UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
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 No. 000-14747
AZUL HOLDINGS INC.
(Formerly Xyvision, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 04-2751102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6672 GUNPARK DRIVE, SUITE 100, BOULDER, CO 80301
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 448-9441
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.03 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. []
The aggregate market value of common stock held by non-affiliates on June 21,
2001, based on the closing bid quotation of the common stock on June 21, 2001 of
$1.25 per share as reported on the OTC Bulletin Board, was approximately
$1,222,910.
As of June 21, 2001, the registrant had 5,134,605 shares of Azul Holdings Inc.
common stock, $.03 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1
Portions of the registrant's definitive Information Statement for the
registrant's 2001 annual meeting of stockholders, to be filed not later than 120
days after the end of the fiscal year (March 31, 2001), are incorporated by
reference in Part III.
2
TABLE OF CONTENTS
ITEM PAGE
PART I
ITEM 1. Business.....................................................................................3
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ITEM 2. Properties..................................................................................10
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ITEM 3. Legal Proceedings...........................................................................11
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ITEM 4. Submission of Matters to a Vote of Security Holders.........................................11
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Executive Officers of the Registrant..................................................11
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................13
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ITEM 6. Selected Financial Data.....................................................................15
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......17
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.................................21
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ITEM 8. Financial Statements and Supplementary Data.................................................22
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........49
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PART III
ITEM 10. Directors and Executive Officers of the Registrant.........................................50
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ITEM 11. Executive Compensation.....................................................................50
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ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................50
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ITEM 13. Certain Relationships and Related Transactions.............................................50
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................51
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Cautionary Information about FORWARD-LOOKING Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. For this purpose, any statements contained herein
that relate to events or circumstances that may occur or exist in the future,
including the statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
located elsewhere herein regarding business prospects and the Company's results
of operations or financial position, may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," and similar expressions are intended to identify
forward-looking statements. The important factors discussed below under the
caption "Risk Factors," among others, could cause actual results to differ
materially from those indicated by forward-looking statements made herein and
presented elsewhere by management from time to time. Such forward-looking
statements represent management's current expectations and are inherently
uncertain. Investors are warned that actual results may differ from management's
expectations.
3
PART I
ITEM 1. Business
General
Azul Holdings Inc. ("Azul" or the "Company") was incorporated under Delaware law
in 1981. At this time, Azul's principal asset is its ownership of a 52.5% equity
ownership in Xyvision Enterprise Solutions Inc. ("XyEnterprise"). XyEnterprise
develops, markets, integrates and supports content management and publishing
software for a variety of customers in numerous industries. These products help
companies create, manage and deliver large amounts of content in Web electronic
or paper formats (or media). XyEnterprise integrates its internally developed
products with selected third-party products to create complete publishing and
content management solutions through its professional services group and
qualified third-party resellers and service partners. These solutions are
designed to increase productivity of content creation and editing, enhance
document and knowledge management functions, improve quality and timeliness of
formatted information and support the growing use of Extensible Markup Language
("XML") as a core business technology.
Azul provides financial and management support to a few carefully selected high
technology companies generally in their emerging or early-stages of corporate
development and to mid-stage companies. To date, Azul's principal asset is its
holdings in XyEnterprise which previously was a wholly-owned subsidiary. During
2000, Azul made an initial investment in NanoFrames, LLC ("NanoFrames") and now
has a 15% preferred ownership interest. NanoFrames is in the early stages of the
research and development of nanotechnology using the principles of molecular
biology. Such technology is expected to have applications in reinforcement,
separation and material design fields. Nanotechnology is expected to become the
new frontier for research in such fields as electronics, optics, materials,
medicine and pharmaceuticals.
From time to time Azul may make additional investments in the above referenced
companies and may make an occasional investment in other companies. Such
investments would be in areas where the Company believes there are unique
opportunities for the potential of significant rapid growth within large
markets, with the corresponding potential of profitability and appreciation in
investment values. Such investments, particularly in emerging and early-stage
companies, require the taking of certain risks that may be significant.
Opportunities to be considered by Azul have generally been provided to Azul by
Tudor Trust ("Tudor"), the majority shareholder of the Company, as a result of
Tudor's existing investments in, and frequent control of, other companies. In
those instances an investment by Azul is approved by its independent directors
with independent legal and financial advice. Other opportunities may be
identified by the Company through various sources including contacts of the
Company's officers with investment companies, brokers, and by direct contact
with principals of potential investees. As a result of the foregoing, Azul
entered into a loan agreement with PlazaBlue Inc. ("PlazaBlue") (formerly
Antiqnet.com, Inc.), a company in which Tudor Trust had a 70% ownership
interest. During fiscal year 2001, Azul advanced PlazaBlue $2,450,000. As a
result of PlazaBlue becoming in default on the repayment of the loan, Azul
participated in a foreclosure sale of the assets of PlazaBlue and, at the
election of Azul, subsequently sold its interest in the assets back to Tudor for
the original principal amount of the loan plus accrued interest to the date of
sale, March 31, 2001.
Financial capital has historically been provided to Azul by Tudor Trust. Tudor
Trust has committed to lend Azul at least $17.5 million, of which approximately
$14 million has already been provided. In the future, Azul may receive further
investment from Tudor Trust to expand its investment in current and newly
acquired companies. There is however, no assurance of further investments from
Tudor or of Azul's ability to expand its investments in current or other
companies.
The Company's current strategy contemplates maximizing long-term economic gain
to its shareholders over time by one or more of the following avenues with
respect to each of the companies in which Azul has made an investment; ongoing
earnings from Azul's share of operating and other gains of such companies; sale
of some or all of Azul's holdings at appreciated values when Azul determines
that partial or complete exit is appropriate, funding future growth of such
companies by accepting the investment of new equity or debt financing from one
or more third parties or related parties in amounts that recognize the
appreciated value of Azul's existing holdings, or creating public trading
markets for the shares of such companies. There can, however, be no assurance
that any of the foregoing results will be achieved.
4
Capital investments made by Azul in companies may be consumed by operating
losses and negative cash flows normally expected in emerging, early-stage, or
expanding and growing mid-stage business activities. Therefore, there can be no
assurance that Azul will be able to ultimately benefit with respect to any
particular company. Also, there can be no assurance that Azul will be able to
sell some or all of its holdings or that a company will be successful in
obtaining additional capital investments from third parties or related parties.
XyEnterprise develops, markets, integrates and supports content management and
publishing software for a variety of customers in numerous industries. These
products help companies create, manage and deliver large amounts of content in
Web electronic or paper formats (or media). XyEnterprise integrates its
internally developed products with selected third-party products to create
complete publishing and content management solutions through its professional
services group and qualified third-party resellers and service partners. These
solutions are designed to increase productivity of content creation and editing,
enhance document and knowledge management functions, improve quality and
timeliness of formatted information and support the growing use of XML as a core
business technology.
During 1998, XyEnterprise acquired the operating assets of Xyvision, Inc. (now
Azul Holdings Inc,) which had been founded in 1982 with the goal of introducing
a new generation of production publishing systems to the commercial and
corporate marketplace. Xyvision Production Publisher pioneered new concepts for
automating the rapid production of high-volume complex documents. Building on
this technology, XyEnterprise developed one of the first compound document
management systems, Parlance Content Manager (Parlance). Parlance is designed to
manage XML content and facilitate the re-use and re-purposing of XML and other
data content for Web or other deliverables. Parlance provides history,
versioning, workflow, and often has been integrated with Xyvision Production
Publisher or other applications to provide an automated publishing process.
Recently, XyEnterprise has begun to offer a broader variety of content
management and publishing software solutions. In the first part of calendar year
2000, XyEnterprise introduced a new set of applications; Parlance Content
Manager v3.0, Content@ (pronounced contenta), and XML Production Publisher
("XPP"). These applications address the requirement of XML content management,
re-use, versioning, workflow and document control in an enterprise environment.
The business of XyEnterprise was formerly wholly owned by Azul. In December 1998
the XyEnterprise business was placed in a new corporation. At the same time,
12.5% of the new company was acquired by Tudor Trust in exchange for a
$1,000,000 equity investment. Tudor Trust also provided a $1,000,000 line of
credit to XyEnterprise. In February 2000, XyEnterprise was able to attract
$7,000,000 in new capital in exchange for a 28.3% ownership interest. As a
result of this transaction, the Company recognized a gain of $5,084,694. During
February and March 2001, a small group of investors provided an additional
$4,000,000 of capital to XyEnterprise in exchange for a 11.3% ownership
interest.
NanoFrames is a Delaware limited liability company founded in 1997 for the
purpose of completing research and product development in the field of
nanotechnology. Such technology, and thusly NanoFrames, is in its early stage of
development. However, success in the research and early development phases could
result in significant breakthroughs in the creation of building blocks in the
nanometer (one billionth of a meter) dimension that could change the
technologies of such fields as material science, printing, data transmission and
others. Research being done at NanoFrames involves the application of molecular
biology to the development of proteins of predictable characteristics that could
form the basis for the creation of nano-devices with capabilities applicable in
many industrial and scientific fields.
5
Azul's executive offices are located at 6672 Gunpark Drive, Suite 100, Boulder,
CO 80301 (303-448-9441). The Company's website address is
http://www.azulholdings.com, XyEnterprise's is http://www.xyenterprise.com, and
NanoFrames' is http://www.nanoframes.com.
PRODUCTS AND SERVICES
XyEnterprise provides content management and delivery solutions that enable
companies to reduce the cost and time required to create, manage and distribute
mission critical information assets. The content management and delivery
solutions of XyEnterprise are successfully utilized by customers including
product manufacturers, scientific and reference publishers, government agencies
and others to effectively manage complex information creation and distribution
needs.
Numerous aircraft manufacturers (Boeing, Pratt & Whitney, Embraer, Sikorsky,
Gulfstream, Bombardier and others) use XyEnterprise's content management and
publishing systems to develop and publish complex technical information used to
repair and operate aircraft. Other customers such as Freightliner, Tweddle
Litho, EDS and Maruboshi use the software to produce owners manuals and
maintenance manuals for truck and automotive manufacturers such as Ford, General
Motors, Daimler/Chrysler, Nissan, and others. Information providers, such as
legal publishers and professional associations, who are increasingly faced with
the need to better manage information content and products use XyEnterprise
technology to reduce costs, shorten turnaround time, and generate new revenue by
repackaging existing information into new publications or media. Standards
organizations and reference publishers such as Cadmus Communications, the Bureau
of National Affairs, ASTM, and Underwriter's Laboratories also use the software
to create, manage and deliver legal, citation and standards information.
XPP is a server-based composition engine designed to shorten production cycles
and reduce publishing production costs by automating composition and pagination
of either high-volume and/or typographically-demanding documents frequently from
XML source data. A powerful solution for corporate and commercial publishers,
XPP streamlines and automates document production and provides "pages per
second" performance unmatched by desktop systems.
XPP is frequently used as a publishing engine with a variety of document
management systems that support SGML (Standard Generalized Markup Language) or
XML (Extensible Markup Language). In fiscal 2001, XyEnterprise released the
latest version of XPP (version 7.0) that provides enhanced support for SGML and
XML processing and output in formats such as HTML for the worldwide web and
Portable Document Format ("PDF") for Adobe Acrobat. A key feature of XPP 7.0 is
the ability to preserve and view XML structure on each page. Additional releases
of XPP are planned for calendar 2001 that enhance the software's web
capabilities, graphical user interface, and automated page assembly
capabilities.
The growth of multiple media delivery, the need for customized and localized
publications and the growth in the need for timely technical and reference
information has increased the demand for powerful document production engines.
In fiscal 2001, XPP continued to be incorporated into solutions from companies
including Thomson & Thomson, Equitable Life Insurance, Pratt & Whitney and
National Fire Protection Association. XyEnterprise believes the speed, power,
and background processing capabilities of XML Production Publisher make it the
most versatile and powerful batch composition system available today.
Content@ is a robust content management engine that facilitates the creation and
management of dynamic XML components from desktop to the Web. Content@ features
include collaboration and group authoring and automatic loading of XML encoded
data from editors or legacy systems. Once data is in the Content@ database,
re-use and automated information assembly for "virtual" publications are easily
achievable for critical information assets that need to be managed, revised, and
fragment distributed from a secure system. Content@ provides standard interfaces
to Framemaker, Xmetal, ArborText EPIC and Microsoft Word software for content
creation. It manages at the component level, including XML or SGML objects,
graphics, multimedia objects and collections of these objects. Because this
content is stored as individual information components, workgroups can edit
information once and then share and reuse the same information in multiple
documents or formats for multi-channel delivery.
6
A key feature of Content@ is the integrated workflow application used to
automate and manage the information creation and delivery process. This approach
can significantly reduce the time and cost associated with traditional
information creation and delivery and creates new opportunities for companies to
resell information while improving quality and accuracy. Content@ stores data as
objects inside relational database technology from Oracle and Informix. This
combination of object-oriented and relational technologies provides a reliable,
transportable storage environment that can handle large volumes of complex data
types while providing fast data access. Content@ is also compatible with a range
of hardware and operating system environments including Unix, Microsoft
Windows/NT and IBM AIX. The use of proven, industry-standard technology makes
Content@ compatible with many existing corporate platform database environments.
XyEnterprise integrates several third-party products with Content@ providing a
complete integrated publishing solution for customers.
Content@ 3.0, released in November, 2000, has been XyEnterprise's most ambitious
new release to date. Features include XML based dynamic import tools, XML
workflow wizards for automated content routing and processing, and new graphical
user interfaces. In addition, version 3.0 provides completely redesigned
application programming interfaces ("API's") built on industry standards
including COM, Corba and Java.
