sentence, the restriction contained in this subparagraph (ii) shall not be
altered, amended, deleted or changed in any manner whatsoever unless the holders
of a majority of the outstanding shares of Common Stock and each holder of
outstanding shares of Series A Preferred Stock shall approve such alteration,
amendment, deletion or change.
D. REQUIRED CONVERSION AT MATURITY. Subject to the limitations set
-------------------------------
forth in Paragraph C(i) of this Article IV and the Corporation's right of
Redemption set forth in Article VIII.D, and provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series A Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), for resale by the
holders of such shares of Series A Preferred Stock and (iii) eligible to be
traded on either the AMEX, the New York Stock Exchange or the Nasdaq National
Market, the Nasdaq Small Cap Market or the successors of any of them, and
provided no Redemption Event has occurred, each share of Series A Preferred
Stock issued and outstanding on the fifth anniversary of the Issuance Date (the
"MATURITY DATE") automatically shall be converted into shares of Common Stock on
such date in accordance with the conversion formulas set forth in Paragraph A of
this Article IV (the "REQUIRED CONVERSION AT MATURITY"). If the Required
Conversion at Maturity occurs, the Corporation and the holders of Series A
Preferred Stock shall follow the applicable conversion procedures set forth in
Article IV.B; PROVIDED, HOWEVER, that the holders of Series A Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation or its
transfer agent. Subject to the Corporation=s right of redemption contained in
Article VIII hereof, if the Required Conversion at Maturity does not occur, each
holder of Series A Preferred Stock shall thereafter have the option, exercisable
in whole or in part at any time and from time to time by delivery of a
Redemption Notice (as defined in Article VIII.C) to the Corporation, to require
the Corporation to purchase for cash, at an amount per share equal to the
Redemption Amount (as defined in Article VIII.B), the holder's Series A
Preferred Stock. If the Corporation fails to redeem any of such shares within
five (5) business days after the day on which the Corporation receives such
Redemption Notice, then such holder shall be entitled to the remedies provided
in Article VIII.C and Article VIII.E.
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<PAGE>
V. RESERVATION OF SHARES OF COMMON STOCK
A. RESERVED AMOUNT. Upon the initial issuance of the shares of Series A
---------------
Preferred Stock, the Corporation shall reserve 200% of the number of shares
which would be issuable if the outstanding shares of Series A Preferred Stock
were converted in their entirety on the Issuance Date based on the Conversion
Price in effect on the Issuance Date of the authorized but unissued shares of
Common Stock for issuance upon conversion of the Series A Preferred Stock and
thereafter the number of authorized but unissued shares of Common Stock so
reserved (the "RESERVED AMOUNT") shall not be decreased and shall at all times
be sufficient to provide for the conversion of the Series A Preferred Stock
outstanding at the then current Conversion Price thereof. The Reserved Amount
shall be allocated to the holders of Series A Preferred Stock as provided in
Article XIV.C.
B. INCREASES TO RESERVED AMOUNT. If the Reserved Amount for any three
----------------------------
consecutive trading days (the last of such three trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the holders of Series
A Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking shareholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series A Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within 90 days after an Authorization Trigger Date
(such event being the ARESERVED AMOUNT TRIGGER EVENT@), each holder of Series A
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series A Preferred Stock
such that, after giving effect to such purchase, the holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of its Series A Preferred Stock.
If the Corporation fails to redeem any of such shares within five (5) business
days after its receipt of such Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.
C. ADJUSTMENT TO CONVERSION PRICE. If the Corporation is prohibited, at
------------------------------
any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series A Preferred
Stock held by any holder (including shares of Series A Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such holder) shall be adjusted as provided in Article VI.A.
