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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|q?[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
|q? 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 000-14747
AZUL HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
30 New Crossing Road, Reading, MA 01867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (781) 756-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[x] Yes ---------- No ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
February 14, 2000.
Common Stock, $.03 par value 2,854,513
(Title of each class) (number of shares)
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<PAGE>
Form 10-Q
Table of Contents
Page
Part I. Financial Information
Consolidated Balance Sheets
at December 31, 1999 and March 31, 1999.............................. 2
Consolidated Statements of Operations
for the three and nine months ended December 31, 1999 and 1998....... 3
Consolidated Statements of Cash Flows
for the nine months ended December 31, 1999 and 1998................. 4
Notes to Consolidated Financial Statements............................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 9
Quantitative and Qualitative Disclosures About Market Risk........... 12
Part II. Other Information.................................................13
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. The important factors
discussed below under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including risks related to the
Company's credit line availability and debt restructuring efforts, among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.
1
<PAGE>
ITEM 1.
AZUL HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
December 31, March 31,
1999 1999
---------- -------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 547 $ 446
Accounts receivable:
Trade, less allowance for doubtful accounts of $224 at December 31, 1999
and $443 at March 31, 1999 .............................................. 1,677 1,608
Inventories ................................................................ 11 513
Other current assets ....................................................... 449 297
---------- -------
Total current assets ................................................... 2,684 2,864
Property and equipment, net ................................................ 605 639
Other assets, net, principally software development costs .................. 385 563
---------- -------
Total assets ......................................................... $ 3,674 $ 4,066
========== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder, less unamortized discount of $170 at
December 31, 1999 and $680 at March 31, 1999............................... $ 14,637 $11,245
Current portion of long-term debt .......................................... 1,867 2,206
Accounts payable and accrued expenses ...................................... 3,245 2,829
Other current liabilities .................................................. 2,358 2,501
---------- -------
Total current liabilities .............................................. 22,107 18,781
---------- -------
Total liabilities .................................................... 22,107 18,781
---------- -------
Minority interest in subsidiary .............................................. 1,832 1,015
Commitments and contingencies ................................................ - -
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700,000 shares authorized;
no shares issued ........................................................ - -
Series B convertible preferred stock, $1.00 par value; 300,000 shares
authorized; 234,403 issued and outstanding at December 31, 1999 and
March 31, 1999 (aggregate liquidation preference of $3,316 and $3,246,
respectively) ........................................................... 235 235
Series C convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; 175,000 shares issued and outstanding at December 31, 1999
and March 31, 1999 ...................................................... 1,750 1,750
Common stock, $.03 par value; 25,000,000 shares authorized; 2,949,616
issued and outstanding at December 31, 1999 and March 31, 1999 .......... 88 88
Additional paid-in capital ................................................. 51,458 51,124
Accumulated deficit ........................................................ (72,628) (67,759)
---------- -------
(19,097) (14,562)
Less:
Treasury stock, at cost; 95,333 shares at December 31, 1999 and
March 31, 1999 .......................................................... 1,168 1,168
---------- -------
Total stockholders' deficit ............................................... (20,265) (15,730)
---------- -------
Total liabilities and stockholders' deficit .......................... $ 3,674 $ 4,066
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
AZUL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
------------------------------- ---------------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited)
Revenues:
Systems .......................................... $ 656 $ 963 $ 2,041 $ 2,728
Service .......................................... 1,637 1,783 5,206 5,077
------- ------- ------- -------
Total revenues ............................... 2,293 2,746 7,247 7,805
------- ------- ------- -------
Cost of sales:
Systems .......................................... 244 250 747 1,173
Service .......................................... 973 1,119 3,325 3,722
------- ------- ------- -------
Total cost of sales .......................... 1,217 1,369 4,072 4,895
------- ------- ------- -------
Gross margin ...................................... 1,076 1,377 3,175 2,910
------- ------- ------- -------
Expenses:
Research and development ......................... 754 801 2,460 2,905
Marketing, general and administrative ............ 1,362 1,769 4,202 6,178
------- ------- ------- -------
Total operating expenses ..................... 2,116 2,570 6,662 9,083
------- ------- ------- -------
Loss from operations .............................. (1,040) (1,193) (3,487) (6,173)
------- ------- ------- -------
Other expense, net:
Interest income .................................. 2 3 13 9
Interest expense - third party ................... (201) (30) (840) (95)
Interest expense - stockholder ................... (250) (385) (484) (999)
------- ------- ------- -------
Total other expense, net .......................... (449) (412) (1,311) (1,085)
------- ------- ------- -------
Loss before income taxes .......................... (1,489) (1,605) (4,798) (7,258)
Provision for income taxes ........................ - - - -
------- ------- ------- -------
Net loss .......................................... (1,489) (1,605) (4,798) (7,258)
Series B Preferred Stock dividends ................ 24 24 71 72
------- ------- ------- -------
Net loss allocable to common stockholders ......... $(1,513) $(1,629) $(4,869) $(7,330)
======= ======= ======= =======
Basic and diluted earnings per share:
Loss allocable to common stockholders ............. (0.53) (0.57) (1.71) (2.57)
------- ------- ------- -------
Net loss per share ................................ (0.53) (0.57) (1.71) (2.57)
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding .................. 2,855 2,854 2,855 2,854
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AZUL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<S> <C> <C>
Nine Months Ended
----------------------------------
December 31, December 31,
1999 1998
------- -------
(Unaudited)
Operations:
Net loss ................................................................... $(4,798) $(7,258)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization .............................................. 464 1,414
Interest expense related to warrants ....................................... 510 -
Provisions for losses on accounts receivable ............................... (110) 397
Loss on sale of assets ..................................................... - 379
Operating assets and liabilities:
Accounts receivable ...................................................... 41 1,702
Inventories .............................................................. 502 164
Accounts payable and accrued expenses .................................... 415 (294)
Other current liabilities ................................................ (150) (38)
Other assets ............................................................. (144) 94
------- -------
Net cash used for operations ............................................... (3,270) (3,440)
Investments:
Additions to property and equipment ........................................ (261) (160)
Capitalized software ....................................................... - (176)
Proceeds from sale of assets ............................................... - 3
------- -------
Net cash used for investments .............................................. (261) (333)
Financing:
Proceeds from line of credit from a stockholder ............................ 2,962 3,300
Proceeds from sale of subsidiary's preferred stock ......................... 750 600
Repayment of line of credit to a stockholder ............................... (80) -
------- -------
Net cash provided from financing ........................................... 3,632 3,900
Net increase in cash and cash equivalents .................................. 101 127
Cash and cash equivalents at the beginning of the period ................... 446 357
------- -------
Cash and cash equivalents at the end of the period ......................... $ 547 $ 484
======= =======
Supplemental Information:
Accrued Preferred Stock dividends ......................................... 71 72
Extinguishment of 4% note payable ......................................... 347 -
Extinguishment of debentures .............................................. 25 -
Note receivable from stockholder .......................................... - 400
Conversion of debt from stockholder ....................................... - 1,750
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying financial statements reflect
all adjustments (including normal recurring adjustments) necessary to
present fairly the consolidated financial position as of December 31, 1999
and the results of consolidated operations and consolidated cash flows for
the three and nine months ended December 31, 1999 and 1998 of Azul
Holdings Inc. ("Parent") and its majority-owned subsidiary Xyvision
Enterprise Solutions, Inc. ("Subsidiary" or "XyEnterprise") (Parent and
Subsidiary are sometimes collectively referred to as the "Company").
