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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 June 30, 2000
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)
4450 Arapahoe Avenue, Suite 100, Boulder, CO 80303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (303) 448-8833
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
August 10, 2000.
Common Stock, $.03 par value 3,881,213
(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 June 30, 2000 and March 31, 2000.................................. 2
Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999.................... 3
Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999.................... 4
Notes to Consolidated Financial Statements............................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7
Quantitative and Qualitative Disclosures About Market Risk............ 8
Part II. Other Information............................................... 9
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. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C>
(Unaudited)
June 30, March 31,
2000 2000
---------- -------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents ......................................................... $ 5,163 $ 6,890
Accounts receivable:
Trade, less allowance for doubtful accounts of $247 at June 30, 2000 and
$224 at March 31, 2000 ......................................................... 1,725 1,747
Other current assets .............................................................. 721 360
---------- -------
Total current assets .......................................................... 7,609 8,997
Property and equipment, net ....................................................... 565 548
Other assets, net, principally software development costs ......................... 270 326
---------- -------
Total assets ................................................................ $ 8,444 $ 9,871
========== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to a stockholder .................................................... $ 12,357 $12,357
Current portion of long-term debt ................................................. 1,878 1,872
Accounts payable and accrued expenses ............................................. 2,338 3,592
Other current liabilities ......................................................... 3,054 2,937
---------- -------
Total current liabilities ..................................................... 19,627 20,758
---------- -------
Notes payable to stockholder-long term .............................................. 1,850 1,850
---------- -------
Total liabilities ................................................................... 21,477 22,608
---------- -------
Minority interest in subsidiary ..................................................... 1,495 2,072
---------- -------
Commitments and contingencies ....................................................... - -
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700 shares authorized; no shares
issued ......................................................................... - -
Series B convertible preferred stock, $1.00 par value; 300 shares authorized;
232 issued and outstanding at June 30, 2000 and
March 31, 2000 (aggregate liquidation preference of $3,327) .................... 232 232
Series C convertible preferred stock, $.01 par value; 1,000 shares authorized;
175 shares issued and outstanding at June 30, 2000 and March 31, 2000 .......... 1,750 1,750
Common stock, $.03 par value; 25,000 shares authorized; 3,997 and 2,991
shares issued and outstanding at June 30, 2000 and March 31, 2000,
respectively, including treasury stock ......................................... 120 90
Additional paid-in capital ........................................................ 55,665 51,347
Accumulated deficit ............................................................... (71,126) (67,059)
---------- -------
(13,359) (13,640)
Less:
Treasury stock, at cost; 95 shares at June 30, 2000 and March 31, 2000 ........... 1,169 1,169
---------- -------
Total stockholders' deficit ...................................................... (14,528) (14,809)
---------- -------
Total liabilities and stockholders' deficit ...................................... $ 8,444 $ 9,871
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
AZUL HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June
30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
(Unaudited)
Revenues:
Systems ......................................................... $ 409 $ 763
Service ......................................................... 1,684 1,861
--------- --------
Total revenues ............................................... 2,093 2,624
--------- --------
Cost of sales:
Systems ......................................................... 182 317
Service ......................................................... 998 1,121
--------- --------
Total cost of sales .......................................... 1,180 1,438
--------- --------
Gross margin ...................................................... 913 1,186
--------- --------
Expenses:
Research and development ........................................ 840 782
Marketing, general and administrative ........................... 1,505 1,465
--------- --------
Total operating expenses ..................................... 2,345 2,247
--------- --------
Loss from operations .............................................. (1,432) (1,061)
Minority interest share of loss ................................... 578 802
--------- --------
Loss from operations after minority interest ...................... (854) (259)
--------- --------
Other income (expense), net:
Interest income ................................................. 60 4