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<PAGE>
VI. FAILURE TO SATISFY CONVERSIONS
A. CONVERSION DEFAULTS. The following shall constitute a "CONVERSION
-------------------
DEFAULT": (i) following the submission by a holder of shares of Series A
Preferred Stock of a Notice of Conversion, the Corporation fails for any reason
(other than because of an event described in clause (iii) below) to deliver, on
or prior to the fourth business day following the expiration of the Delivery
Period for such conversion, such number of freely tradeable shares of Common
Stock to which such holder is entitled upon such conversion; PROVIDED, HOWEVER,
that prior to the Registration Statement (as described in Article VIII.A(ii)
below) being declared effective, such shares of Common Stock shall bear the
restrictive legend set forth in Section 2(g) of the Securities Purchase
Agreement, (ii) the Corporation provides notice to any holder of Series A
Preferred Stock at any time of its intention not to issue freely tradeable
shares of Common Stock upon exercise by any holder of its conversion rights in
accordance with the terms of this Certificate of Designation (other than because
of an event described in clause (iii) below), or (iii) the Corporation is
prohibited, at any time, from listing shares of Common Stock or from issuing
shares of Common Stock upon conversion of Series A Preferred Stock to any holder
because the Corporation (A) does not at the date of such conversion have
available a sufficient number of authorized and reserved shares of Common Stock
or (B) such listing or issuance would exceed the then unissued portion of such
holder's Cap Amount. In the case of a Conversion Default described in clause (i)
or (iii) above, the Fixed Conversion Price in respect of any shares of Series A
Preferred Stock held by such holder (including shares of Series A Preferred
Stock submitted to the Corporation for conversion, but for which shares of
Common Stock have not been issued to such holder) shall thereafter be the lesser
of (x) the Fixed Conversion Price on the date of the Conversion Default and (y)
the lowest Conversion Price in effect during the period beginning on, and
including, such date through and including (A) in the case of a Conversion
Default referred to in clause (i) above, the earlier of (1) the day such shares
of Common Stock are delivered to the holder and (2) the day on which the holder
regains its rights as a holder of Series A Preferred Stock with respect to such
unconverted shares of Series A Preferred Stock pursuant to the provisions of
Article XIV.F hereof, and (B) in the case of a Conversion Default referred to in
clause (iii) above, the date on which the prohibition on listing or issuance of
Common Stock terminates. In the case of a Conversion Default described in clause
(ii) above, the Fixed Conversion Price with respect to any conversion thereafter
shall be the lowest Conversion Price in effect at any time during the period
beginning on, and including, the date of the occurrence of such Conversion
Default through and including the Default Cure Date (as defined below).
Following any adjustment to the Fixed Conversion Price pursuant to this Article
VI.A, the Fixed Conversion Price shall thereafter be subject to further
adjustment for any events described in Article XI. Upon the occurrence of each
reset of the Fixed Conversion Price pursuant to this Paragraph A, the
Corporation, at its expense, shall promptly compute the new Fixed Conversion
Price and prepare and furnish to each holder of Series A Preferred Stock a
certificate setting forth such new Fixed Conversion Price and showing in detail
each Conversion Price in effect during such reset period.
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock, (ii) with
respect to a Conversion Default described in clause (ii) of its definition, the
date the Corporation issues freely tradeable shares of Common Stock in
satisfaction of all conversions of Series A Preferred Stock in accordance with
Article IV.A, and (iii) with respect to a Conversion Default described in clause
(i) or clause (ii) of its definition, the date on which the Corporation redeems
shares of Series A Preferred Stock held by such holder pursuant to paragraph C
of this Article VI.
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<PAGE>
B. BUY-IN CURE. Unless the Corporation has notified the applicable
-----------
holder in writing prior to the delivery by such holder of a Notice of Conversion
that the Corporation is unable to honor conversions, if (i) (a) the Corporation
fails for any reason to deliver during the Delivery Period shares of Common
Stock to a holder upon a conversion of shares of Series A Preferred Stock or (b)
there shall occur a Legend Removal Failure (as defined in Article VIII.A(iii)
below) and (ii) thereafter, such holder purchases (in an open market transaction
or otherwise) shares of Common Stock to make delivery in satisfaction of a sale
by such holder of the unlegended shares of Common Stock (the "SOLD SHARES")
which such holder anticipated receiving upon such conversion (a "Buy-In"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification indicating any amounts payable to such holder pursuant to
this Paragraph C. The Corporation shall make any payments required pursuant to
this Paragraph C in accordance with and subject to the provisions of Article
XIV.E.