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation 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 and would impact future results of operations and cash
flows.
The results of consolidated operations for the three and nine months ended
December 31, 1999 are not necessarily indicative of the results of
consolidated operations that may be expected for the complete fiscal year.
2. The Company sells its products to a wide variety of customers in a variety
of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and
such losses have been within management's expectations. Trade receivables
do not contain any material amounts collectible over a period in excess of
one year.
3. Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of third party products
and software.
4. Parent has a line of credit with Tudor Trust ("Tudor Trust"), the largest
stockholder of Parent. Mr. Jeffrey Neuman, the grantor, sole trustee and
sole current beneficiary of Tudor Trust, also serves as Chairman of the
Board of Directors of Parent. The line, which is payable on March 31,
2000, is collateralized by the common stock of Subsidiary held by Parent,
and has been used for working capital and general business purposes.
Interest on the line of credit is payable on March 31, 2000 in cash,
provided that Tudor Trust has the option to receive interest on a
quarterly basis after January 1, 1999, payable in shares of Parent's
common stock ("Parent Common Stock") based on the fair market value of the
Parent Common Stock on such payment dates. Since the initial adoption on
June 30, 1992, there have been numerous amendments to the line of credit,
with each amendment increasing the maximum loan amount thereunder and
providing other terms and provisions.
On July 1, 1998, Parent and Tudor Trust entered into an additional
amendment to the line of credit that, among other things, (i) increased
the maximum loan amount thereunder to $13,500,000, (ii) provided that
Tudor Trust shall have the sole discretion to decide whether or not to
make advances of funds thereunder, (iii) provided Tudor Trust with the
option of receiving the interest payable thereunder in cash or in shares
of Parent Common Stock based on the fair market value of the Parent Common
Stock on the interest payment dates, (iv) provided for the issuance by
Parent to Tudor Trust of warrants to purchase 600,000 shares of Parent
Common Stock at an exercise price of $1.25 per share (representing the
fair market value of the Parent Common Stock on the date of issuance), and
(v) increased the interest rate on the line of credit from 6% to 8% per
annum. The value of the warrants (representing the parties' understanding
as to the fair market value of the Parent Common Stock as of the date the
warrants were issued) is part of the unamortized discount of the note
issued by Parent and payable to Tudor Trust evidencing the line of credit.
On December 31, 1998, as part of the corporate restructuring plan further
described in Note 5 to the
5
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Consolidated Financial Statements, Tudor Trust converted $1,750,000 of the
outstanding indebtedness under the line of credit into 175,000 shares of
Parent's Series C Preferred Stock ("Parent Series C Preferred") (which are
convertible into 1,750,000 shares of Parent Common Stock). In addition,
Parent and Tudor Trust entered into an additional amendment to the line of
credit that, among other things (i) provided that an additional $5,000,000
of the outstanding indebtedness became convertible in June 1999, into
shares of Parent Series C Preferred at a rate of $10.00 per share at the
option of Tudor Trust, (ii) decreased the interest rate on the convertible
portion of the line of credit from 8% to 6% per annum, (iii) decreased the
maximum loan amount thereunder to $12,227,000, less any amount converted
from time to time into shares of Parent Series C Preferred, (iv) Tudor
Trust released its liens on the assets of Parent that were transferred to
Subsidiary while taking a security interest in the stock of Subsidiary
held by Parent, and (v) Tudor Trust also surrendered for cancellation
warrants to purchase an aggregate of 4,956,000 shares of Parent Common
Stock at various exercise prices. On December 7, 1999, Parent and Tudor
Trust entered into an additional amendment to the line of credit that
increased the maximum loan amount to $12,326,620.
Notwithstanding the fact such warrants have been cancelled, as described
in the preceding paragraph, Parent has continued to amortize the portion
of the warrants related to Parent's outstanding line of credit balance
into interest expense.
On December 31, 1998, Subsidiary and Tudor Trust entered into a Loan
Agreement providing Subsidiary with a $1,000,000 line of credit for
working capital and general business purposes, which was subsequently
amended to $2,400,000 with a maturity extended to March 31, 2003. This
line of credit bears an interest rate of 8% per annum, and is
collateralized by substantially all of the assets of Subsidiary.