Interest expense-third party .................................... (31) (60)
Interest expense-stockholder .................................... (425) (373)
--------- --------
Total other expense, net ..................................... (396) (429)
--------- --------
Loss before extraordinary item .................................... (1,250) (688)
Extraordinary gain on extinguishments of debt ..................... - 353
Extraordinary loss on settlement of accrued interest by issuance of
common stock ..................................................... (2,793) -
--------- --------
Net loss .......................................................... (4,043) (335)
Accrued preferred stock dividends ................................. 24 24
--------- --------
Net loss allocable to common stockholders ......................... $ (4,067) $ (359)
========= ========
Basic and diluted earnings (loss) per share:
Before extraordinary item ....................................... $ (.38) $ (.25)
Extraordinary item .............................................. ( .85) .12
--------- --------
Net loss per share .............................................. $ (1.23) $ (.13)
========= ========
Basic and diluted weighted average common and equivalent shares
outstanding ...................................................... 3,297 2,854
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AZUL HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
-------------- ----------
<S> <C> <C>
(Unaudited)
Operations:
Net loss ....................................................................... $(4,043) $ (335)
Adjustments to reconcile net loss to net cash used for operating activities:
Gain on early extinguishments of debt .......................................... - (353)
Depreciation and amortization .................................................. 146 149
Common stock issuance in settlement of accrued interest obligations ............ 2,793 -
Settlement of accrued interest by payment of common stock ......................
Minority interest share of loss of subsidiary .................................. (578) (802)
Interest expense related to warrants ........................................... 163 170
Provision for losses on accounts receivable .................................... 23 -
Operating assets and liabilities:
Accounts receivable .......................................................... (1) 122
Inventories .................................................................. - 268
Other assets ................................................................. (7) (186)
Accounts payable and accrued expenses ........................................ (232) (206)
Other current liabilities .................................................... 116 (118)
------------ --------
Net cash used for operations ................................................... (1,620) (1,291)
------------ --------
Investments:
Additions to property and equipment ............................................ (107) (128)
------------ --------
Net cash used for investments .................................................. (107) (128)
------------ --------
Financing:
Proceeds from line of credit from a stockholder ................................ - 1,225
Proceeds from sale of XyEnterprise's Series A Preferred Stock .................. - 750
------------ --------
Net cash provided from financing ............................................... - 1,975
------------ --------
Net decrease in cash and cash equivalents ...................................... (1,727) 556
Cash and cash equivalents at the beginning of the period ....................... 6,890 446
------------ --------
Cash and cash equivalents at the end of the period ............................. $ 5,163 $ 1,002
============ ========
Supplemental Cash Flow Information:
Accrued preferred stock dividends .............................................. $ 24 $ 24
Payment of prior periods' accrued interest by issuance of common stock ......... 1,040 -
Value assigned to warrants issued .............................................. 392 -
Extinguishment of 4% note payable .............................................. - 347
Extinguishment of Debenture .................................................... - 25
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Unaudited Interim Information
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 June 30, 2000 and the results
of consolidated operations and consolidated cash flows for the quarter ended
June 30, 2000 and 1999 of Azul Holdings Inc. ("Azul" or the "Company") and its
majority-owned subsidiary, Xyvision Enterprise Solutions, Inc. ("XyEnterprise")
and the subsidiaries thereof. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The consolidated
balance sheet as of March 31, 2000, is excerpted from the Company's audited
financial statements for the fiscal year then ended. The Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2000, should be read in conjunction with these
interim financial statements.
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 and liabilities 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 quarter ended June 30, 2000 are
not necessarily indicative of the results of consolidated operations that may
be expected for the fiscal year ending March 31, 2001.
Note 2. Nature of Business
Azul provides financial and management support to high technology companies.
The Company provides financial capital and managerial and advisory consulting
to these emerging, early stage and mid- stage companies. To date Azul's
principal asset and its sole portfolio company is XyEnterprise, which
previously was a wholly-owned subsidiary of Azul and in which Azul now has a
57% ownership. Azul has entered into a loan agreement with Antiqnet.com Inc.