C. REDEMPTION RIGHT. If the Corporation fails, and such failure
----------------
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the holders shall have the remedies set
forth in Articles V and VII, respectively) to issue shares of Common Stock
within 10 business days after the expiration of the Delivery Period with respect
to any conversion of Series A Preferred Stock, then the holder may elect at any
time and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Redemption Notice to the Corporation, to have all of
such holder=s shares of Series A Preferred Stock which were submitted for
conversion purchased by the Corporation for cash, at an amount per share equal
to the Redemption Amount (as defined in Article VIII.B). If the Corporation
fails to redeem any of such shares within five business days after its receipt
of such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
D. VOID NOTICE OF CONVERSION. If for any reason a holder has not
-------------------------
received all of the shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock and (i) such shares have not been called for redemption
pursuant to Article VIII.D, provided the Redemption Amount therefor has been or
may be paid within the time limits set forth in Article VIII.D, and (ii) such
shares are not subject to a redemption notice from the holder thereof, then the
holder, upon written notice to the Corporation's transfer agent, with a copy to
the Corporation, may void its Notice of Conversion with respect to, and retain
or have returned, as the case may be, any shares of Series A Preferred Stock
that have not been converted pursuant to such holder's Notice of Conversion;
provided that the voiding of a holder's Notice of Conversion shall not affect
such holders rights and remedies which have accrued prior to the date of such
notice pursuant to Article VI hereof or otherwise.
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<PAGE>
A. OBLIGATION TO CURE. Because, on the Issuance Date, the then unissued
------------------
portion of each holder's Cap Amount is less than 135% of the number of shares of
Common Stock then issuable upon conversion of each holder's shares of Series A
Preferred Stock (a "TRADING MARKET TRIGGER EVENT"), the Corporation shall take
immediate action (including, if necessary, seeking the approval of its
shareholders to authorize the listing or issuance of the full number of shares
of Common Stock which would be issuable upon the conversion of the then
outstanding shares of Series A Preferred Stock but for the Cap Amount) to
eliminate all prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its securities on
the Corporation's ability to list or issue shares of Common Stock in excess of
the Cap Amount ("TRADING MARKET PROHIBITIONS"). In the event the Corporation
fails to eliminate all such Trading Market Prohibitions within 120 days after
the Issuance Date, then each holder of Series A Preferred Stock shall thereafter
have the option, exercisable in whole or in part at any time and from time to
time until such date that all such Trading Market Prohibitions are eliminated,
by delivery of a Redemption Notice (as defined in Article VIII.C) to the
Corporation, to require the Corporation to purchase for cash, at an amount per
share equal to the Redemption Amount, a number of the holder's shares of Series
A Preferred Stock such that, after giving effect to such redemption, the then
unissued portion of such holder's Cap Amount exceeds 135% of the total number of
shares of Common Stock issuable upon conversion of such holder's shares of
Series A Preferred Stock. If the Corporation fails to redeem any of such shares
within five (5) business days after its receipt of such Redemption Notice, then
such holder shall be entitled to the remedies provided in Articles VII.B and
VIII.C.
B. REMEDIES. If the Corporation fails to redeem any shares of Series A
--------
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series A Preferred Stock to any holder because
such listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, any holder who is so
prohibited from converting its Series A Preferred Stock because the shares of
Common Stock underlying such Series A Preferred Stock may not be listed or
issued, may elect either or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series A Preferred Stock (including
any shares of Series A Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the Nasdaq Small Cap
(or any other stock exchange, interdealer quotation system or trading market)
and to cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board; or
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<PAGE>
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price equal
to the average of the Closing Bid Prices for the Common Stock during the five
consecutive trading days ending on the trading day immediately preceding the
date of the holder's written notice to the Corporation of its election to
receive shares of Common Stock pursuant to this subparagraph (ii) (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such five trading day period).
