UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 13-3842844
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
509 Madison Avenue, New York, NY 10022
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(Address of principal executive office) (Zip Code)
(212) 317- 0712
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(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of registrant's Common Stock, $.001 par value, outstanding
as of November 15, 1999 was 6,107,179 shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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AZUREL LTD. AND SUBSIDIARIES
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INDEX
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Page
Number
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Financial Statements 4-6
Item 2 - Management's Discussion and Analysis or
Plan of Operation 7-11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a
Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURE 14
PART I
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FINANCIAL INFORMATION
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ITEM 1 FINANCIAL STATEMENTS
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AZUREL LTD. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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(Unaudited)
ASSETS
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CURRENT ASSETS:
Cash $ 389,043 $ 84,711
Accounts receivable, net of allowance for
doubtful accounts of $81,000 and $71,000 2,854,765 4,640,440
Inventories 5,324,102 4,995,113
Due from related parties 80,703 124,972
Prepaid expenses and other current assets 501,213 55,947
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TOTAL CURRENT ASSETS 9,149,827 9,901,183
FURNITURE AND EQUIPMENT 1,730,063 1,757,444
GOODWILL 150,559 156,052
FORMULAE AND CUSTOMER LISTS 2,618,050 2,770,543
DUE FROM RELATED PARTY -- 49,066
OTHER ASSETS 233,504 90,273
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$ 13,882,003 $ 14,724,561
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 2,281,550 $ 5,041,655
Accounts payable 2,292,484 2,696,913
Notes payable 1,983,000 --
Accrued expenses and other liabilities 689,283 494,962
Customer advances 104,018 31,408
Current portion of long-term debt 716,913 784,352
Capital lease obligation - current portion 55,000 43,848
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TOTAL CURRENT LIABILITIES 8,122,248 9,093,138
LONG TERM DEBT 2,876,170 1,003,975
CAPITAL LEASE OBLIGATION- NON-CURRENT PORTION 227,314 212,471
MINORITY INTEREST 357 --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 4,000,000 shares;
issued and outstanding 1,001,500 shares in 1999: 1,500 in 1998 .. 2,237,587 1,237,587
Common stock, $.001 par value, authorized 24,000,000 shares,
issued and outstanding 6,107,179 shares in 1999; 5,318,745 in 1998 6,107 5,319
Additional paid-in-capital 8,549,788 7,475,476
Accumulated deficit (8,135,679) (4,303,405)
Translation gain/loss (1,889) --
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TOTAL STOCKHOLDERS' EQUITY 2,655,914 4,414,977
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$ 13,882,003 $ 14,724,561
============ ============
See notes to consolidated financial statements.
-1-
AZUREL LTD. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- --------------
NET SALES $ 4,745,158 $ 5,321,433 $ 13,508,158 $ 11,612,784
COST OF GOODS SOLD 3,507,040 3,941,181 11,819,176 8,265,080
----------- ----------- ------------ ------------
GROSS PROFIT 1,238,118 1,380,252 1,688,981 3,347,704
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,867,874 1,584,664 5,746,355 4,047,269
----------- ----------- ------------ ------------
LOSS FROM OPERATIONS (629,756) (204,412) (4,057,373) (699,565)
INTEREST EXPENSE (111,158) (124,414) (509,824) (301,324)
GAIN ON SALE OF FIXED ASSETS -- -- 237,924 --
OTHER INCOME - CONSULTING -- -- 500,000 --
----------- ----------- ------------ ------------
NET LOSS $ (740,914) $ (328,826) $ (3,829,273) $ (1,000,889)
=========== =========== ============ ============
BASIC LOSS PER COMMON SHARE $ (0.12) $ (0.06) $ (0.66) $ (0.18)
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,107,179 5,543,745 5,826,623 5,543,745
=========== =========== ============ ============
See notes to consolidated financial statements.