PROFESSIONAL SERVICES
XyEnterprise offers a comprehensive range of professional services that includes
systems integration, implementation planning, onsite and classroom training,
applications support, program management, process reengineering, document
analysis, XML analysis and Web consulting. XyEnterprise service professionals
are considered experts in analyzing and implementing sophisticated content
management, publishing, and electronic delivery systems. In February 2001,
XyEnterprise acquired Lightbinders, Inc., and merged their San Francisco based
consulting staff into the professional services group. Lightbinders staff has
expertise related to the scientific, technical and medical (STM) publishing
market, SGML/XML publishing tools and services, as well as data conversion for
electronic delivery.
A significant number of XyEnterprise's customers enter into maintenance and
support contracts and purchase training and consulting services. As part of a
standard software support contract, XyEnterprise provides software and
documentation updates and telephone support.
MARKETS, APPLICATIONS AND CUSTOMERS
XyEnterprise solutions are targeted for businesses and organizations that
produce documentation in support of manufactured products (technical
documentation), those that produce information as the primary product
(commercial publishing), and combinations of the two that use collaborative and
remote connectivity to facilitate greater efficiencies. Within the technical
documentation arena, XyEnterprise's solutions are used by product manufacturers
to support a product or service. Market segments that produce technical
documentation include aerospace, automotive, discrete manufacturing, computers,
electronics, telecommunications, and transportation companies who publish such
documents as maintenance manuals, tariff directories, and end-user
documentation. These publications often have a long shelf life, need frequent
revisions, and require output in a variety of formats including Interactive
Electronic Technical Manuals (IETMs), World Wide Web pages, PDF, and printed
pages. Companies that produce technical documentation often produce manuals in
loose-leaf format and distribute updates as loose-leaf change pages. XPP's
unique Automatic Loose-leaf option enables companies to automatically create
update pages when new information is added to previously released documents,
enabling users to distribute only changed pages instead of reprints of the
entire document. This dramatically reduces printing and warehousing costs, and
allows more timely updates of technical information.
7
XyEnterprise's customers in the technical documentation segment include: Allied
Signal, Atraxis/Swiss Air, The Boeing Company, British Aerospace, Cummins
Engine, Allison Transmissions, IBM Corporation, Maruboshi, Pratt & Whitney
Canada, Raytheon Service Company and the Royal Australian Air Force, among
others.
Commercial publishing customers include commercial printers and trade service
bureaus; book, journal, and financial publishers; professional associations;
financial services and insurance companies; government agencies; and wholesale
distributors. In order to remain competitive, commercial printers, publishers,
and service providers must be able to efficiently produce high-quality,
cost-effective printed and electronic documents. Information providers, such as
legal publishers and professional associations, are increasingly faced with the
need to better manage information content, versions, and workflow. Content@
Document Manager provides these companies with a complete information management
solution that reduces costs, shortens turnaround time, and enables customers to
generate new revenue by repackaging existing information into new publications
or media. Commercial publishing customers include AAA, American Institute of
Physics, American Chemical Society, American Medical Association, British
Medical Association, Bureau of National Affairs, Cadmus Communications, Merck &
Co., Reed, Telia, Underwriters Laboratories, ValueLine Inc., West Publishing and
Wolters Kluwer. Underwriters Laboratories accounted for approximately 18% of
revenues for the year ended March 31, 2000; no single customer accounted for
more than 10% of revenues for the years ended March 31, 2001, or March 31, 1999.
SALES AND DISTRIBUTION
In North America, XyEnterprise markets its products and related services
primarily through its direct sales force. In fiscal 2001, XyEnterprise increased
its sales efforts by adding sales consultants geographically throughout the
United States and sales management and staff focused on vertical market
solutions. In fiscal 2001, XyEnterprise initiated strategic partnerships with
Pennant Information Services Limited, BenefitNation and Cadmus Communications.
It also continued its strategic relationships with companies such as IBM, CSC,
Atraxis, and Telcordia. XyEnterprise maintains a European sales and support
headquarters in England with additional offices in Paris, France and Munich,
Germany. The Company also has sales and support representatives in Australia. It
also resells its products through selected distributors in Europe, Africa, and
Asia. Sales to unrelated customers by geographic region for the years ended
March 31, 2001, 2000 and 1999, were as follows:
2001 2000 1999
---- ---- ----
North America $7,520,417 $7,980,680 $8,029,850
Western Europe 881,709 1,127,000 1,861,347
Asia/Pacific 516,302 301,187 664,000
--------- --------- ---------
Total $8,918,428 $9,408,867 $10,555,197
Revenue is recognized in accordance with Statement of Position No. 97-2 ("SOP
97-2") "Software Revenue Recognition" as amended by "SOP 98-9" "Software Revenue
Recognition." XyEnterprise's systems revenue is derived from licensing of its
page composition, content management and third party software. Service revenues
include maintenance and support, consulting and training services. Revenue from
license arrangements is recognized upon shipment of the product if collection of
the resulting receivable is probable and remaining vendor obligations are
insignificant. The strategy of providing customers with complete integrated
publishing solutions may result in bundling of services with software and
recognition of software licensing revenue and services over the length of the
implementation in conformity with Accounting Research Bulletin No. 45,
"Long-Term Construction Type Contracts" using the relevant guidance of SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production Type
Contracts." Service revenues include maintenance and support, consulting, and
training services. Payments received in advance of delivery are recorded as
deferred revenue in the consolidated balance sheet until goods or services are
delivered. Revenues from annual maintenance contracts are recognized ratably
over the duration of the related contracts. Revenue for consulting and training
is recognized when the services are performed and collectibility is deemed
probable.
8
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101 ("SAB 101"), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company adopted SAB 101
on April 1, 2000, and it did not have any impact on the Company's financial
position or results of operations.
RESEARCH AND DEVELOPMENT
The market for XyEnterprise's products is characterized by rapid technological
change that requires continuous enhancement of existing products and the
development of new products. During the past three fiscal years, XyEnterprise
has invested 34 - 47% of its revenues in product development and engineering,
including capitalized development costs. In the future, product development
efforts will focus on enhancing its open-architecture systems, enhancing
ease-of-use with graphical user interfaces, increasing the price/performance of
its products, enhancing web based access mechanisms and developing software for
specific application needs. During fiscal years 2001, 2000, and 1999, the
Company incurred research and development expenses, net of capitalized software
development costs, in the amounts of $4,049,924, $3,241,969, and $3,776,692,
respectively. Capitalized software development costs during these periods were
$125,000, $0, and $263,000, respectively.
The Company believes it is appropriate for XyEnterprise to continue to invest a
significant portion of its revenues in development of both XPP and Content@
product lines to remain competitive in its markets.
COMPETITION
The markets for XyEnterprise's products are characterized by intense
competition, rapid technology developments, and frequent new product
introductions. Future success will depend on its ability to enhance its existing
products on a timely basis, meet changing customer needs, and respond to
emerging standards and other technological changes. Competition is usually based
on price/performance, functionality differences, quality and extent of service
and support, and the financial strength of the vendor. Many of XyEnterprise's
competitors have greater financial, technical, and other resources, greater name
recognition, and a larger installed base of customers.
XPP competitors include Advent 3B2, Miles 33, and Datalogics. Content@
competitors include Documentum, Chrystal (a Xerox New Enterprise Company) and
Arbor Text.
BACKLOG
XyEnterprise believes that it is able to anticipate near-term demand for its
products and ship products shortly after receipt of the order. Accordingly,
XyEnterprise's backlog for software licenses is generally neither significant
nor indicative of future sales levels. Backlog for services is a function of the
timing and volume of software license sales and service and consulting
contracts.
PATENTS, LICENSES, AND TRADEMARKS
XyEnterprise relies on copyright, patent, and trade secret laws to protect its
technology. XyEnterprise Solutions and XyEnterprise are registered trademarks.
XyEnterprise also uses the following trademarks: Content@, Parlance, WebPorter
and SGML Conductor. All other trademarks and trade names referred to in this
Annual Report are the property of their respective owners.
9
XyEnterprise has acquired non-exclusive licenses for certain software from
several companies. These licenses permit it to grant sublicenses to its
customers. Loss of these rights to grant sublicenses to its customers on some of
these software products could have a material adverse effect on the Company.
EMPLOYEES
As of March 31, 2001, Azul had 1 full time employee, whose employment terminated
on June 30, 2001. Azul has a permanent part time Chief Financial Officer in
addition to its permanent part time Chief Executive Officer. For a short time
during early 2001 the Company employed a full time President. Both the Chief
Executive and the Chief Financial officers provide their services to Azul on an
as needed basis. The Company contracts for its legal, accounting, and other
services. To date the Chief Executive Officer has agreed to serve without cash
compensation for his services. As of March 31, 2001, XyEnterprise employed 108
persons, which included 26 in research and development, 28 in sales and
marketing, 36 in customer support, and 18 in finance and administration.
Additional resources, particularly in research and development and customer
support are provided by engineering and consulting outsource partners.
NanoFrames employs the services of two full time molecular biologists in
addition to having available the services of an additional senior research
scientist in the field of nanotechnology and other business specialists on an
as-needed basis.
XyEnterprise fits the category of companies that is commonly referred to as an
"intellectual property" company. As such, management believes that the future
success of XyEnterprise will depend in large part on its ability to attract and
retain qualified employees. Due to the competitive market for skilled software
engineers and other employees in the greater Boston area, XyEnterprise from time
to time experiences difficulty in hiring and retaining personnel. XyEnterprise
also employs independent contractors located in the US and abroad to support its
research and development, marketing and administrative organizations. Its
employees are not represented by a labor union, and it has never suffered an
interruption of business as a result of a labor dispute. XyEnterprise believes
its employee relations are good.
RISK FACTORS
In addition to other information contained in this report, investors should
carefully consider the following factors when evaluating Azul:
Future operations of the Company depend on the Company's ability to raise
additional capital or borrow additional funds from Tudor Trust, its principal
shareholder, and others. Further, future results of operations are dependent on
individual companies meeting or exceeding the returns on investment and growth
potentials anticipated by Azul. Azul investments are made in companies in their
emerging, early stages, and mid-stages of their development and which
participate in high technology arenas. As such, these investment are speculative
in nature and can result in significant profits or losses to early investors
like Azul. Further, the Company is dependent on the continued forbearance by the
holders of the Debentures, 15% Promissory Notes and 4% Promissory Notes (Note 7
to the Consolidated Financial Statements).
Future operating results of XyEnterprise will depend upon many factors including
the demand for its products, the level of product and price competition, the
length of its sales cycle, the timing of individual license transactions, the
mix of products and services sold, and the delay or deferral of customer
implementations. Results of operations are also dependent on XyEnterprise
locating and recruiting new hires, expanding its direct sales force and indirect
distribution channels, and developing and introducing new products and product
enhancements timely. Additional factors include activities of and acquisitions
by competitors, changes in foreign currency exchange rates, and general domestic
and international economic and political conditions. Sales generally reflect a
relatively high amount of revenues per order. The loss or delay of individual
orders, therefore, could have a significant impact on revenues and quarterly
results. In addition, the timing of license revenue is difficult to predict
because of the length of the sales cycle, which is typically six to twelve
months from the initial contact. Because operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in losses.
10
The financial statements of the Company have been prepared assuming that it will
continue as a going concern, as set forth in the report of its independent
auditors. The Company however has sustained recurring losses from operations,
has a working capital deficiency, and has a substantial stockholders' deficit.
The Company has also been in default for a number of years on interest payments
due on its outstanding unsecured debentures and promissory notes, exclusive of
its senior secured obligations to Tudor Trust. These uncertainties necessarily
represent substantial risks with respect to the ability of the Company to
continue as a going concern.
RELATED PARTY TRANSACTIONS
The Company maintains a credit facility with Tudor Trust in the aggregate
principal amount of up to $17,500,000. The current President and Chairman of the
Board of Directors of the Company is also Chairman of the Board of Directors of
XyEnterprise, the Chairman of NanoFrames, and is the sole trustee and
beneficiary of Tudor Trust. Each of these positions are held without
compensation. Through shares of common stock of the Company owned by Tudor Trust
and shares which Tudor Trust has the right to acquire by the conversion of debt,
Tudor Trust controls the Company. Tudor Trust also directly holds a minority
stock interest in XyEnterprise; and a majority stock interest in PlazaBlue, Inc.
and its successor company, 2001 Investments LLC; and in NanoFrames. The
transactions between the Company, XyEnterprise, and NanoFrames with Tudor Trust
have been unanimously approved by the independent members of the board of
directors of each company.
During the fiscal year, the Company provided a $2,450,000 loan to PlazaBlue Inc.
Tudor Trust held a majority interest in PlazaBlue Inc. as a result of stock
owned and stock which it had a right to acquire through the conversion of debt.
As a result of default by PlazaBlue in the repayment of its debts, the lenders,
including Tudor Trust and Azul, foreclosed on the assets of PlazaBlue. Effective
March 31, 2001, the Company, at the election of Azul, sold its entire interest
in the Assets to Tudor Trust for its carrying value in the company.
Effective March 31, 2001, the Company entered into an agreement with Tudor Trust
to purchase shares of XyEnterprise from Tudor Trust such that the Company's
interest in XyEnterprise would exceed 50% even in the event of conversion to
common stock of the recently issued convertible preferred stock. Accordingly,
during March 2001 the Company acquired an additional 575,000 shares of
XyEnterprise common stock in exchange for the issuance of 1,092,500 shares of
Azul common stock. The transaction was based upon the values of the XyEnterprise
and Azul common stocks at the last sales price for XyEnterprise common shares
and the value of the Azul shares at the close of business on March 31, 2001, the
effective date of the agreement.
In March 2001, Tudor Trust and the Company agreed to amend their loan agreement
extending the maturity date to March 31, 2002. Tudor Trust and the Company also
agreed that the interest payable of $1,621,024 be added to and become part of
the principal sum of the indebtedness, and agreed that interest for subsequent
periods would similarly be added to and become part of the principal in the
event that Tudor fails to elect to receive such interest in the form of common
stock of the Company.