C. ADJUSTMENT TO CONVERSION PRICE. If the Corporation is prohibited, at
------------------------------
any time after the ninetieth day after the Issuance Date, from listing shares of
Common Stock or from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because such listing or issuance would exceed the
then unissued portion of such holder's Cap Amount because of applicable law or
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Corporation or its
securities, then the Fixed Conversion Price in respect of any shares of Series A
Preferred Stock held by any holder (including shares of Series A Preferred Stock
submitted to the Corporation for conversion, but for which shares of Common
Stock have not been issued) shall be adjusted as provided in Article VI.A.
VIII. REDEMPTION
A. REDEMPTION BY HOLDER. In the event (each of the events described in
--------------------
clauses (i)-(vi) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including, from and after the Issuance Date,
any of the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock) is suspended from trading on any of, or is not listed (and
authorized) for trading on at least one of, the NASDAQ Small Cap Market, the
NASDAQ National Market, the New York Stock Exchange or the American Stock
Exchange for an aggregate of 10 trading days in any nine month period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to that certain Registration Rights Agreement by and among
the Corporation and the other signatories thereto entered into in connection
with the Securities Purchase Agreement (the "REGISTRATION RIGHTS AGREEMENT") has
not been declared effective by the 60th day following the Registration Deadline
(as defined in the Registration Rights Agreement) or such Registration
Statement, after being declared effective, cannot be utilized by the holders of
Series A Preferred Stock for the resale of all of their Registrable Securities
(as defined in the Registration Rights Agreement) for an aggregate of more than
30 days;
(iii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series A
Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
or the Registration Rights Agreement (a "LEGEND REMOVAL FAILURE"), and any such
failure continues uncured for five business days after the Corporation has been
notified thereof in writing by the holder;
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<PAGE>
(iv) the Corporation provides notice to any holder of Series A
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, shares of Common Stock to
any holder of Series A Preferred Stock upon conversion in accordance with the
terms of this Certificate of Designation (other than due to the circumstances
contemplated by Articles V or VII for which the holders shall have the remedies
set forth in such Articles);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder approval being
conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation);
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Corporation and other than pursuant to a merger in which the Corporation is
the surviving or continuing entity and the voting capital stock of the
Corporation immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the merger and its
capital stock is unchanged);
(c) have fifty percent (50%) or more of the voting power of its
capital stock owned beneficially by one person, entity or Agroup@ (as such term
is used under Section 13(d) of the Securities Exchange Act of 1934, as amended);
or
(vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreement or the Registration Rights
Agreement;
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<PAGE>
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series A Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series A Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iv) or (v)
above shall immediately constitute a Redemption Event and there shall be no cure
period. Upon the Corporation's receipt of any Redemption Notice hereunder (other
than during the three trading day period following the Corporation's delivery of
a Redemption Announcement (as defined below) to all of the holders in response
to the Corporation's initial receipt of a Redemption Notice from a holder of
Series A Preferred Stock), the Corporation shall immediately (and in any event
within one business day following such receipt) deliver a written notice (a
"REDEMPTION ANNOUNCEMENT") to all holders of Series A Preferred Stock stating
the date upon which the Corporation received such Redemption Notice and the
amount of Series A Preferred Stock covered thereby. Subject to Article VIII.D,
the Corporation shall not redeem any shares of Series A Preferred Stock during
the three trading day period following the delivery of a required Redemption
Announcement hereunder. At any time and from time to time during such three
trading day period, each holder of Series A Preferred Stock may request (either
orally or in writing) information from the Corporation with respect to the
instant redemption (including, but not limited to, the aggregate number of
shares of Series A Preferred Stock covered by Redemption Notices received by the
Corporation) and the Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such requesting holder.
B. DEFINITION OF REDEMPTION AMOUNT. The "REDEMPTION AMOUNT" with
-------------------------------
respect to a share of Series A Preferred Stock means an amount equal to the
greater of:
(i) V X M
-----
C P
and (ii) V X 1.13
where:
"V" means the Face Amount thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption
Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Redemption Notice and ending on the date immediately
preceding the date of payment of the Redemption Amount and (ii) with respect to
redemptions pursuant to Article VIII.A(v) hereof, the greater of (a) the amount
determined pursuant to clause (i) of this definition or (b) the fair market
value, as of the date on which the Corporation receives the Redemption Notice,
of the consideration payable to the holder of a share of Common Stock pursuant
to the transaction which triggers the redemption. For purposes of this
definition, "fair market value" shall be determined by the mutual agreement of
the Corporation and holders of a majority-in-interest of the shares of Series A
Preferred Stock then outstanding, or if such agreement cannot be reached within
five business days prior to the date of redemption, by an investment banking
firm selected by the Corporation and reasonably acceptable to holders of a
majority-in-interest of the then outstanding shares of Series A Preferred Stock,
with the costs of such appraisal to be borne by the Corporation.
