UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-22809
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AZUREL LTD.
-----------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 13-3842844
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
509 MADISON AVENUE, NEW YORK, NY 10022
-----------------------------------------
(Address of principal executive office) (Zip Code)
(212) 317- 0712
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(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of May 12, 1999 was 5,318,845 shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
INDEX
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Page
Number
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3-4
Notes to Financial Statements 5-6
Item 2 - Management's Discussion and Analysis or
Plan of Operation 7-10
PART II - OTHER INFORMATION
Item 3 - Other Information 11
SIGNATURE 12
<PAGE>
PART I
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FINANCIAL INFORMATION
---------------------
ITEM 1 FINANCIAL STATEMENTS
---------------------------
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 82,395 $ 84,711
Accounts receivable, net of allowance for
doubtful accounts of $118,000 and $71,000 3,529,911 4,640,440
Inventories 4,795,277 4,995,113
Due from related parties 139,704 124,972
Prepaid expenses and other current assets 197,305 55,947
----------- -----------
TOTAL CURRENT ASSETS 8,744,592 9,901,183
FURNITURE AND EQUIPMENT 1,703,115 1,757,444
GOODWILL 155,989 156,052
FORMULAE AND CUSTOMER LISTS 2,717,944 2,770,543
DUE FROM RELATED PARTY -- 49,066
OTHER ASSETS 114,346 90,273
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$ 13,435,986 $ 14,724,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 3,933,429 $ 5,041,655
Accounts payable 3,116,706 2,696,913
Notes payable 845,000 --
Accrued expenses and other liabilities 528,996 494,962
Customer advances 53,925 31,408
Current portion of long-term debt 867,566 784,352
Capital lease obligation - current portion 85,402 43,848
----------- -----------
TOTAL CURRENT LIABILITIES 9,431,024 9,093,138
LONG TERM DEBT 1,146,001 1,003,975
CAPITAL LEASE OBLIGATION- NON-CURRENT PORTION 165,592 212,471
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 1,000,000, 1,500
issued and outstanding 1,237,587 1,237,587
Common stock, $.001 par value, authorized 24,000,000 shares,
issued and outstanding 5,318,845 shares in 1999;
5,318,745 in 1998 5,319 5,319
Additional paid-in-capital 7,475,576 7,475,476
Accumulated deficit (6,024,470) (4,303,405)
Translation gain/loss (643) --
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TOTAL STOCKHOLDERS' EQUITY 2,693,369 4,414,977
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$ 13,435,986 $ 14,724,561
=========== ===========
</TABLE>
See notes to financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Three Months ended March 31,
------------------------------------------
1999 1998
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<S> <C> <C>
NET SALES $ 4,092,011 $ 2,989,289
COST OF GOODS SOLD 3,815,536 2,133,359
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GROSS PROFIT 276,475 855,930
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,849,800 1,179,442
------------------- -------------------
LOSS FROM OPERATIONS (1,573,325) (323,512)
INTEREST EXPENSE 147,740 98,865
------------------------------------------
NET LOSS $ (1,721,065) $ (422,377)
=================== ===================
BASIC LOSS PER COMMON SHARE $ (0.32) $ (0.08)
=================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,318,845 5,293,745
=================== ===================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three months Ended Mar. 31,
------------------------------
1999 1998
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,721,065) $ (422,377)
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Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 64,294 83,363
Amortization 52,662 50,610
Amortization of deferred financing costs 2,231 --
Translation loss (643) --
Changes in assets and liabilities:
Decrease in accounts receivable 1,110,529 241,217
Decrease in inventories 199,836 35,757
(Increase) decrease in prepaid expenses and other current assets (141,358) 11,160
Decrease in other assets 8,030 35,138
Increase (decrease) in accounts payable and accrued expenses 453,828 (278,289)
Increase (decrease) in customer advances 22,517 (48,185)
(Decrease) increase in related party loans -- (115,342)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 50,860 (406,948)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,965) (109,884)
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NET CASH USED IN INVESTING ACTIVITIES (9,965) (109,884)
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CASH FLOW FROM FINANCING ACTIVITIES:
Decrease in revolving line of credit (1,108,226) (57,482)
Increase in cash overdraft -- 30,074
Increase in restricted cash -- 290,521
Increase in notes payable 845,000 --
Increase in long-term debt 313,216 57,482
Decrease in capital lease obligations (14,593) (47)
Payment of long term debt (78,708) (179,051)
Proceeds from exercise of stock options 100 --
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (43,211) 141,497
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NET DECREASE IN CASH (2,316) (375,335)
CASH, beginning of period 84,711 414,731
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CASH, end of period $ 82,395 $ --
============== =============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
THREE MONTHS ENDED MAR. 31,
1999 1,998
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
<S> <C> <C>
Interest $ 134,528 $ 52,727
============== =============
Taxes $ 3,385 $ -
============== =============
</TABLE>
See notes to financial statements
-4-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
(UNAUDITED)
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1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements as of March 31, 1999
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, 1999.