All transactions among the companies have been approved by the independent
members of the Boards of Directors of each company.
ITEM 2. Properties
Azul maintains an office leased on a monthly basis for its administrative
offices, located in Boulder, Colorado. There are no long term commitments
relative to this location.
11
XyEnterprise's executive, administrative, research and development, and home
office sales support facilities, which consist of approximately 31,200 square
feet of office space, are located in Reading, Massachusetts. This facility is
occupied under a lease which expires in January, 2002 and which requires monthly
payments totaling $593,800 per year. XyEnterprise also leases smaller sales and
service facilities at other locations in the United States and abroad.
NanoFrames maintains approximately 400 square feet of space as a molecular
biology research lab and office on a monthly basis in Boston, MA.
ITEM 3. Legal Proceedings
Azul has been advised that certain minority shareholders of PlazaBlue have
retained counsel for the purpose of possibly asserting a claim against Azul, the
president of Azul, Tudor Trust and one other person with respect to transactions
of such persons with PlazaBlue. As discussed under Item 1 above, Azul and Tudor
Trust made loans to PlazaBlue that subsequently became in default and resulted
in a foreclosure on the assets of PlazaBlue. Azul believes, based on the advice
of counsel after a review of the facts and circumstances related to the possible
claim, that the claim is without merit. Counsel for Azul has commenced
discussions with the potential claimants for the purpose of avoiding the claim.
However, there can be no assurance that a legal proceeding asserting the claim
will not be subsequently initiated against Azul.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended March 31, 2001.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
Jeffrey L. Neuman...... 57 President, Chairman of the Board and Chief Executive Officer of Azul, Chairman of
the Board of XyEnterprise, and Chairman of NanoFrames
Edward S. Wittman...... 54 Chief Financial Officer, Vice-President, Secretary and Treasurer of Azul, and Chief
Operating Officer of NanoFrames
Kevin J. Duffy......... 46 President and Chief Executive Officer of XyEnterprise
Mr. Neuman has been Chairman of the Board of Directors of Azul since 1996 and
been President and Chief Executive Officer since 1999. He is also Chairman of
XyEnterprise. Mr. Neuman has been a private investor since 1986 when he founded
Tudor Trust, a merchant banking firm which has interests in a number of public
and private companies. Mr. Neuman received his BA from the University of
Pennsylvania and his MBA from the Wharton School of Business.
Mr. Wittman joined Azul in May 2000 as Vice President, Chief Financial Officer,
Secretary and Treasurer. Since April 2001 he has also served as Chief Operating
Officer for NanoFrames. For the previous nine years he has been President of
Wittman Associates Inc., a privately held consulting services firm specializing
in strategic and managerial services to entrepreneurships, both privately and
publicly held. From October 1997 through March 1999 he served as Vice President
of Business Development for Itex Corporation, a publicly held company. He has
held or presently holds positions as member of the board for several
corporations and not-for-profit organizations. Previously Mr. Wittman has served
in various operations and financial management positions for publicly-held and
private organizations. He holds a BSBA from California State University and an
MBA from the University of Colorado.
12
Mr. Duffy was elected President and Chief Executive Officer of XyEnterprise in
December 1998. Mr. Duffy joined the Company in June 1983. In December 1995 he
was promoted to Senior Vice President and General Manager, Xyvision Publishing
Group. From April 1991 to December 1995 he served as Vice President, North
American Sales.
Each officer serves at the discretion of the Company's board of directors or of
XyEnterprise's board of directors. There are no family relationships among any
of the directors and executive officers of the Company.
13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Azul Holdings Inc.'s common stock is currently traded through the OTC Bulletin
Board under the symbol "AZUL". Price per share of Azul Holdings Inc. common
stock is reported on the OTC Bulletin Board and through the National Quotation
Bureau Pink Sheets.
The following table sets forth the reported high and low bid quotations for the
Company's common stock for the periods indicated, as reported on the OTC
Bulletin Board. These quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not necessarily represent actual
transactions.
High Low
Fiscal Year Ended March 31, 2001
April 1 - June 30....................... $5.50 $2.63
July 1 - September 30................... 4.50 3.13
October 1 - December 31................. 4.25 1.63
January 1 - March 31.................... 3.96 1.25
Fiscal Year Ended March 31, 2000
April 1 - June 30....................... $ .81 $ .69
July 1 - September 30................... .69 .56
October 1 - December 31................. 2.19 .53
January 1 - March 31.................... 11.13 1.50
As of June 20, 2001, there were approximately 537 holders of record of the
common stock. No cash dividends have been declared on the common stock since
Azul's formation. The Company does not expect to declare cash dividends on the
common stock in the foreseeable future. The Company cannot pay dividends on the
common stock until accrued dividends on Series B preferred stock are paid or at
any time while shares of Series C preferred stock are outstanding. The Delaware
General Corporation Law and the Company's line of credit agreement with Tudor
Trust each currently prohibit the payment of dividends on the common stock.
During the fiscal year ended March 31, 2001, Azul issued the following
securities, which were not registered under the Securities Act of 1933:
o 1,142,900 shares of common stock to Tudor Trust in payment of accrued
interest in the amount of $1,870,816 under the credit facility
agreement between Tudor Trust and Azul,
o 1,092,500 shares of common stock to Tudor Trust in exchange for the
transfer of 575,000 shares of XyEnterprise common stock from Tudor
Trust to Azul, which were valued at $1,638,750,
o warrants to purchase 500,000 shares of common stock to Tudor Trust
which expired on March 31, 2001, at an exercise price of $5.25 per
share as consideration for extension of the credit facility to March
31, 2001,
o warrants to purchase 500,000 shares of common stock to Tudor Trust,
which expire on March 31, 2002 at an exercise price of $3.00 per share
as consideration for extension of the credit facility to March 31,
2002, and
o warrants to purchase 15,000 shares of common stock to Greenley Capital
Company at an exercise price of $3.25 per share as
consideration for consulting services.
14
These securities were not registered under the Securities Act of 1933 in
reliance on Rule 506 of Regulation D promulgated by the SEC since the recipients
are accredited investors and certificates representing the shares and the
warrants bear a legend restricting the transfer of those securities.
15
ITEM 6. Selected Financial Data
The following table summarizes certain selected financial data and should be
read in conjunction with the financial statements and related notes appearing
elsewhere in this report.
Fiscal Year Ended March 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Income Statement Data
Revenues............................................ $ 8,918 $ 9,409 $ 10,555 $ 16,501 $22,234
Gross margin........................................ 4,051 4,030 4,570 5,675 10,406
Operating expenses.................................. 10,976 9,030 11,762 12,574 10,765
Loss from operations................................ (6,925) (5,000) (7,192) (6,899) (359)
Minority interest share of loss..................... 3,386 2,143 --- --- ---
Loss from operations after minority
interest share..................................... (3,538) (2,857) (7,192) (6,899) (359)
Gain on capital transactions of subsidiary.......... --- 5,085 --- --- ---
Income (loss) before extraordinary item (1) (7,831) 441 (8,707) (7,913) (1,359)
Net income (loss) allocable to common stock -
holders (1)..................................... (7,926) 701 (8,801) (8,007) (1,353)
Income (loss) per share:
Basic (1).......................................... $ (2.12) $ 0.24 $ (3.08) $ (2.81) $ (.56)
Diluted (1)........................................ $ (2.12) $ 0.10 $ (3.08) $ (2.81) $ (.56)
Weighted average shares outstanding:
Basic.............................................. 3,741 2,857 2,854 2,854 2,419
Diluted............................................ 3,741 10,169 2,854 2,854 2,419
Financial Position at March 31
Cash and cash equivalents........................... $ 4,418 $ 6,890 $ 446 $ 357 $ 261
Working capital deficit............................. (13,739) (11,761) (15,918) (10,788) (4,834)
Total assets........................................ 10,023 9,871 4,066 6,916 9,977
Long-term debt...................................... -- 1,850 -- -- 165
Stockholders' deficit............................... (15,633) (14,809) (15,731) (8,847) (1,867)
Other Information
Research and development expenditures,
including capitalized software costs............... $ 4,175 $3,242 $4,040 $ 4,743 $ 4,381
(1) Fiscal 2001 results include an unusual charge to earnings in the
amount of $2,794 or $.75 per basic and diluted share as a result of the
settlement of an interest obligation by the issuance of common stock. Fiscal
2000 results include an extraordinary gain of $353 or $.12 per basic share and
$.03 per diluted share from the early extinguishment of debt. Fiscal 1997
results include an extraordinary gain of $100, or $.04 per share from the
exchange of Debentures for unsecured, unsubordinated promissory notes and shares
of common stock (also, see Note 7 of the Notes to Consolidated Financial
Statements).
16
Quarterly Financial Data (Unaudited)
The Company's interim financial information for the quarterly period ended June
30, 2000 has been reclassified to include in Other income and expense, net, a
loss of $2,794 incurred on settlement of an accrued interest liability. The
Company's interim financial information for the quarterly period ended September
30, 2000 has been restated to reverse a previously recorded $900,000 gain on a
capital transaction of a subsidiary.
In thousands (except per share amounts)
Quarters Ended
------------- ---------------------------- ---- -------------
---------------- --------------- -------------- -------------
6/30/00 9/30/00 12/31/00 3/31/01
(Reclassified) (Restated)*
---------------- --------------- -------------- -------------
Fiscal Year 2001
Revenues $ 2,093 $ 1,659 $ 2,315 $ 2,851
Cost of sales 1,180 1,056 1,219 1,412
Operating expenses 2,345 2,561 2,690 3,380
Minority interest share of loss 578 782 676 1,350
Other income (expense) (3,189) (317) (330) (457)
Net loss allocable to common stockholders $(4,067) $(1,516) $(1,272) $(1,071)
Weighted average number of shares of common stock
outstanding 3,297 3,884 3,884 3,899
Basic loss per share $ (1.23) $ (0.39) $ (0.33) $ (0.27)
Diluted loss per share $ (1.23) $ (0.39) $ (0.33) $ (0.27)
Quarters Ended
--------------------------------------------------------
--------------------------------------------------------
6/30/99 9/30/99 12/31/99 3/31/00
Fiscal Year 2000
--------------------------------------------------------
--------------------------------------------------------
Revenues $2,624 $2,330 $2,293 $2,162
Cost of sales 1,438 1,417 1,217 1,307
Operating expenses 2,247 2,299 2,116 2,368
Minority interest share of loss 802 948 --- 393
Other income (expense), net (including $5,085 of gain on
capital transactions of a subsidiary in the quarter ended
March 31, 2000) (429) (432) (449) 4,608
Income (loss) before extraordinary item (688) (870) (1,489) 3,488
Extraordinary item - gain on early extinguishment of debt 353 --- --- ---
Net income (loss) allocable to common stockholders $ (359) $ (893) $(1,512) $3,465
Weighted average number of shares of common stock
outstanding 2,854 2,854 2,854 2,867
Basic earnings (loss) per share $(0.13) $(0.31) $(0.53) $1.21
Diluted earnings (loss) per share $(0.13) $(0.31) $(0.53) $0.35
* See Note 12 to Consolidated Financial Statements.
17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000
During August 2000, Tudor Trust exercised its option to convert $1,850,000 of
its outstanding term loan due from XyEnterprise to common stock of XyEnterprise
at the rate $2.85 per share, the same value at which shares of common stock were
sold to third parties during February, 2000, in accordance with the option
created at that time.
In an independent transaction, XyEnterprise attracted additional equity
investment, and during February and March, 2001, sold shares in a newly created
class of preferred stock to unrelated third parties totaling $4,000,000. Of this
amount, a single investor, Cadmus Communications, invested $3,000,000. The
issuance of these shares reduced the Company's proportionate interest in
XyEnterprise to 47.5%. Effective March 31, 2001, the Company purchased 575,000
shares of XyEnterprise common stock from Tudor Trust for the issuance of
1,092,500 shares of Azul common stock, based on the most recent sale price for
XyEnterprise common stock and the market price at the close of business on March
31, 2001, for Azul stock. This transaction increased the Company's ownership
interest in XyEnterprise to 52.5% and the Company accounted for this transaction
as an acquisition of minority interest and recorded goodwill of approximately
$1,616,000.
Common and preferred stock of XyEnterprise held by parties other than the
Company are classified as minority interest in the Company's consolidated
balance sheet and not included in consolidated stockholders' deficit. The
Company charges a pro rata share of XyEnterprise's losses to the Company's
common interest and to the minority common interest in proportion to the
respective ownership interest percentages. If either the Company's or the
minority's common interest is fully eliminated, further losses are charged to
the remaining Company or minority common interest until it is fully eliminated,
after which any further losses are charged to the balance of any existing
preferred minority interest. After any preferred minority interest is
eliminated, further losses are fully absorbed in the consolidated profit and
loss of the Company. The minority interests' share of losses of XyEnterprise
were $3,386,333 in 2001, $2,142,874 in 2000 and $0 in 1999.
During fiscal year 2001, the Company made loans totaling $2,450,000 bearing
interest at 10% which had an original due date of September 30, 2000, that was
subsequently extended to November 30, 2000, to PlazaBlue, Inc., a company in
which Tudor held a majority interest. PlazaBlue was a fine art, antique and
collectibles Internet store front and auction house. PlazaBlue was not able to
secure equity funding to enable it to repay the loan when due. In December 2000,
PlazaBlue defaulted on the repayment of that debt. During January 2001, Azul and
Tudor participated in the purchase of the assets of PlazaBlue in a foreclosure
sale. Shortly thereafter, part of the acquired assets were sold to GoAntiques,
Inc. for a 19% interest in GoAntiques, a development stage privately-held
company providing an internet auction site. Effective March 31, 2001, at the
election of Azul, the Company sold its entire interest in the assets to Tudor
Trust at the Company's carrying value in 2001 Investments LLC, resulting in no
gain or loss to Azul. The transaction was completed as a reduction in debt owed
to Tudor Trust by the Company.