The Company is currently in negotiations with Tudor Trust to facilitate
the Company's cash requirements for at least the remainder of fiscal 2000.
There can be no assurance, however, that such negotiations will be
successful or that increased borrowings will be available under the
Company's line of credit or otherwise from Tudor Trust.
As of December 31, 1999, the Company had an outstanding credit line
balance of $14,557,000, of which $2,200,000 are the borrowings of the
Subsidiary. As of February 11, 2000, the Company had an outstanding credit
line balance of $14,757,000, of which $2,400,000 are borrowings of the
Subsidiary.
5. In May 1987, Parent issued an aggregate of $25,000,000 principal aggregate
amount of 6% Convertible Subordinated Debentures due 2002 (the
"Debentures") convertible into Parent Common Stock at a conversion price
of $112.50 per share. Interest on the Debentures is payable annually and
the Debentures may be called by Parent under certain conditions. During
fiscal 1992, Parent began a program to restructure its financial position,
specifically, the Debentures, which continues to this date.
From March 10, 1992 to September 30, 1996, Parent completed restructuring
transactions pursuant to which the holders of an aggregate of $19,035,000
aggregate principal amount of Debentures exchanged such Debentures for a
combination of unsecured, unsubordinated promissory notes issued by Parent
bearing interest at 15% per year (the "15% Notes") and shares of Parent
Common Stock. Between September 30, 1996 and December 31, 1998, Parent
completed restructuring transactions pursuant to which holders of an
aggregate of $2,020,000 of Debentures generally exchanged such Debentures
for shares of Parent Common Stock. As discussed in the second to the last
paragraph of this Note 5, Tudor Trust has made an offer to purchase
certain outstanding Debentures, 15% Notes and 4% Notes. As a result,
$25,000 of Debentures were repurchased and cancelled during the first
quarter of fiscal 2000. The gain created by such cancellation was treated
as a contribution of capital because Tudor Trust is a related and
significant stockholder. As of December 31, 1999, an aggregate of
$1,330,000 Debentures remained outstanding. Parent may seek to restructure
the remaining Debentures, but there can be no assurance that it will do
so.
Parent did not make the interest payments due on the Debentures on May 5,
of 1992, 1993, 1994, 1995, 1996, 1997, 1998 or 1999. As of December 31,
1999, the cumulative unpaid interest due on the Debentures totaled
$703,000. Under the terms of the Indenture covering the Debentures, the
Trustee or the holders of no less than
6
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
25% of outstanding principal amount of Debentures have the right to
accelerate the maturity date of the remaining Debentures. As of December
31, 1999, no such acceleration had occurred or been threatened.
25% of outstanding principal amount of Debentures have the right to
accelerate the maturity date of the remaining Debentures. As of December
31, 1999, no such acceleration had occurred or been threatened.
As of March 31, 1998, Parent completed restructuring transactions pursuant
to which holders of 15% Notes in an aggregate principal amount of
$5,709,000 with accrued interest of $2,353,000 generally exchanged such
15% Notes (including all rights to receive any interest accrued thereon)
for a combination of (i) unsecured, unsubordinated promissory notes of
Parent bearing interest at 4% per year (the "4% Notes"), (ii) shares of
Parent Common Stock and (iii) shares of Parent Series B Preferred. The
Parent Series B Preferred accrues a cumulative dividend in the amount of
$.40 per share per annum, whether or not declared, and has a liquidation
preference of $12.50 per share, plus any dividends declared or accrued but
unpaid. As of December 31, 1999, cumulative accrued but unpaid dividends
on the Parent Series B Preferred totaled $375,000. As of December 31,
1999, 15% Notes in an aggregate principal amount of $60,000 with accrued
interest of $89,000 were overdue. Parent may seek to restructure the
remaining 15% Notes, but there can be no assurance that it will do so. No
15% notes have been repurchased by Tudor Trust.
As a result of Tudor Trust's offer to purchase certain outstanding
Debentures, 15% Notes and 4% Notes, $346,500 of 4% Notes were repurchased
and cancelled during the first quarter of fiscal 2000. The gain created by
such cancellation was treated as a contribution of capital because Tudor
Trust is a related and significant stockholder. As of June 30, 1999,
Parent had completed restructuring transactions pursuant to which the
holders of 4% Notes in an aggregate principal amount of $5,321,000
exchanged such 4% Notes for shares of Parent Common Stock plus accrued but
unpaid interest. As of December 31, 1999, 4% Notes in an aggregate
principal amount of $389,000 with accrued interest of $30,000 were
overdue.
Parent continues to negotiate restructuring transactions with as many of
the remaining holders of Debentures, 15% Notes and 4% Notes as possible.
Independently of Parent, Tudor Trust has made an offer to certain holders
of Debentures, 15% Notes and 4% Notes to purchase such securities at 10%
of their face amount. Tudor Trust has agreed to reduce Parent's liability
with respect to such securities to the purchase price paid by Tudor Trust.
Despite the fact that 96% of the original Debentures have been exchanged
or sold by the holders for such securities, Parent has been unable to
identify most of the remaining original Debentureholders. For this reason,
Parent can still give no assurance about the outcome of the effort to
restructure the Debentures and does not expect the matters to be resolved
in the near future.