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, 1999 are not necessarily indicative of the
results expected for the full year ending December 31, 1999. Certain
prior year amounts have been reclassified to conform with the current
year's presentation.
2. REVOLVING LINE OF CREDIT
------------------------
On January 21, 1999, Finova Capital Corporation, under the terms of
their $4,000,000 line of credit, extended a $500,000 over-advance to
Ben Rickert Corp., to be repaid as follows:
June 1, 1999 $250,000
July 1, 1999 $250,000
3. NOTES PAYABLE
-------------
During the first quarter of 1999, the Company borrowed an aggregate of
$850,000 in unsecured short term notes at interest rates ranging from
8% to 20.8%.
-5-
<PAGE>
4. BEN RICKERT, INC. ACQUISITION
-----------------------------
On July 31, 1998, the Company acquired from Summit Bank the assets of
Ben Rickert, Inc., a manufacturer and distributor of cosmetics,
fragrances and gift items, for $1.5 million.
The following tables summarizes pro forma consolidated results of
operations (unaudited) of the Company and the 1998 Ben Rickert asset
acquisition as though the acquisition had been consummated at January
1, 1998. The pro forma amounts give effect to the appropriate
adjustments for the fair value of assets acquired and the amortization
of goodwill, depreciation and the debt incurred and resulting interest
expense.
<TABLE>
<CAPTION>
Azurel Without Ben Rickert
Three Months Ended March 31,
1999 1998
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<S> <C> <C>
Total Revenue $ 3,444,576 $ 2,989,289
Net Loss $ (365,638) $ (422,377)
Net Loss Per Share $ (0.07) $ (0.08)
Weighted Average Number of Shares 5,318,845 shares 5,293,745 shares
Ben Rickert Corp Only
Three Months Ended March 31,
1999 1998
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Total Revenue $ 647,435 $ 1,090,926
Net Loss $ (1,355,427) $ (1,428,527)
Net Loss Per Share $ (0.25) $ (0.27)
Weighted Average Number of Shares 5,318,845 shares 5,293,745 shares
Consolidated
Three Months Ended March 31,
1999 1998
-------------- ------------
Total Revenue $ 4,092,011 $ 4,080,215
Net Loss $ (1,721,065) $ (1,850,904)
Net Loss Per Share $ (0.32) $ (0.35)
Weighted Average Number of Shares 5,318,845 shares 5,293,745 shares
</TABLE>
The consolidated results of operations without the impact of Ben
Rickert, indicate a decreased loss for the three months ended March 31,
1999 as compared to the same period in 1998. Sale of closeout
merchandise and disposal of obsolete Ben Rickert inventory had a
$700,000 negative impact on 1999 results.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
- -----------------------------------------------
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------
Azurel, Ltd., hereinafter "Azurel" or "the Company", through its wholly-owned
subsidiaries, manufactures, markets, and sells private label cosmetics,
fragrances and skincare products. Prior to the completion of the acquisitions of
the subsidiaries, Azurel focused its operations on negotiating and consummating
such acquisitions and developing and implementing marketing strategies for its
branded products.
In August 1996, Azurel acquired the stock of Private Label Group (PLC), and in
October 1996, Azurel acquired the stock of Scent Overnight (currently Scent
1-2-3).
In October 1997, Azurel acquired the stock of Cambridge Business Services
Corporation.
On July 31, 1998, Ben Rickert Corp ("Ben Rickert") a wholly owned subsidiary of
Azurel acquired the assets of Ben Rickert, Inc. ("BRI"), a 28-year old cosmetic
company, for $1.5 million. The Ben Rickert acquisition will help Azurel more
than double its core business, based on BRI's 1998 fiscal year end sales of
$10.9 million, which were prior to Azurel's acquisition of BRI. Azurel expects
to enjoy numerous advantages, such as transferring much of BRI's out source
manufacturing to PLC, as well as reducing overhead by combining several
departments. Additionally, the acquisition allows Azurel to enter the soap
manufacturing business and affords the Company more clout with `key account'
retailers for other Azurel product lines.
-7-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the three months ended March 31, 1999 were $4,092,011
compared to $2,989,289 for the three months ended March 31, 1998. This increase
is largely attributable to a $600,000 increase in sales to a major customer at
PLC. The division expects the increased business from this customer to
continue. The other major factor is the acquisition of Ben Rickert in July, 1998
(see page 6 analysis).
Cost of sales was $3,815,536 and $2,133,359 for the three months ended March 31,
1999 and the three months ended March 31, 1998, respectively. Gross profit as a
percentage of revenue was 6.8% for the three months ended March 31, 1999 and
28.6% for the three months ended March 31, 1998. The deterioration in gross
profit percentage in the quarter ended March 31, 1999 was primarily the result
of $700,000 of losses incurred at Ben Rickert in the sale of closeout
merchandise and the disposal of obsolete inventory.