XyEnterprise derives its systems revenues from the licensing of its page
composition, content management and third party software. Services revenues
include maintenance, support, consulting and training. Cost of systems sales is
comprised of the amortization of capitalized product development costs, royalty
and third-party product expenses for the licensing or resale of technology. Cost
of sales of services includes personnel-related costs incurred in providing
consulting, training and telephone support to our customers, costs of third
party contractors and other allocated expenses of the organization.
Revenues for 2001 decreased $491,000, a 5% decline, from $9,409,000 in fiscal
2000 to $8,918,000 in 2001. The decrease in revenues in fiscal 2001 reflected a
decline in new orders during the first six months of the year as customers
anticipated previously announced new product releases which became available in
the second half of the year. Revenues for the second half of the year were
$5,166,000, a 38% increase over the first six months of 2001. Systems revenue
were $2,347,000, a 10% decrease from $2,600,000 in 2000. Systems revenues for
the second half of the year were $1,680,000, a 152% increase over the first six
months of 2001. Service revenues decreased 3% in fiscal 2001 primarily
associated with the initial decline in systems revenue for the first six months
of the year.
18
Gross margins were 45% of revenues in 2001, a slight improvement from 43% in
2000. Systems margins were 75% of systems revenues in fiscal 2001, a significant
improvement over 61% in 2000. The improvement in systems margins is a result of
lower third party software costs than those associated with fiscal 2000 sales.
Service margins were 35% of service revenues in 2001, approximately the same as
2000.
Research and development costs, including capitalized software development
costs, were $4,175,000 in 2001, an increase from $3,242,000 in 2000,
representing 47% and 34% of revenues for 2001 and 2000, respectively.
Capitalized software costs were $125,000 and $0 in 2001 and 2000, respectively.
The increase in research and development expenditures in fiscal 2001 included
increased spending due to increased contract engineering expenses related to the
development and testing of the new products releases. Further, XyEnterprise
recorded a reserve based on its evaluation of the collectibility of a note
receivable for $500,000 it had previously advanced to a vendor to complete a
product to be used to create XML versions from Microsoft Word files. Although
XyEnterprise has recently sold a limited number of licenses of this product, the
loan was determined to be impaired due the vendor's limited financial resources
and limited revenue growth of its primary product.
Marketing, general and administrative expenses were $6,926,000 in 2001 as
compared to $5,788,000 in fiscal 2000. The 20% increase in expenses in 2001 was
primarily the result of hiring and developing an expanded sales and marketing
staff, initiating marketing programs for new product releases and general
management advisory services at XyEnterprise. In addition, Azul had employed the
services of a paid President for a five-month period and a permanent part-time
Chief Financial Officer for a nine-month period of 2001.
Interest income was $351,194 and $59,435 in 2001 and 2000, respectively. The
increase in interest income resulted from the investment of cash proceeds from
the private placement offering closed by XyEnterprise in the fourth quarter of
fiscal 2000. Interest expense accrued to third parties was $123,000 and $147,000
in fiscal 2001 and 2000, respectively. Interest expense accrued to Tudor Trust,
the largest stockholder of the Company, remained level at $1,727,000 in fiscal
2001 and $1,699,000 in fiscal 2000. The interest expense payable to third
parties includes the interest obligation due on the Company's 6% Convertible
Subordinated Debentures (the "Debentures") and the quarterly interest payments
due on the 4% Promissory Notes.
In October 2000, Azul agreed to invest up to $500,000 in NanoFrames, LLC. Tudor
Trust also has an interest in NanoFrames. As of March 31, 2001, $245,900 had
been advanced to NanoFrames. These funds were used for the purchase of
laboratory equipment and supplies, salaries, and rent and office expenses.
During fiscal 2001, Tudor Trust and the Company agreed that the interest payable
for the period from January 1, 1999, through March 31, 2000, would be paid by
the issuance to Tudor of 984,624 shares of common stock of the Company. The
Company also agreed that on or before March 31, 2001, interest for the period
July 1, 1998, through December 31, 1998 would be convertible into 158,266 shares
of common stock of the Company at the option of Tudor. Azul recorded a loss on
settlement of an accrued interest liability of $2,794,000 as a result of this
transaction. During fiscal 2000, the Company realized an extraordinary gain of
$353,000 on the extinguishment of certain indebtedness.
YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999
During the fiscal year ended March 31, 2000, XyEnterprise attracted additional
equity investments totaling $7,850,000. While the issuance of new common stock
of XyEnterprise decreased the Company's proportionate interest in XyEnterprise
to 57.4%, the increased book value of the Company's interest after the new stock
issuance resulted in a gain to the Company of $5,085,000, which has been
included in the Statement of Operations.
19
Revenues for 2000 decreased $1,146,000, an 11% decline, from $10,555,000 in
fiscal 1999 to $9,409,000 in 2000. This decrease in systems revenues in fiscal
2000 reflects a decline in new orders from publishing revenues outside the
United States due largely to increased competition. Service revenues decreased
4% in fiscal 2000 primarily due to a decrease in European training and
integration services associated with the decline in systems revenue.
Gross margins were 43% of revenues in 2000, the same as in 1999. Systems margins
were 61% of systems revenues in fiscal 2000, the same as in 1999. Service
margins were 36% of service revenues in 2000, a slight increase from 35% in
1999. The increase in margin was attributable to a relatively lower level of
costs related to outsourcing training and consulting.
Research and development costs, including capitalized software development
costs, were $3,242,000 in 2000, a decrease from $4,040,000 in 1999, representing
34% and 38% of revenues for 2000 and 1999, respectively. Capitalized software
costs were $0 and $263,000 in 2000 and 1999, respectively. The decrease in
research and development expenditures in fiscal 2000 was primarily the result of
headcount decreases and efficient outsourcing of manpower. Research and
development expenses, excluding capitalized software development costs, were 34%
and 36% of revenues in 2000 and 1999, respectively. The decrease in the
percentage of revenue of net research and development expenses from 1999 to 2000
was due to the significant decrease in overall research and development spending
based on higher utilization of outside manpower.
Marketing, general and administrative expenses were $5,788,000, or 62% of
revenues, in 2000 as compared to $7,985,000, or 76% of revenues, in fiscal 1999.
The 27% decrease in expenses in 2000 was primarily the result of a reduction in
overall personnel costs, reduced sales and marketing expenditures pending new
product releases, and the sale of the Contex division in fiscal year 1999.
XyEnterprise anticipates increasing marketing and general and administrative
expenses in fiscal 2001 as it increases the promotion of upcoming new products
and rebuilds the sales and marketing staff.
Interest income was $59,000 and $15,000 in 2000 and 1999, respectively. The
increase in interest income resulted from the investment of cash proceeds from
the private placement offering closed by XyEnterprise in the fourth quarter of
fiscal 2000. Interest expense accrued to third parties was $147,000 and $94,000
in fiscal 2000 and 1999, respectively. Interest expense accrued to Tudor Trust
was $1,699,000 in fiscal 2000 and $1,436,000 in fiscal 1999. The increase is a
result of increased borrowings and interest rates. The interest expense payable
to third parties includes the interest obligation due on the Company's
Debentures and the quarterly interest payments due on the 4% Promissory Notes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, XyEnterprise had cash and cash equivalents of $4,275,000
which is a decrease of $2,566,000 from the previous fiscal year end. This
decrease in cash for fiscal 2001 resulted from a use of cash for operating and
investing activities of $5,675,000 and $1,003,000, respectively, offset by cash
provided from financing activities of $4,112,000.
In fiscal 2001, XyEnterprise invested $438,000 in capital assets. XyEnterprise
anticipates that it will continue to invest in capital assets as required to
support its product development efforts and general business needs.
As of March 31, 2001, Azul has a $17,500,000 amended line of credit with Tudor
Trust, the largest stockholder of the Company, of which $14,308,000 ,was
outstanding at March 31, 2001. The grantor, sole trustee and sole current
beneficiary of Tudor Trust, also serves as Chairman of the Board of Directors of
Azul and XyEnterprise. This credit line, which is payable March 31, 2002, is
collateralized by the Company's stock in XyEnterprise and has been used for
working capital and general business purposes. The first $5,000,000 of the
principal balance outstanding bears interest at 6% per year and the remaining
principal balance bears interest at 8% per year. (See Note 5 to Consolidated
Financial Statements).
See Note 7 to the Consolidated Financial Statements for a description of the
Company's efforts to restructure the outstanding Debentures, 15% Promissory
Notes and 4% Promissory Notes. Despite the fact that the Company has
successfully restructured 96% of the Debentures, the Company can give no
assurance about the outcome of continued restructuring efforts and does not
expect the matters to be resolved in the near future.
20
The Company accrued dividends of $94,000 annually on Azul's Series B preferred
stock during 2001, 2000, and 1999.
The Company reported a net loss allocable to common stockholders of $7,926,000
in fiscal 2001 and net income allocable to common stockholders of $701,000 for
fiscal 2000, respectively. This difference can be attributed primarily to the
gain on capital transaction of a subsidiary during 2000 of $5,085,000 that did
not recur in 2001.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
continuing losses from operations and has a substantial working capital
deficiency and a stockholders' deficit at March 31, 2001 and is in default on
its 6% Convertible Subordinated Debentures, 15% Promissory Notes, and 4%
Promissory Notes (See Note 7 to Consolidated Financial Statements). The
Company's attainment of profitable operations and sufficient additional
financing, as well as the continued forbearance of its debenture holders, cannot
be determined at this time. These uncertainties raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recovery and classification of
recorded asset amounts or the amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company anticipates that its cash requirements for fiscal 2002 will be
satisfied mainly from its working capital and credit line, assuming the
continued forbearance by the holders of the 6% Convertible Subordinated
Debentures, 15% Promissory Notes and 4% Promissory Notes.
FOREIGN CURRENCY - CONVERSION TO EURO
The euro has been adopted by the European Union as their legal currency. There
was no effect on the operations of XyEnterprise and its subsidiaries as a
result.
21
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Neither the Company nor XyEnterprise currently use derivative financial
instruments. The Company and XyEnterprise, when and if practicable, generally
place marketable security investments in high credit quality instruments,
primarily U.S. Government and Federal Agency obligations, tax-exempt municipal
obligations and corporate obligations with contractual maturities of ten years
or less. Neither the Company nor XyEnterprise expect any material loss from
marketable security investments and therefore believe that potential interest
rate exposure is not material.
Internationally, XyEnterprise invoices customers primarily in local currency.
XyEnterprise is exposed to foreign exchange rate fluctuations from when
customers are invoiced in local currency until collection occurs. Neither the
Company nor XyEnterprise enters into foreign currency hedge transactions.
Through March 31, 2001, foreign currency fluctuations have not had a material
impact on the financial position or results of operations of the Company.
22
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Azul Holdings Inc.:
We have audited the accompanying consolidated balance sheet of Azul Holdings
Inc. and subsidiary (the "Company") as of March 31, 2001 and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
March 31, 2001 and the consolidated results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements as of and for the year ended
March 31, 2001 have been prepared assuming that the Company will continue as a
going concern. As described in Notes 1 and 7 to the consolidated financial
statements, the Company's recurring losses from operations, working capital
deficiency, stockholders' deficit and default on its 6% Convertible Subordinated
Debentures, 15% Promissory Notes, and 4% Promissory Notes raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Notes 1 and 7. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Denver, Colorado
June 29, 2001
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Azul Holdings Inc.:
We have audited the accompanying consolidated balance sheet of Azul Holdings
Inc. and subsidiaries as of March 31, 2000, and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. We have not audited the financial statements
of Azul Holdings Inc. for any period subsequent to March 31, 2000.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Azul Holdings Inc.
and subsidiaries as of March 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1b to the
financial statements, the Company has sustained recurring losses from
operations, has a working capital deficiency and a stockholders' deficit, and is
in default on interest payments on its 6% Convertible Subordinated Debentures,
15% Promissory Notes, and its 4% Promissory Notes. These uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
May 12, 2000
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Azul Holdings Inc.:
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' deficit and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Azul Holdings
Inc. (formerly Xyvision, Inc.) and its subsidiaries for the year ended March 31,
1999 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Azul Holdings Inc. for any period
subsequent to March 31, 1999.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the fiscal
1999 financial statements, the Company has incurred recurring losses from
operations, a working capital deficit, stockholders' deficit and is in default
on interest payments on its 6% Convertible Subordinated Debentures,
15%Promissory Notes and 4% Promissory Notes. These uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1 to
the fiscal 1999 statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 25, 1999
25
AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
ASSETS 2001 2000
---- ----
Current assets:
Cash and cash equivalents................................................................... $ 4,418,033 $ 6,889,513
Accounts receivable:
Trade, less allowance for doubtful accounts of $154,516
and $224,345 at March 31, 2001 and 2000, respectively................................... 1,892,496 1,746,952
Other current assets........................................................................ 910,223 360,511
--------------- ------------
Total current assets........................................................................ 7,220,752 8,996,976
Property and equipment, net................................................................. 608,530 547,552
Goodwill.................................................................................... 1,697,919 --
Investment in unconsolidated entity......................................................... 245,894 --
Other assets, net, principally capitalized software costs .................................. 250,006 326,836
--------------- ------------
Total assets................................................................................ $ 10,023,101 $ 9,871,364
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholder................................................................ $14,307,911 $12,357,150
Current portion of long-term debt........................................................... 1,895,089 1,872,056
Accounts payable and accrued expenses....................................................... 1,658,359 3,591,971
Deferred service revenues................................................................... 1,640,280 1,657,627
Other current liabilities................................................................... 1,458,009 1,279,073
-------------- -------------
Total current liabilities .................................................................. 20,959,648 20,757,877
Notes payable to stockholder - long term.................................................... -- 1,850,000
----------------- -------------
Total liabilities .......................................................................... 20,959,648 22,607,877
-------------- ------------
Minority interest in subsidiary............................................................. 4,696,279 2,072,430
-------------- -------------
Commitments and contingencies
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700,000 shares
authorized; no shares issued and outstanding.......................................... --- ---
Series B convertible preferred stock, $1.00 par value; 300,000 shares
authorized; 229,131 and 232,407 shares issued and outstanding at March 31,
2001 and 2000 respectively (aggregate liquidation preference of $3,349,763
and $3,306,536, respectively).......................................................... 229,131 232,407
Series C convertible preferred stock, $1.00 par value; 1,000,000
shares authorized; 175,000 shares issued and outstanding at
March 31, 2001 and 2000 respectively (aggregate liquidation preference of $1,750,000). 175,000 1,750
Common stock, $.03 par value; 25,000,000 shares authorized;
5,231,622 and 2,991,496 shares issued and outstanding at
March 31, 2001 and 2000, respectively, ............................................... 156,949 89,745
Additional paid-in capital.................................................................. 59,959,543 53,094,764
Accumulated deficit......................................................................... (74,984,912) (67,059,072)
-------------- -------------
(14,464,289) (13,640,406)
Less:
Treasury common stock, at cost; 95,333 shares at March 31, 2001 and
2000, respectively ....................................................................... (1,168,537) (1,168,537)
-------------- --------------
Total stockholders' deficit................................................................. (15,632,826) (14,808,943)
-------------- -------------
Total liabilities and stockholders' deficit................................................. $ 10,023,101 $ 9,871,364
=============== =============
The accompanying notes are an integral part of the
consolidated financial statements.
