SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 000-27113
AZUR INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 50-0015673
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State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
101 NE 3rd Avenue, Fort Lauderdale, Florida 33301
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (954) 763-1515
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the small business issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES |_| NO |X|
As of the close of business on September 29, 2005, there were 50,571,238 shares
of the Small business issuer's $.0001 par value per share Common Stock
outstanding.
AZUR INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I Financial Information Pages
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Item 1. Financial Statements 3-6
Item 2 Management's Discussion and Analysis or
Plan of Operation 27-35
Item 3. Controls and Procedures 36
PART II Other Information
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Items 1 through 6 36-37
Forward Looking Statements and Associated Risks
Signature Page 38
Exhibits/Certifications 39-44
2
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
2005
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(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 441,024
Accounts Receivable (net of allowance for doubtful
accounts of $45,120) 2,779,123
Inventory 437,393
Prepaid Expenses 415,099
Other Receivables 932,664
Costs and Estimated Earnings in Excess of Billings
on Uncompleted Contracts 7,971,581
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Total Current Assets 12,976,883
Property, Plant & Equipment (net of accumulated depreciation
of $2,108,105) 13,596,358
Other Assets
Loan Acquisition Costs (net of amortization of $83,907) 266,064
Investments in Real Estate 240,000
Construction Deposits 1,688,000
Deposits - Land Purchase 1,300,309
Loans Receivable 250,000
Security Deposits 13,016
Other Deposits 43,830
Goodwill 9,872,793
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Total Other Assets 13,674,013
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TOTAL ASSETS $ 40,247,253
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LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable & Accrued Expenses $ 3,018,210
Current Portion-Notes/Mortgages Payable 19,196,712
Current Portion-Capital Lease Obligation 255,920
Other Current Liabilities 116,254
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Total Current Liabilities 22,587,097
Long-Term Debt
Notes/Mortgages Payable 11,727,544
Capital Lease Obligation 575,577
Liabilities Subject to Compromise from Bankruptcy 752,971
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Total Long-Term Debt 13,056,091
Other Liabilities
Deposits Held 2,488,000
Deferred Tax 227,405
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Total Other Liabilities 2,715,405
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Total Liabilities 38,358,593
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CONTINGENCY (FOOTNOTE 19)
Stockholders' Equity
Common Stock - $.01 par value, 200,000,000 shares
authorized; shares issued and outstanding 46,667,438 466,675
Non Controlling Interest in Subsidiaries 3,024,664
Additional Paid in Capital 2,278,844
Accumulated Deficit (3,719,990)
Accumulated Other Comprehensive Loss (161,533)
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Total Stockholders' Equity 1,888,659
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 40,247,253
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The accompanying notes are an integral part of the financial statements.
3
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2005 and 2004
2005 2004
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(Unaudited) (Unaudited)
Revenues
Sales $ 3,312,660 $ -
Rents 4,650,621 68,411
Revenues from Construction Contracts 3,650,592 -
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Total Revenue 11,613,873 68,411
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Cost of Sales 3,189,187 -
Construction Operating Expenses 2,566,582 -
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Total Cost of Sales and Construction Expenses 5,755,769 -
Gross Profit 5,858,103 68,411
Operating Expenses
General & Administrative Expenses 5,121,981 778,867
Amortization Expense 22,163 -
Depreciation Expense 675,712 -
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Total Operating Expenses 5,819,856 778,867
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Net Income (Loss) Before
Other Income/(Expense) 38,247 (710,456)
Other Income and (Expense)
Interest Income 1,758 93
Interest Expense (442,658) (155,253)
Other Expense (6,396) -
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Total Other Income and (Expense) (447,296) (155,160)
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Net Income (Loss) before adjustments for minority interest (409,048) (865,616)
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Non Controlling Interest in Subsidiary (465,305) 63,093
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Income (Loss) before Provision for Income Taxes (874,353) (802,523)
Provision for Income Taxes (136,980) -
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Net Income (Loss) $ (1,011,333) $(802,523)
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Net Loss per Weighted Average Number of
Common Shares $ (0.02) $ (0.03)
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Weighted Average Number of Common
Shares Outstanding 43,017,715 25,733,417
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The accompanying notes are an integral part of the consolidated financial
statements.
4
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter Ended June 30, 2005 and 2004
2005 2004
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(Unaudited) (Unaudited)
Revenues
Sales $ 1,779,587 $ -
Rents 2,401,723 45,620
Revenues from Construction Contracts 3,650,592 -
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Total Revenue 7,831,902 45,620
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Cost of Sales 1,651,707 -
Construction Operating Expenses 2,566,582 -
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Total Cost of Sale and Construction Expenses 4,218,289 -
Gross Profit 3,613,612 45,620
Operating Expenses
General & Administrative Expenses 3,118,943 559,308
Amortization Expense 11,082 -
Depreciation Expense 356,184 -
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Total Operating Expenses 3,486,209 559,308
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Net Income (Loss) Before
Other Income/(Expense) 127,403 (513,688)
Other Income and (Expense)
Interest Income 11 91
Other Income 30,595 -
Interest Expense (302,267) (139,880)
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Total Other Income and (Expense) (271,661) (139,789)
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Net Income (Loss) before adjustments for minority interest (144,258) (653,477)
Non Controlling Interest in Subsidiary (416,568) 57,972
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Income (Loss) before Provision for Income Taxes (560,826) (595,505)
Provision for Income Taxes (61,667) -
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Net Income (Loss) $ (622,492) $(595,505)
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Net Loss per Weighted Average Number of
Common Shares $ (0.01) $ (0.02)
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Weighted Average Number of Common
Shares Outstanding 44,778,716 29,393,827
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The accompanying notes are an integral part of the consolidated financial
statements.
5
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
2005 2004
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (1,011,333) $(802,523)
Adjustments to Reconcile Income (Loss) to Net Cash
Provided (Used) for Operating Activities:
Depreciation and Amortization 587,967 29,292
Services and Interest paid by Isuance of Common Stock 315,379 177,431
Earnings In Excess of Billings (3,650,592) -
Changes in Assets and Liabilities:
Increase in Accounts Receivable (307,283) -
Decrease in Inventory 223,196 -
Increase/Decrease in Prepaid Expenses (48,339) 85,052
Increase in Security Deposits (13,016) (20,000)
Increase/Decrease in Other Receivables (106,243) 63,879
Increase in Other Assets (285,000)
Decrease in Deferred Taxes (260,116)
Increase in Other Current Liabilities 116,254 27,965
Increase in Accounts Payable & Accruals 437,147 -
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Net Cash Used In Operations (4,001,979) (438,904)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Building in Progress
Increase in Real Estate Holdings - (10,876)
Increase in Real Estate Deposits (1,300,309) (50,000)
Increase in Other Deposits (43,830)
Purchase of Fixed Assets (163,655) (19,464)
Cash Acquired on Acquisitions 25,036 3,206
Cash Paid for Acquisitions (410,445)
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Net Cash Used in Investing Activities: (1,893,203) (77,134)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Customer Deposit Escrows 800,000 -
Minority Shareholder Contributions 141,971 267,921
Payments on Capital Leases (180,170) -
Proceeds From Notes and LoansPayable 6,630,341 50,000
Payment of Notes and Loans Payable (1,777,607) (1,053,274)
Proceeds from Sale of Common Stock - 1,335,001
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Net Cash Provided in Financing Activities: 5,614,535 599,648
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Effect of Foreign Exhange Rate on Cash 109,908 -
Net Increae (Decrease) in Cash (170,739) 83,610
Beginning Cash 611,763 -
Ending Cash $ 441,024 $ 83,610
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SCHEDULE OF NONCASH ACTIVITIES:
Common Stock Issued for Services and Interest $ 315,379 177,431
Common Stock Issued for Acquisitions 21,467 698,800
Property and equipment valued at $ 11,224,000 were
acquired through the issuance of an obligation payable. 11,224,000
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Expense Paid 442,658 $ 152,253
Income Taxes Paid - -
The accompanying notes are an integral part of the consolidated financial
statements.
