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 September 30, 2000
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.
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(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
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(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 November 21, 2000 was 6,911,797 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
AZUREL LTD. AND SUBSIDIARIES
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 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 7-9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 10
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
SIGNATURE 11
<PAGE>
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1 FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
SEPTEMBER 30, 2000
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(UNAUDITED)
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ASSETS
------
CURRENT ASSETS:
<S> <C>
Cash $ 5,437
Accounts receivable, net of allowance for
doubtful accounts of $37,000 433,309
Short-term note receivable 70,612
Inventory 2,113,047
Due from related parties 31,284
Prepaid expenses and other current assets 137,832
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TOTAL CURRENT ASSETS 2,791,521
FURNITURE AND EQUIPMENT 192,046
GOODWILL 137,186
LONG-TERM NOTE RECEIVABLE 1,800,000
OTHER ASSETS 111,090
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$ 5,031,843
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank Loans $ 21,415
Accounts payable 1,843,775
Notes payable 2,984,533
Accrued expenses and other liabilities 1,284,604
Current portion of long-term debt 1,577,741
Capital lease obligation - current portion 184,000
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TOTAL CURRENT LIABILITIES 7,896,068
LONG TERM DEBT --
OBLIGATIONS UNDER CAPITAL LEASE 16,000
MINORITY INTEREST 357
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, authorized 4,000,000 shares;
issued and outstanding 1,001,500 shares 2,237,587
Common stock, $.001 par value, authorized 24,000,000 shares,
issued and outstanding 6,911,797 shares 6,912
Additional paid-in-capital 8,998,983
Accumulated deficit (14,126,453)
Translation loss 2,389
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TOTAL STOCKHOLDERS' DEFICIT (2,880,582)
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$ 5,031,843
=============
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended September 30, Nine Months ended September 30,
---------------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 421,590 $ 809,075 $ 1,296,470 $ 2,610,870
COST OF GOODS SOLD 290,162 545,233 746,267 3,651,360
-------------- ---------------- ---------------- ------------
GROSS PROFIT (LOSS) 131,428 263,842 550,203 (1,040,490)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 792,338 1,065,652 3,091,121 3,377,684
-------------- ---------------- ---------------- ------------
LOSS FROM OPERATIONS (660,910) (801,810) (2,540,918) (4,418,174)
INTEREST EXPENSE (133,098) (113,946) (505,400) (427,307)
OTHER INCOME (EXPENSE) 20,655 -- 283,961 736,000
-------------- ---------------- ---------------- ------------
NET LOSS FROM CONTINUING OPERATIONS $ (773,353) $ (915,756) $ (2,762,357) $ (4,109,481)
INCOME FROM DISCONTINUED OPERATIONS -- 174,842 197,260 280,208
-------------- ---------------- ---------------- ------------
NET LOSS $ (773,353) $ (740,914) $ (2,565,097) $ (3,829,273)
============== ================ ================ ============
BASIC (LOSS) EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.12) $ (0.15) $ (0.40) $ (0.71)
DISCONTINUED OPERATIONS -- 0.03 0.03 0.05
============== ================ ================ ============
BASIC LOSS PER COMMON SHARE $ (0.12) $ (0.12) $ (0.37) $ (0.66)
============== ================ ================ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,522,908 6,107,179 6,911,797 5,826,623
============== ================ ================ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
---------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,565,096) $ (3,829,274)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 40,286 10,233
Amortization 5,967 5,298
Loss (gain) on disposal of fixed assets 3,305 (237,924)
Provision for discontinued operations 132,000 --
Increase in minority interest -- 357
Changes in assets and liabilities:
Decrease in accounts receivable 1,401,315 1,734,495
Decrease (increase) in inventories 611,750 (272,600)
Increase in prepaid expenses and other current assets (359) (441,931)
Increase in other assets (569) (85,140)
Decrease in accounts payable and accrued expenses (290,277) (145,007)
Increase in net assets of discontinued operations (73,024) (30,653)
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (734,702) (3,292,146)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,951) (46,805)
Disposal of property and equipment 879 237,924
---------------- ----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (5,072) 191,119
---------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from repayment of short-term note receivable 153,791 --
