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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number: 0-22809
--------
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 May 12, 2000 was 6,211,797 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
------ ---
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
----------------------------
INDEX
-----
Page
Number
-------
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 5 - Other Information 11
SIGNATURE 12
<PAGE>
<TABLE>
<CAPTION>
PART I
------
FINANCIAL INFORMATION
---------------------
ITEM 1 FINANCIAL STATEMENTS
---------------------------
AZUREL LTD. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
March 31,
2000
----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C>
Cash $ 45,177
Accounts receivable, net of allowance for
doubtful accounts of $11,000 869,196
Inventory 2,709,086
Due from related parties 31,283
Prepaid expenses and other current assets 221,776
Net current assets of discontinued operations 1,210,998
------------
TOTAL CURRENT ASSETS 5,087,517
FURNITURE AND EQUIPMENT 218,845
GOODWILL 141,164
OTHER ASSETS 110,454
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 1,975,322
------------
$ 7,533,302
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 310,988
Accounts payable 2,424,855
Notes payable 3,007,000
Accrued expenses and other liabilities 1,066,168
Current portion of long-term debt 68,012
Capital lease obligation - current portion 136,000
------------
TOTAL CURRENT LIABILITIES 7,013,024
LONG TERM DEBT 1,528,167
OBLIGATIONS UNDER CAPITAL LEASE 64,000
MINORITY INTEREST 652,267
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 6,211,797 shares 6,212
Additional paid-in-capital 8,649,683
Accumulated deficit (12,617,178)
Translation loss (460)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,724,156)
------------
$ 7,533,302
============
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended March 31,
----------------------------
2000 1999
----------- ------------
<S> <C> <C>
NET SALES $ 382,031 $ 791,785
COST OF GOODS SOLD 179,331 1,338,774
----------- -----------
GROSS PROFIT (LOSS) 202,700 (546,989)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,137,469 1,098,137
----------- -----------
LOSS FROM OPERATIONS (934,769) (1,645,126)
INTEREST EXPENSE (129,305) (111,052)
OTHER EXPENSE (8,108) --
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS $(1,072,182) $(1,756,178)
DISCONTINUED OPERATIONS:
INCOME FROM OPERATIONS OF PLC (NET OF
MINORITY INTEREST; $8,182 IN 2000, $0 IN 1999) 16,364 35,113
----------- -----------
NET INCOME FROM DISCONTINUED OPERATIONS 16,364 35,113
----------- -----------
NET LOSS $(1,055,818) $(1,721,065)
=========== ===========
BASIC (LOSS) EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS $ (0.17) $ (0.33)
DISCONTINUED OPERATIONS 0.00 0.01
----------- -----------
BASIC LOSS PER COMMON SHARE $ (0.17) $ (0.32)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,211,797 5,318,845
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,055,818) $(1,721,065)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 14,366 3,240
Amortization 1,989 52,662
Loss (gain) on disposal of fixed assets 3,305 (643)
Provision for discontinued operations 132,000 --
Increase in minority interest 8,182 --
Changes in assets and liabilities:
Decrease in accounts receivable 965,428 1,118,820
Decrease in inventories 15,711 356,247
Decrease (increase) in prepaid expenses
and other current assets 106,190 (141,358)
(Increase) decrease in other assets (190,425) 4,092
Increase in accounts payable and accrued expenses 72,367 298,634
Increase in customer advances -- 22,517
Increase in net assets of discontinued operations (129,795) (25,018)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (56,500) (31,873)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,951) (700)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (5,951) (700)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Decrease in revolving line of credit (857,962) (1,069,642)
Proceeds from borrowings on notes 350,000 845,000
Borrowings from long term debt -- 301,322
Principal payments of capital lease obligations -- (703)
Payment of long term debt (9,100) (16,050)
Proceeds from exercise of stock options -- 100
Initial proceeds regarding impending sale of PLC 600,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 82,938 60,027
----------- -----------
Effect of exchange rate 9,453 --
NET INCREASE IN CASH 29,940 27,454
CASH, beginning of period 15,237 14,624
----------- -----------
CASH, end of period $ 45,177 $ 42,078
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTS ENDED MARCH 31,
---------------------------
2000 1999
-------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid for interest $ 72,510 $ 162,132
======== =========
Cash paid for income taxes $ 1,661 $ 3,042
======== =========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements as of March 31, 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 three months ended March 31, 2000.