On December 31, 1998, Parent completed a corporate restructuring plan (the
"Restructuring") pursuant to which, among other things, substantially all
of the assets of Parent's publishing business were transferred to
Subsidiary in exchange for shares of the common stock of Subsidiary, while
the majority of Parent's liabilities, including obligations under its line
of credit with Tudor Trust, remained with Parent. As described in Note 4
to the Consolidated Financial Statements, Parent's credit line with Tudor
Trust was amended. In addition, Tudor Trust converted $1,750,000 of
Parent's outstanding indebtedness under a line of credit with Parent into
175,000 shares of Parent Series C Preferred, which are convertible into
Parent Common Stock. An additional $5,000,000 of Parent's outstanding
indebtedness became convertible into Parent Series C Preferred in June
1999 at the option of Tudor Trust at the conversion ratio of $10.00 per
share. Tudor Trust has also surrendered for cancellation warrants to
purchase an aggregate of 4,956,000 shares of Parent Common Stock at
various exercise prices. Tudor Trust has also provided Subsidiary with a
$2,400,000 line of credit, and has invested $1,750,000 to purchase 700,000
shares of Subsidiary's Series A Preferred Stock (the "Subsidiary Series A
Preferred"). The Subsidiary Series A Preferred converts into Subsidiary's
common stock on a one-for-one basis, subject to adjustment.
6. The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. Management has assigned a valuation allowance to fully
offset the future tax benefits of these deferred tax assets.
7
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Earnings Per Share
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited)
Basic and diluted EPS computation:
Net loss ........................................... $(1,489) $(1,605) $(4,798) $(7,258)
Series B Preferred Stock dividends ................. 24 24 71 72
------- ------- ------- -------
Net loss allocable to common stockholders .......... $(1,513) $(1,629) $(4,869) $(7,330)
------- ------- ------- -------
Weighted average common shares outstanding ......... 2,855 2,854 2,855 2,854
======= ======= ======= =======
Basic and diluted EPS:
Loss allocable to common stockholders .............. (0.53) (0.57) (1.71) (2.57)
------- ------- ------- -------
Net loss per share ................................. (0.53) (0.57) (1.71) (2.57)
======= ======= ======= =======
</TABLE>
On October 20, 1998 Parent amended its Certificate of Incorporation to effect a
one-for-five reverse split of
Parent Common Stock and to change the number of authorized shares from
50,000,000 to 25,000,000. All
references to number of shares and per share information in the consolidated
financial statements have been
adjusted to reflect a reverse stock split on a retroactive basis.
At December 31, 1999, the following antidilutive common stock equivalents
were not included in the
diluted EPS calculation as a result of the net loss for the period: (i)
options to purchase 326,751 shares of
common stock, (ii) shares of Series B Preferred Stock convertible to
94,000 shares of common stock, (iii)
shares of Series C Preferred convertible to 1,750,000 shares of common
stock, (iv) and 99,478 common
equivalents as a result of certain debt to equity transactions.
8. Sale of Assets: On September 18, 1998, the Company sold substantially all
of the assets of its Contex division, with the exception of approximately
$300,000 of accounts receivable, for approximately $200,000 pursuant to
the terms of an Asset Purchase Agreement dated September 18, 1998 between
the Company and Barco, Inc. Included in the assets sold were inventory,
equipment, certain accounts receivable, source code and object code for
Contex PackageMaker, Contex Professional, Contex Rip'n'Strip, and Contex
Object Library. In connection with the sale, the Company recorded direct
transaction costs, costs to write-off other assets and other accruals for
costs directly associated with the sale in the amount of approximately
$564,000.
9. Xyvision, Inc. changed its name to Azul Holdings Inc. during quarter ended
September 30, 1999 and now trades under symbol "AZUL". The name change
reflects Azul Holding's focus on its investment portfolio, including the
Subsidiary.
10. Restructuring: On December 31, 1998, the Company completed a corporate
restructuring plan (the "Restructuring") pursuant to which, among other
things, substantially all of the assets of the publishing business were
transferred to XyEnterprise in exchange for shares of common stock of
XyEnterprise, while the majority of its liabilities, including obligations
under its line of credit with Tudor Trust, remained with the Company. As
described in Note 4 to the Consolidated Financial Statements, the
Company's credit line with Tudor Trust
8
<PAGE>
was amended. In addition, Tudor Trust converted $1,750,000 of the
outstanding indebtedness under the line of credit into 175,000 shares of
Series C Preferred Stock, which are convertible into Common Stock. An
additional $5,000,000 of the outstanding indebtedness under the line of
credit will become convertible into shares of Series C Preferred Stock in
June 1999 at the option of Tudor Trust at the conversion ratio of $10.00
per share. Tudor Trust has also surrendered for cancellation all of its
Common Stock Purchase Warrants, covering an aggregate of 4,956,000 shares
of Common Stock at various exercise prices. Tudor Trust has provided
XyEnterprise with a $2,400,000 line of credit, as well as invested
$1,750,000 to purchase 700,000 shares of Series A Preferred Stock of
XyEnterprise.
11. On February 9, 2000, the Company's majority-owned operating subsidiary,
XyEnterprise announced that it had sold $6 million of its Common Stock to
investors in a private placement. A portion of the Common Stock was issued
to existing investor Tudor Trust and to Saltzman Partners, an entity
controlled by James Saltzman, in exchange for the foregiveness by those
entities of certain indebtedness owned to them by the Company. Mr. Neuman
and Mr. Saltzman are directors of the Company and XyEnterprise.
9
<PAGE>
ITEM 2.
AZUL HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the three month periods ended December 31, 1999 and 1998
Results of Operations
Revenues for the third quarter of fiscal 2000 were $2,293,000, a decrease
of approximately $453,000, or 16%, from the third quarter of fiscal 1999.
Systems revenues dropped $307,000, or 32% from the same quarter of fiscal 1999.
Service revenues decreased $146,000, or 8%, from $1,783,000 in the third
quarter of fiscal 1999. Service revenues in the third quarter of fiscal 1999
included $206,000 attributable to the Contex division which had been sold the
prior quarter. Service revenues for the third quarter ended 12/31/99 increased
10% when compared to Publishing service revenues for the quarter ended
12/31/98. One significant customer sale and related services accounted for 17%
of the revenues in the third quarter of fiscal 2000.
Revenues for the nine months ended December 31, 1999 were $7,247,000, a
decrease of $558,000 or 7% from the nine months ended December 31, 1998.