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<PAGE>
C. REDEMPTION DEFAULTS. If the Corporation fails to pay any holder the
-------------------
Redemption Amount with respect to any share of Series A Preferred Stock within
five business days after its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series A Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV but subject
to Paragraph C of Article IV) all or any portion of the Redemption Amount, plus
interest as aforesaid, into shares of Common Stock at the lowest Conversion
Price in effect during the period beginning on the date on which the Corporation
receives the Redemption Notice and ending on the Conversion Date with respect to
the conversion of such Redemption Amount. In the event the Corporation is not
able to redeem all of the shares of Series A Preferred Stock subject to
Redemption Notices delivered prior to the date upon which such redemption is to
be effected, the Corporation shall redeem shares of Series A Preferred Stock
from each holder pro rata, based on the total number of shares of Series A
Preferred Stock outstanding at the time of redemption included by such holder in
all Redemption Notices delivered prior to the date upon which such redemption is
to be effected relative to the total number of shares of Series A Preferred
Stock outstanding at the time of redemption included in all of the Redemption
Notices delivered prior to the date upon which such redemption is to be
effected.
D. REDEMPTION BY CORPORATION.
-------------------------
(i) The Corporation shall have the right at any time and from time
to time to redeem any shares which are the subject of a Notice of Conversion for
an amount of cash equal to the Redemption Amount (a "REDEMPTION IN LIEU OF
CONVERSION"), in its sole discretion by delivery of an Optional Redemption
Notice in accordance with the redemption procedures set forth below.
(ii) Within ten (10) calendar days prior to the beginning of any
calendar month during which the Corporation elects to effect a Redemption in
Lieu of Conversion, the Corporation shall provide written notice to the holders
of Series A Preferred Stock by facsimile and overnight courier stating that the
Corporation will redeem any conversions of Series A Preferred Stock in such
calendar month (an "OPTIONAL REDEMPTION Notice"). In the event the Corporation
fails to provide an Optional Redemption Notice to the holders of Series A
Preferred Stock within such ten (10) day period, the Corporation shall not be
permitted to so redeem any conversions of Series A Preferred Stock during such
calendar month. In the event a timely Optional Redemption Notice is provided as
aforesaid, upon the Corporation's receipt of a Notice of Conversion the
Corporation shall be obligated to redeem on or before the fifth business day
after the receipt of the Notice of Conversion, the entire number of shares of
the Series A Preferred Stock which are the subject of the Notice of Conversion
for the Redemption Amount (as defined in Article VIII.B).
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<PAGE>
(iii) At any time and from time to time on or before the 90th day
after the Issuance Date, the Corporation shall have the right, on 10 business
days prior written notice, to redeem any or all of the then outstanding shares
of Series A Preferred Stock by paying to each holder an amount per share of
Series A Preferred Stock equal to 120% of the Stated Value thereof. At all times
prior to redemption pursuant to this Article VIII.D(iii) (including after
receipt of the notice required by this Article), each holder of Series A
Preferred Stock shall remain entitled to convert shares of Series A Preferred
Stock into shares of Common Stock in accordance with the terms of Article IV
hereof. Notwithstanding anything herein to the contrary the first redemption, if
any, by the Corporation pursuant to this Article VIII.D(iii) shall not be for an
amount of cash less than $500,000, with any subsequent redemptions, if any,
hereunder for an amount of cash not less than $100,000.