Decrease in revolving line of credit (1,168,950) (2,711,050)
Increase in bank loans 21,415 --
Proceeds from borrowings on notes 677,533 1,983,000
Borrowings from long term debt -- 2,660,294
Principal payments of capital lease obligations -- (2,105)
Payment of long term debt (27,538) (650,570)
Proceeds from exercise of stock options -- 100
Proceeds from sale of common stock -- 1,075,000
Proceeds from sale of preferred stock -- 1,000,000
Proceeds from sale of PLC 1,061,418 --
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 717,669 3,354,669
---------------- ----------------
Effect of exchange rate on cash 12,305 (4,890)
---------------- ----------------
NET (DECREASE) INCREASE IN CASH (9,800) 248,752
CASH, beginning of period 15,237 14,624
---------------- ----------------
CASH, end of period $ 5,437 $ 263,376
================ ================
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
------------------------------------------
2000 1999
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid for interest $ 157,260 $ 151,083
=================== ===================
Cash paid for income taxes $ 11,908 $ --
=================== ===================
Notes received in connection with sale of subsidiary $ 2,024,403 $ --
=================== ===================
Conversion of notes to common stock $ 350,000 $ --
=================== ===================
</TABLE>
See notes to financial statements
-4-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------
(UNAUDITED)
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1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements as of September 30,
2000 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 nine months ended September 30, 2000.
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 nine months
ended September 30, 2000 are not necessarily indicative of the results
expected for the full year ending December 31, 2000. Certain prior year
amounts have been reclassified to conform with the current year's
presentation.
2. GOING CONCERN
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The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company sustained
losses of approximately $2,565,000 for the nine months ended September
30, 2000 and had a working capital deficiency of approximately
$5,105,000 as of that date. Although the Company is current with
respect to payments of year 2000 payroll tax obligations, it has not
remitted 1999 third and fourth quarter federal and state payroll taxes
of approximately $325,000. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans with respect to these matters include restructuring
its existing debt, raising additional capital through issuance of stock
and debentures, and ultimately developing a viable business through new
leadership. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.
5
<PAGE>
3. NOTES PAYABLE
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During the first quarter of 2000, the Company borrowed an aggregate of
$350,000 in unsecured short term notes at an interest rate of 8%. These
notes were converted to 700,000 shares of the Company's common stock at
a price of $.50 per share in June 2000. The Company has extended a
$500,000 note to a lender which came due during the first quarter of
2000 to the first quarter of 2001, in return for a security interest in
the Company's inventory. Another lender notified the Company that it
was in default of payment of a $300,000 note due on July 19, 2000,
along with accrued interest of $27,000. A third lender notified the
Company on August 2, 2000, that it is in default of its obligations to
repay a $550,000 note along with approximately $50,000 of interest on
June 30, 2000. The same lender also notified the Company, on the same
day, that it is in default of making interest payments of approximately
$130,000 on a two-year, $1,528,167 note, as of June 30, 2000. This note
is collateralized by the $1,800,000 long term note receivable from
Private Label Cosmetics, Inc. (see Note 4). During the third quarter of
2000, Azurel borrowed an aggregate of approximately $328,000 in
unsecured notes, at an interest rate of 8%.
4. NOTE RECEIVABLE
---------------
The $1,800,000 long-term note receivable from Private Label Cosmetics,
Inc., pursuant to the sale of the Company's ownership in its subsidiary
in May 2000, is collateralized against a $1,528,167 note, payable in
June 2001. Furthermore, the note is in the hand of the lender's
attorney, who also issued a default letter to the Company relative to
non-payment of interest as explained above.
5. LEGAL
-----
The Company has received legal notification of claims from certain
vendors and former employees and is in the process of negotiating
settlements to most of these claims. In certain instances, the Company
intends to challenge the validity of these claims.
6
<PAGE>
6. REVOLVING LINE OF CREDIT
------------------------
On May 26, 2000, on the same day that the Company consummated the sale
of its Private Label subsidiary, the Company used the proceeds obtained
at the closing, to pay off the remaining balance on its revolving line
of credit.