Revenues in fiscal 1999 include both the Contex and Publishing divisions. On
September 18, 1998, the Company sold substantially all the assets of its Contex
division pursuant to the terms of an Asset Purchase Agreement dated September
18, 1998 between the Company and Barco, Inc. (See Note 8 to the Consolidated
Financial Statements). For that reason, system revenues for the nine months
ended December 31, 1999 include revenues from only the Publishing division
which increased $69,000, or 3%, when compared to Publishing systems revenues
for the same period of fiscal 1999. Overall combined systems revenues declined
$687,000, or 25%, from the comparable period ended December 31, 1998 as a
result of the sale of the Contex division. Service revenues increased by
$129,000, or 3%, from $5,077,000 (which include Contex service revenues) in the
first nine months of fiscal 1999. Service revenues for only the Publishing
division for the nine months ended December 31, 1999 increased 24% or $997,000
from the comparable period of fiscal 1999. The increase in service revenues was
primarily a result of increased consulting service revenues and maintenance
revenues from new and renewing accounts. One significant customer sale and
related services accounted for 16% of the revenues in the first nine months of
fiscal 2000.
Gross margins in the third quarter of the current fiscal year decreased to
47% of revenues from 50% in the comparable quarter of fiscal 1999. Systems
margins were 63% of systems revenues in the current fiscal quarter as compared
to 74% of systems revenues in the third quarter of the previous fiscal year.
The decrease of system margins in the third quarter of fiscal 2000 was
primarily a result of product mix. The service margins in the third quarter of
fiscal 2000 were 41% as compared with service margins of 37% in the third
quarter of the previous fiscal year. The improvement is a result of reduced
employee headcount and other cost containment.
Gross margins for the nine months ended December 31, 1999 were 44% of
revenues as compared to 37% of revenues for the nine months ended December 31,
1998. Systems margins were 63%, an increase from 57% for the comparable period
in fiscal 1999. The increase in the system margins was primarily a result of
reduced amoritization of capitalized software. Service margins for the first
nine months of fiscal 2000 of 36% increased from 27% for the first nine months
of fiscal 1999. The improvement is a result of reduced employed headcount and
other cost containment.
Research and development expenses in the third quarter of fiscal 2000, net
of capitalized software development costs, were $754,000, a decrease of
$47,000, or 6%, from the third quarter of fiscal 1999. The decrease was
primarily due to reduced development headcount and payroll. There were no
capitalized software development costs in the third quarter of 2000 and in the
third quarter of fiscal 1999. Research and development expenses, net of
capitalized software development costs, for the nine months ended December 31,
1999 were $2,460,000, a decrease of 15% from the comparable period ended
December 31, 1998. The decrease was primarily due to a lower level of
capitalization of development costs in the Contex and Publishing division
partially offset by a reduction in headcount and payroll in the Contex division
early in the year and the ultimate sale of the division in the second quarter.
Capitalized software costs were none and $176,000 for the first nine months of
fiscal 2000 and 1999, respectively due to the products in research and
development not yet achieving technological feasability.
Marketing, general and administrative expenses were $1,362,000 for the
third quarter of fiscal 2000, a decrease of $407,000, or 23%, from the third
quarter of fiscal 1999. Corporate administrative expenses reflect savings
associated with a reduction in headcount, as well as other cost containment
programs.
Net total other expense was $449,000 for the third quarter of fiscal 2000,
an increase of $37,000, or 9%, from the third quarter of 1999, primarily due to
an increase in interest expense. The increase in interest expense for the third
quarter of fiscal 2000 was primarily due to a rate increase on the note payable
to Tudor Trust from 6% to 8% as well
10
<PAGE>
as higher average balance of the Company's credit line and the increase in
warrant amortization expense related to additional warrants issued pursuant to
the July 1, 1998 amendment to the Tudor Trust line of credit agreement. See
Note 4 to Consolidated Financial Statements.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred assets.
The Company accrued dividends of $24,000 on the Parent Series B Preferred
Stock in each of the third quarters of fiscal 2000 and 1999, as well as $26,000
on the Subsidiary Series A Preferred in the third quarter of fiscal 2000.
The Company recorded a net loss allocable to common stockholders of
$1,513,000 for the third quarter of fiscal 2000 compared to $1,629,000 for the
third quarter of fiscal 1999.
Liquidity and Capital Resources
At December 31, 1999, the Company had cash of $547,000, an increase of
$101,000 from March 31, 1999. For the first nine months of fiscal 2000, the
Company's operating and investment activities used $3,531,000 of cash,
primarily for operations. The Company invested $22,000 in capital expenditures
during the quarter.
Parent has a $12,327,000 line of credit with Tudor Trust, the largest
stockholder of Parent. Mr. Jeffrey L. Neuman, the grantor, sole trustee and
sole current beneficiary of Tudor Trust, also serves as Chairman of the Board
of Directors of Parent. This credit line has been used for working capital and
general business purposes. As of December 31, 1999, Parent had an outstanding
line of credit balance of $12,257,000. As of February 11, 2000 Parent had an
outstanding line of credit balance of $12,257,000. Parent has received a waiver
as of December 31, 1999 and February 14, 2000 for the amount borrowed over the
line of credit maximum. Subsidiary has a separate $2,400,000 line of credit
with Tudor Trust. As of December 31, 1999, Subsidiary had drawn down $2,200,000
of the line of credit. As of February 11, 2000, Subsidiary had an outstanding
credit balance of $2,200,000 and a $300,000 bridge loan from Saltzman Partners,
an entity controlled by James Saltzman, a director of the Company. See Note 4
to the Consolidated Financial Statements for a further description of these
lines of credit.