E. VOID REDEMPTION. In the event that the Corporation does not pay the
---------------
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays
such unpaid applicable Redemption Amount in full, a holder of Series A Preferred
Stock shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu
of redemption, require the Corporation to promptly return to such holder any or
all of the shares of Series A Preferred Stock that were submitted for redemption
by such holder under this Article VIII and for which the applicable Redemption
Amount (together with any interest thereon) has not been paid, by sending
written notice thereof to the Corporation via facsimile and confirmed by
overnight courier, in person (by courier or otherwise) or by telephone (to an
authorized officer of the Corporation or his or her administrative assistant)
(the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Corporation's receipt of such
Void Optional Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with respect
to those shares of Series A Preferred Stock subject to the Void Optional
Redemption Notice, and (ii) the Corporation shall immediately return any shares
of Series A Preferred Stock subject to the Void Optional Redemption Notice
IX RANK
The Series A Preferred Stock shall rank (i) prior to the Corporation's
Common Stock; (ii) prior to any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series A
Preferred Stock ("JUNIOR SECURITIES"); (iii) junior to any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series A Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, senior to the Series A Preferred
Stock ("SENIOR SECURITIES"); and (iv) PARI PASSU with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of the Series A Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking by its terms on parity with the Series A Preferred
Stock ("PARI PASSU SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
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<PAGE>
X LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "LIQUIDATION EVENT"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities and Pari Passu Securities) upon liquidation, dissolution or winding
up unless prior thereto the holders of shares of Series A Preferred Stock shall
have received the Liquidation Preference with respect to each share. If, upon
the occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series A Preferred Stock and holders of
PARI PASSU Securities shall be insufficient to permit the payment to such
holders of the preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to the Series A
Preferred Stock and the PARI PASSU Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preference payable on all
such shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series A
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any PARI PASSU Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
XI ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
as follows:
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<PAGE>
A. STOCK SPLITS, STOCK DIVIDENDS, ETC. If, at any time on or after the
-----------------------------------
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time after
---------------------------------------------
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "CORPORATE CHANGE"), then the holders of Series A
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Corporate Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Corporate Change
not taken place, and in any such case, appropriate provisions (in form and
substance reasonably satisfactory to the holders of a majority of the Series A
Preferred Shares then outstanding) shall be made with respect to the rights and
interests of the holders of the Series A Preferred Stock to the end that the
economic value of the shares of Series A Preferred Stock are in no way
diminished by such Corporate Change and that the provisions hereof (including,
without limitation, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is not the Corporation, an
immediate adjustment of the Fixed Conversion Price so that the Fixed Conversion
Price immediately after the Corporate Change reflects the same relative value as
compared to the value of the surviving entity=s common stock that existed
between the Fixed Conversion Price and the value of the Corporation=s Common
Stock immediately prior to such Corporate Change and an immediate revision to
the Variable Conversion Price so that it is determined as provided in Article
III.H but based on the price of the common stock of the surviving entity and the
market in which such common stock is traded) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Corporation shall not
effect any Corporate Change unless (i) each holder of Series A Preferred Stock
has received written notice of such transaction along with the notice sent to
the holders of the Common Stock of the Corporation, but in no event later than
20 days prior to the record date for the determination of shareholders entitled
to vote with respect thereto, and (ii) the resulting, successor or acquiring
entity (if not the Corporation) assumes by written instrument (in form and
substance reasonably satisfactory to the holders of a majority of the Series A
Preferred Shares then outstanding) the obligations of this Certificate of
Designation. The above provisions shall apply regardless of whether or not there
would have been a sufficient number of shares of Common Stock authorized and
available for issuance upon conversion of the shares of Series A Preferred Stock
outstanding as of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
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<PAGE>
C. ADJUSTMENT DUE TO MAJOR ANNOUNCEMENT. In the event the Corporation
------------------------------------
at any time after the Issuance Date (i) makes a public announcement that it
intends to consolidate or merge with any other entity (other than a merger in
which the Corporation is the surviving or continuing entity and its capital
stock is unchanged) or to sell or transfer all or substantially all of the
assets of the Corporation or (ii) any person, group or entity (including the
Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
Corporation's Board of Directors by waging or proxy battle or otherwise (the
date of the announcement or commencement referred to in clause (i) or (ii) of
this Paragraph C is hereinafter referred to as the "ANNOUNCEMENT DATE"), then
the Conversion Price shall, effective upon the Announcement Date and continuing
through the tenth trading day following the earlier of the consummation of the
proposed transaction or tender offer, exchange offer or another transaction or
the Abandonment Date (as defined below) (the earlier of such dates being the
"ADJUSTED CONVERSION PRICE TERMINATION DATE"), be equal to the lower of (x) the
Conversion Price which would have been applicable for an Optional Conversion
occurring on the Announcement Date and (y) the Conversion Price determined in
accordance with Article III.C on the Conversion Date set forth in the Notice of
Conversion for the Optional Conversion. After the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in
Article III.C. "ABANDONMENT DATE" means with respect to any proposed transaction
or tender offer, exchange offer or another transaction for which a public
announcement or an action contemplated by this Paragraph C has been made or
commenced, the date upon which the Corporation (in the case of clause (i) above)
or the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer, exchange offer or another transaction which caused this Paragraph C to
become operative.