("Antiqnet"), a company in which Tudor Trust ("Tudor Trust") has a 70%
ownership and the right to increase that ownership to 75% as a result of the
conversion of loans (with the foregoing determined without regard to the
conversion of other convertible securities or the exercise of other stock
purchase rights). The loan agreement provides for Azul to loan Antiqnet up to
$2,000,000 convertible under present circumstances into 9% of Antiqnet, with
provisions for possibly subsequently increasing that percent. Tudor Trust is
the largest stockholder of Azul. The grantor, sole trustee, and sole current
beneficiary of Tudor Trust also serves as Chairman of the Board of Directors
and President of Azul.
XyEnterprise develops, manages and supports content management and publishing
software products. These products help companies create, manage and distribute
large amounts of information and automate the compilation and delivery of this
content into paper, electronic and web based formats. XyEnterprise sells its
products to a wide variety of customers in a variety of industries.
XyEnterprise performs ongoing credit evaluations of its customers but does not
require collateral or other security to support customer receivables.
XyEnterprise maintains reserves for credit losses and such losses have been
within management's expectations.
Note 3. Note Payable to Stockholder
Azul has a line of credit with Tudor Trust. The line of credit, which is
payable on March 31, 2001, is collateralized by the Company's stockholdings in
XyEnterprise and has been used for working capital and general business
purposes. Interest on the line of credit is payable on March 31, 2001 in cash;
however, Tudor Trust has the option to receive interest on a quarterly basis,
payable in shares of common stock of the Company based on the fair market value
as determined at the end of each quarter. Since the line of credit's inception
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.
5
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Note 4. Earnings Per Share
Earnings Per Share (in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 30, June 30,
2000 1999
------------ ---------
<S> <C> <C>
(Unaudited)
Basic and diluted EPS Computation:
Loss before extraordinary item .................................... (1,250) (688)
Extraordinary gain on extinguishments of debt ..................... - 353
Extraordinary loss on settlement of accrued interest by issuance of
common stock ..................................................... (2,793) -
---------- ----
Net loss .......................................................... (4,043) (335)
Accrued preferred stock dividends ................................. 24 24
---------- ----
Net loss allocable to common stockholders ......................... $ (4,067) $ (359)
========== ======
Basic and diluted earnings (loss) per share:
Before extraordinary item ......................................... $ (.38) $ (.25)
Extraordinary item ................................................ ( .85) .12
---------- ------
Net loss per share ................................................ $ (1.23) $ (.13)
========== ======
Basic and diluted weighted average common and equivalent shares
outstanding ...................................................... 3,297 2,854
========== ======
</TABLE>
6
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the three month periods ended June 30, 2000 and 1999
Results of Operations
Revenues for the first quarter of fiscal 2001 were $2,093,000, a decrease
of approximately $531,000, or 20%, from the first quarter of fiscal 2000. All
revenue in both quarters were generated by Azul's subsidiary, XyEnterprise. One
significant customer sale and related services accounted for 21% of the
revenues in the first quarter of fiscal 2000. XyEnterprise did not have a
comparable large individual transaction in the first quarter of 2001.
XyEnterprise also believes that a number of customers are waiting for the
availability of major new versions its XPP and Parlance software before
deciding to place their orders.
Gross margins in the first quarter of the current fiscal year decreased
slightly to 44% of revenues from 45% in the comparable quarter of fiscal 2000,
reflecting the greater contribution as a percent of revenues from service
revenues during the current period.
Research and development expenses in the first quarter of fiscal 2001, net
of capitalized software development costs, were $840,000, an increase of
$58,000. The increase was primarily due to increased consulting services to
complete product releases. No software costs were capitalized during the first
quarter of fiscal 2001 or 2000.
Marketing, general and administrative expenses were up slightly for the
first quarter of fiscal 2001. The increase was due primarily to increased
general and administrative costs in the company's European subsidiaries.