-2-
AZUREL LTD. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASHFLOWS
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NINE MONTHS ENDED SEPTEMBER 30,
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1999 1998
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,829,273) $(1,000,889)
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Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 191,541 188,257
Amortization 157,986 134,248
Amortization of deferred financing costs 6,693 --
Translation loss (4,889) --
Gain on sale of fixed assets (237,924) --
Stock subscription writeoff -- 2,175
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,785,675 (676,347)
Increase in inventories (328,989) (109,050)
Increase in prepaid expenses and other current assets (445,266) (248,614)
(Increase) decrease in other assets (56,590) 151,808
(Decrease) increase in accounts payable and accrued expenses (210,108) 440,487
Increase (decrease) in customer advances 72,610 (48,126)
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NET CASH USED IN OPERATING ACTIVITIES (2,898,535) (1,166,051)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (169,736) (342,857)
Disposal of property and equipment 243,500 --
Decrease from Ben Rickert Acquisition -- (2,000,182)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 73,764 (2,343,039)
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CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) increase in revolving line of credit (2,760,105) 1,949,667
Proceeds from borrowings on notes 2,183,000 250,000
Increase in restricted cash -- 290,521
Decrease in related party loans -- (140,312)
Borrowings from long term debt 2,660,294 --
Principal payments of capital lease obligations (52,181) --
Payment of long term debt (777,362) (105,683)
Increase in minority interest 357 --
Proceeds from exercise of stock options 100 --
Proceeds from issuance of common stock 1,075,000 37,500
Proceeds from issuance of preferred stock 800,000 1,237,587
Decrease in intangibles -- (128,088)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 3,129,103 3,391,192
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NET INCREASE (DECREASE) IN CASH 304,332 (117,898)
CASH,beginning of period 84,711 414,731
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CASH, end of period $ 389,043 $ 296,833
=========== ===========
See notes to consolidated financial statements.
-3-
AZUREL LTD. AND SUBSIDIARIES
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NOTES TO FINANCIAL STATEMENTS
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NINE MONTHS ENDED SEPTEMBER 30, 1999
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(UNAUDITED)
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1. BASIS OF PRESENTATION
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The accompanying consolidated financial statements as of September
30, 1999 and for the nine months ended September 30, 1999 and 1998
have not been audited by independent auditors, but in the opinion of
management, such unaudited statements include all adjustments
consisting of normal recurring accruals necessary for a fair
presentation of the financial position, the results of operations and
cash flows for the nine months ended September 30, 1999.
The consolidated financial statements should be read in conjunction
with the financial statements and related notes concerning the
Company's accounting policies and other matters contained in the
Company's annual report on Form 10-KSB. The results for the nine
months ended September 30, 1999 are not necessarily indicative of the
results expected for the full year ending December 31, 1999. Certain
prior year amounts have been reclassified to conform with the current
year's presentation.
2. REVOLVING LINE OF CREDIT
------------------------
On September 17, 1999, Finova Capital Corporation issued a letter to
the Company, indicating that the Company was in default of its
Security Agreement. However, Finova Capital Corporation has continued
to provide financing to the Company under modified terms. The Company
is in the process of seeking financing from other financial
institutions.
-4-
3. NOTES PAYABLE
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During the first quarter of 1999, the Company borrowed an aggregate
of $850,000 in unsecured short term notes at interest rates ranging
from 8% to 20.8%.In the third quarter, these notes where all
restructured to 8% interest. On June 1, 1999, the Company borrowed an
additional $1,528,167. As consideration, the Company has pledged a
majority of PLC common stock, and is obligated to pay monthly
interest at a rate of 8% for a period of 2 years, at which time the
entire principal on the unsecured note is payable. Private Label
Cosmetics, Inc. (PLC) is a wholly-owned subsidiary of the Company.
During the third quarter, the Company borrowed an aggregate of
$1,100,000 in unsecured short term notes and an aggregate of $750,000
in unsecured long term notes, due in October, 2000, all at 8%. The
Company also converted $200,000 of existing short term notes to
equity (see preferred stock below).