D. ADJUSTMENT DUE TO DISTRIBUTION. If, at any time after the Issuance
------------------------------
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation=s common shareholders in shares (or
rights to acquire shares) of capital stock of a subsidiary (I.E. a spin-off)) (a
"DISTRIBUTION"), then the holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
E. ISSUANCE OF OTHER SECURITIES WITH VARIABLE CONVERSION PRICE. If, at
-----------------------------------------------------------
any time after the Issuance Date, the Corporation shall issue any securities
which are convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") at a conversion price or exchange rate which is more favorable to
the holders of such Convertible Securities than the Conversion Price mechanism
provided for herein, then such conversion price or exchange rate shall be
applicable hereto.
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<PAGE>
F. PURCHASE RIGHTS. If, at any time after the Issuance Date, the
---------------
Corporation issues any securities which are convertible into or exchangeable for
Common Stock, or rights to purchase stock, warrants, securities or other
property (the "PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, then the holders of Series A Preferred Stock will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Series A Preferred Stock (without giving effect to the limitations contained in
Article IV.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
G. NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
---------------------
readjustment of the Conversion Price pursuant to this Article XI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series A Preferred Stock.
XII VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "BUSINESS CORPORATION ACT") and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its shareholders
for the purpose of determining shareholders entitled to (a) receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger consolidation or recapitalization)
any share of any class or any other securities or property, or to receive any
other right, or (b) to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Corporation, or any
proposed merger, consolidation, liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each holder, at least 20
days prior to the record date specified therein (but in no event earlier than
public announcement of such proposed transaction), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
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<PAGE>
To the extent that under the Business Corporation Act the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series A Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series A Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated.
XIII PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of a majority in interest
of the holders of the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
previously issued shares of capital stock of the Corporation so as to affect
adversely the Series A Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock ranking PARI
PASSU with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "PARI PASSU SECURITIES");
(e) increase the authorized number of shares of Series A
Preferred Stock;
(f) issue any shares of Senior Securities;
(g) issue any shares of Series A Preferred Stock other than
pursuant to the Securities Purchase Agreement;
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<PAGE>
(h) redeem, or declare or pay any cash dividend or distribution
on, any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A Preferred Stock then outstanding.
XIV MISCELLANEOUS
A. CANCELLATION OF SERIES A PREFERRED STOCK. If any shares of Series A
----------------------------------------
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
B. LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of (i)
---------------------------
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series A Preferred Stock.
C. ALLOCATION OF CAP AMOUNT AND RESERVED AMOUNT. The initial Cap Amount
--------------------------------------------
and Reserved Amount shall be allocated pro rata among the holders of Series A
Preferred Stock based on the number of shares of Series A Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series A Preferred Stock based on the
number of shares of Series A Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series A Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Series A Preferred Stock shall be allocated to the remaining holders of
shares of Series A Preferred Stock, pro rata based on the number of shares of
Series A Preferred Stock then held by such holders.