6
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
A. BACKGROUND
Azur International, Inc. is in the business of developing and marketing luxury
residential and resort properties The Company was originally incorporated in the
State of Nevada in June 1997 under the name of Union Chemical Corporation in
order to be a partner in a joint venture that was never consummated. In June
1999, the Company changed its name to Hotyellow98.com, Inc. as it acquired an
Arizona corporation, Hotyellow98.com. The Company subsequently changed its name
to the current name of Azur International, Inc.
In November of 2001 the Company entered bankruptcy under chapter 7 of the
bankruptcy laws in the United States Bankruptcy Court for the district of
Arizona. It emerged from bankruptcy in July 2003.
On February 9, 2004 Azur International, Inc. acquired Azur Development Corp.
(formally known as Mingo Bay Development Corp) in a stock for stock transaction.
In November of 2004, the company acquired The Grand Shell Landing, Inc., which
operates an 18-hole golf course, pro shop and restaurant in Mississippi. At the
present time, The Grand Shell Landing, Inc. generates golf-related revenues
only; there is no real estate activity
On February 24, 2005 the Company purchased Airtek Safety Limited, a British
company which derives income from the rental of cranes and equipment and
services to the construction industry. The purchase, which was effective January
1, 2005, was a cash transaction whereby the sellers have the option of taking
stock in lieu of cash.
On June 1, 2005, pursuant to a Stock Purchase Agreement dated as of June 1, 2005
between HVST Acquisition Corporation, a Nevada corporation owned and controlled
by James A. Ditanna of King of Prussia, Pennsylvania ("HVST Acquisition"), and
Azur International, Inc. ("Azur"), HVST Acquisition sold to Azur 68,960,000
shares of common stock of New Harvest Capital Corporation, constituting
approximately 50.4% of the outstanding common stock of New Harvest (the "Harvest
Shares"). The purchase price for the New Harvest Shares was $550,000 paid in
cash. By virtue of its acquisition of a majority of the voting securities of New
Harvest on such date, Azur acquired from HVST Acquisition control of Harvest on
June 1, 2005.
7
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
Simultaneously with the acquisition of the New Harvest Shares, Azur entered into
a Consulting and Investment Banking Services Agreement with Venture Fund I,
Inc., a Nevada corporation owned by James Ditanna ("Venture") under which
Venture has agreed to provide to Azur certain information, evaluation and
consulting and investment banking services for a consideration of 600,000 shares
of common stock of Azur, which were issued on June 27th, 2005.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of Azur International,
Inc. and its wholly-owned subsidiaries. All material inter-company transactions
have been eliminated. The following is a list of subsidiaries and their
respective controlling interests:
Rio Vista, LLC - 53%
48 Hendricks. LLC - 63%
New Harvest Capital Corp. - 51%
Azur Development Corp. - 100%
The Grand Shell Landing - 100%
Airtek Safety Limited - 100%
C. FOREIGN CURRENCY TRANSLATION
The Company's subsidiary, Airtek Safety, is located in the United Kingdom along
with its subsidiary operating company Airtek Cranes. The majority of financial
transactions take place in British pounds. Accordingly, Airtek has determined
the British pound as the currency of its primary economic environment and thus
its functional currency.
Non-dollar transactions and balances for Airtek and its subsidiaries have been
re-measured to U.S. dollars in accordance with statement No. 52 of the Financial
Accounting Standards Board ("FASB"). All transaction gains and losses from
re-measurement of monetary balances sheet items denominated in non-dollar
currencies are reflected in the statement of operations as financial income or
expenses, as appropriate.
D. REAL ESTATE HOLDINGS
Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties based on appraisals of the various
properties acquired in the acquisition.
8
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
E. REVENUE RECOGNITION
Revenues for sales and rentals generated from The Grand Shell Landing, Inc. are
recognized under the full accrual method of accounting. Airtek Safety Limited
reports under the historical cost convention and in accordance with the
Financial Reporting for Smaller Entities (effective June 2002).
Construction Operations - Azur International, Inc. determines earnings from
construction under the percentage of completion method. Under this method,
earnings are recognized in proportion of the total earnings anticipated from a
contract which the cost of the work completed bears to the estimated total cost
of the work covered by the contract. The Company's construction contracts
generally extend over more than one year, and revisions in costs and earnings
estimates during the course of the work are reflected in the year in which the
facts which require the revision become known. Due to uncertainties inherent in
the estimation process, it is reasonably possible that such estimates will be
revised over the next years until completion of the job.
When a loss is forecasted for a contract, the full amount of the anticipated
loss is recognized in the period in which it is determined that a loss will
occur. Estimated costs and earnings from construction contracts are reviewed and
necessary adjustments are made based on current evaluations of the indicated
outcome. Cost of construction contracts includes all direct material, labor and
subcontracting costs, and those indirect costs related to contract performance
expenses that are not directly attributable to construction contracts, such as
business development, estimating, purchasing, accounting, cost control, general
office support and similar costs attributed to our construction activities, are
expensed as incurred.
F. USE OF ESTIMATES
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand; cash in banks, and any highly
liquid investments with maturity of three months or less at the time of
purchase. The Company and its subsidiaries maintain cash and cash equivalent
balances at several financial institutions, which are insured by the Federal
Deposit Insurance Corporation up to $100,000. At times, the cash balances may
exceed federally insured limits. We have not experienced any losses in such
accounts and we believe the risk related to these deposits is minimal.
9
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
H. LEASES
Leases that transfer substantially all of the risks and benefits of ownership
are accounted for as capital leases. Other leases are operating leases that are
expensed over the terms of the lease using the straight line method. Capital
leases are included in property and equipment and are amortized using the same
methods as used for depreciation of property and equipment
I. CONSTRUCTION DEPOSITS
Construction deposits amounting to $2,488,000 for the purchase of units in the
48 Hendricks project have been collected and deposited in an escrow account with
the escrow agent, Adorno & Yoss, P.A., as per our Escrow Agreement dated August
25, 2004. As per said agreement, the first 10% of the purchase price of each
unit, due at signing, must remain in the escrow account at all times. The second
10% deposit, due at the start of construction, may be used to towards hard
construction costs only. At June 30, 2005, the balance in the escrow account is
$1,688,000, and a total of $800,000 has been used towards hard construction
costs.
J. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is estimated and recorded based on the
Company's historical bad debt experience. The current balance of the allowance
for doubtful accounts is approximately $45,120.
K. INVENTORY
Inventory is stated at the lower of cost or market with cost determined using
the first-in, first-out method. Inventory for Airtek Cranes is comprised
primarily of crane parts and supplies valued at $281,204. Crane inventory
includes motors, gear boxes, wheels, cables, batteries, brakes and other parts
necessary to support the crane rental business. Inventory for Airtek Safety of
$83,631 consists primarily of airmats that are required on construction sites
under English law. The balance is stairsafe inventory utilized on jobsites for
railings around open staircases. Inventory for The Grand Shell Landing Golf
Course totaling $72,558 at June 30, 2005, consists of apparel and equipment sold
at the pro shop, as well as food and beverages items.
L. EARNINGS/LOSS PER SHARE
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the quarter and year-to-date. The number of
shares used for the six months ended June 30, 2005 was 43,017,715 and the
resulting loss per share was $0.02 per share.
10
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
M. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards 109 of "Accounting for Income Taxes." Under
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The Company has net operating losses (NOL's) of
approximately $ 3,719,990.
Statutory federal income taxes 34%
Valuation allowance (34)
Effective tax rate 0%
Airtek Safety Limited, the British subsidiary, had income subject to taxation of
$874,692 for the six months ended June 30, 2005. A provision for income taxes of
$136,980 is included in the June 30, 2005 financials.
NOTE 2 - RELATED PARTY TRANSACTIONS
Rio Vista LLC, a subsidiary of Azur Development Corp. has mortgages with banks
on property owned that were financed in the individual name of a principal of
the company. There are also bank accounts that are titled in the name of the
same principal that belong to Rio Vista, LLC.
A major shareholder of Azur International is also a minority owner in both Rio
Vista, LLC and 48 Hendricks, LLC.
An officer of the company is currently using a property owned by the corporation
personally, the value of which is approximately $4,000 monthly.