4. PREFERRED STOCK
---------------
At the annual shareholders meeting held on September 7, 1999, the
Company received shareholder approval to sell up to $3,000,000 of its
convertible preferred stock. During the third quarter 1999, the
Company raised $800,000 in the issuance of this stock, and converted
$200,000 of existing debt into preferred stock.
5. CONSULTING AGREEMENT
--------------------
On June 1, 1999, the Company entered into an agreement to design,
develop, implement, and launch a world wide web site for a client.
This project, for which the Company was paid $500,000, was
successfully completed by the end of June.
6. PROPERTY LEASE
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Ben Rickert relocated its operations in the third quarter of 1999
from Wayne, NJ to Fairfield, NJ, signing a 5 year lease effective
August 1, 1999, with a net basic annual rent of approximately
$340,000.
-5-
7. BEN RICKERT, INC. ACQUISITION
-----------------------------
On July 31, 1998, the Company acquired from Summit Bank the assets of
Ben Rickert, Inc., a manufacturer and distributor of cosmetics,
fragrances and gift items, for $1.5 million.
The following tables summarizes pro forma consolidated results of
operations (unaudited) of the Company and the 1998 Ben Rickert asset
acquisition as though the acquisition had been consummated at January
1, 1998. The pro forma amounts give effect to the appropriate
adjustments for the fair value of assets acquired and the
amortization of goodwill, depreciation and the debt incurred and
resulting interest expense.
AZUREL WITHOUT BEN RICKERT
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
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Total Revenue $ 11,494,639 $ 10,895,010
Net Loss $ (660,041) $ (506,362)
Net Loss Per Share $ (0.11) $ (0.10)
Weighted Average Number of Shares 5,826,623 shares 5,302,078 shares
BEN RICKERT CORP ONLY
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
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Total Revenue $ 2,013519 $ 3,120,354
Net Loss $ (3,169,232) $ (4,510,095)
Net Loss Per Share $ (0.55) $ (0.85)
Weighted Average Number of Shares 5,826,623 shares 5,302,078 shares
CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
----------------- -----------------
Total Revenue $ 13,508,158 $ 14,015,364
Net Loss $ (3,829,273) $ (5,016,457)
Net Loss Per Share $ (0.66) $ (0.95)
Weighted Average Number of Shares 5,826,623 shares 5,302,078 shares
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
- -----------------------------------------------
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
OVERVIEW
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Azurel, Ltd., hereinafter "Azurel" or "the Company", through its wholly-owned
subsidiaries, manufactures, markets, and sells private label cosmetics,
fragrances and skincare products. Prior to the completion of the acquisitions of
the subsidiaries, Azurel focused its operations on negotiating and consummating
such acquisitions and developing and implementing marketing strategies for its
branded products.
In August 1996, Azurel acquired the stock of Private Label Group (PLC), and in
October 1996, Azurel acquired the stock of Scent Overnight (currently Scent
1-2-3).
In October 1997, Azurel acquired the stock of Cambridge Business Services
Corporation.
On July 31, 1998, Ben Rickert Corp. ("Ben Rickert"), a wholly owned subsidiary
of Azurel, acquired the assets of Ben Rickert, Inc., a 28-year old cosmetic
company, for $1.5 million. The Ben Rickert acquisition will help Azurel to enjoy
numerous advantages, such as transferring much of Ben Rickert's out source
manufacturing to PLC, as well as reducing overhead by combining several
departments. Additionally, the acquisition allows Azurel to enter the bath and
body gift business and affords the Company more clout with `key account'
retailers for other Azurel product lines.
At the end of the second quarter of 1999, Ben Rickert sold its fully depreciated
soap machines for $236,000. In addition to the positive cash flow impact, the
Company now has more flexibility in its breadth of soap line through the
outsourcing of soap manufacturing. At the same time, Ben Rickert moved into
significantly smaller facilities, which will reduce rent expense approximately
$400,000 on an annualized basis.