7. PURCHASE ORDER FINANCING AND FACTORING AGREEMENT
------------------------------------------------
In July 2000, the Company signed a purchase order financing and
factoring agreement, whereby 100 percent of its overseas purchases can
be funded by letters of credit, and the receivables generated by the
sale of this merchandise will be factored. The aforementioned inventory
and receivables will be secured by the financing company and factoring
company, respectively.
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, 1999.
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
---------------------------------------------------------------
Azurel, Ltd., hereinafter "Azurel" or "the Company", through its
wholly-owned subsidiaries, markets, and sells private label cosmetics,
fragrances and skincare products, in addition to providing warehousing,
assembly and distribution services for other companies in related
businesses. Prior to the sale of its Private Label Cosmetics subsidiary
on May 26, 2000, the Company was also engaged in the manufacture of
many of those same products.
7
<PAGE>
RESULTS OF OPERATIONS
---------------------
Total revenues for the nine and three months ended September 30, 2000
were $1,296,470 and $421,590, respectively, compared to $2,610,870 and
$809,075 for the nine and three months ended September 30, 1999. This
decrease is largely attributable to a significantly higher volume of
closeout sales in the first half of 1999 and delays in receiving
product to ship for the Christmas season until the fourth quarter of
2000.
Cost of goods sold were $746,267 and $290,162 for the nine and three
months ended September 30, 2000 and $3,651,360 and $545,233 for the
respective periods ended September 30, 1999. The significant decrease
is attributable to two factors. The first factor relates to the
capturing of overhead costs at the Azurel Sales and Distribution
facility. In the 1999 period, when this subsidiary was manufacturing
soap, overhead was allocated to cost of goods sold. The Company,
however, sold its soap machines in June, 1999, and is now recording all
overhead costs in "Selling, general and administrative expenses" in
2000. Secondly, the Company sold off significant quantities of slow
moving inventory and disposed of obsolete inventory during the first
half of 1999. The gross profit as a percentage of revenue was 42.4% and
31.2% for the nine and three months ended September 30, 2000 as
compared to (39.9)% and 32.6% for the corresponding periods ended
September 30, 1999.
Selling, general and administrative (S,G&A) expenses for the nine and
three months ended September 30, 2000 were $3,091,121 and $792,338 and
$3,377,684 and $1,065,652 for the nine and three months ended September
30, 1999. As mentioned in the last paragraph, overhead expenses in 1999
were captured in cost of goods sold, but are treated as selling,
general and administrative expenses in 2000. Current year expenses were
adversely impacted by approximately $100,000 of increased computer
training and programming costs associated with the implementation of a
new computer system and increased legal expenses resulting from the
sale of the Company's Private Label Cosmetics subsidiary. These factors
were more than offset by current year expense reductions in wages and
associated costs of approximately $400,000 and lower rent resulting
from the move to a smaller facility by approximately $125,000.
Additionally, amortization expense was approximately $150,000 lower in
2000 due to the write-off of formulae and customer lists attributable
to the discontinued operation, in December 1999.
Interest expense was $505,400 for the nine months ended September 30,
2000 and $133,098 for the three months ended September 30, 2000
compared to $427,307 for the nine months ended September 30, 1999 and
$113,946 for the three months ended September 30, 1999. The increase is
a reflection of increased debt financing levels in 2000, partially
offset by a reduction in the revolving line of credit.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's primary source of liquidity is accounts receivable of
$433,309.
In September 1999, the Company sold $800,000 of its Series C
Convertible Preferred Stock.
During the first quarter of 2000, Azurel borrowed an aggregate of
$350,000 in unsecured notes, at an interest rate of 8%. These notes
were converted to 700,000 shares of common stock at a price of $.50 per
share in June 2000.
During the third quarter of 2000, Azurel borrowed an aggregate of
approximately $328,000 in unsecured notes, at an interest rate of 8%.
In July, 2000, the Company signed a purchase order financing and
factoring agreement, whereby 100 percent of its overseas purchases can
be funded by letters of credit, and the receivables generated by the
sale of this merchandise will be factored. The aforementioned inventory
and receivables are secured by the financing company and factoring
company, respectively.
Cash used in operating activities for the nine months ended September
30, 2000 was $734,702 as compared to $3,292,146 for the corresponding
1999 period. This decrease is primarily attributable to a decrease in
9
<PAGE>
net loss of approximately $1,300,000. Net losses of $2,383,538 before
non-cash expenses were funded essentially by a $1,401,315 decrease in
accounts receivable and a $611,750 decrease in inventory.