26
AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Revenues:
Systems.............................................................. $2,347,079 $2,599,690 $3,474,551
Service.............................................................. 6,571,349 6,809,177 7,080,646
------------- ------------- -------------
Total revenues................................................... 8,918,428 9,408,867 10,555,197
------------- ------------- ------------
Cost of sales:
Systems.............................................................. 596,750 1,008,890 1,371,012
Service.............................................................. 4,270,548 4,370,172 4,613,865
------------- ------------- -------------
Total cost of sales.............................................. 4,867,298 5,379,062 5,984,877
------------- ------------- -------------
Gross margin.......................................................... 4,051,130 4,029,805 4,570,320
Operating expenses:
Research and development............................................. 4,049,924 3,241,969 3,776,692
Marketing, general, and administrative............................... 6,926,015 5,787,637 7,985,172
------------- ------------- -------------
Total operating expenses......................................... 10,975,939 9,029,606 11,761,864
------------ ------------- ------------
Loss from operations................................................... (6,924,809) (4,999,801) (7,191,544)
Minority interest share of loss 3,386,333 2,142,874 --
------------- ------------- --------------
Loss from operations after minority interest share (3,538,476) (2,856,927) (7,191,544)
------------- ------------- ------------
Other income (expense), net:
Gain on capital transactions of subsidiary........................... --- 5,084,694 ---
Loss on settlement of an accrued interest liability - stockholder.... (2,793,550) --- ---
Interest income...................................................... 351,194 59,435 14,639
Interest expense - third party....................................... (123,511) (147,301) (93,627)
Interest expense - stockholder....................................... (1,727,377) (1,698,527) (1,436,299)
------------- ------------- ------------
Total other income (expense), net................................ (4,293,244) 3,298,301 (1,515,287)
------------- ------------ ------------
Income (loss) before extraordinary item ............................... (7,831,720) 441,374 (8,706,831)
Extraordinary item:
Gain on early extinguishment of debt................................. --- 353,490 ---
------------- ------------- ------------
Net income (loss)...................................................... (7,831,720) 794,864 (8,706,831)
Accrued preferred stock dividends...................................... 94,120 94,120 94,120
-------------- -------------- -------------
Net income (loss) allocable to common stockholders..................... $ (7,925,840) $ 700,744 $(8,800,951)
============ ========= ============
Basic earnings (loss) per share:
Before extraordinary item............................................ $ (2.09) $ .15 $ (3.05)
Extraordinary item................................................... --- .12 ---
Accrued preferred stock dividends (.03) (.03) (.03)
------------- ------------- ------------
Basic earnings (loss) per share...................................... $ (2.12) $ .24 $ (3.08)
================ ================ ==============
Diluted earnings (loss) per share:
Before extraordinary item............................................ $ (2.09) $ .08 $ (3.05)
Extraordinary item................................................... --- .03 ---
Accrued preferred stock dividends (.03) (.01) (.03)
Diluted earnings (loss) per share...................................... $ (2.12) $ .10 $ (3.08)
================ ================= =============
Basic weighted average shares outstanding............................ 3,741,235 2,857,247 2,854,283
Diluted weighted average shares outstanding.......................... 3,741,235 10,168,769 2,854,283
The accompanying notes are an integral part of the
consolidated financial statements.
27
AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
Series B Series C Additional Total
Preferred Preferred Common Paid-in Accumulated Treasury Stockholders'
stock stock Stock Capital Deficit Stock Deficit
----- ---- ----- -------- ------- ----- -------
Balance, March 31, 1998.......................... $235,299 $ --- $ 88,488 $50,956,310 $(58,958,865) $(1,168,537) $ (8,847,305)
Issuance of Series C convertible preferred stock. 175,000 1,575,000 1,750,000
Issuance of common stock purchase warrants...... 300,000 300,000
Writedown of discount from forgiveness of
warrants....................................... (132,501) (132,501)
Dividends on Series B convertible preferred stock (94,120) (94,120)
Net loss......................................... (8,706,831) (8,706,831)
======== ====== ======== =========== ============= ============ =============
Balance, March 31, 1999.......................... 235,299 175,000 88,488 52,698,809 (67,759,816) (1,168,537) (15,730,757)
Conversion of Series B convertible preferred ....
stock to common stock......................... (2,892) 34 2,858 -
Exercise of stock options........................ 1,223 71,299 72,522
Compensation paid in stock options .............. 148,548 148,548
Dividends on Series B convertible
preferred stock............................... (94,120)
Net income....................................... 794,864 794,864
======== ====== ======== =========== ============= ============ =============
Balance, March 31, 2000 ......................... 232,407 175,000 89,745 52,921,514 (67,059,072) (1,168,537) (14,808,943)
Conversion of Series B convertible preferred
stock to common stock (3,276) 39 3,237 -
Conversion of debt and accrued interest
payable to stockholder to common stock 34,287 4,630,080 4,664,367
Issuance of common stock purchase warrants and
fair value of debt conversion, primarily to
shareholder as consideration for extensions of
line-of-credit................................. 791,146 791,146
Issuance of common stock to Tudor Trust in
exchange for 575,000 shares of common stock of
Xyvision Enterprise Solutions, Inc. ........... 32,775 1,605,975 1,638,750
Dividends on Series B convertible preferred .....
stock.......................................... (94,120) (94,120)
Other, including exercise of stock options ...... 103 7,591 7,694
Net loss......................................... (7,831,720) (7,831,720)
Balance, March 31, 2001 ......................... $229,131 $175,000 $156,949 $59,959,543 $(74,984,912) $(1,168,537) $(15,632,826)
======== ====== ======== =========== ============= ============ =============
The accompanying notes are an integral part of the
consolidated financial statements.
28
AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2000, AND 1999
2001 2000 1999
---- ---- ----
Operating Activities:
Net income (loss)........................................................... $(7,831,720) $ 794,864 $(8,706,831)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization............................................... 622,354 611,000 1,225,278
Noncash compensation........................................................ 75,000 148,548 ---
Common stock and warrants issued to a shareholder in payment of interest
and as consideration for extension of credit facility....................... 3,309,071 --- ---
Reserve for note receivable................................................. 500,000 --- ---
Gain on early extinguishment of debt........................................ --- (353,490) ---
Gain on capital transactions of subsidiary.................................. --- (5,084,694) ---
Minority share of loss of subsidiary........................................ (3,386,333) (2,142,874) ---
Interest expense related to warrants........................................ 157,000 679,730 519,479
Writedown of capitalized software to net realizable value................... --- --- 410,000
Loss on sale of Contex assets............................................... --- --- 379,000
Provision for (recovery of) losses on accounts receivable................... (69,829) (218,601) 366,184
Changes in operating assets and liabilities:
Accounts receivable....................................................... (75,715) 79,348 1,656,482
Inventories............................................................... --- 513,144 (176,099)
Other assets.............................................................. (663,954) (53,371) 347,539
Accounts payable and accrued expenses..................................... 1,163,035 747,911 (180,624)
Deferred service revenues................................................. (17,347) 279,530 ---
Other current liabilities................................................. 325,719
------- -------- ---------------
178,936 81,582
------------ ----------
Net cash used by operations................................................. (6,039,502) (3,917,373) (3,833,873)
------------ ----------- - -----------
Investing Activities:
Loan to PlazaBlue and Hypervision........................................... (2,950,000) --- ---
Investment in NanoFrames, LLC............................................... (245,894) --- ---
Additions to property and equipment......................................... (438,473) (294,203) (288,287)
Capitalized software costs.................................................. (125,184) (262,949)
--------- -------------- ---------
Net cash used by investments................................................ (3,759,551) (294,203) (551,236)
----------- --------- ---------
Financing Activities:
Proceeds from credit facility from a stockholder, net....................... 3,241,763 2,832,150 3,475,000
Proceeds from bridge loan................................................... --- 300,000 ---
Proceeds from sale of subsidiary's preferred stock, net of issuance costs... 4,082,254 750,000 1,000,000
Proceeds from sale of subsidiary's common stock, net of issuance costs...... --- 6,700,000 ---
Exercise of stock options................................................... 3,556
------------- ------- ----------
72,522 ---
------- ---
Net cash provided from financing............................................ 7,327,573 10,654,672 4,475,000
------------ ----------- ---------
Net increase (decrease) in cash and cash equivalents........................ (2,471,480) 6,443,096 89,891
Cash and cash equivalents at the beginning of the year...................... 6,889,513 446,417 356,526
--------- ------------ ---------
Cash and cash equivalents at the end of the year............................ $ 4,418,033 $ 6,889,513 $ 446,417
=========== =========== =========
(continued)
29
AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(concluded)
Supplemental cash flow information:
Conversion of note receivable from PlazaBlue............................... 2,450,000 --- ---
Sale of investment in 2001 Investments LLC to Tudor Trust for reduction in
amount outstanding from credit facility ................................. 2,450,000 --- ---
Conversion of debt to stockholder to subsidiary's common stock.............. 1,850,000 1,750,000
---
Accrued dividends on preferred stock........................................ 94,120 94,120 94,120
Issuance of common stock in payment of prior periods' accrued interest...... 1,870,816 --- ---
Issuance of common stock to Tudor Trust in exchange for 575,000 shares of
common stock of Xyvision Enterprise Solutions, Inc.......................... 1,638,750 --- ---
Issuance of warrants to purchase common stock and fair value of debt
conversion as consideration for extension of credit facility to March 118,626
31,2002.................................................................. --- ---
The accompanying notes are an integral part of the
consolidated financial statements.
30
AZUL HOLDINGS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a Nature of Business: Azul Holdings Inc. ("Azul" or the "Company"), a
Delaware corporation, through its majority owned subsidiary, Xyvision
Enterprise Solutions Inc. ("XyEnterprise") develops, markets,
integrates and supports content management and publishing software for
a variety of customers in numerous industries. These products help
companies create, manage and deliver large amounts of content in Web
electronic or paper formats (or media). XyEnterprise integrates its
internally developed products with selected third-party products to
create complete publishing and content management solutions through its
professional services group and qualified third-party resellers and
service partners. These solutions are designed to increase productivity
of content creation and editing, enhance document and knowledge
management functions, improve quality and timeliness of formatted
information and support the growing use of XML as a core business
technology. Azul provides financial and management support principally
to a few carefully selected high technology companies generally in
their emerging or early-stages of corporate development and mid-stage
companies. To date, Azul's principal asset is its holdings in
XyEnterprise which previously was a wholly-owned subsidiary and in
which Azul has a 52.5% ownership as of March 31, 2001.
Over the past two years, XyEnterprise has invested significantly in the
development and expansion of its product line. Additionally,
XyEnterprise has greatly expanded its sales force during the year ended
March 31, 2001 to serve the market interest generated by the release of
the new versions of the products. To become profitable and achieve
positive operating cash flow, XyEnterprise must generate and sustain
higher levels of revenue.
During 2001, Azul made an initial investment in NanoFrames, LLC
("NanoFrames") and at March 31, 2001 has a 15% preferred ownership
interest accounted for by the cost method. NanoFrames is in the early
stages of the research and development of nanotechnology using the
principles of molecular biology. Such technology is expected to have
applications in reinforcement, separation and material design fields.
Nanotechnology is expected to become the new frontier for research in
such fields as electronics, optics, materials, medicine and
pharmaceuticals. As of March 31, 2001, the Company had committed to
invest up to $500,000 in NanoFrames.
b. Basis of Presentation and Consolidation: The accompanying financial
statements have been prepared assuming that the Company will continue
as a going concern. The Company has sustained recurring losses from
operations, and has a working capital deficiency, a stockholders'
deficit and is in default on its 6% Convertible Subordinated
Debentures, 15% Promissory Notes, and 4% Promissory Notes as of March
31, 2001. The Company's attainment of profitable operations and
sufficient additional financing, as well as the continued forbearance
of its debenture holders, cannot be determined at this time. These
uncertainties raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
any adjustments relating to the recovery and classification of recorded
asset amounts or the amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a going
concern. See also Note 7.
