UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
-------- ----------
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
---------------
(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
--- ---
The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of August 10, 1999 was 6,107,179 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
------
FINANCIAL INFORMATION
---------------------
ITEM 1 FINANCIAL STATEMENTS
---------------------------
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 89,000 $ 84,711
Accounts receivable, net of allowance for
doubtful accounts of $124,000 and $71,000 3,829,197 4,640,440
Inventories 4,335,529 4,995,113
Due from related parties 110,704 124,972
Prepaid expenses and other current assets 268,501 55,947
----------- -----------
TOTAL CURRENT ASSETS 8,632,931 9,901,183
FURNITURE AND EQUIPMENT 1,773,514 1,757,444
GOODWILL 155,926 156,052
FORMULAE AND CUSTOMER LISTS 2,665,345 2,770,543
DUE FROM RELATED PARTY -- 49,066
OTHER ASSETS 251,460 90,273
----------- -----------
$13,479,176 $14,724,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 3,313,762 $ 5,041,655
Accounts payable 2,357,141 2,696,913
Notes payable 845,000 --
Accrued expenses and other liabilities 743,614 494,962
Customer advances 249,102 31,408
Current portion of long-term debt 853,231 784,352
Capital lease obligation - current portion 66,725 43,848
----------- -----------
TOTAL CURRENT LIABILITIES 8,428,575 9,093,138
LONG TERM DEBT 2,416,011 1,003,975
CAPITAL LEASE OBLIGATION- NON-CURRENT PORTION 231,750 212,471
MINORITY INTEREST 357 --
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
6,107,179 shares in 1999;
5,318,745 in 1998 6,107 5,319
Additional paid-in-capital 8,549,788 7,475,476
Accumulated deficit (7,391,598) (4,303,405)
Translation gain/loss 600 --
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,402,484 4,414,977
----------- -----------
$13,479,176 $ 14,724,561
=========== ============
</TABLE>
See notes to financial statements.
-1-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------------------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 4,670,989 $ 3,302,062 $ 8,763,000 $ 6,291,351
COST OF GOODS SOLD 4,496,601 2,190,540 8,312,137 4,323,899
----------- ----------- ----------- -----------
GROSS PROFIT 174,388 1,111,522 450,863 1,967,452
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,028,681 1,283,163 3,878,481 2,462,605
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,854,293) (171,641) (3,427,618) (495,153)
INTEREST EXPENSE 250,926 78,045 398,666 176,910
GAIN ON SALE OF FIXED ASSETS 237,924 -- 237,924 --
OTHER INCOME - CONSULTING 500,000 -- 500,000 --
----------- ----------- ----------- -----------
NET LOSS $(1,367,295) $ (249,686) $(3,088,360) $ (672,063)
=========== =========== =========== ===========
BASIC LOSS PER COMMON SHARE $ (0.23) $ (0.05) $ (0.54) $ (0.13)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,053,845 5,293,745 5,686,345 5,293,745
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Six months Ended June 30,
------------------------------
1999 1998
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(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,088,360) $ (672,063)
-------------- ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 127,542 111,556
Amortization 105,324 107,358
Amortization of deferred financing costs 4,462 --
Translation loss 767 --
Gain on sale of fixed assets (237,924) --
Changes in assets and liabilities:
Decrease in accounts receivable 811,243 83,945
Decrease (increase) in inventories 659,584 (373,112)
(Increase) decrease in prepaid expenses
and other current assets (212,554) 56,030
(Increase) decrease in other assets (102,315) 77,754
(Decrease) increase in accounts payable
and accrued expenses (91,120) 130,685
Increase (decrease) in customer advances 217,694 (46,385)
-------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,805,658) (524,232)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (149,187) (306,818)
Disposal of property and equipment 243,500 --
-------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 94,313 (306,818)
-------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) increase in revolving line of credit (1,727,893) 169,737
Increase in notes payable 845,000 418,366
Decrease in restricted cash -- 290,521
(Decrease) in related party loans -- (149,983)
Borrowings from long term debt 1,910,294 --
(Decrease) in capital lease obligations (36,020) --
Payment of long term debt (351,203) (272,666)
Increase in minority interest 357 --
Proceeds from exercise of stock options 100 --
Proceeds from issuance of common stock 1,075,000 --
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,715,635 455,975
-------------- -------------
NET INCREASE (DECREASE) IN CASH 4,289 (375,075)
CASH, beginning of period 84,711 414,731
-------------- -------------
CASH, end of period $ 89,000 $ 39,656
============== =============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
1999 1998
---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 193,180 $ 188,868
============== =============
See notes to financial statements
-4-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
(UNAUDITED)
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1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements as of June 30, 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 June 30, 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 six months
ended June 30, 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. On June 2, 1999, $250,000 of the over-advance was
repaid. An additional $100,000 has been repaid in the third quarter.