NOTE 3 - EMPLOYMENT/CONSULTING AGREEMENTS
The following employment and consulting agreements are in effect as of June 30,
2005:
11
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
A. The Chief Executive Officer, who also serves as the chairman of the
Board of Directors of the Company, has a consulting agreement with a 36
month term, commencing on February 1, 2004. His compensation for the
duration of the agreement is as follows: Year 1 - 500,000 restricted
shares of Azur International common stock at $.01. Year 2 - $360,000 per
year, plus 500,000 restricted shares of Azur International common stock at
$.01. Year 3 - $480,000 per year, plus 500,000 restricted shares of Azur
International common stock at $.01. Under this Consulting Agreement, the
Company provides said executive with an automobile.
B. The President of the Company, who also serves on the Board of
Directors, has an employment agreement with a term of 3 years, commencing
on September 1, 2004. His compensation, beginning on January 1, 2005, is
$240,000 per annum. He also received a signing bonus in the form of
166,666 restricted shares of the Company's common stock valued at $3.00
per share. The signing bonus was paid sixty days from the effective date
of the contract, which was September 1, 2004.
C. The Vice President of Operations of the Company's has an employment
agreement with a term of 3 years, commencing on September 1, 2004. His
compensation, beginning on January 1st, 2005, is $120,000 per annum. He
also received a signing bonus in the form of 50,000 restricted shares of
the Company's common stock at $3.00 per share. The Signing Bonus was paid
sixty days from the effective date of the contract, which was September 1,
2004. This agreement was terminated effective July 1, 2005. (Please see
Note 17 (A) on Commitments and Subsequent Events)
D. The General Counsel & Corporate Secretary has an employment agreement
with a term of one year, commencing on April 15, 2004. After the initial
term, the agreement shall renew automatically for additional one year
periods, unless terminated by either party. His compensation is $180,000
per annum, to be increased at a rate of no less than 10% per annum. The
Executive received a signing bonus of 50,000 of restricted shares of the
Company's stock.
E. The Vice President of Development, who is also the President of the
Azur Development subsidiary, has a Consulting Agreement with a term of
twelve months, commencing on November 1, 2004. After the initial term, the
agreement shall renew automatically for additional twelve month term,
unless terminated by either party. His compensation is 10% of the net
profits of any developments that he initiates. He shall be paid 50% in
cash payment, and 50% in restricted common shares at $.01. This agreement
was replaced with the Chief Operating Officer employment agreement on July
12, 2005. (Please see Note 17 (A) on commitments and subsequent events)
12
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
F. A Director of the Company, who has been engaged to develop home
building and commercial development projects, as well as oversee any
European projects, has a Consulting agreement with a term of three years,
commencing on October 5, 2004. His compensation is a base fee of 3,000,000
of shares of common stock at $.01.
G. An advisory agreement is in effect between the Company and another
consulting firm for services related to the acquisition of new companies
and the listing of shares on the American Stock Exchange and other foreign
exchanges. The agreement commences on August 1st, 2004, for a term of 2
years, ending on August 1st, 2006. The compensation is 2,000,000 shares of
common stock at $.01, plus 10% of the acquisition price of new companies
identified by the consulting company. The 10% shall be paid in shares of
common stock valued at the previous day's bid price. In a First Addendum
to the Advisory Agreement dated June 27, 2005, the Company agreed to
afford the consultant an advance payment of $25,000 against future
compensation. The advance shall be against any subsequent payments due and
payable to the Consultant.
H. An IR/PR-Services Agreement is in effect between the Company and an
international consulting company for a period of twelve moths, commencing
on June 30, 2005. In connection with this agreement, the Company shall pay
the Consultant compensation as follows: (1) a $15,000 listing fee for
listing application at a German stock exchange, which shall be satisfied
by the issuance of 12,000 shares of the Company's common stock, (2) a
$110,000 engagement fee for the performance of consulting services, which
shall be satisfied by the issuance of 88,000 shares of the Company's
common stock valued at $1.25 per share and (3) a 10% finder's fee in
connection with any acquisitions, projects, or any other findings or
transactions involving products, commodities, services, currencies,
additions, renewals, extensions, rollovers, amendments, new contracts,
re-negotiations, parallel contracts or agreements or third party
assignments thereof.
I. A retainer agreement dated May 31, 2005 is in effect between the
Company and an investor relations firm for implementation of the Company's
financial communications program. The agreement, which has an effective
date of June 1, 2005 carries a term of twelve months ending on May 31,
2006. During the term, in consideration for the services, the company
shall pay the investor relations firm a retainer fee of $60,000 for the
initial ninety day start up period, and $15,000 monthly for each month
after the third month. As additional consideration, the Company grants the
investor relations firm warrants to purchase an aggregate of 100,000
shares of common stock over a three year period at the exercise price per
share of $2.00 per share.
13
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
J. The Company has a retention agreement for strategic and business
consultancy services with a consulting firm dated February 1, 2005. (1)
consulting fees of $25,000 upon execution of the agreement, and each
subsequent month for a period of one year, (b) warrants to purchase an
aggregate number of shares of the Company's common stock (i) equal to 9.8%
of the outstanding common stock of Azur International as of the February
1, 2005, or 4,093,708 shares at the exercise price per share equal to 50%
of the average closing price for the common stock during the ten days
immediately preceding February 1, 2005 ($1.691), and (c) finder's fees as
stipulated in section 4-c of the retention agreement.
K. The Company has a retainer agreement with a land planner dated February
3, 2005 for land planning and golf course design services which are to
take place in three stages. The fees for said services total $210,000,
with $84,000 to be paid in shares of the Company's common stock. The
remaining $126,000 is to be paid in cash and will be billed each month,
based on the percentage of work completed.
L. A one year consultant agreement dated May 6, 2005 is in effect between
the Company and a consultant to develop programs to achieve the Company's
public relations objectives. The compensation for the consultant's
services shall be paid in 2,000,000 restricted shares of the Company's
stock to be issued upon execution of the agreement on the date stated
above.
NOTE 4 - CAPITAL TRANSACTIONS
In January 2005, Azur International issued 50,000 restricted shares, valued at
$.01 per share, to an attorney in consideration of an employment contract. The
Company also issued 50,000 restricted shares for the same value to a director in
consideration of directors' fees, and 500,000 restricted shares valued at $5,000
to a lender in consideration of loan fees.
14
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
In February 2005, the Company issued 2,146,666 restricted shares valued at $.01
per share in consideration of the acquisition of Airtek Safety Limited, (a
United Kingdom company). This stock, along with the initial 1,443,734 restricted
shares issued in November 2004 as part of the Airtek acquisition, is being held
in escrow pending consummation of the terms of the acquisition.
During the months of April and May 2005, Azur International, Inc. issued 22,443
restricted shares valued at $33,665 each month in consideration of architect
fees and creative design services relating to the planned Shell Landing
Development construction project. Also, the Company issued 420,000 restricted
shares valued at $.01 per share to various investors as payment of loan fees,
and 50,000 at $.01 per share for director's fees.
In May 2005, the Company issued 2,000,000 restricted shares valued at $.01 per
share as payment on a consulting agreement, and another 600,000 valued at $6,000
for services. During this month the company also issued 1,580,282 restricted
shares valued at $15,803 as consideration of loan fees.
NOTE 5 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following amount
as of June 30, 2005:
Golf Membership & Events $ 112,758
Trade Receivables 2,666,365
-----------
$2,779,123
NOTE 6 - OTHER RECEIVABLES
Other receivables of $932,664 consist of Shareholder loans receivable totaling
$564,812, and miscellaneous accounts receivable of $361,702. The miscellaneous
accounts receivable consists of $157, 893 in car loans provided to employees.
The account also contains an insurance claim receivable for $8,527. The
remaining balance $195,282 is comprised primarily of advances to employees and
shareholders.
15
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are being depreciated over their
useful lives using straight line depreciation methods.
The estimated useful lives of significant assets are as follows:
Equipment 5 years
Land Improvements 20 years
Buildings 40 years
Hire Equipment 12 years
Property and equipment consist of the following as of June 30, 2005:
Land and Improvements $ 6,931,070
Less accumulated depreciation (246,562)
------------
Net Land and Improvements $ 6,684,508
Buildings $ 2,295,616
Less accumulated depreciation (34,212)
------------
Net buildings $ 2,261,403
Equipment & Fixtures $ 6,477,776
Less accumulated depreciation (1,827,329)
------------
Net Equipment & Fixtures $ 4,650,447
Total Property & Equipment $ 13,596,358
============
* Total Depreciation Expense for the six months ended June 30, 2005 was
$675,712.