See Note 4 to the Consolidated Financial Statements for a description of
Parent's efforts to restructure its outstanding Debentures, 15% Notes and 4%
Notes. Despite the fact that 96% of the Debentures have been exchanged or sold
by the holders thereof, Parent has been unable to identify the holders of the
remaining Debentures. For this reason, Parent can give no assurance about the
outcome of the effort to restructure and does not expect the matters to be
resolved in the near future. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
financial statements do not include any adjustments relating to the recovery
and classification of recorded asset amounts or the amounts and classifications
or liabilities that might be necessary should the Company be unable to continue
as a going concern.
As a result of Tudor Trust's offer to purchase certain outstanding
Debentures, 15% Notes and 4% Notes, $346,500 of 4% Notes and $25,000 of
Debentures were repurchased and cancelled during the first quarter of fiscal
2000. The gain created by such retirement was treated as a contribution of
capital.
The Company anticipates that its cash requirements for fiscal 2000 will be
satisfied mainly from its credit lines, or otherwise from Tudor Trust, assuming
the continued forbearance by the holders of the Debentures, 15% Notes and 4%
Notes. There can be no assurances that increased borrowings will be available
under the Company's line of credit or otherwise from Tudor Trust.
Foreign Currency - Conversion To Euro
On January 1, 1999, 11 of the 15 members of the European Union established
fixed conversion rates between their existing currencies and the "euro." The
euro will trade on currency exchanges and the legacy currencies will remain
legal tender for a transition period between January 1, 1999 and January 1,
2002. During the transition period, goods and services may be paid for using
the euro or the participating country's legacy currency. Participating
countries no longer control their own monetary policies by directing
independent interest rates for their legacy currencies. Instead, the authority
to direct monetary policy, including money supply and official interest rates
will be exercised by the new European Central Bank. No later than July 1, 2002,
the legacy currencies of the participating countries will no longer be legal
tender for any transaction, making conversion to the euro complete.
The Company has established plans and has included the necessary
modifications for the technical adaptation of its internal information
technology and other systems to accommodate euro-denominated transactions. The
Company is also assessing the business implications of the conversion to the
euro, including long-term competitive
11
<PAGE>
implications. The Company does not expect the euro conversion to have a
significant impact on its results of operations, financial condition or cash
flows. However, the Company will continue to assess the impact of euro
conversion issues as the applicable accounting, tax, legal and regulatory
guidance evolves.
Year 2000
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
or generates erroneous results because of the inability of the system or
application to properly read the date data, the results could conceivably have
a material adverse effect on the Company.
Products
Year 2000 problems are characteristic of applications in which sorting by
date is stored in a format that relies solely on the last two digits of the
calendar year. Neither Xyvision Production Publisher ("XPP") nor Parlance
Document Manager ("PDM") store date information in this type of truncated
format. Date information is stored in full standard UNIX date formats so that
all four digits of the year are available both within the applications and to
any applications built upon them. Both XPP and PDM continue to be tested
internally to meet the Company's qualifications for Year 2000 compliance. The
total cost relating to compliance by its products is not expected to be
material to the Company's financial position or operations. As a key supplier
to the technical documentation and publishing industries, the Company's major
exposure for Year 2000 problems is the effect of shutting down page composition
or document management capabilities production at one of its customer's
facilities. The Company believes its contracts with its customers preclude
liability for consequential damages as a result of such claims.
Third Party Products
The Company continues to assess its exposure to failures of products
obtained from third parties to be Year 2000 compliant. The primary risk in that
regard relates to software applications integrated within its core
applications, and the Company has received assurances that software licensed
for use within its products are Year 2000 compliant. This assessment and
testing program will be ongoing and the Company's efforts with respect to
specific problems identified will depend in part upon its assessment of the
risk that any such problems may cause. Unfortunately, the Company cannot fully
control the conduct of its suppliers, and there can be no guarantee that Year
2000 problems originating with a supplier will not occur. The Company has not
yet developed contingency plans in the event of a year 2000 failure caused by a
supplier or third party, but intends to consider developing such plans if a
specific problem is identified through the programs described above. In some
cases, especially with respect to its software vendors, alternative suppliers
may not be available. Despite its efforts to test its own and third party
products, these products may contain undetected problems associated with Year
2000 compliance.
Information Technology and Operating Equipment
The Company has identified anticipated costs, problems and uncertainties
associated with making its internal use systems Year 2000 compliant. Costs
identified by December 31, 1999 were $217,000. The Company believes it resolved
the Year 2000 issue with respect to its computer systems and software
applications during calendar year 1999 through the upgrade, conversion,
modification or replacement of non-compliant systems and applications. The
Company's Year 2000 readiness task force continues to assess the exposure of
its internal information technologies ("IT"), including operating equipment and
software systems.
The Company has determined that the replacement of older non-compliant
personal computers with Year 2000 compliant technology represents the most
extensive task yet to be completed. The Company has replaced its customer
support database application with an application that offers additional
features, better interfaces and is warranted to be Year 2000 compliant. The
Company replaced its human resource and financial business system, which it
believes will offer substantial benefits of improved functionality, ease of use
and maintenance and which is Year 2000 compliant. The Company recently upgraded
its payroll application which was accomplished swiftly.
The Company's communications infrastructure was partially upgraded in
conjunction with its corporate relocation in February, 1998. The replacement of
its voicemail system was accomplished in March 1999. The Company has been
assured by its suppliers that its telecommunication systems and internet
connectivity is Year 2000 compliant.
12
<PAGE>
The Company believes that it has an effective compliance plan in place,
supported by its product planning and support organizations, and its internal
IT support function. The remediation efforts are complete.
The Company does not use operating equipment beyond systems which support
what is considered to be merely office space. Maintenance of building support
systems is wholly the responsibility of the Company's landlord according to the
current lease agreement, and remediation of failures in this regard would fall
under the landlord's extensive on-site maintenance operation.