Cash used in investing activities amounted to $5,072 for the nine
months ended September 30, 2000 compared to $191,119 provided by
investing activities for the nine months ended September 30, 1999. The
1999 figure is primarily a reflection of the sale of the soap machines
at the Azurel Sales & Distribution facility in June 1999. The proceeds
from the sale of PLC, $1,061,418, proceeds from the issuance of notes
$677,533 (of which $350,000 was converted to common stock), and
reduction of the short term note receivable, $153,791, were more than
sufficient to pay down loan balances with Finova, $1,168,950.
DISCONTINUED OPERATIONS
-----------------------
In March 2000, the Company entered into an agreement to sell its
two-thirds interest in Private Label Cosmetics, Inc. and Fashion
Laboratories, Inc. (collectively known as the "Private Label Group") to
Michael J. Assante, President of Private Label Cosmetics. Mr. Assante
previously owned one-third of the Private Label Group. The Company
completed the sale on May 26, 2000, receiving an aggregate of
$1,061,418 in cash, a one-year $224,403 promissory note and a two-year
$1,800,000 promissory note. In addition, Mr. Assante agreed to forgive
$600,000 owed to him by the Company in connection with the Company's
acquisition of the Private Label Group in August 1996.
The Company had established a provision for an estimated loss of
approximately $1,156,000. The results of operations for the
discontinued operations have been reclassified for all periods in the
accompanying financial statements.
GOING CONCERN
-------------
The Company received a going concern opinion from its auditors for the
year ended December 31, 1999. The Company sustained losses of
approximately $2,565,000 for the nine months ended September 30, 2000
and had a working capital deficiency of approximately $5,105,000 as of
that date. Although the Company is current with respect to payment of
its year 2000 payroll tax obligations, it has not remitted 1999 third
and fourth quarter federal and state payroll taxes of approximately
$325,000. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect
to these matters include restructuring its existing debt, raising
additional capital through issuance of stock and debentures, and
ultimately developing a viable business through new leadership.
10
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
-----------------
On or about September 11, 2000, International Licensing (California)
Corp., filed a complaint for damages for breach of contract in the
Superior Court in the State of California, county of San Diego. The
complaint references an agreement to collect royalties for the use of
the Hang Ten trademark. The Company is vigorously defending this action
and believes, with no assurance, that it has a meritorious defense.
Although the ultimate outcome of this action can not be determined at
this time, the Company does not believe that the result will have a
material adverse effect on the Company's financial position or overall
trends in results of operations.
On or about November 16, 2000, a former officer of the Company filed
suit against the Company in the Superior Court in the State of New
York, county of New York, claiming breach of an employment contract and
default on a promissory note. In the opinion of management, this suit
is without merit. Although the ultimate outcome of this action can not
be determined at this time, the Company does not believe that the
result will have a material adverse effect on the Company's financial
position or overall trends in results of operations.
Item 5. OTHER INFORMATION
-----------------
Meeting with Nasdaq - On March 23, 2000, the Company met with the
Nasdaq Listing Qualifications Panel ("The Panel") to respond to
concerns raised by Nasdaq. Although the Company believed it was in
compliance with corporate governance requirements, on April 28, 2000,
the Panel determined to delist the Company's securities for public
interest concerns. The Panel also cited the Company's December 31, 1999
reported net tangible assets of $(820,944) - net tangible assets as of
March 31, 2000 are reported as $(1,792,607)- and that, as of the close
of business on April 27, 2000, the Company failed to evidence a minimum
bid price of $1.00 per share, as required by Nasdaq Marketplace Rule
430(c)(4), for 27 consecutive trading days.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a.) EXHIBIT DESCRIPTION
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27 Financial Data Schedule
(b.) Reports on Form 8-K
-------------------
An 8-K was filed on July 26, 2000, announcing
various management changes.
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/ EDWARD ADAMCIK
------------------
Edward Adamcik
Chief Financial Officer
/S/ STEVEN M. BARRY
-------------------
Steven M. Barry
Corporate Controller and Secretary
Dated : November 21, 2000
12