** In April 2005 the Property Plant and Equipment account was reduced by
approximately $5,000,000 due to the transfer of assets related to the
Meritage construction project to the Cost and Earnings In Excess of
Billings account.
16
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 8 - CAPITAL LEASES
Property held under capital Leases, included with property and equipment at
March 31, 2005 consists of the following:
Equipment $ 256,027
Less: Accumulated depreciation (53,434)
---------
Equipment capital lease-net $ 202,593
Capital lease obligations consist of the following at June 30, 2005:
Non-cancelable leases, through 2008, $ 831,497
Secured by equipment
Less: current portion of lease obligations (255,920)
---------
Long-term capital lease obligations $ 575,577
The Company currently has two capital leases for cranes used in its rental
operations. The first lease, dated 2/3/2004, with a finance company is for six
cranes. The fixed monthly payment is $8,967 with the last payment due 2/20/2008.
This lease is in the name of Airtek Safety. A sub-lease was executed between
Airtek Safety Limited and Airtek Cranes Limited as the cranes are operated out
of the Airtek Crane rental business.
The second lease, dated 7/22/2004 is for eight Arcomet cranes. The monthly
payments are $33,649 with the last payment due 4/15/2009.
NOTE 9 - LOANS RECEIVABLE
On June 15, 2005, Azur entered into a loan agreement with one of its
shareholders, whereby Azur International loaned the shareholder $250,000 at 6%
interest per annum. This loan is evidenced by a promissory note. The payment of
Principal and accrued Interest shall be due and payable in full the earlier of:
i) June 15 2007; or, ii)upon the distribution of any proceeds derived from any
transaction concerning the property known as "Shell Landing Development" in
Gautier, Mississippi, which is currently owned by Shell Landing Development II
LLC, including any proceeds derived from the development or any other
transaction regarding the Islands at Shell Landing (Shell Landing Development)
or any other development (through any corporate entity) taking place at the
property known as Shell Landing Development in Mississippi. All payments shall
be first applied to accrued Interest and then the balance to the Principal.
As security for the Payment, the Shareholder granted Azur International a
security interest upon 125,000 shares of Azur held in the Shareholder's name.
This security interest is evidenced in a Pledge Agreement and Escrow agreement
dated June 15, 2005. The secured interest shall be held until all payments of
Principal and Interest have been paid to Lender.
17
AZUR INTERNATIONAL, INC. & SUBSIDIARIES $
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 10- LONG TERM DEBT
Long term debt consists of the following:
Equity Line of credit -Loan is in the name of a partner. Interest rate is
variable (currently at 7.875%). Loan secured by Rio Vista property. $ 149,427
Mortgage Payable - First Mortgage in name of a partner. Interest is at a
variable rate, currently 5.25%. Interest only is due monthly until November 1,
2012, and the borrower has the right to prepay with no penalty. Maturity date of
the mortgage is October 1, 2027 1,034,822
Mortgage Payable - First mortgage secured by 48 Hendricks property. Bank has a
Secured interest in rents, leases, fixed asset and profits. Interest is variable
but can never be less than 5 %. Current rate is 5.5 %. Payments are interest
only 4,576,341
Note Payable to finance company, monthly payments are variable, including
interest of 6.75%, collateralized by Grand Shell Landing golf course property,
due November 2009 6,273,156
Note Payable to finance company, monthly payments of $ 278, including imputed
interest of 7%, collateralized by equipment, due October 2006 4,910
Note Payable to finance company, monthly payments of $ 277, including imputed
interest of 6.49% collateralized by equipment, due May 2007 5,942
Note payable to a finance company, monthly payments of $ 814, including imputed
interest of 6.75%, collectivized by equipment, due October 2006 11,624
Note Payable to private investor, due on May 6, 2005 (Extended to January 1,
2006) with interest payable at 12%, and unsecured. 3,000,000
Notes Payable to private investor with maturity date of August 14th, 2005
(Extended to February 14, 2006) 700,000
Notes Payable - various installment obligations for crane and safety equipment.
933,224
Note Payable bearing interest at 6% on acquisition of The Grand Shell Landing
Golf course to former owner. Owner has an option to purchase the Company's
stock, currently held in escrow, in lieu of payment of the note, due on November
16, 2005 1,070,811
18
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
Obligation payable for acquisition of Airtek Safety Ltd, non-interest-bearing ,
secured by common stock held in escrow, due on August 24, 2005 (Extended to
February 24th, 2006). The shareholders of Airtek can choose to accept common
stock in lieu of cash payment. 11,224,000
Note Payable to private investor, due May 31, 2006 with 18% interest 840,000
Note Payable to private investor, due September 30, 2005, bearing 12% interest.
((Extended to March 8, 2006). 100,000
Convertible Debenture to Investment Company bearing 12% interest, due on June 1,
2006 700,000
Convertible Debenture to private investor bearing 12% interest, due on June 1, 300,000
-----------
2006
Total obligations $ 30,924,257
Less: Short-term portion (19,196,712)
-----------
Long-term maturities $ 11,727,545
============
A. MATURITIES ON LONG-TERM OBLIGATIONS:
2005 $14,128,035
2006 9,645,018
2007 191,500
2008 202,761
Thereafter 6,756,943
B. EXTENTION OF NOTES PAYABLE:
On May 6th, 2005, the private investor who loaned the Company $3,000,000 in
December of 2004, executed an extension agreement whereby he agreed to extend
the maturity date on the Convertible Secured Promissory Note dated December 29,
2004 to January 1, 2006.
19
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
C. NOTE PAYABLE TO PRIVATE INVESTOR
On May 31, 2005 Azur International executed a convertible note in the amount of
$840,000 with a private investor. The note, which has a maturity date of May 31,
2006, carries an interest rate of 18% per annum, which must be paid monthly in
arrears. The lender has the right to convert the principal amount of the loan
into 1,200,000 shares of the company's stock during the term of the note.
D. CONVERTIBLE DEBENTURE TO INVESTMENT COMPANY
On May 31, 2005, Azur International executed a convertible debenture with an
investment company, in the amount of $700,000. To evidence the terms and
obligations of the loan, Azur International executed the following documents
associated with the loan: Convertible Debenture (the "Note") with an interest
rate of 12% per annum which is paid monthly in arrears, and matures on May 31,
2006, a Securities Purchase Agreement which evidences the lender's purchase of
up to $700,000 in Debentures as set forth in the convertible debenture,
Membership Interest Security Agreement, whereby Azur International secures its
obligation under the loan with its interest in 48 Hendricks LLC, and an Opinion
from counsel regarding representations and warranties.
E. CONVERTIBLE DEBENTURE TO PRIVATE INVESTOR
On May 31, 2005, Azur International executed a convertible debenture with a
private investor, in the amount of $300,000. To evidence the terms and
obligations of the loan, Azur International executed the following documents
associated with the loan: Convertible Debenture (the "Note") with an interest
rate of 12% per annum which is paid monthly in arrears, and matures on May 31,
2006, a Securities Purchase Agreement which evidences the lender's purchase of
up to $300,000 in Debentures as set forth in the convertible debenture,
Membership Interest Security Agreement, whereby Azur International secures its
obligation under the loan with its interest in 48 Hendricks LLC, and an Opinion
from counsel regarding representations and warranties.
NOTE 11 - LOAN ACQUISITION COSTS
Loan acquisition costs consist of the following:
The Grand Shell Landing $180,038
Rio Vista, LLC mortgage 10,350
48 Hendricks, LLC 124,582
Azur Shell Landing LLC 35,000
-------
339,620
Less Accumulated Amortization (83,907)
-------
Total Loan Acquisition Costs $255,713
========
Loan costs are amortized as follows:
The Grand Shell Landing 60 months
Rio Vista, LLC 120 months
48 Hendricks, LLC 35 months
Amortization Expense for the six months ended June 30, 2005 totaled $ 22,163
20
AZUR INTERNATIONAL, INC. & SUBSIDIARIES $
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 12 - DEPOSIT ON LAND PURCHASE
On May 5,th, 2005, the Company entered into an agreement to acquire up to 80% of
the land surrounding the Grand Shell Landing Golf Course in Mississippi. The
company has invested a total of $1,300,309 in said land.