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<PAGE>
D. QUARTERLY STATEMENTS OF AVAILABLE SHARES. For each calendar quarter
----------------------------------------
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreement is declared effective and
thereafter so long as any shares of Series A Preferred Stock are outstanding,
the Corporation shall deliver (or cause its transfer agent to deliver) to each
holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series A Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series A Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series A Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be listed or issued by the Corporation upon conversion of
the Series A Preferred Stock before the Corporation would exceed the Cap Amount
and the Reserved Amount. The Corporation (or its transfer agent) shall deliver
the report for each quarter to each holder prior to the tenth day of the
calendar month following the quarter to which such report relates. In addition,
the Corporation (or its transfer agent) shall provide, within 15 days after
delivery to the Corporation of a written request by any holder, any of the
information enumerated in clauses (i) - (iv) of this Paragraph D as of the date
of such request.
E. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to
-------------------------
make any cash payment to a holder under this Certificate of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (E.G., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.
F. STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion by
---------------------
a holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder=s rights as a holder of such converted shares of Series A Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth business day after the expiration of
the Delivery Period with respect to a conversion of Series A Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series A Preferred Stock with respect to such unconverted
shares of Series A Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the holder. In all cases, the
holder shall retain all of its rights and remedies (including, without
limitation, the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.A) for the Corporation's
failure to convert Series A Preferred Stock.
-22-
<PAGE>
G. REMEDIES CUMULATIVE. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder=s right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series A Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series A Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-23-
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 12th day of August, 1998.
AZUREL LTD.
By: /S/ GERARD SEMHON
---------------------------------
Name: Gerard Semhon
Title: Chief Executive Officer
-24-
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series A Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of common
stock ("COMMON STOCK") of AZUREL LTD. (the "CORPORATION") according to the
conditions of the Certificate of Designations, Preferences and Rights of the
Series A Convertible Preferred Stock of the Corporation (the "CERTIFICATE OF
DESIGNATION"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC TRANSFER").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
/ / In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned
hereby requests that the Corporation issue and deliver to the
undersigned physical certificates representing such shares of Common
Stock.
Date of Conversion:____________________________
Applicable Conversion Price:___________________
Number of Shares of Common
Stock to be Issued:____________________________
Signature:_____________________________________
Name:__________________________________________
Address:_______________________________________
_______________________________________
_______________________________________
<PAGE>
GENERAL PROXY - SPECIAL MEETING OF STOCKHOLDERS OF AZUREL, LTD.
The undersigned hereby appoints Gerard Semhon, with full power of
substitution, proxy to vote all of the shares of Common Stock of the undersigned
and with all of the powers the undersigned would possess if personally present,
at the Special Meeting of Stockholders of Azurel Ltd., to be held at the offices
of Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East 52nd Street, 9th
Floor, New York, New York 10022 on December 9, 1998 at 10:00 a.m. and at all
adjournments thereof, upon the matters specified below, all as more fully
described in the Proxy Statement dated October 23, 1998 and with the
discretionary powers upon all other matters which come before the meeting or any
adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF AZUREL LTD.'S BOARD OF DIRECTORS.
1. To vote upon the ratification of the issuance of the Company's Common Stock
upon conversion of its Series A Convertible Preferred Stock.
__ FOR __ AGAINST __ ABSTAIN
2. To vote upon a proposal to increase the number of shares of Common Stock
authorized for issuance under the Company's 1997 Stock Option Plan to 1,750,000
from 750,000.
__ FOR __ AGAINST __ ABSTAIN
3. In their discretion, upon such other matter or matters that may properly come
before the meeting, or and adjournments thereof.
- --------------------------------------------------------------------------------
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
Every properly signed proxy will be voted in accordance with the specifications
made thereon. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2 AND 3.
The undersigned hereby acknowledges receipt of a copy of the accompanying Notice
of Meeting and Proxy Statement and hereby revokes any proxy or proxies
heretofore given.
Please mark, date, sign and mail your proxy promptly in the envelope provided.
Date: ________________________, 1998 ______________________________
(Print name of Stockholder)
------------------------------
(Print name of Stockholder)
------------------------------
Signature
------------------------------
Signature
Number of Shares
- ------------------
Note: Please sign exactly as name
appears in the Company's
records. Joint owners should
each sign. When signing as
attorney, executor or trustee,
please give title as such.