In March 2000, the Company entered into an agreement to sell its
ownership in its Private Label Group subsidiary.
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, 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
-------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company sustained
losses of approximately $916,000 in the quarter ended March 31, 2000
and had a working capital deficiency of approximately $1,925,000 as of
that date. Furthermore, the Company 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. 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. 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, 2000 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.
4. NOTES PAYABLE
-------------
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%. The
Company has not repaid a $500,000 note to a lender which came due
during the first quarter of 2000, and is attempting to reach an
agreement to extend the term of the note with said lender. Another
lender notified the Company on May 5, 2000, that it is in default of
its obligations to make interest payments under two separate notes of
approximately $98,000 in the aggregate as of March 31, 2000. The same
lender has notified the Company that it is in default of making
payments on an equipment lease arrangement of $40,000 in principal
payments and approximately $8,000 in associated interest payments, as
of March 31, 2000. While the lender has not exercised its right to
accelerate any of the aforementioned payments, it has not waived its
rights to do so in the future.
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, 1999.
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------
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. In March 2000,
Azurel entered into an agreement to sell PLC and anticipates completion of sale
in May 2000. In October 1996, Azurel acquired the stock of Scent Overnight. In
October 1997, Azurel acquired the stock of Cambridge Business Services
Corporation.
In July 1998, Azurel's wholly owned subsidiary, Azurel Sales & Distribution,
acquired the assets of Ben Rickert, Inc.
7
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the three months ended March 31, 2000 (the "2000 period")
were $382,031 compared to $791,785 for the three months ended March 31, 1999
(the "1999 period"). This $409,734 decrease is largely attributable to a
significantly higher volume of closeout sales in the 1999 period.
Cost of goods sold were $179,391 and $1,338,774 for the 2000 period and the 1999
period, respectively. Approximately $455,000 of the decrease is attributable 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 the 2000 period. The gross profit as a percentage of
revenue was 53.1% for the 2000 period as compared to (69.1)% for the 1999
period. In addition to the aforementioned reclassification of overhead expenses,
the 1999 period was adversely impacted by the sale of closeout merchandise
(Almost $650,000 in cost on $300,000 in sales volume) and the disposal of
obsolete inventory (approximately $100,000).
Selling, general and administrative (S,G&A) expenses for the 2000 period and
the 1999 period were $1,137469 and $1,098,137, respectively. As mentioned in the
last paragraph, there were approximately $455,000 of overhead expenses in the
1999 period that were captured in cost of goods sold, but are treated as
selling, general and administrative expenses in 2000. If those expenses were,
instead, categorized as S,G&A in the 1999 period, the period-to-period
comparison would yield an approximate decrease of $400,000 in the current
period. The expense improvements include lower wages and associated costs,
$100,000, lower rent resulting from the move to a smaller facility, $63,000, and
lower amortization expense as a result of the write-off of formulae and customer
lists associated with the discontinued operation, $51,000.
Interest expense was $156,546 for the 2000 period and $35,113 for the 1999
period. The increase is a reflection of debt financing levels increasing from
about $2,000,000 at March 31, 1999, to $4,800,000 at March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity is accounts receivable of $869,196.
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.