Contingency Plans
The Company would expect Year 2000 related problems to be addressed by
reliance upon its backup of its IT related information assets with its physical
hardcopy of customer files containing amounts owed, software and services
previously delivered, and software options currently licensed by its customer
base. There is no formal contingency plan under development, nor is one
expected to be produced. The most likely worst case scenario is that the
Company will have to upgrade applications without enhancing features and
benefits in its financial, human resource and payroll applications. The Company
has centralized the majority of its administrative functions at its corporate
headquarters, and has a minimal reliance on widely geographically dispersed
systems or networks to support its information resource needs.
The foregoing shall be considered a Year 2000 readiness disclosure to the
maximum extent allowed under the Year 2000 Information and Readiness Disclosure
Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not currently use derivative financial instruments. The
Company generally places its marketable security investments in high credit
quality instruments, primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less. The Company does not expect any material loss
from its marketable security investments and therefore believes that its
potential interest rate exposure is not material.
Internationally, the Company invoices customers primarily in local
currency. The Company is exposed to foreign exchange rate fluctuations from
when customers are invoiced in local currency until collection occurs. The
Company does not currently enter into foreign currency hedge transactions.
Through September 30, 1999, foreign currency fluctuations have not had a
material impact on the Company's financial position or results of operations.
13
<PAGE>
PART II: OTHER INFORMATION
Item 3. Defaults Upon Senior Securities:
For a description of defaults upon the Debentures, 15% Notes and 4% Notes
and arrearage in the payment of dividends on the Parent Series B
Preferred, see Note 4 to the Consolidated Financial Statements, which is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K:
(a) The exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of or are included in this report.
(b) On September 29, 1999 Parent filed a report on Form 8-K disclosing
under Item 5 thereof the amendment of Parent's certificate of
incorporation to change its name to "Azul Holdings Inc."
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZUL HOLDINGS INC.
------------------------------
(Registrant)
February 14, 2000
/s/ Wendy Darland
------------------------------
Wendy Darland
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit No. Description
- - --------------- ----
3.1 Restated Certificate of Incorporation, incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1988.
3.2 Certificate of Amendment to Certificate of Incorporation, incorporated
herein by reference to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1993.
3.3 Certificate of Amendment to Certificate of Incorporation, incorporated
herein by reference to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1996.
3.4 Certificate of Designation to Certificate of Incorporation designating Series
B Preferred Stock, incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1996.
3.5 Certificate of Amendment of Amended and Restated Certificate of Incorpo-
ration, incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
3.6 Certificate Eliminating the Series A Junior Participating Preferred Stock,
incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1998.
3.7 Certificate of Designations of the Preferred Stock to be Designated Series C
Preferred Stock, incorporated by reference to Exhibit 3.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.
3.8 Certificate of Amendment of Amended and Restated Certificate of Incorpo-
ration of the Registrant, incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1999.
3.9 Certificate of Ownership and Merger Merging Xyvision Design Systems,
Inc. into Xyvision, Inc. and Changing the Name of Xyvision, Inc.
10.1 First Amendment to Secured Advanced Facility Loan Agreement dated as of
July 1, 1999 between Xyvision Enteprise Solutions, Inc. and Jeffrey L.
Neuman as Trustee of Tudor Trust u/d/t December 12, 1997
10.2 Series A Convertible Preferred Stock Purchase Agreement dated as of July
1, 1999 between Xyvision Enterprise Solutions, Inc. and Tudor Trust
27 Financial Data Schedule (Electronic version only)
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 547 547
<SECURITIES> 0 0
<RECEIVABLES> 1901 1901
<ALLOWANCES> (224) (224)
<INVENTORY> 11 11
<CURRENT-ASSETS> 449 449
<PP&E> 4828 4828
<DEPRECIATION> (3839) (3839)
<TOTAL-ASSETS> 3674 3674
<CURRENT-LIABILITIES> 23939 23939
<BONDS> 0 0
235 235
1750 1750
<COMMON> (21082) (21082)
<OTHER-SE> (1168) (1168)
<TOTAL-LIABILITY-AND-EQUITY> 3674 3674
<SALES> 2293 7247
<TOTAL-REVENUES> 2293 7247
<CGS> 1217 4072
<TOTAL-COSTS> 1217 4072
<OTHER-EXPENSES> 2116 6662
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 449 1311
<INCOME-PRETAX> (1489) (4798)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1489) (4798)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1489) (4798)
<EPS-BASIC> (0.53) (1.71)
<EPS-DILUTED> (0.53) (1.71)
</TABLE>
<PAGE>
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED
SECURED ADVANCE FACILITY LOAN AGREEMENT
This SECOND AMENDMENT TO SECOND AMENDED AND RESTATED THE SECURED ADVANCE
FACILITY LOAN AGREEMENT (the "Amendment") is entered into as of December 7,
1999 by and between Azul Holdings Inc. a Delaware corporation with its
principal place of business at 30 New Crossing Road, Reading, Massachusetts
01867 (the "Borrower"), and Jeffrey L. Neuman as trustee of the Tudor Trust
u/d/t December 12, 1997, with an address of 450 North Roxbury Drive, 4th Floor,
Beverly Hills, California 90210 (the "Lender").
WHEREAS, the Borrower and the Lender are parties to that Second Amended
and Restated Secured Advance Facility Loan Agreement dated as of July 1, 1998,
as amended by that First Amendment to Second Amended and Restated Secured
Advance Facility Loan Agreement dated as of December 31, 1998 (as amended, the
"Agreement");
WHEREAS, the Borrower and the Lender desire to amend and modify the
Agreement as set forth herein; and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and with the specific intent to
be bound hereby, the parties hereby agree as follows:
1. Amendment to Agreement.
(a) Section 1.19 of the Agreement is amended and restated in its
entirety as follows:
"1.19. Maximum Loan Amount. Twelve Million Three Hundred
Twenty-Six Thousand Six Hundred Twenty Dollars ($12,326,620) less
the principal amount of any Liabilities of the Borrower converted
from time to time into the Borrower's Series C Convertible
Preferred Stock (the "Series C Stock") pursuant to Section 3.7 of
this Agreement."