-7-
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the nine and three months ended September 30, 1999 were
$13,508,158 and $4,745,158, respectively, compared to $11,612,784 and $5,321,433
for the nine and three months ended September 30, 1998. This increase is largely
attributable to the acquisition of Ben Rickert in July, 1998 (see page 6
analysis). With the exclusion of Ben Rickert sales in 1999, first half sales
were about $600,000 higher in 1999 than a year earlier, almost entirely
attributable to increased sales to a major customer at PLC.
Cost of sales was $11,819,176 and $3,507,040 for the nine and three months ended
September 30, 1999 and $8,265,080 and $3,941,181 for the respective periods
ended September 30, 1998. Gross profit as a percentage of revenue was 12.5% and
26.1% for the nine and three months ended September 30, 1999 and 28.8% and
25.9% for the corresponding periods ended September 30, 1998. The deterioration
in the nine month gross profit percentage in 1999 was primarily the result of
losses incurred at Ben Rickert from the sale of closeout merchandise and the
disposal of obsolete inventory in the first half of the year.
Selling, general and administrative (S,G & A) expenses for the nine and three
months ended September 30, 1999 were $5,746,355 and $1,867,874 as compared to
$4,047,269 and $1,584,664 for the nine and three months ended September 30,
1998. The increase in S, G & A expenses was due primarily to expenses associated
with the Ben Rickert operations. Additionally, PLC experienced a first half
increase of approximately $358,000 in 1999 compared to 1998. This represented
increased research and development costs as well as increased salaries and
selling expenses.
For the nine and three months ended September 30, 1999, the Company's net income
included non-cash expenses of $351,331 and $113,236, respectively. For the same
periods in 1998, the Company's net income included non-cash expenses of $324,680
and $105,766. Such expense was incurred principally as a result of depreciation
and amortization of assets acquired with the acquisition of PLC.
Interest expense was $509,824 for the nine months ended September 30, 1999 and
$111,158 for the three months ended September 30, 1999, compared to $301,324 for
the nine months ended September 30, 1998 and $124,414 for the three months ended
September 30, 1998. The increase represents interest expense related to the Ben
Rickert subsidiary (approximately $140,000 for nine months) and the interest
associated with the issuance of $2,183,000 of unsecured short term notes in
1999.
-8-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity is accounts receivable of $2,854,765,
and inventory of $5,324,102.
The Company has funded its operations to date primarily through a combination of
debt and equity financing. In August 1997, Azurel completed its initial public
offering of 1,200,000 shares of common stock and 1,200,000 common stock purchase
warrants which resulted in approximately $4,800,000 to the Company.
In February 1998, the Company secured a revolving line of credit in the amount
of $3,500,000 with Finova Capital Corporation until February 2000. This line of
credit bears an interest rate of 2.5% above the prime rate and is secured by the
Company's receivables, inventory and a second lien on machinery and equipment.
An additional line of credit of $4,000,000 was secured for the subsidiary Ben
Rickert Corp in September 1998 with Finova. The terms and expiration date are
the same as the $3,500,000 line of credit except that the $4 million line is
secured by Ben Rickert's receivables, inventory and a first lien on Ben
Rickert's machinery and equipment. In September 1999, Finova notified the
Company of a default condition with respect to its security agreement. However,
Finova has continued to provide financing to the Company under modified terms.
The Company is in the process of entertaining proposals from other financial
institutions, and expects to have a new financing agreement in place by early
next year.
-9-
In March 1998, the Company obtained a 5-year term loan of $272,112, secured by
new equipment and machinery, at a rate of approximately 10.5%, with The CIT
Group.
On August 12,1998 the Company sold 1,500 units of convertible preferred stock
and warrants, receiving net proceeds of $1,237,587.