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiary, XyEnterprise. XyEnterprise has the
following wholly owned subsidiaries: Xyvision Enterprise Solutions
Europe Ltd. (an English corporation), Xyvision S.A.R.L. (a French
corporation) and Xyvision Enterprise Solutions GmbH (a German
corporation), and Lightbinders, Inc. (a U.S. Delaware corporation). All
material intercompany transactions and balances have been eliminated in
consolidation.
31
AZUL HOLDINGS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
c. Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with an original maturity of three months or less
to be cash equivalents.
d. Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation and amortization. Major improvements are
capitalized while repair and maintenance charges are expensed when
incurred. Depreciation and amortization are computed on a straight-line
basis over the useful lives of the assets, except for leasehold
improvements which are amortized over the lesser of the term of the
lease or the estimated useful life of the related asset. When assets
are sold or retired, their cost and related accumulated depreciation
are removed from the accounts. Any gain or loss is included in income.
The following useful lives are used to provide for depreciation and
amortization:
Lives In Years
Computer equipment.................. 3
Office furniture and fixtures....... 7
Leasehold improvements.............. 2-4
Purchased software.................. 3-5
Other............................... 3
e. Goodwill and Other Acquisition-Related Intangibles: Goodwill is
recorded when the consideration paid for acquisitions exceeds the fair
value of net tangible and identifiable intangible assets acquired.
Other identifiable intangibles include assets such as the acquired
workforce. Goodwill and other acquired intangibles are amortized on a
straight-line basis over the periods indicated below. During fiscal
2001 the Company acquired 575,000 shares of XyEnterprise from Tudor
Trust (see Note 16). The Company accounted for this transaction as an
acquisition of minority interest and recorded goodwill of approximately
$1,616,000.
Net goodwill and other intangibles at March 31, 2001, and 2000, were as
follows:
Life in Years 2001 2000
------------- ---- ----
Goodwill............. 10 $1,697,919 ---
Other Intangibles.... 7 53,158 ---
----------- ---
$1,751,077 ---
========== ===
The total balances presented above are net of total accumulated
amortization of $22,621 at March 31, 2001.
f. Impairment of Long-Lived Assets: Long-lived assets to be held and used
are reviewed for impairment whenever circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company
assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with those assets against their
respective carrying amounts. Impairment, if any, is based on the excess
of the carrying amount over the fair value of those assets. Long-lived
assets to be disposed of are reported at the lower of the carrying
amount or fair value, less cost of disposal. No impairment charges have
been recognized during the years ended March 31, 2001, and 2000. See
Note 1(h).
g. Revenue Recognition: Revenue is recognized in accordance with Statement
of Position No. 97-2 ("SOP 97-2") "Software Revenue Recognition" as
amended by "SOP 98-9" "Software Revenue Recognition." XyEnterprise's
systems revenue is derived from licensing of its page composition,
content management and third party software. Service revenues include
maintenance and support, consulting and training services. Revenue from
license arrangements is recognized upon shipment of the product if
collection of the resulting receivable is probable and remaining vendor
obligations are insignificant. The strategy of providing customers with
complete integrated publishing solutions may result in bundling of
services with software and recognition of software licensing revenue
and services over the length of the implementation in conformity with
Accounting Research Bulletin No. 45, "Long-Term Construction Type
Contracts" using the relevant guidance of SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production Type
Contracts." Service revenues include maintenance and support,
consulting, and training services. Payments received in advance of
delivery are recorded as deferred revenue in the consolidated balance
sheet until goods or services are delivered. Revenues from annual
maintenance contracts are recognized ratably over the duration of the
related contracts. Revenue for consulting and training is recognized
when the services are performed and collectibility is deemed probable.
32
h. Software Development Costs: Costs for research, design, and development
of software for sale to others incurred prior to the achievement of
"technological feasibility" are charged to expense as incurred. The
Company capitalizes certain software costs in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
The Company's policy is to amortize capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated
life of the product including the period being reported on. It is
possible that the estimate of anticipated future gross revenues, the
remaining estimated economic life of the product or both could vary
from management's estimates. The Company periodically reviews
capitalized software to report such capitalized software at the lower
of unamortized cost or the realizable value. Any adjustments resulting
from this analysis are included in results of operations. During the
year ended March 31, 1999, the Company recorded a charge of $410,000 to
reduce its capitalized software development costs to estimated net
realizable value.
i. Earnings (Loss) Per Common Share: The Company reports earnings (loss)
per common share in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". This statement requires
the presentation of basic and diluted earnings per share. Basic
earnings per share excludes the dilutive effect of potential common
shares and is computed by dividing income or loss available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if stock options and warrants were
exercised, or preferred stock or debt were converted into common stock,
unless their effect would be antidilutive. The Company has restated all
share references due to the 1 for 5 reverse stock split effective
October 20, 1998.
j. Foreign Currency: The Company has determined that the United States
dollar is its functional currency for all entities. Accordingly, all
balance sheet accounts of foreign operations are remeasured into United
States dollars. The results of operations are measured at rates in
effect during the periods in which transactions occur. Transaction
gains and losses are recorded to the statement of operations.
Transaction gains and losses are not material.
k. Comprehensive Income: For the periods presented, the Company's
comprehensive income and loss, as defined by SFAS No. 130, "Reporting
Comprehensive Income", is equal to its net income and loss.
l. Fair Value of Financial Instruments: The Company's financialinstruments
include cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities and current and noncurrent debt
obligations. The carrying amounts for short-term financial instruments
approximate fair value due to their short maturities. The carrying
value of long-term obligations is considered to approximate their fair
value due to the rates approximating what the Company believes it could
currently secure for the relative risks of the debt.
33
m. Income Taxes: The Company accounts for income taxes using the asset and
liability approach for financial accounting and reporting. Deferred
income tax assets and liabilities are computed for differences between
the financial statement basis and the income tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future. Deferred income tax computations are based on enacted laws and
rates applicable to the years in which the differences are expected to
affect taxable income. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of the available evidence, it is more
likely than not that these benefits will not be realized.
n. Concentration of Credit Risk: Financial instruments that potentially
subject the Company to concentrations of credit risk consist
principally of trade receivables. XyEnterprise sells its products and
services primarily to major corporations and systems integrators that
serve a wide variety of U.S. and foreign markets. The practice of
establishing reasonable credit lines limits risk. The Company maintains
an allowance for doubtful accounts and believes it is adequate to cover
potential credit risks. The loss of a major customer or a delay in an
order by such customer may have a material adverse effect on
XyEnterprise's business, operating results and financial condition.
o. Use of Estimates: In conformity with accounting principles generally
accepted in the United States of America, management of the Company has
made a number of estimates and assumptions relating to the reporting of
assets, liabilities, revenues and expenses to prepare these
consolidated financial statements. Some of the more significant
estimates include allowances for doubtful accounts and note receivable,
estimated useful lives and the related depreciation and amortization of
long-lived assets and the deferred tax asset valuation allowance.
Actual results could differ from these estimates. The allowance for
doubtful accounts receivable recorded in these consolidated financial
statements relates to XyEnterprise, which recorded net bad debt
recoveries through its allowance for doubtful accounts of approximately
$69,000 and $176,000 for the years ended March 31, 2001 and 2000,
respectively, and no movement in this account for the year ended March
31, 1999. In June 2000, XyEnterprise entered into a loan agreement with
HyperVision, Ltd. ("HVL") and advanced $500,000 to HVL for the
completion of the development of its product, WorX. As of March 31,
2001, Company and XyEnterprise management determined that the loan was
impaired due to HVL's limited financial resources and limited revenue
growth of its primary product. Accordingly, a reserve for the principal
amount of the outstanding note was recognized.
p. Accounting for Stock-Based Compensation: The Company accounts for
stock-based compensation to employees and directors under the
intrinsic-value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related interpretations. In accordance with this method, no
compensation expense is recognized in the financial statements in
connection with stock awards to employees and directors provided that,
as of the grant date, all terms associated with the award are fixed and
the fair value of the Company's stock, as of the grant date, is not
greater than the amount an employee must pay to acquire the stock.
The Company accounts for grants to nonemployees or directors not in
connection with their service as directors of the Company under SFAS
No. 123, "Accounting for Stock-Based Compensation," and Emerging Issues
Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." All transactions in which
services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Disclosures of pro forma operating results had the Company prepared its
consolidated financial statements in accordance with the
fair-value-based method, as stated in SFAS No. 123, have been included
in Note 10.
34
q. Minority Interest in Subsidiary: Minority interest in subsidiary
represents the minority stockholders' share of XyEnterprise's income or
loss and the liquidation preference value, $4,311,811, of Series A
convertible preferred stock issued by XyEnterprise during fiscal 2001,
as well the carrying value of minority common interest of $384,468. The
holders of XyEnterprise's Series A convertible stock are entitled to
receive dividends pro rata with the holders of shares of XyEnterprise's
common stock through February 15, 2003, if any such dividends are
declared. After February 15, 2003, each holder of XyEnterprise's Series
A convertible preferred stock shall receive quarterly dividends, which
shall accrue at eight percent per annum.
r. Subsidiary Stock Issuances: The Company recognizes gains from
subsidiary common stock in fiscal 2000 issuances in income in
accordance with Staff Topic 5(h), "Accounting for Sales of Stock by a
Subsidiary," issued by the United States Securities and Exchange
Commission. During the fiscal year ended March 31, 2001, Tudor Trust,
the majority stockholder of the Company, converted an outstanding loan
of $1,850,000 owed by XyEnterprise into 649,123 shares of XyEnterprise
common stock at the price of $2.85 per share, the price at which shares
were sold to third parties during February 2000; however, since this
was a voluntary action by Tudor Trust, a related party, no gain was
recognized. During the fiscal year ended March 31, 2000, the Company's
subsidiary, XyEnterprise issued 4,154,386 shares of common stock. This
included the required conversion into 1,400,000 shares of XyEnterprise
common stock of the minority interests that were previously outstanding
in the form of preferred stock of XyEnterprise.
The other newly-issued shares of XyEnterprise common stock in fiscal
year 2000 consisted of; (a) the required conversion of a bridge loan of
$850,000 owed by XyEnterprise into 298,246 shares of XyEnterprise
common stock, at a price of $2.85 per share and (b) the completion of a
private placement of 2,456,140 shares of XyEnterprise common stock,
resulting in net proceeds (after costs of the placement) to
XyEnterprise of $6,700,000, or $2.73 per share. The Company's
proportionate interest in XyEnterprise decreased from 80% (after the
conversion of the preferred stock) to 57.4% (after the subsequent
conversion of the bridge loan and the private placement). As a result
of the increase in equity of XyEnterprise, the Company recognized a
gain of $5,084,694.
s. New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that all
derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133, as
amended, requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. The accounting provisions for qualifying hedges allow
gains and losses related to a hedged item recognized in the income
statement to be offset by the related derivative's gain and losses, and
requires the Company to formally document, designate ,and assess the
effectiveness of transactions that qualify for hedge accounting. The
Company adopted this statement on April 1, 2001. The adoption of SFAS
No. 133, as amended, did not have any impact on the Company's financial
position or results of operations.
On June 29, 2001, FASB concluded its voting process on SFAS No. 141,
"Business Combinations" and this statement will be issued in July 2001.
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Goodwill
and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect
that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The Company
is required to implement SFAS No. 141 on July 1, 2001 and it has not
determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
35
On June 29, 2001, FASB concluded its voting process on SFAS No. 142,
"Goodwill and Other Intangible Assets" and this statement will be
issued in July 2001. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The Company
is required to implement SFAS No. 142 on April 1, 2002 and it has not
determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition, which
outlines the basic criteria that must be met to recognize revenue and
provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed
with the SEC. The Company adopted SAB 101 as of April 1, 2000 and it
did not have any impact on the Company's financial position or results
of operations.
t. Reclassifications: Certain reclassifications have been made to prior
year financial statement balances to conform to the 2001 presentation.
2. Property and Equipment
Property and equipment consists of the following as of March 31, 2001
and 2000:
March 31, 2001 March 31, 2000
------------- --------------
Computer hardware............................ $ 1,305,710 $ 1,063,075
Office furniture and fixtures................ 126,692 124,350
Leasehold improvements....................... 447,954 444,428
Purchased software........................... 635,151 445,182
Other........................................ 9,333 9,333
------------- -------------
2,524,840 2,086,368
Accumulated depreciation and amortization.... (1,916,310) (1,538,816)
------------ ------------
Net property and equipment................... $ 608,530 $ 547,552
============ ===========
Depreciation and amortization expense for property and equipment was
approximately $377,000, $386,000 and $452,000 for the years ended March
31, 2001, 2000 and 1999, respectively.
3. Other Current Assets
Other current assets consist of the following as of March 31, 2001 and
2000:
March 31, 2001 March 31, 2000
------------- ---------------
Costs of projects in-progress..... $141,080 $8,124
Prepaid insurance................. 116,730 56,177
Prepaid maintenance............... 107,822 95,874
Prepaid royalties................. 79,136 21,095
Prepaid rent...................... 54,590 --
Prepaid interest.................. 137,705 3,362
Prepaid trade shows............... 33,665 13,918
Other............................. 239,495 161,961
--------- ---------
$910,223 $360,511
======== ========
36
Debenture issuance costs amortized and charged to expense were $7,000, $4,000,
and $3,000 in fiscal 2001, 2000, and 1999, respectively. The accumulated
amortization of the Debenture issuance costs was $788,000 and $781,000 at March
31, 2001 and 2000, respectively.