NOTE 13 - ASSIGNMENT OF INTEREST
On May 18, 2005, Azur Development Corp. a wholly owned subsidiary of Azur
assigned its interest in 48 Hendricks LLC to Azur International Inc, for
business and financing purposes.
NOTE 14 - ACQUISITION OF AIRTEK SAFETY LTD.
On February 24, 2005, the Company acquired 100% of the outstanding shares of
Airtek Safety Limited (a United Kingdom corporation). Pursuant to the purchase
agreement with the shareholders of Airtek, Azur International has agreed to pay
6.1 million pounds (approximately $11,224,000) on August 24, 2005 (Extended to
February 24th, 2006). The shareholders have the option to acquire an aggregate
of 3,741,333 shares of common stock in lieu of cash payment due. The shares of
Airtek are being held in escrow pending payment of the purchase consideration.
In the event that the Company defaults on its obligation, the agreement will be
rescinded and the escrowed shares will be returned to the Airtek shareholders.
NOTE 15 - GOODWILL
Goodwill was calculated by analyzing the difference between the purchase price
of each Airtek Safety Limited, Azur Development Corp., and Harvest Corp. and the
consolidated net asset value of each company at acquisition. At June 30, 2005,
the Company has recorded on its balance sheet goodwill from these three
acquisitions as follows:
21
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
Azur Development Corp. $ 152,172 (Note 1-A)
Airtek Safety Limited 9,170,674 (Note 14)
Harvest 549,947 (Note 1-A)
----------
Total $9,872,793
==========
NOTE 16 - BUSINESS SEGMENT INFORMATION
The Company has three operating and reporting segments: Real Estate Development,
Grand Shell Landing Golf Course and Airtek Safety Limited. The Company's
reportable operating segments are strategic business units that offer different
products and services.
Segment amounts include all elimination adjustments made in consolidation. The
Company accounts for all inter-segment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
Real Estate Development consists of the development and sale a luxury
condominium project located in Ft Lauderdale, Florida. Construction on the
project, which commenced in March of 2005, and has an expected completion date
of May 2006, includes a total of sixteen units, which have been 80% pre-sold as
of June 30, 2005.
Grand Shell Landing is an eighteen-hole golf course and club house located in
Gulfport, Mississippi. Surrounding the golf course is land designated for
single-family home sites and multi-family condominium projects. The Company owns
the golf course and club house and has entered into revenue sharing agreements
for specific residential development projects where the Company previously held
an equity interest.
Airtek consists of a crane and a constructions safety equipment rental business.
Airtek is located in Hampshire, England and conducts the majority of its
operations within the United Kingdom.
The following table presents information about reported segment profit or loss
and segment assets:
22
AZUR INTERNATIONAL, INC. & SUBSIDIARIES $
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
Real Estate Grand Shell Airtek Safety All Other Totals
Development Landing Ltd.
----------- ----------- ------------- ---------- ----------
Total Revenue 3,657,238 1,789,850 6,166,784 -- 11,613,872
Depreciation and Amortization 21,645 349,553 323,404 3,272 697,874
Net income (loss) before other 823,827 362,179 923,264 (1,921,022) 188,247
income and expense
Interest Expense -- 234,351 50,264 158,043 442,658
Non-controlling interest in (304,816) (182,188) 21,699 (465,305)
subsidiary
Provision for income taxes (136,980)
Net income (loss) 519,011 127,931 555,524 (2,063,799) (861,333)
Other significant non-cash items:
Cost in excess of billings on 7,971,581
long-term contracts
Segment Assets 9,743,989 8,530,091 8,578,468 13,394,705 40,247,253
Expenditures for segment assets --
The "Other" category includes the following:
o Expenses associated with Rio Vista, a property which is 53% owned by
the Company
o Azur Shell Landing Development, a subsidiary in Mississippi owned
100% by the Company
o Corporate overhead
23
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
The following table details the reportable segment assets included in the
"Other" category, and how they are combined into consolidated totals presented
in the financial statements of the Company.
Rio Vista Azur Azur Shell Azur Int. Totals
Property Development Landing Dev.
-------- ----------- ------------ -------- ----------
Single-family home owned 1,496,092 1,455,225
by the Company
Goodwill -- 9,872,793 9,872,793
Other 240,000 1,351,275 434,490 2,066,633
Total 1,496,092 240,000 1,351,275 10,307,285 13,394,705
The Rio Vista Property category is a single family home in the Las Olas section
of Ft Lauderdale, which was purchased for resale purposes and is currently
listed with a broker. The Goodwill pertains to the acquisition of three
subsidiaries, as detailed in Note 15. The last category called "other" consists
of:
Other consists of the following:
o Azur Development - 3% investment in the Place des Arts condominium
project.
o Azur Shell Landing Development - Investment in the purchase of land
in Mississippi
o Azur International - Cash balances, office furniture and equipment,
loan receivable (Note 9), security deposits, and other deposits.
NOTE 17 - COMMITMENTS & SUBSEQUENT EVENTS
A. On July 1, 2005, the Company singed a Termination of Employment Agreement
by and between the Vice President of Operations, whereby both parties
mutually agreed to terminate the Executive's employment agreement with the
corporation. As stipulated in the agreement, the Executive shall receive
the following severance benefits: (1) Salary until August 15, 2005 (2)
20,000 Restricted Shares of stock (3) health benefits until
24
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
August 15, 2005 and (4) stipend of $5,000 for moving expenses. The Company
appointed a new Chief Operating Officer on July 12, 2005, and entered into an
employment agreement with the Executive, with an effective date of July 1, 2005.
The agreement details the following terms and conditions: (1) The Executive's
salary shall be $60,000 per annum, (2) The Executive shall receive a signing
bonus of 50,000 restricted shares of the Company's stock, (3) The Executive
shall receive 5,000 restricted shares of the Company's stock on the first of
each month, for term of the agreement, (4) The Executive shall receive 5% of the
net profits derived by the Company from any project, which has been directly
originated by the Executive; the 5% consideration shall be payable 1% in cash
payments and 4% in restricted shares of the Company's stock, (5) The Executive
shall receive 5% of the net profits derived by the Company from the leasing of
cranes, which has been directly referred to by the Executive; the 5%
consideration shall be payable 1% in cash payments and 4% in restricted shares
of the Company's stock and (6) the term of the agreement is one year and shall
renew automatically for additional one year periods, unless terminated by either
party.
B. On August 9th, 2005, the Company and the shareholders of Airtek Safety
Limited signed the First Addendum to the Agreement for the Sale and Purchase of
the Entire Issued Share Capital of Airtek Safety Limited. The addendum extended
the "Deferred Payment Date" in the initial agreement to six months from August
24, 2005, making the new due date February 24, 2006. As part of the addendum,
the Company shall pay the following "Installment Payments": $250,000 on
September 24th, 2005 , and $75,000 each subsequent month on October 24th, 2005,
November 24th, 2005, December 24th, 2005 and January 24th, 2005. The first
payment of $250,000 was made on September 29, 2005. The Installment Payments
shall be distributed to the Sellers in their respective percentages. The
Installment Payments shall reduce the total purchase price accordingly, and the
Consideration Shares held by the escrow agent shall be reduced and returned to
the Company as follows: 83,000 shares on September 24, 2005, and 25,000 shares
upon each subsequent installment payment.
C. On August 14th, 2005, the Company executed a First Addendum to the Promissory
Note for $700,000 from a private investor, which extended the due date of said
note to February 14, 2006. The loan carries a 10% interest per annum to be paid
along with the principal on the new due date.
25
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
D. On the August 29th - 30th of 2005, the state of Mississippi was affected by
Hurricane Katrina. Shell Landing Golf Course which is located in Gautier,
Mississippi was impacted by this hurricane. No significant structural damage has
occurred, mostly due to the high elevation of the land pertaining to the golf
course. There was loss of power to the area, which resumed on September 2, 2005.