During the first quarter of 1999, Azurel borrowed an aggregate of $850,000 in
unsecured notes, at interest rates ranging from 8% to 20.8%. In the third
quarter, these notes where all restructured to 8% interest.
In April and May of 1999, the Company sold 716,667 shares of common stock at
$1.50 per share, receiving gross proceeds of $1,075,000.
In May, 1999, the Company obtained $1,528,167 additional funds, secured by an
8%, 2-year note, and a majority of PLC common stock.
In the third quarter of 1999, the Company borrowed an aggregate of $1,100,000 in
unsecured short term notes and $750,000 in unsecured long term notes, all at a
rate of 8%.
Azurel purchased computer software and hardware approximating $200,000, in the
third quarter of 1999. On October 25, 1999, the Company sold the software and
hardware, and entered into a 25-month sale-leaseback agreement, with a monthly
principal payment of $8,000 plus interest at a rate of 10.5%.
Cash used in operations for the first nine months of 1999 was $2,898,535 as
compared to $1,166,051 for the first nine months of 1998. Losses before non-cash
expenses of $3,829,273 in 1999, were partially funded by a decrease in accounts
receivable, $1,785,675. The balance was funded primarily by financing activities
as follows:
Net borrowings from long term debt, $1,882,932, and notes, $2,183,000, and
raising $1,875,000 in equity capital, partially offset by a $2,760,105 reduction
in the revolving line of credit. The resulting $3,129,103 in net cash provided
by financing activities during the nine months ended September 30, 1999 compared
to $3,391,192 net cash provided by financing activities during the same period
of 1998.
Cash availability as of September 30, 1999, against the Finova revolving line of
credit was approximately $400,000.
-10-
YEAR 2000 COMPLIANCE
- --------------------
Many computer systems and software products worldwide and throughout all
industries will not function properly as the year 2000 approaches unless
changed, due to a once-common programming standard that represents the years
using two digits. This is the "Year 2000 problem" that has received considerable
media coverage. The Company has recently upgraded its management information
systems. As part of this program, the Company identified those systems and
applications that required modification, redevelopment, or replacement. The
Company believes that its management information systems are Year 2000
compliant. Management of the Company does not believe that failure of the
Company's vendors or third-party providers' systems to be Year 2000 compliant
will have a material adverse effect upon the Company.
-11-
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
On September 7, 1999, the Company held its 1998 Annual Meeting of
Stockholders.
At the annual meeting, the Company's stockholders were asked to vote
upon the election of directors for the ensuing year, the appointment of an
independent accounting firm for the ensuing year and to approve common stock
issuable upon the exercise of the Company's Series C Convertible Preferred
Stock, in excess of 19.9% of the Company's outstanding common stock.
The following persons were elected as directors of the company for the ensuing
year by the votes next to such persons name:
Gerard Semhon 3,390,725 shares in favor 0 shares against
Frank DeSimone 3,390,725 shares in favor 0 shares against
Kay Shortway 3,390,725 shares in favor 0 shares against
Norman Grief 3,390,725 shares in favor 0 shares against
Robert Gillings 3,391,323 shares in favor 0 shares against
99,798 shares were withheld from voting for each of the above
directors.
Feldman Sherb Horowitz & Co. was approved to act as the Company's
independent certified public accountants for the ensuing year by the following
vote:
3,391,323 shares in favor 3,200 shares against 0 shares withheld
The issuance, if necessary, upon conversion of the Company's Series C
Convertible Preferred Stock of more than 1,215,308 shares of common stock,
representing 19.9% of the Company's outstanding shares of common stock on the
date of sale of the Series C Convertible Preferred Stock, as required by Nasdaq
rules was approved by the following vote:
3,254,725 shares in favor 100,598 shares against 0 shares withheld
-12-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a.) EXHIBIT DESCRIPTION
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27 Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
-13-
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 : November 18, 1999
-14-