4. Other Assets
Other assets (net of accumulated amortization) consists of the following as of
March 31, 2001 and 2000:
March 31, 2001 March 31, 2000
------------- --------------
Capitalized Software Costs....... $137,166 $254,333
Deposits......................... 55,385 64,743
Identifiable Intangibles......... 53,158 ---
Other............................ 4,297 7,760
---------- -----------
Totals........................... $250,006 $326,836
======== ========
The Company capitalized $125,184, $0, and $262,000 during the years ended March
31, 2001, 2000, and 1999, respectively, as a result of the significant
enhancements to its product line. Capitalized software costs amortized and
charged to expense were approximately $242,000, $225,000 and $262,000 for the
years ended March 31, 2001, 2000, and 1999 respectively. Capitalized software
costs are presented net of accumulated amortization of approximately $663,000
and $421,000 at March 31, 2001 and 2000, respectively. Accumulated amortization
of identifiable intangibles was approximately $13,000 at March 31, 2001 and $0
at March 31, 2000. XyEnterprise continually evaluates the future benefit of its
capitalized software costs. During fiscal 1999, XyEnterprise determined that
certain costs exceeded their net realizable value due to new software
technologies developed and released by XyEnterprise. Accordingly, XyEnterprise
wrote down these capitalized software costs by $410,000 in fiscal 1999. There
were no write downs in fiscal 2001 and 2000.
5. Notes Payable to Stockholder
Azul Holdings Inc. has a line of credit with Tudor Trust ("Tudor Trust"), the
majority stockholder of the Company. The grantor, sole trustee and sole current
beneficiary of Tudor Trust, also serves as Chairman of the Board of Directors
and President of Azul Holdings Inc., Chairman of the Board of Directors of
XyEnterprise, and Chairman of NanoFrames. The line, which was payable on March
31, 2001, and which has been extended until March 31, 2002, is collateralized by
the Company's stock in XyEnterprise and has been used for working capital and
general business purposes. Interest on the line of credit is payable on March
31, 2001 in cash; however, Tudor Trust has had the option to receive interest on
a quarterly basis after January 1, 1999, payable in shares of common stock based
on the fair market value as determined at the end of each quarter. As part of
the amendment to extend the maturity date of the Company's credit facility to
March 31, 2002, Tudor Trust and the Company agreed that the interest payable
equal to $1,621,024 as of March 31, 2001, be added to and become part of the
principal sum of the indebtedness, and agreed that interest for subsequent
periods would similarly be added to and become part of the principal, in the
event that Tudor Trust does not elect to receive such interest in the form of
common stock of the Company. Since the initial establishment of the credit line
in 1992, there have been numerous amendments affecting the maximum loan amount
among other terms and provisions.
In December 1999, the Company and Tudor Trust agreed to increase the line of
credit to $12,327,000. Subsequent amendments and agreements between Azul and
Tudor Trust increased the line to $12,500,000 at March 31, 2000, exclusive of
the separate $5,000,000 loan facility described below, and changed the maturity
date to March 31, 2002. Tudor Trust and the Company also agreed that the
interest payable of $1,871,000 for the period from July 1, 1998 through March
31, 2000 would be paid by the issuance to Tudor Trust of 1,142,890 shares of the
common stock of the Company and agreed that interest for subsequent periods
would, at the option of Tudor Trust, be paid in cash or in shares of the common
stock of the Company valued for such purposes based upon their public trading
market price at the end of each quarterly interest payment period. The Company
recorded a charge to earnings during the current fiscal year of $2,793,000 as a
result of the settlement of this interest obligation by the issuance of common
stock.
37
During June 2000 Tudor Trust agreed to provide a $5,000,000 loan facility for
the Company to be utilized for the making of loans to or investments in other
entities. The loan bears interest at 8% per annum, is due March 31, 2002, and is
secured by a pledge of all of the assets of the Company on the same basis as the
prior indebtedness of the Company to Tudor Trust. The additional loan is
convertible into the common stock of the Company at the option of Tudor Trust at
a price of $3.25 per share. The Company has utilized such loan facility to make
loans to PlazaBlue Inc. of $2,450,000. PlazaBlue was a large internet art,
antiques and fine collectibles portal. PlazaBlue was formed through the merger
of Antique Networking, Inc. and Sloan's Auction Galleries ("Sloan's"). Sloan's
is a 150-year old Washington D.C. based auction house specializing in paintings
and sculpture, jewelry, silver, American and European furniture, decorate arts,
rugs and rare books. PlazaBlue operated in both the e-commerce environment and
in the brick and mortar auction industry. As a result of PlazaBlue becoming in
default on the repayment of the loan, Azul participated in a foreclosure sale of
the assets of PlazaBlue and, at the election of Azul, subsequently sold its
interest in the assets to Tudor for the original principal amount of the loan
plus accrued interest to the date of sale, March 31, 2001.
On December 31, 1998, XyEnterprise and Tudor Trust entered into a Loan Agreement
providing XyEnterprise with a $1,000,000 line of credit which was amended to
$2,400,000 and subsequently reduced to $1,850,000 upon conversion of $550,000
into XyEnterprise common stock. The line of credit was for working capital and
general business purposes. The indebtedness was converted into 649,123 common
stock of XyEnterprise during August 2000, at the option of the note holder. As
of March 31, 2001, the Company had an outstanding loan balance of $14,308,000 of
the $17,500,000 available under the credit lines with the first $5,000,000 of
the principal balance outstanding bearing interest at 6% per year and the
remaining principal balance bearing interest at 8% per year.
6. Other Current Liabilities
Other current liabilities consists of:
March 31, 2001 March 31, 2000
------------- --------------
Interest payable on debentures................................ $ 791,076 $ 711,276
Dividends payable on Series B convertible preferred stock..... 492,568 398,448
Other......................................................... 174,365 169,349
------------ -----------
$1,458,009 $1,279,073
7. Current Maturities of Long-Term Debt
Long-term debt consists of:
March 31, 2001 March 31, 2000
------------- ---------------
Note payable to shareholder................................... $ --- $1,850,000
6% Convertible Subordinated Debentures........................ 1,330,000 1,330,000
15% promissory notes due fiscal 1996.......................... 176,589 153,556
4% promissory notes, due fiscal 1998 and 1999................. 388,500 388,500
---------- -----------
1,895,089 3,722,056
Current maturities of long-term debt.......................... (1,895,089) (1,872,056)
--------- -----------
Long-term debt................................................ $ --- $1,850,000
============= ==========
38
In May 1987, the Company issued an aggregate $25,000,000 principal amount of 6%
Convertible Subordinated Debentures due 2002 (the "Debentures") convertible into
common stock at a conversion price of $112.50 per share. Interest on the
Debentures is payable annually and the Debentures may be called by the Company
under certain conditions. During fiscal 1992, the Company began a program to
restructure its financial position specifically relating to the Debentures. From
March 10, 1992 to September 30, 1996, the Company completed restructuring
transactions pursuant to which the holders of a total of $19,035,000 aggregate
principal amount of Debentures generally exchanged Debentures for a combination
of unsecured, unsubordinated promissory notes of the Company bearing interest at
15% per year and shares of common stock. Between September 30, 1996 and December
31, 1998, the Company completed restructuring transactions pursuant to which the
holders of a total of $2,020,000 aggregate principal amount of Debentures
generally exchanged Debentures for shares of common stock. As of March 31, 2001,
a total of $1,330,000 principal amount of Debentures remained outstanding. The
Company may seek to restructure the remaining Debentures, but there can be no
assurance that it will do so.
The Company did not make the interest payment due on the Debentures on May 5, of
the years 1992 through 2001. As of March 31, 2001, and 2000, the cumulative
unpaid interest due on the Debentures totaled approximately $791,000 and
$711,000, respectively. Under the terms of the Indenture covering the
Debentures, the Trustee or the holders of no less than 25% of outstanding
principal amount of the Debentures have the right toaccelerate the maturity date
of the remaining Debentures. As of March 31, 2001, no such acceleration had
occurred or been threatened.
As of March 31, 1998, the Company had completed restructuring transactions
pursuant to which the holders of 15% Promissory Notes in the aggregate principal
amount of $5,709,000 with accrued interest of $2,353,000 generally exchanged 15%
Promissory Notes (including all rights to receive any interest accrued thereon)
for a combination of unsecured, unsubordinated promissory notes of the Company
bearing interest at 4% per year, shares of common stock and shares of Series B
preferred stock. As of March 31, 2001, 15% Promissory Notes in an aggregate
principal amount of $60,000 with accrued interest of approximately $117,000 were
overdue. The Company may seek to restructure the remaining 15% Promissory Notes,
but there can be no assurance that it will do so.
As of March 31, 1999, the Company had completed restructuring transactions
pursuant to which the holders of 4% Promissory Notes in the aggregate principal
amount of $4,974,000 generally exchanged 4% Promissory Notes for shares of
common stock plus accrued but unpaid interest. As of March 31, 2001, 4%
Promissory Notes in an aggregate principal amount of $388,500 with accrued
interest of $42,000 were overdue. The Company may seek to restructure the
remaining 4% Promissory Notes, but there can be no assurance that it will do so.
The Company continues to negotiate, in good faith, restructuring transactions
with as many of the remaining holders of Debentures, 15% Promissory Notes and 4%
Promissory Notes as possible. Tudor Trust has made an offer to certain holders
of Debentures, 15% Promissory Notes and 4% Promissory Notes to purchase such
securities at 10% of their face amount. Tudor Trust has agreed to reduce the
Company's liability with respect to such securities to the purchase price paid
by Tudor Trust. In June 1999, Tudor provided the Company with $372,000 of notes
which the company retired. The Company recognized an extraordinary gain of
$353,000 in fiscal 2000 as a result of this extinguishment of debt.
Approximately 96% of the Debentures have been restructured but the Company has
been unable to identify the holders of the remaining Debentures. The Company can
give no assurance about the outcome of these restructuring and repurchasing
efforts. The Company does not expect the matters to be resolved in the near
future.
8. Restructuring
On December 31, 1998, the Company completed a corporate restructuring plan (the
"Restructuring") pursuant to which, among other things, substantially all of the
assets of the Company's publishing and content management business were
transferred to XyEnterprise in exchange for shares of common stock of
XyEnterprise, representing an 87% equity interest while the majority of its
liabilities, including obligations under its line of credit with Tudor Trust,
remained with Azul Holdings Inc. As described in Note 5 to the Consolidated
Financial Statements, the Company's credit line from Tudor Trust has been
amended. In addition, Tudor Trust converted $1,750,000 of the outstanding
indebtedness under the Azul Holdings line of credit into 175,000 shares of the
Company's Series C preferred stock, which are convertible into the Company's
common stock.
39
An additional $5,000,000 of the outstanding indebtedness under the Company's
line of credit became convertible into shares of Series C preferred stock in
June 1999 at the option of Tudor Trust at the conversion ratio of $10.00 per
share. Tudor Trust has also surrendered for cancellation all of its common stock
purchase warrants, covering an aggregate of 4,956,000 shares of the Company's
common stock at various exercise prices.
Tudor Trust initially provided XyEnterprise with a $1,000,000 line of credit, as
well as invested $1,750,000 to purchase 1,400,000 shares of Series A preferred
stock of XyEnterprise. In fiscal 2000, XyEnterprise reached an agreement with
Tudor Trust to amend the line of credit to increase the amount available
thereunder to $2,400,000, which was subsequently reduced to $1,850,000 upon
conversion of $550,000 into common stock. The notes were converted during August
2000 at the option of the note holder into common stock of XyEnterprise at a
price of $2.85 per share. The Series A preferred stock was converted to common
stock of XyEnterprise on a one-for-one basis, as a requirement of the private
placement completed by XyEnterprise in February 2000.
9. Income Taxes
For fiscal years 2001, 2000, and 1999 the Company was not required to provide
for income taxes due to operating losses and utilization of net operating loss
carryforwards. The Company was not required to make alternative minimum tax
payments in fiscal 2001, 2000, and 1999.
The income tax effects of temporary differences that give rise to significant
portions of the Company's net deferred assets are as follows:
March 31, 2001 March 31, 2000
------------- --------------
Deferred tax assets:
Net operating loss carryforwards............................ $24,403,000 $22,705,000
Stock warrant interest expense 160,000 ---
Tax credit carryforwards.................................... 1,175,000 1,315,000
------------ -------------
25,738,000 24,020,000
Deferred tax liability:
Investment in subsidiary principally attributable to
gain on capital transactions of subsidiary................ (1,932,000) (1,932,000)
Valuation allowance............................................. (23,806,000) (22,088,000)
------------ ------------
Net deferred tax asset $ ---- $ ----
=================================
The Company has recorded a full valuation allowance against the excess of its
deferred tax assets over its deferred tax liability to reflect uncertainties as
to the realization of these deferred tax assets. The valuation allowance
increased by $1,718,000, $358,000, and $37,000 in 2001, 2000, and 1999,
respectively.
As a result of XyEnterprise's issuance of additional common stock to unrelated
third parties during the fiscal year ended March 31, 2000, it can no longer be
included in a consolidated federal income tax return with Azul (commencing with
the date of the stock issuance). As of March 31, 2001, XyEnterprise has
approximately $10,100,000 of net operating loss carryforwards which
predominately expire in fiscal 2019 through 2021. These net operating losses
will be available for utilization only by XyEnterprise on its separate income
tax returns in future periods and not against future income of Azul.
40
As of March 31, 2001 Azul has $55,520,000 of net operating loss carryforwards
expiring at various dates from fiscal 2005 through 2020, investment tax credits
of $10,000 expiring in fiscal 2002 and research and development credits of
$1,165,000 expiring at various dates from fiscal 2002 to fiscal 2009. These net
operating losses and credits will be available for utilization only by Azul on
its separate income tax returns in future periods and not against future income
of XyEnterprise.
Under Federal tax law, certain changes in ownership or classification of debt of
Azul or XyEnterprise, which may not be within either company's control, may
restrict future utilization of these carryforwards.