8
<PAGE>
In December 1997, the Company secured a 4 year term loan of $800,000 at 11.3%
from GE Capital. Such loan is secured by the company's existing machinery and
equipment. In February 1998, the Company secured a revolving line of credit in
the amount of $3,500,000 with Finova Capital Corporation, which will be
transferred to Private Label Group upon completion of the sale. 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 Company's wholly
owned subsidiary, Azurel Sales & Distribution, in September 1998 with Finova
Capital Corp. The terms are the same as the $3,500,000 line of credit except
that the $4 million line is secured by Azurel Sales & Distribution's
receivables, inventory and a first lien on Azurel Sales & Distribution's
machinery and equipment. In June 1999, Finova notified the Company of a default
condition with respect to its security agreement, pursuant to which it increased
the interest rate by an additional 2% to 4 1/2% above prime, in accordance with
the terms of the security agreement. However, Finova has allowed a loan balance
to remain outstanding, in return for a $15,000 per month administrative fee. In
connection with the Company's sale of PLC, it is required, pursuant to the
contract, to pay off the outstanding balance owed to Finova, by the Company,
from the sale proceeds.
In August, 1998 the Company sold shares of its Series A Convertible Preferred
Stock, receiving net proceeds of approximately $1,237,587.
In April 1999 and May 1999, the Company sold 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, to several investors, pursuant to an exemption from the registration
requirements.
In May 1999, the Company obtained approximately $1,000,000 and converted a
$500,000 short-term note. The $1,500,000 is secured by a majority of PLC common
stock. On April 10, 2000, it was agreed to exchange this security for the
$1,800,000 promissory note that would be issued in connection with the sale of
PLC, conditional on the successful completion of such sale.
In June 1999, the Company entered into a web-site design and consulting
agreement with Tadeo E-Commerce Corp. In connection with the agreement, Tadeo
paid the Company a $500,000 non-refundable fee for the right to develop the
website and for the Company's consulting services pertaining to the cosmetic
industry. The Company believes it had substantially fulfilled all of its
requirements under the contract prior to June 30, 1999. In connection with the
agreement, Tadeo is entitled to receive a 5% royalty on gross revenues generated
from the website until it receives an aggregate of $500,000 in royalties, at
which time its royalty shall be reduced to 3% of gross revenues generated from
the website.
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%.
9
<PAGE>
Cash used in operating activities for the 2000 period was $26,451 as compared to
$31,873 for the 1999 period. Net loss of $895,976 before non-cash expenses re
funded essentially by a $965,428 decrease in accounts receivable.
Cash provided by investing activities amounted to $82,938 in the 2000 period and
$60,027 in the 1999 period. The initial proceeds from the impending sale of PLC,
$600,000 and from borrowings on notes, $350,000 were more than sufficient to pay
down loan balances with Finova, $867,062.
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 currently owns one-third of
the Private Label Group. Pursuant to the agreement, the Company will receive
cash of $886,000 ($825,000 of which has been received to date), a one-year
$400,000 promissory note and a two-year $1,800,000 promissory note. In addition,
upon completion of the sale, Mr. Assante has 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 expects the sale to be completed by May
31, 2000.
The Company 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 incurred has a working capital deficit of
$1,926,000 at March 31, 2000 and 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 future issuance of stock
and debentures and ultimately developing a viable business. In addition, the
Company has entered into an agreement to sell its Private Label Group.
10
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
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, 2000 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
------- -----------
27 Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
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 : May 22, 2000
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 45,177
<SECURITIES> 0
<RECEIVABLES> 880,196
<ALLOWANCES> 11,000
<INVENTORY> 2,709,086
<CURRENT-ASSETS> 5,087,517
<PP&E> 271,373
<DEPRECIATION> 52,528
<TOTAL-ASSETS> 7,533,302
<CURRENT-LIABILITIES> 7,013,024
<BONDS> 1,528,167
0
2,237,587
<COMMON> 6,212
<OTHER-SE> (3,967,955)
<TOTAL-LIABILITY-AND-EQUITY> 7,533,302
<SALES> 382,031
<TOTAL-REVENUES> 382,031
<CGS> 179,331
<TOTAL-COSTS> 179,331
<OTHER-EXPENSES> 1,137,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,305
<INCOME-PRETAX> (1,055,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,072,182)
<DISCONTINUED> 16,364
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,055,818)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