(b) Section 1.25 of the Agreement is amended and restated in its
entirety as follows:
"1.25. Secured Promissory Note. The amended and restated secured
promissory note in the amount of Twelve Million Three Hundred
Twenty-Six Thousand Six Hundred Twenty Dollars ($12,326,620) dated
December 7, 1999, executed by the Borrower and delivered to the
Lender." (c) The Secured Promissory Note attached as Exhibit 7.1
to the Agreement is amended and restated in its entirety in the
form attached hereto as Exhibit A (the "Restated Note"). The
Borrower shall execute the Restated Note and deliver the
originally-executed Restated Note to the Lender. A condition to
the Borrower's obligation to execute and deliver the Restated Note
to the Lender hereunder shall be the Lender's obligation to
deliver to the Borrower for cancellation the originally-executed
Secured Promissory Note dated December 31, 1998 in the original
principal amount of $12,226,620 (the "Original Note"). The
Original Note shall be marked "CANCELED" and stored at the
Borrower's executive offices.
2. Effect on Agreement. Except as amended by this Amendment, the
Agreement shall remain in full force and effect. After the date of this
Amendment, every reference in the Agreement to "this Agreement" shall mean
the Agreement as amended by this Amendment.
3. Miscellaneous.
(a) Successors and Assigns. The obligations of the Borrower hereunder
shall be binding upon its successors and assigns (but such reference
is not intended as a consent to any assignment not specifically
permitted by the Lender) and shall inure to the benefit of the
successors and assigns of the Lender.
1
<PAGE>
(b) Counterparts and Facsimile Signature. This Amendment may be
executed in two or more counterparts, each of which shall be deemed
an original but all of which together shall constitute one and the
same instrument. This Amendment may be executed by facsimile
signature.
(c) Headings. The section headings contained in this Amendment are
inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Amendment.
(d) Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of The Commonwealth of Massachusetts and
shall constitute an agreement under seal.
(e) Expenses. The Borrower will pay the reasonable legal fees and
out-of pocket expenses of the Lender's counsel incurred in
connection with the preparation, execution and delivery of this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
AZUL HOLDINGS INC.
By: /s/ Wendy Darland
-------------------------
Vice President
/s/ Jeffrey Neuman
-------------------------
Jeffrey Neuman, as trustee of the Tudor Trust
u/d/t
December 12, 1997 and not individually
2
<PAGE>
Exhibit A
AMENDED AND RESTATED SECURED PROMISSORY NOTE
$12,326,620
Boston, Massachusetts December 7, 1999
FOR VALUE RECEIVED, the undersigned AZUL HOLDINGS INC., a Delaware
corporation with a principal place of business located at 30 New Crossing Road,
Reading, Massachusetts (hereinafter, the "Borrower") promises to pay in good
U.S. funds to the order of Jeffrey L. Neuman as trustee of the Tudor Trust
u/d/t dated December 12, 1997 (hereinafter, with any subsequent holder, the
"Lender"), at the Lender's principal office located at 450 North Roxbury Drive,
Beverly Hills, California, the Liabilities then outstanding under the loan made
by the Lender to the Borrower pursuant to that certain Second Amended and
Restated Secured Advance Facility Loan Agreement executed between the Borrower
and the Lender dated July 1, 1998, as amended by that First Amendment to Second
Amended and Restated Secured Advance Facility Loan Agreement dated as of
December 31, 1998 and that Second Amendment to Second Amended and Restated
Secured Advance Facility Loan Agreement dated as of December 7, 1999 (as
amended, the "Agreement"). Advances made pursuant to the Agreement shall, from
and after the date hereof, bear interest at the rate from time to time provided
in the Agreement, and after any Default at the rate of twelve (12) percent per
annum, calculated based upon a 360-day year and actual day months.
Interest at the rate set forth above shall be paid as provided in Section
3.2 of the Agreement. Unless a Default under the Agreement shall have occurred
earlier, the principal balance of this Note shall be due and payable in full on
March 31, 2000.
All payments by the Borrower to the Lender under Article III of the
Agreement shall be applied first to principal and then to interest.
To secure the obligations of the Borrower under this Note, (i) the Lender
has been granted a security interest in substantially all of the Borrower's
presently existing and hereafter acquired property pursuant to that certain
Sixth Amended and Restated Security Agreement executed between the Borrower and
the Lender dated November 10, 1997 (the "Security Agreement"), and (ii) the
Lender has been granted a security interest in 2,800,000 shares of Common Stock
of Xyvision Enterprise Solutions, Inc. held of record by the Borrower pursuant
to that certain Pledge Agreement executed between the Borrower and the Lender
dated as of December 31, 1998. All capitalized terms used herein, unless
otherwise defined herein, shall have the meanings ascribed to them in the
Security Agreement.
3
<PAGE>
No delay or omission by the Lender in exercising or enforcing any of the
Lender's powers, rights, privileges, remedies or discretions hereunder shall
operate as a waiver thereof on that occasion nor on any other occasion.
After demand by the Lender, the Borrower will pay on demand all reasonable
attorneys' fees and out-of-pocket expenses incurred by the Lender in recovering
the amounts due to the Lender by the Borrower hereunder.
This Note shall be binding upon the Borrower and upon its heirs,
successors, assigns, and representatives, and shall inure to the benefit of the
Lender and its successors, endorsees, and assigns.
This Note amends and restates that Secured Promissory Note dated December
31, 1998 in the original principal amount of $12,226,620 previously made by the
Borrower in favor of the Lender, and is taken in substitution but not in
satisfaction thereof.
This Note shall be governed by the laws of the Commonwealth of
Massachusetts and shall take effect as a sealed instrument.
WITNESS AZUL HOLDINGS INC.
- - ------------------------- By: -------------------------
Name:
Title:
4