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%. In May, 1999, the Company borrowed an additional $1,528,167.
As consideration, the Company has pledged a majority of PLC common stock,
and is obligated to pay monthly interest at a rate of 8% for a period
of 2 years, at which time the entire principal on the unsecured note
is payable.
4. CONSULTING AGREEMENT
--------------------
On June 1, 1999, the Company entered into an agreement to design,
develop, implement, and launch, a world wide web site for a client.
This project, for which the Company was paid $500,000, was successfully
completed by the end of June.
-5-
<PAGE>
5. 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.
Azurel Without Ben Rickert
Six Months Ended June 30
1999 1998
------------- ------------
Total Revenue $ 7,276,828 $ 6,291,351
Net Loss $ (299,976) $ (672,063)
Net Loss Per Share $ (0.06) $ (0.13)
Weighted Average Number of Shares 5,686,345 shares 5,293,745 shares
Ben Rickert Corp Only
Six Months Ended June 30
1999 1998
------------ ------------
Total Revenue $ 1,486,172 $ 2,088,168
Net Loss $ (2,788,384) $ (2,849,630)
Net Loss Per Share $ (0.52) $ (0.54)
Weighted Average Number of Shares 5,686,345 shares 5,293,745 shares
Consolidated
Six Months Ended June 30
1999 1998
------------- ------------
Total Revenue $ 8,763,000 $ 8,379,519
Net Loss $ (3,088,360) $ (3,521,693)
Net Loss Per Share $ (0.58) $ (0.67)
Weighted Average Number of Shares 5,686,345 shares 5,293,745 shares
The consolidated results of operations without the impact of Ben
Rickert, indicate higher sales volumes, which translated into a 55%
reduction in losses for the six months ended June 30, 1999 as compared
to the same period in 1998. The sale of closeout merchandise and the
disposal of obsolete Ben Rickert inventory had approximately a $1,600,000
negative impact on first half 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 SIX AND THREE MONTHS ENDED JUNE 30, 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., a 28-year old cosmetic company,
for $1.5 million. The Ben Rickert acquisition will help Azurel to enjoy numerous
advantages, such as transferring much of Ben Rickert's out source manufacturing
to PLC, as well as reducing overhead by combining several departments.
Additionally, the acquisition allows Azurel to enter the bath and body gift
business and affords the Company more clout with `key account' retailers for
other Azurel product lines.
At the end of the second quarter of 1999, Ben Rickert sold its fully depreciated
soap machines for $236,000. In addition to the positive cash flow impact, the
Company now has more flexibility in its breadth of soap line through the
outsourcing of soap manufacturing. At the same time, Ben Rickert moved into
significantly smaller facilities, which will reduce rent expense approximately
$400,000 on an annualized basis.
-7-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the six and three months ended June 30, 1999 were $8,763,000
and $4,670,989, respectively, compared to $6,291,351 and $3,302,062 for the six
and three months ended June 30, 1998. This increase is largely attributable to
the acquisition of Ben Rickert in July, 1998 (see page 6 analysis). However,
even without Ben Rickert sales in 1999, first half sales were still about
$1,000,000 higher in 1999 than a year earlier, almost entirely attributable to
increased sales to a major customer at PLC.