Although the golf course resumed operations on Sept. 23rd, we do expect a
reduction in revenues from the golf course in the short term as a result of the
hurricane. The insurance company has been contacted and the claims have been
submitted with respect to economic loss and any damage that may have occurred to
the golf course and any related property.
E. The Comptroller of Azur International signed an employment agreement with the
Company dated August 30, 2005, for a term of one year, which shall renew
automatically in one year periods. As per said agreement, the Executive's salary
is $80,000 and shall increase at a rate of no less than 5% per annum. The
Executive shall receive a signing bonus of 25,000 restricted shares of the
Company's stock , and an additional performance bonus of $10,000 per quarter in
restricted shares of the Corporation, contingent on the Corporation meeting
quarterly filings with the SEC beginning with the third quarter of 2005.
F . On October 5, 2005, the Company executed a First Addendum to the Promissory
Note for $100,000 payable to a private investor, which extended the due date of
said note to March 8, 2006. An extension fee shall be paid equivalent to 40,000
of restricted shares of the Company's stock.
NOTE 18 - GOING CONCERN
Although the management of the Company has a reasonable expectation that the
Company has adequate resources to continue in operational existence for the
foreseeable future, the Company adopts the going concern basis in preparing
these financial statements. The Company has accumulated losses amounting to
$3,715,990 and a negative working capital position of $9,610,214. The year to
date loss was $1,011,333 as of June 30, 2005. Notwithstanding the foregoing, 55%
of the Company's debt is convertible into shares of the Company. The Company's
ability to continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required, to receive the continued support of the
Company's shareholders, and ultimately to obtain successful operations.
26
AZUR INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
NOTE 19 - CONTINGENCIES
The Company is subject to substantial risks due to the following contingencies:
A. As a result of Hurricane Katrina and the Company's real estate
holdings in close proximity to the Louisiana - Mississippi region of
the country, there may be an impairment to the use and development
of this real estate. In addition, the golf course business due to
damages in the nearby regions, have incurred reduced operations,
thus resulting in negative cash flows.
B. The Company in accordance with its business plan, utilizes
substantial highly leveraged debt to finance its current operations
and acquisitions. The Company at this time has not secured permanent
means of financing its cash flow deficits, or achieving positive
cash flow to fund its debt service. The Company is subject to
substantial risk of foreclosure of its real estate holdings and
rescission of business arrangements of acquired assets obtained
through its highly leveraged and aggressive acquisitions.
Item 2. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Azur is a diversified real estate development company with operations in the
United States and the United Kingdom. Our lines of business include real estate
development and operation, and the sale and rental of capital equipment to the
construction industry. The year 2004 was effectively Azur's initial year of
significant operations.
In 2004 we made initial acquisitions of interests in real estate properties and
development projects that now comprise our real estate activities. These
acquisitions, included among other things, interests in the Place des Arts and
Meritage condominium development projects, and the Grand Shell Landing Golf
Course.
In February, 2005, we acquired Airtek Safety Limited, which provides us with
diversified revenue streams related to construction, and a U.K. - based
management team to lead planned efforts to expand our real estate development
activities to the United Kingdom and Europe.
On March 23, 2005, we commenced development activity on the Meritage condominium
project in Ft. Lauderdale, Florida.
27
On June 1, 2005, pursuant to a Stock Purchase Agreement between HVST Acquisition
Corporation and Azur International, Inc, we acquired 50.4% of the outstanding
common stock of Harvest Corporation.
During the quarter ended and the six months ended June 30, 2004, Azur
International had minimal operations. While the analysis below addresses the
2004 financials, the focus of discussion is the current period results, since
they are more representative of the company's operations and financial standing.
Results of Operations
- ---------------------
Quarter Ended and Six Months Ended June 30, 2005 versus Quarter Ended and Six
Months Ended June 30, 2004
Revenue and Gross Profit
For the quarter ended June 30, 2005, the Company achieved revenues of
$7,831,902, versus $45,620 during the same period in 2004. The current period
revenues, which were mostly the result of current acquisitions, included
$1,597,231 in crane rentals and related income, $1,745,394 from the sale and
rental of safety equipment and related consulting services, $864,866 in sales
from golf course operations, and $3,650,988 in revenues from construction
operations. For the quarter ended June 30, 2004, revenues of $45,620 were
comprised solely of rental income from the Meritage and Rio Vista properties.
We determine our earnings from construction using the percentage of completion
method, under which earnings are recognized in proportion to the total earnings
anticipated from a contract which the cost of the work completed bears to the
estimated total cost of the work covered by the contract. For the quarter ended
June 30, 2005, the percentage of completion used was 29.35%, which accounted for
$3,650,592 in revenues. There were no revenues from construction projects during
the quarter ended June 30, 2004.
Crane rentals, which are priced on a weekly basis, totaled $1,210,159 for the
quarter ended June 30, 2005, which accounted for 75% of the total revenues in
the crane business. Additional revenues came from transportation and set up
charges, training, hire of ancillary equipment and operators, and totaled
$387,071 during the second quarter of 2005. Safety equipment is offered for
outright sale as well as rent, with rentals priced on a day-rate basis. During
quarter ended June 30, 2005, rentals accounted for 70% of the safety equipment
business at $1,191,192, while sales of $527,651 made up the remaining 30%. There
were no revenues from crane and safety rentals and sales during the quarter
ended June 30, 2004.
Golf course revenues are primarily derived from daily green fees at The Grand
Shell Landing Golf Club. During the quarter ended June 30, 2005, $738,758 were
derived from green fees. Additional revenues of $126,108 came from sales of
clothing, equipment, food, and beverages at the retail facilities in the Shell
Landing clubhouse. There were no golf course revenues during the same period in
2004.
For the six months ended June 30, 2005, the Company achieved revenues of
$11,613,873 which included $3,099,441 in crane rentals and related income,
$3,067,343 from the sale and rental of safety equipment and related consulting
services, $1,789,850 in sales from golf course operations, and $3,657,239 in
revenues from construction operations. During the same period in 2004, the
Company had rental income of $68,411.
28
Cost of Sales
Cost of sales for the quarter ended June 30, 2005 were $4,218,289 and were
comprised of $884,803 in costs relating to crane rentals, $662,115 in safety
equipment-related production costs, $104,805 in inventory costs for retail items
sold at the golf course club house, and approximately $2,566,582 in construction
operating expenses related to the Meritage construction project. For the quarter
ended June 30, 2004 there were no costs of sales reported.
In crane rentals, the cost of sales are comprised primarily of rental payments
to Arcomet. and direct labor costs. In safety equipment the cost of sales
include the cost of actual equipment sold, in the case of sales, and in the case
of the rental business the costs are largely direct labor.
The cost of sales for the golf course business is comprised entirely of
inventory costs for equipment, clothing, food, and beverages.
The construction operating expenses are mostly comprised of payments to the
construction company, A.V.I. Contractors, Inc., for labor and materials
expenses, as well costs for licenses and permits, engineering and architect
fees, and developer fees.
Cost of sales for the six months June 30, 2005 were $5,755,769 and were
comprised of $1,663,988 in costs relating to crane rentals, $1,326,773 in safety
equipment-related production costs, $198,425 in inventory costs for retail items
sold at the golf course club house, and $2,566,582 in construction operating
expenses related to the Meritage construction project. For six months ended June
30, 2004 there were no costs of sales reported.
General and Administrative
General and administrative expenses were $3,118,943 for the quarter ended June
30, 2005 and were comprised primarily of: crane and safety equipment rental and
sales expenses of $1,082,197, golf-related expenses of $480,667, construction
related expenses of $212,197 and corporate overhead and real estate-related
expenses of $1,343,882. During the same period in 2004, general and
administrative expenses totaled $559,308, and were mostly comprised of corporate
overhead.
During the six months ended June 30, 2005, general and administrative expenses
totaled $5,121,981 and were comprised of: crane and safety equipment rental and
sales expenses of $1,929,954, golf-related expenses of $879,693, construction
related expenses of $245,184 and corporate overhead and real estate-related
expenses of $2,067,150. During the same period in 2004, general and
administrative expenses totaled $559,308, and were mostly comprised of corporate
overhead.