Tudor Trust and the Company, on May 24, 2000, agreed that the interest
payable of $1,040,000 for the period from January 1, 1999 through March 31,
2000 would be paid by the issuance to Tudor Trust of 984,624 shares of the
common stock of the Company and that interest for subsequent periods would, at
the option of Tudor Trust, be paid in cash or in shares of the common stock of
the Company valued for such purposes based upon their public trading market
price at the end of each quarterly interest payment period. The Company also
agreed that on or before March 31, 2001 interest for the period July 1, 1998
through December 31, 1998 be convertible into 158,266 shares of common stock of
the Company at the request of Tudor. Azul recorded an extraordinary charge to
earnings in the first quarter of fiscal 2001 in the amount of approximately
$2,793,000 as a result of the settlement of this interest obligation by the
agreement for the issuance of common stock.
The Company accrued dividends of $24,000 on the Azul Series B Preferred
Stock in each of the first quarters of fiscal 2001 and 2000, as well as $15,000
on the XyEnterprise Series A Preferred Stock in the first quarter of fiscal
2000.
Liquidity and Capital Resources
At June 30, 2000, XyEnterprise had cash of $5,163,000. For the first three
months of fiscal 2001, XyEnterprise used $1,620,000 of cash primarily to meet
operational costs and the growth in staffing principally in the sales and
development areas. XyEnterprise invested $107,000 in capital expenditures
during the quarter.
As of June 30, 2000, Azul has a $17,500,000 amended line of credit with
Tudor Trust, the largest stockholder of the Company of which $12,357,000 was
outstanding at March 31, 2000. Jeffrey L. Neuman, the grantor, sole trustee and
sole current beneficiary of Tudor Trust, also serves as Chairman of the Board
of Directors of Azul and XyEnterprise. This credit line, which is payable March
31, 2001, is collateralized by the Company's stock in XyEnterprise, and has
been used for working capital and general business purposes. The first
$5,000,000 of the principal balance outstanding bears interest at 6% per year
and the remaining principal balance bears interest at 8% per year. In addition,
Tudor Trust has provided XyEnterprise a line of credit of $1,850,000 with a
maturity date to March 31, 2003. The line of credit bears an interest rate of
8%. As of June 30, 2000, Azul Holdings Inc. and its subsidiaries had an
outstanding credit line balance of $14,207,000 including the XyEnterprise line
of credit balance of $1,850,000. On August 9, 2000 Tudor Trust gave notice of
its intent to convert the full balance of the XyEnterprise line of credit into
equity under the terms and conditions of the February 2000 private placement
agreement.
The Company anticipates that its cash requirements for fiscal 2001 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, which are currently in default. Please refer to the Company's report on
Form 10K for further information.
7
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Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Neither The Company nor XyEnterprise currently use derivative financial
instruments. The Company and XyEnterprise, when and if practicable, generally
place 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. Neither the Company nor XyEnterprise expect any material loss from
marketable security investments and therefore believe that potential interest
rate exposure is not material.
Internationally, XyEnterprise invoices customers primarily in local
currency. XyEnterprise is exposed to foreign exchange rate fluctuations from
when customers are invoiced in local currency until collection occurs. Neither
the Company nor XyEnterprise enters into foreign currency hedge transactions.
Through June 30, 2000, foreign currency fluctuations have not had a material
impact on the financial position or results of operations of the Company.
8
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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 Azul Series B Preferred,
see Note 6 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) Azul filed no reports on Form 8-K during the quarter for which this
report is filed.
9
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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)
August 14, 2000
/s/ Edward S. Wittman
------------------------------
Edward S. Wittman
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
10
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EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit No. Description
--------------- ----------------------------------------------------------------------
10.1 Third Amendment to Second Amended and Restated Advance Facility Loan
Agreement, dated as of May 24, 2000 by and between the Registrant and
Tudor Trust.
27.1 Financial Data Schedule (Electronic version only)
</TABLE>
11