Cost of sales was $8,312,137 and $4,496,601 for the six and three months ended
June 30, 1999 and $4,323,899 and $2,190,540 for the respective periods ended
June 30, 1998. Gross profit as a percentage of revenue was 5.1% and 3.7 % for
the six and three months ended June 30, 1999 and 31.3% and 33.7% for the
corresponding periods ended June 30, 1998. The deterioration in gross profit
percentage in 1999 was primarily the result of losses incurred at Ben Rickert
from the sale of closeout merchandise and the disposal of obsolete inventory.
Selling, general and administrative (S,G & A) expenses for the six and three
months ended June 30, 1999 were $3,878,481 and $2,028,681 for the six and three
months ended June 30, 1999 as compared to $2,462,605 and $1,283,163 for the six
and three months ended June 30, 1998. The increase in S, G & A expenses was due
primarily to the Ben Rickert operations. Additionally, PLC experienced a first
half increase of approximately $250,000 in 1999 compared to 1998. This
represented $100,000 of increased research and development costs as well as
increased salaries and selling expenses.
For the six and three months ended June 30, 1999, the Company's net income
included non-cash expenses of $238,095 and $119,551, respectively. For the same
periods in 1998, the Company's net income included non-cash expenses of $218,914
and $84,941. Such expense was incurred principally as a result of depreciation
and amortization of assets acquired with the acquisition of PLC.
Interest expense was $398,666 for the six months ended June 30, 1999 and
$250,926 for the three months ended June 30, 1999, compared to $176,910 for the
six months ended June 30, 1998 and $78,045 for the three months ended June 30,
1998. The increase represents interest expense related to the Ben Rickert
subsidiary (approximately $150,000 for six months) and the interest associated
with the issuance of $845,000 of unsecured short term notes in 1999.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity is accounts receivable of $3,829,197,
and inventory of $4,335,529.
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 of the two-year facility
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. Half of this amount was repaid in June 1999
and another $100,000 has been repaid in the third quarter.
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 sold 1,500 units of convertible preferred stock
and warrants, receiving net proceeds of $1,237,587.
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%.
In April and May of 1999, the Company sold 716,667 shares of common stock @
$1.50 per share, receiving gross proceeds of $1,075,000.
In May, 1999, the Company obtained $1,528,167 additional funds, secured by an
8%, 2-year note, and a majority of PLC common stock.
-9-
<PAGE>
Cash used in operations for the first six months of 1999 was $1,805,658 as
compared to $524,232 for the first quarter 1998. Losses before non-cash expenses
of $3,088,189 in 1999, were partially funded by a decrease in accounts
receivable, $811,243, and in inventory, $659,584. The balance was funded
primarily by financing activities as follows:
Borrowings from long term debt, $1,910,294, raising $1,075,000 in equity
capital, and an $845,000 increase in notes payable, partially offset by a
$1,727,893 reduction in the revolving line of credit. The resulting $1,715,635
in net cash provided by financing activities during the first six months of 1999
compares to $455,975 net cash provided by financing activities during the first
half of 1998.
Cash availability as of June 30, 1998, against the Finova revolving line of
credit was approximately $100,000.
-10-
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 3. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a.) EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 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/ FRANK DESIMONE
-----------------------
Frank DeSimone
Chief Operating Officer
Dated : August 12, 1999
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 89,000
<SECURITIES> 0
<RECEIVABLES> 3,953,197
<ALLOWANCES> 124,000
<INVENTORY> 4,335,529
<CURRENT-ASSETS> 8,632,931
<PP&E> 4,592,959
<DEPRECIATION> 2,819,445
<TOTAL-ASSETS> 13,479,176
<CURRENT-LIABILITIES> 8,428,575
<BONDS> 2,416,011
<COMMON> 6,107
0
1,237,587
<OTHER-SE> 1,158,790
<TOTAL-LIABILITY-AND-EQUITY> 13,479,176
<SALES> 8,763,000
<TOTAL-REVENUES> 8,763,000
<CGS> 8,312,137
<TOTAL-COSTS> 8,312,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398,666
<INCOME-PRETAX> (3,088,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,088,360)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