Interest Expense
Interest expense for the quarter ended June 30, 2005 totaled $302,267 compared
to $139,880 in 2004. The increase is due to various loan instruments associated
with the purchase of real property, leased equipment, as well as funds borrowed
to finance daily operations. For the six months ended June 30, 2005, interest
expense was $442,658, compared to $155,253 during the same period in 2004.
29
Net Loss
For the quarter ended June 30, 2005, the Company had net losses of $622,492,
compared to $595,505 for the quarter ended June 30, 2004. For the six months
ended June 30, 2005, net losses were $1,011,333 compared to $802,523 in 2004.
These results reflect the early stage of our business operations, as costs are
being incurred in connection with acquisition activities and to create
management infrastructure, and as pre-development expenses are paid in
connection with new real estate development projects.
Liquidity and Capital Resources
At June 30, 2005 we had a net working capital deficit of $9,610,214 compared to
working capital deficit of $409,640 at June 30, 2004. The increase in the
working capital deficit is primarily attributed to current portion of notes and
mortgages payable which come due on or before June 30, 2006, including notes
payable of $11,224,000 to former Airtek shareholders in connection with our
acquisition of Airtek Safety Limited which will come due on February 24, 2006.
According to the terms of our purchase agreement, we are not allowed to transfer
any cash from the Airtek operation to the parent company or to any affiliates
prior to the complete satisfaction of these notes payable. Please refer to the
schedule of maturities shown below for additional details regarding the
maturities of our long-term debt.
Management is currently pursuing multiple financing alternatives with respect to
satisfying these obligations, including (a) raising additional equity capital,
(b) restructuring the terms of these existing debt obligations, and (c) issuing
additional debt securities. There can be no assurance, however, that such
additional funds will be available, or, if available, available on commercially
acceptable terms. If we are unable to raise capital and renegotiate terms of
existing debt we may be forced into a substantial liquidation of assets, which
may occur on terms unfavorable to us and may foreclose future growth
opportunities. Please refer to the more detailed schedule of our maturities and
debt obligations shown below for information regarding obligations outstanding
and security interests that have been granted in connection with those
obligations.
There are other factors and risks that could impair our ability to meet current
obligations in the future. A significant portion of our expected future cash
inflows are dependent upon successfully completing and closing sales on the
various condominium development projects that are now planned or underway. These
expected cash inflows will not occur until construction is complete and we have
closed on the sales of the individual units to the purchasers. As such, our
revenues are collected at very irregular intervals and we are required to fund
substantial receivables during the construction period.
We have identified numerous real estate development opportunities, which, in our
opinion offer attractive growth and profit potential, based on the risks
involved. However, our expectations for growth in the real estate development
business are entirely dependent on our ability to raise additional capital. We
are currently seeking a total of approximately $60 million in additional capital
from potential equity partners and from conventional construction lenders to
finance the construction of The Islands at Shell Landing, a 200 unit condominium
project located adjacent to the club house at The Grand Shell Landing Golf
Course. We are also seeking to raise approximately $12 million in a form yet to
be determined in order to provide necessary working capital for operations and
to finance, among other things, the purchase of additional land adjacent to The
Grand Shell Landing Golf Course. Currently, there remains significant interest
in gulf coast real estate among the investment community. However, our ability
to raise the funds we need in order to pursue these opportunities is not assured
and may become more difficult if interest rates continue to rise, if a major
natural disaster were to hit the area, or if investors begin to perceive real
estate prices to have risen beyond the point where attractive future returns are
possible.
30
In a related party transaction, subsequent to March 31, 2005 we entered into an
agreement to acquire from the Crawford Family Limited Partnership ("CFLP") and
from the Naranjo Family Limited Partnership ("NFLP") up to an 80% interest in
approximately 1,200 acres of land that adjoins the Grand Shell Landing Golf
Course, on which we have the opportunity to pursue significant real estate
development projects well into the future. The purchase agreement between Azur
and the sellers contains several conditions that require future performance on
the part of Azur. In the event that we are unable to meet these conditions on a
timely basis, the sellers have remedies available by contract that may cause our
ownership interest in the land to revert back to the sellers, which will
significantly reduce our future cash flow and profit potential.
Our interests in these two land parcels represent substantially all of our
existing future opportunity for growth and profit as it relates to our ownership
of The Grand Shell Landing resort property.
Discussion of Certain Current Assets and Liabilities
Accounts receivable
Our accounts receivable at June 30, 2005 amounted to $2,779,123 which was
comprised primarily of trade receivables as follows: $1,450,964 in the safety
equipment business, $1,215,401 in the crane rental business, and $112,758 from
the golf course business. There were no accounts receivable as of June 30, 2004.
Inventory
At June 30, 2005, our inventory was $437,393 which consisted primarily of
$364,835 in parts and components related to the rental of cranes and safety
equipment, and $72,558 in apparel and equipment held in stock in our golf course
occupations. There was no balance on inventory as of June 30, 2004.
Prepaid expense
At June 30, 2005 our prepaid expenses totaled $415,009, which consisted of
$125,067 of prepaid insurance, prepaid property taxes, and employee advances
related to the golf course business, $265,667 of prepaid expenses from the crane
and safety equipment businesses, and $24,365 in escrow for property taxes on the
Rio Vista property. At June 30, 2004, there was a balance of $3,060 in prepaid
expenses, which was mostly office rent prepaid.
Other receivables
At June 30, 2005, other receivables totaled $932,664, which consisted primarly
of shareholder loans receivable of $564,812 and miscellaneous accounts
receivables of $361,702 from the crane and safety equipment businesses. The
miscellaneous accounts receivables consists of $157,893 in car loans provided to
employees, $8,527 in insurance claims receivable, and $195,282 in advances to
employees and shareholders. In June 30, 2004, there was $32,771 in other
receivables, which was comprised of officer loan receivables.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
At June 30, 2005, the Company had $7,971,581 in costs and estimated earnings in
excess of billing on uncompleted contracts for the Meritage construction
project. Construction on the project began on March 23, 2005 and is expected to
be completed by May 2006. At June 30, 2004 there were no costs and estimated
earnings in excess of billings on uncompleted contracts.
31
Accounts Payable
Accounts payable and accrued expenses at June 30, 2005 were $3,018,210 and
consisted primarily of $1,899,380 of trade payables, $3,689,223 of accrued
general and administrative expenses, and $749,607 of bank overdrafts related to
the crane and safety equipment business. At June 30, 2004 there were no accounts
payable and accrued expenses.
Analysis of Cash Flow
Cash flow used in operations
Cash used in operations totaled $4,001,979, and was comprised primarily of our
net loss of approximately $1,011,333 plus an increase in accounts receivable of
$307,283, a decrease in inventory of $223,196, an increase in prepaid expenses
and security deposits of $61,355, and increase in other receivables of 106,243,
an increase of other assets of $285,000 a decrease in deferred taxes of
$260,116, an increase in other current liabilities of $116,254, and an increase
in accounts payable and accruals of $437,147. The Company also issued a total of
$315,379 in stock as payment for loan fees and services.
Cash flow used in investing activities
Cash used in investing activities totaled $1,893,203. As described previously,
we are in the beginning phases of our real estate development operations and as
such we currently require significant amounts of cash to fund acquisitions of
property for development. In connection with these efforts we entered a purchase
contract for undeveloped land that adjoins the Grand Shell Landing Golf Course
which required a cash deposit of approximately $1,300,309. Other uses of cash in
investing activities included cash paid to acquire New Harvest Capital
Corporation of approximately $410,445, and the acquisition of additional fixed
assets, primarily equipment in our Airtek subsidiary, of approximately $163,655.
Cash flow from financing activities
Our financing activities provided net cash of $5,614,535. This cash was raised
principally in the form of net new debt of approximately, $6,630,341 and from
deposits received in connection with the pre-sale of condominiums. As of June
30, 2005 we have received total condominium deposits of $2,488,000. The total
amount of deposits reflected as a source of cash of approximately $800,000 is
limited to the amount by which total deposits received exceed the
legally-stipulated amount to be held in escrow. Below are additional details
with respect to our debt financing at June 30, 2005.