Selling, general and administrative expenses for the three months ended March
31, 1999 and the three months ended March 31, 1998 were $1,849,800 and
$1,179,442, respectively. The increase in selling, general and administrative
expenses was due primarily to expenses associated with the Ben Rickert
operations ($622,224).
For the three months ended March 31, 1999 and the three months ended March 31,
1998, the Company's net income included non-cash expenses of $118,544 and
$133,973, respectively. Such expense was incurred principally as a result of
depreciation and amortization of assets acquired with the acquisition of PLC.
Interest expense was $147,740 for the three months ended March 31, 1999 and
$98,865 for the three months ended March 31, 1998. The increase represents
interest expense related to the Ben Rickert subsidiary ($85,960), partially
offset by reduced borrowing levels at the other operating locations.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity is accounts receivable of $3,529,911,
and inventory of $4,795,277.
The Company has funded its operations to date primarily through a combination of
debt and equity financing. In August 1997, Azurel completed its initial public
offering of 1,200,000 shares of common stock and 1,200,000 common stock purchase
warrants which resulted in approximately $4,800,000 to the Company.
In February 1998, the Company secured a revolving line of credit in the amount
of $3,500,000 with Finova Capital Corporation until February 2000. This line of
credit bears an interest rate of 2.5% above the prime rate and is secured by the
Company's receivables, inventory and a second lien on machinery and equipment.
An additional line of credit of $4,000,000 was secured for the subsidiary Ben
Rickert Corp in September 1998 with Finova. The terms and expiration date are
the same as the $3,500,000 line of credit except that the $4 million line is
secured by Ben Rickert's receivables, inventory and a first lien on Ben
Rickert's machinery and equipment. In January 1999, Ben Rickert received a
$500,000 over-advance from Finova, to be repaid half in June 1999 and the
balance in July.
In March 1998, the Company obtained a 5-year term loan of $272,112, secured by
new equipment and machinery, at a rate of approximately 10.5%, with The CIT
Group.
On August 12,1998 the Company obtained $1,237,587 additional equity through the
issuance of preferred shares.
During the first quarter of 1999, Azurel borrowed an aggregate of $850,000 in
unsecured notes, at interest rates ranging from 8% to 20.8%.
-9-
<PAGE>
Cash provided by operations for the first quarter 1999 was $50,860 as compared
to $406,948 used in operations for the first quarter 1998. Losses before
non-cash expenses of $1,601,878 in 1999, were funded essentially by a decrease
in accounts receivable, $1,110,529, and an increase in accounts payable
$453,828.
Increases of $850,000 in notes payable and $313,216 in long term debt
essentially offset a $1,108,226 decrease in the revolving line of credit, as
$43,211 in cash was used in financing activities in the first quarter of 1999,
as compared to $141,497 net cash provided by financing activities in the first
quarter 1998.
Cash availability as of March 31, 1998, against the Finova revolving line of
credit was approximately $69,000. Additionally, during the two week period ended
April 15, 1999, the Company sold to various investors an aggregate of 716,667
shares of its common stock at a price of $1.50 per share, for an aggregate sale
price of $1,075,000. In addition, an aggregate of 179,167 warrants (one warrant
for every four shares), to purchase shares of Azurel's common stock at an
exercise price of $2.00 per share, were issued to the above investors. The
Company has received all such monies and is also seeking to raise up to
$5,000,000 for the sale of up to 3,333,333 shares of common stock on
substantially the same terms as above, subject to NASDAQ approval.
-10-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 3. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a.) EXHIBIT DESCRIPTION
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27 Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
-11-
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AZUREL LTD.
/S/ GERARD SEMHON
-----------------
Gerard Semhon
Chief Executive Officer
/S/ PHILIP G. ORSI
------------------
Philip G. Orsi
Chief Financial Officer
Dated : May 13, 1999
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 82,395
<SECURITIES> 0
<RECEIVABLES> 3,647,743
<ALLOWANCES> 117,832
<INVENTORY> 4,795,277
<CURRENT-ASSETS> 8,744,593
<PP&E> 4,464,505
<DEPRECIATION> 2,761,389
<TOTAL-ASSETS> 13,435,987
<CURRENT-LIABILITIES> 9,431,025
<BONDS> 1,146,001
0
1,237,587
<COMMON> 5,319
<OTHER-SE> 1,450,463
<TOTAL-LIABILITY-AND-EQUITY> 13,435,987
<SALES> 4,092,011
<TOTAL-REVENUES> 4,092,011
<CGS> 3,815,536
<TOTAL-COSTS> 3,815,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,740
<INCOME-PRETAX> (1,721,065)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,721,065)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