DUE IN
LESS DUE DUE
THAN 1 IN 1-3 AFTER 4
OBLIGATION YEAR YEARS YEARS
------------ ---------- -----------
Notes Payable $ 19,047,240 $ 550,279 $ 5,566,103
Mortgages 149,427 4,576,341 1,034,822
------------ ---------- -----------
Total cash obligations $ 19,196,712 $5,126,620 $ 6,600,925
32
Equity Line of credit -Loan is in the name of a partner. Interest rate is
variable (currently at 7.875 %). Loan secured by Rio Vista property. 149,427
Mortgage Payable - First Mortgage in name of a partner. Interest is at a
variable rate, currently 3.250%. Interest only is due monthly until November 1,
2012, and the borrower has the right to prepay with no penalty. Maturity date of
the mortgage is October 1, 2027 1,034,822
Mortgage Payable - First mortgage secured by 48 Hendricks property. Bank has a
Secured interest in rents, leases, fixed asset and profits. Interest is variable
but can never be less than 5 %. Current rate is 5.5 %. Payments are interest
only 4,576,341
Note Payable to finance company, monthly payments are variable, including
interest of 6.75%, collateralized by Grand Shell Landing golf course property,
due November 2009 6,273,156
Note Payable to finance company, monthly payments of $ 278, including imputed
interest of 7%, collateralized by equipment, due October 2006 4,910
Note Payable to finance company, monthly payments of $ 277, including imputed
interest of 6.49% collateralized by equipment, due May 2007 5,942
Note payable to a finance company, monthly payments of $ 814, including imputed
interest of 6.75%, collectivized by equipment, due October 2006 11,624
Note Payable to private investor, due January 1, 2006 with interest payable at
12%, and unsecured. 3,000,000
Notes Payable to private investor with maturity date of August 14th, 2005
(Extended to February 14, 2006) 700,000
Notes Payable - various installment obligations for crane and safety equipment.
933,224
Note Payable bearing interest at 6% on acquisition of The Grand Shell Landing
Golf course to former owner. Owner has an option to purchase the Company's
stock, currently held in escrow, in lieu of payment of the note, due on November
16, 2005 1,070,811
Obligation payable for acquisition of Airtek Safety Ltd, non-interest-bearing ,
secured by common stock held in escrow, due on August 24, 2005 (Extended to
February 24, 2006). The shareholders of Airtek can choose to accept common stock
in lieu of cash payment. 11,224,000
Note Payable to private investor, due May 31, 2006 with 18% interest 840,000
Note Payable to private investor, due September 30, 2005, bearing 12% interest
100,000
Convertible Debenture to Investment Company bearing 12% interest, due on June 1,
2006 700,000
Convertible Debenture to private investor bearing 12% interest, due on June 1,
2006 300,000
------------
Total $ 30,924,257
33
Critical Accounting Policies
- ----------------------------
Real Estate Holdings
Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties based on appraisals of the various
properties acquired in the acquisition.
Revenue Recognition
Real Property: Revenue is recognized under the full accrual method of accounting
upon the completed sale of real property held for development and sale. All
costs incurred directly or indirectly in acquiring and developing the real
property are capitalized. Revenues for sales and rentals generated from The
Grand Shell Landing, Inc. are also recognized under the full accrual method of
accounting.
Construction Operations - Azur International, Inc. determines earnings from
construction under the percentage of completion method. Under this method,
earnings are recognized in proportion of the total earnings anticipated from a
contract which the cost of the work completed bears to the estimated total cost
of the work covered by the contract. The Company's construction contracts
generally extend over more than one year, and revisions in costs and earnings
estimates during the course of the work are reflected in the year in which the
facts which require the revision become known. Due to uncertainties inherent in
the estimation process, it is reasonably possible that such estimates will be
revised over the next years until completion of the job. When a loss is
forecasted for a contract, the full amount of the anticipated loss is recognized
in the period in which it is determined that a loss will occur. Estimated costs
and earnings from construction contracts are reviewed and necessary adjustments
are made based on current evaluations of the indicated outcome. Cost of
construction contracts includes all direct material, labor and subcontracting
costs, and those indirect costs related to contract performance expenses that
are not directly attributable to construction contracts, such as business
development, estimating, purchasing, accounting, cost control, general office
support and similar costs attributed to our construction activities, are
expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand; cash in banks, and any highly
liquid investments with maturity of three months or less at the time of
purchase. Azur and its subsidiaries maintain cash and cash equivalent balances
at several financial institutions, which are insured by the Federal Deposit
Insurance Corporation up to $100,000. At times, the cash balances may exceed
federally insured limits. Azur has not experienced any losses in such accounts
and believes the risk related to these deposits is minimal.
Property and Equipment
Property and equipment are carried at cost and are being depreciated over their
useful lives using straight line depreciation methods. The estimated useful
lives of significant assets are as follows:
Equipment 5 years
Land Improvements 20 years
Buildings 40 years
Hire Equipment 12 years
34
Leases
Leases that transfer substantially all of the risks and benefits of ownership
are capital leases. Other leases are operating leases that are expensed over the
terms of the lease using the straight line method. Capital leases are included
in property and equipment and are amortized using the same methods as used for
depreciation of property and equipment [GRAPHIC OMITTED]
Construction Deposits
Construction deposits amounting to $1,688,000 for the purchase of units in the
48 Hendricks project are held in escrow with the Escrow Agent, Adorno & Yoss,
P.A., as per an Escrow Agreement dated August 25, 2004.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is estimated and recorded based on the
Company's historical bad debt experience. The current balance of the allowance
for doubtful accounts is approximately $45,120.
Inventory
Inventory is stated at the lower of cost or market with cost determined using
the first-in, first-out method. Inventory for Airtek Cranes is comprised
primarily of crane parts and supplies valued at $281,204. Crane inventory
includes motors, gear boxes, wheels, cables, batteries, brakes and other parts
necessary to support the crane rental business. Inventory for Airtek Safety of
$83,631 consists primarily of airmats that are required on construction sites
under English law. The balance is stairsafe inventory utilized on jobsites for
railings around open staircases. Inventory for The Grand Shell Landing Golf
Course totaling $72,558 at June 30, 2005, consists of apparel and equipment sold
at the pro shop, as well as food and beverages items.
Earnings/Loss per Share
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the quarter and year-to-date. The number of
shares used for the six months ended June 30, 2005 was 43,017,715 and the
resulting loss per share was $0.02 per share.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards 109 of "Accounting for Income Taxes." Under
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The Company has net operating losses (NOL's) of
approximately $ 3,719,990.
Year ending
-------------------
December December
-------- --------
31, 2004 31, 2003
Statutory federal income tax rate 34% 34%
Valuation allowance (34) (34)
Effective tax rate -% -%
35
ITEM 3 - CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
At the conclusion of the period ended June 30, 2005, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer and General Counsel, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chairman and Chief Executive Officer
and General Counsel concluded that our disclosure controls and procedures were
effective in alerting them in a timely manner to information relating to the
Company required to be disclosed in this report but adopted additional
disclosure controls and procedures to improve the quality and timeliness of
disclosure during our transition from a private to a public company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the months of April and May 2005, the Company issued a total 22,443
shares of its common stock in consideration of architect fees and creative
design services relating to the planned Shell Landing Development construction
projects. Also, the Company issued an aggregate of 420,000 shares to various
investors as payment of loan fees, and 50,000 shares of common stock to a
non-employee director as a director's fee. All of the above issuances were made
in a private placement transactions under an exemption from the registration
requirements of the Securities Act afforded by Section 4(2) of the Securities
Act.
36
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
31.1- Certification of Chief Executive Officer pursuant to Rules 13a-14(a)
as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of
2202.
31.2- Certification of the Chief Financial Officer pursuant to Rules
13a-14(a) as adopted, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1- Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted, pursuant to Section 906 of the Sarbanes-
OxleyAct of 2002.
32.2- Certification of the Principal Accounting Officer pursuant to 18
U.S.C. Section 1350 as adopted, pursuant to Section 906 of the
Sarbanes- OxleyAct of 2002.
37
SIGNATURES
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.
Azur International, Inc.
(Registrant)
Date: October 12, 2005 By: /s/ Donald Winfrey
---------------------------------------
Donald Winfrey
President
38