41
10. Stock Option Plans
The Company's 1982 Stock Option Plan expired on May 5, 1992. No options were
granted under the 1982 Stock Option Plan after March 31, 1992. Under the 1982
Stock Option Plan, incentive stock options were granted at a price greater than
or equal to fair market value at the date of grant. Currently, all options
outstanding are vested. Options expire ten years subsequent to award. There were
options to purchase 10,903 shares of common stock outstanding under the 1982
Stock Option Plan at March 31, 2001.
During fiscal 1992 the Board adopted the 1992 Stock Option Plan for which
200,000 shares of common stock were reserved. The 1992 Stock Option Plan was
approved by the Company's stockholders at the Company's 1992 Annual Meeting of
Stockholders. Under the 1992 Stock Option Plan, incentive stock options are
granted at a price greater than or equal to fair market value at the date of
grant. Generally, options become exercisable at a rate of 25% per year over a
four year period. Options expire ten years subsequent to award. At the date of
termination, an employee's unvested options are canceled and any vested options
are canceled after 90 days. At the 1994 Annual Meeting of Stockholders, the
stockholders of the Company approved an amendment to the Company's 1992 Stock
Option Plan increasing the authorized number of options that may be granted from
200,000 to 400,000. Options issued under the 1992 Stock Option Plan remain under
the terms of such plan. There were options to purchase 240,763 shares of common
stock outstanding under the 1992 Stock Option Plan at March 31, 2001. During
fiscal 1998, the Board adopted the 1997 Stock Incentive Plan for which 400,000
shares of common stock are reserved. No options had been granted under the 1997
Stock Incentive Plan at March 31, 2001.
Under the 1982 Stock Option Plan and the 1992 Stock Option Plan, options were
exercisable for 211,566, 168,469 and 140,072 shares of common stock at March 31,
2001, 2000 and 1999, respectively. At March 31, 2001, 2000, and 1999, options
for the purchase of 548,334, 504,902, and 493,992 shares of common stock,
respectively, were available for future grants under the 1992 Stock Option Plan
and the 1997 Stock Incentive Plan.
On October 21, 1992, the 1992 Director Stock Option Plan was approved by
stockholders of the Company. Under this Plan, options to purchase up to a total
of 30,000 shares of common stock may be granted to outside directors of the
Company. Each outside director who is initially elected to the Board of
Directors may be granted an option for 4,000 shares of common stock, at an
exercise price equal to the fair market value of the common stock on the date of
grant. In general, an option holder may exercise his option, to the extent
vested, only while he is a director of the Company and for up to three months
thereafter. In connection with the adoption of the 1992 Director Stock Option
Plan, the Company terminated the 1989 Director Stock Option Plan. Under the 1992
Director Stock Option Plan, options to purchase an aggregate of 4,000, 12,000,
and 12,000 shares of common stock were outstanding at March 31, 2001, 2000 and
1999, respectively. At March 31, 2001, 2000 and 1999, options for the purchase
of 3,600, 12,000 and 12,000 shares of common stock, respectively, were
exercisable. At March 31, 2001, 2000 and 1999, there were 26,000, 18,000, and
18,000 options, respectively, for the purchase of shares of common stock
available for future grant under the Plan.
In June, 2000, the Company issued options at fair market value for 60,000 shares
of common stock to its Directors immediately vested with a term of five years
unless otherwise terminated due to the individual no longer continuing to serve
as a director. Options for 10,000 shares of common stock at fair market value
were issued during May 2000 to an officer of the Company vesting over a one year
period and having a three year term.
The following sets forth certain information relating to the stock options
described above for the years ended March 31, 2001, 2000 and 1999:
42
Weighted-Average Exercise
Shares Price
------ -----
Options outstanding as of March 31, 1998 352,780 $2.60
Granted 81,600 0.82
Canceled (107,629) 2.70
Exercised --- ---
-------------
Options outstanding as of March 31, 1999 326,751 2.10
Granted 29,000 1.80
Canceled (23,735) 2.75
Exercised (40,723) 1.93
----------
Options outstanding as of March 31, 2000 291,293 2.01
Granted 70,000 3.32
Canceled (32,177) 1.18
Exercised (3,450) 1.03
-----------
Options outstanding as of March 31, 2001 325,666
========
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-average Weighted-Average
Range of Exercise Prices Number Remaining Contractual Weighted-average Number Exercisable Exercise Price
Outstanding Live Exercise Price
$0.75 - $1.45 63,500 6.50 $0.93 37,350 $0.99
1.50 - 2.45 30,257 1.28 $1.66 30,257 $1.66
2.50 - 3.45 205,390 4.22 $2.72 191,040 $2.74
3.50 - 4.45 11,500 3.66 $3.79 6,500 $3.82
4.50 - 5.00 15,019 4.38 $4.77 15,019 $4.77
-------- --------
$0.75 - $5.00 325,666 4.38 $2.40 280,166 $2.52
======= =======
The Company has adopted the disclosure provisions of SFAS 123 "Accounting for
Stock-Based Compensation" and has applied APB Opinion 25 and related
interpretations in accounting for its employee and director plans. The fair
value of each option granted during fiscal 2001, 2000 and 1999 is estimated on
the date of the grant using the Black-Scholes pricing model with the following
weighted average assumptions:
Fiscal 2001 Fiscal 2000 Fiscal 1999
Dividend yield........................................... 0 0 0
Expected volatility...................................... 80% 80% 100.0%
Risk-free interest rate.................................. 6.3% 6.0% 5.3%
Expected life (years).................................... 4.7 10.0 8.0
Weighted-average fair value of options granted at or
above fair value during:
Fiscal 2001............................................ $1.96
Fiscal 2000............................................ $ .93
Fiscal 1999............................................ $ .58
43
Had compensation cost for fiscal 2001, 2000, and 1999 been determined by
charging the cost of the options to expense based on the computations described
above, the Company's net profit (loss) allocable to common stockholders and net
loss per share would approximate the pro forma amounts below:
Net Income (Loss) Basic/Diluted Net
Allocable to Common Income (Loss) Per
Stockholders Share
As reported:
Fiscal 2001............................................ $(7,925,840) $ (2.12)
Fiscal 2000............................................ 700,744 .24/.10
Fiscal 1999............................................ (8,800,951) (3.08)
Pro Forma:
Fiscal 2001............................................ $(8,153,138) $ (2.18)
Fiscal 2000............................................ $585,708 .20/.06
Fiscal 1999............................................ (9,002,168) (3.15)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards made prior
to fiscal 1996. Additional awards in future years are anticipated.
11. Employee Stock Ownership Plan
In fiscal 1990, the Company created the Azul Holdings Inc. Employee Stock
Ownership Plan and Trust (the "Trust") and entered into a Term Loan Agreement
with the Trust whereby the Trust borrowed $1,800,000 from the Company and paid
the proceeds to the Company to purchase 80,000 shares of the Company's common
stock at $22.50 per share. The loan was fully repaid during fiscal 1997.
Currently no new participants are being admitted to the Plan. No payment was
required and the Company incurred no charges to operations for contributions to
the Trust in fiscal 2001, 2000 and 1999. The Company has applied to the Internal
Revenue Service for approval to terminate the Plan, and, upon approval, the
Company intends to distribute the shares attributable to each participant.
12. Quarterly Financial Data (Unaudited)
The Company's interim financial information for the quarterly period ended June
30, 2000, has been reclassified to include in other income and expenses, net, a
loss of $2,794,000 incurred in settlement of an accrued interest liability to a
stockholder. This loss was previously classified as an extraordinary item. A
summary of significant effects of the reclassification and the amount of net
loss allocable to common stockholders and loss per share, which did not change,
is as follows:
Shown in thousands of US$ (except per share amounts)
For the quarter ended June 30, 2000 As previously reported As reclassified
Other income (expense) $ (396) $(3,190)
Loss before extraordinary item (1,250) (4,044)
Net loss allocable to common stockholders (4,067) (4,067)
Basic and diluted loss per share $(1.23) $(1.23)
The Company's interim financial information for the quarterly period ended
September 30, 2000, has been restated to reverse a previously recorded $900,000
gain on a capital transaction of a subsidiary. Management has subsequently
determined that the subsidiary's transaction resulting from the voluntary
actions by a related party did not meet the Company's criteria for gain
recognition. A summary of the significant effects of the restatement is as
follows:
44
Shown in thousands of US$ (except per share amounts)
For the quarter ended September 30, 2000 As previously reported As restated
Other income (expense) $ 583 $(317)
Loss before extraordinary item (593) (1,493)
Net loss allocable to common stockholders (616) (1,516)
Basic and diluted loss per share $(0.15) $(0.39)
45
The following is a summary of selected quarterly financial information for
each of the quarters in the years ended March 31, 2001 and 2000:
Shown in thousands of US$ (except per share
amounts.)
Quarters Ended
------------ ---------------------- ---------- -------------
--------------- --------------- -------------- -------------
6/30/00 9/30/00 12/31/00 3/31/01
--------------- --------------- -------------- -------------
(Reclassified) (Restated)
--------------- --------------- -------------- -------------
Fiscal Year 2001
Revenues $ 2,093 $ 1,659 $ 2,315 $ 2,851
Cost of sales 1,180 1,056 1,219 1,412
Operating Expenses 2,345 2,561 2,690 3,380
Minority interest share of loss 578 782 676 1,350
Other income (expense) (3,189) (317) (330) (457)
Net loss allocable to common stockholders $(4,067) $(1,516) $(1,272) $(1,071)
Weighted average number of shares outstanding 3,297 3,884 3,884 3,899
Basic loss per share $(1.23) $(0.39) $(0.33) $(0.27)
Diluted loss per share $(1.23) $(0.39) $(0.33) $(0.27)
Quarters Ended
-----------------------------------------------------------
6/30/99 9/30/99 12/31/99 3/31/00
--------------- --------------- -------------- -------------
Fiscal Year 2000
Revenues $2,624 $2,330 $2,293 $2,162
Cost of sales 1,438 1,417 1,217 1,307
Operating Expenses 2,247 2,299 2,116 2,368
Minority interest share of loss 802 948 --- 393
Other income (expense), net (including $5,085 of gain on
capital transactions of a subsidiary in the quarter
ended March 31, 2000) (429) (432) (449) 4,608
Income (loss) before extraordinary item (688) (870) (1,489) 3,488
Extraordinary item - gain on early extinguishment of debt 353 --- --- ---
Net income (loss) allocable to common stockholders $ (359) $ (893) $(1,512) $3,465
Weighted average number of shares outstanding 2,854 2,854 2,854 2,867
Basic earnings (loss) per share $(0.13) $(0.31) $(0.53) $1.21
Diluted earnings (loss) per share $(0.13) $(0.31) $(0.53) $0.35
13. Commitments and Contingencies
Azul maintains a lease for its offices on a month to month basis.
Lease Commitments - At March 31, 2001, the Company was committed under
operating leases, principally for office space. Certain leases required
the payment of expenses under escalation clauses. The primary
facilities lease is for an initial four-year term, ending January 31,
2002. In April 2001 the Company provided written notice to exercise an
option to extend the lease agreement through January 31, 2004.
46
Future minimum lease payments under all noncancelable leases as of March 31,
2001 are as follows:
Fiscal Year
2002..................................... $ 727,351
2003..................................... 135,266
2004..................................... 95,965
2005..................................... 47,982
2006 and thereafter...................... ---
----------------
Total.................................... $1,006,564
==========
Rental expense under all operating leases was approximately $561,000 and
$582,000 and $743,000 for the years ended March 31, 2000, 2000, and 1999
respectively. The Company received approximately $195,000 and $98,000 for the
years ended March 31, 2001 and 2000, respectively, under a sublease agreement
expiring in June 2001. The sublease income has been recorded as an offset to
operating rents in the consolidated statement of operations.
Contingencies
Azul has been advised that certain minority shareholders of PlazaBlue have
retained counsel for the purpose of possibly asserting a claim against Azul, the
president of Azul, Tudor Trust and one other person with respect to transactions
of such persons with PlazaBlue. As discussed under Item 1 above, Azul and Tudor
Trust made loans to PlazaBlue that subsequently became in default and resulted
in a foreclosure on the assets of PlazaBlue. Azul believes, based on the advice
of counsel after a review of the facts and circumstances related to the possible
claim, that the claim is without merit. Counsel for Azul has commenced
discussions with the potential claimants for the purpose of avoiding the claim.
However, there can be no assurance that a legal proceeding asserting the claim
will not be subsequently initiated against Azul.
14. Industry Segments and Operations by Geographic Areas
Sales to unrelated customers by geographic region for the years ended March 31,
2001, 2000 and 1999, were as follows:
2001 2000 1999
---- ---- ----
North America.......... $7,520,417 $7,980,680 $8,029,850
Western Europe......... 881,709 1,127,000 1,861,347
Asia/Pacific........... 516,302 301,187 664,000
----------- ----------- -------------
Total.................. $8,918,428 $9,408,867 $10,555,197
========== ========== ===========
The Company operates predominantly in one product segment, the development and
marketing of content management and publishing software. One customer accounted
for approximately 18% of revenues for the year ended March 31, 2000; no single
customer accounted for more than 10% of revenues for the years ended March 31,
2001, or March 31, 1999.
47
15. Earnings Per Share
The following table reconciles the numerator and the denominators of the basic
and diluted earnings per share (EPS) computations as shown on the Consolidated
Statements of Operations included in this report on Form 10-K.
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- -----------
Numerator:
Income (loss) before extraordinary item............... $(7,831,720) $ 441,374 $(8,706,831)
Less accrued preferred stock dividends................ 94,120 94,120 94,120
------------------ --------- --------------
Income (loss) available to common stockholders
before extraordinary item (numerator for basic
earnings (loss) per share)......................... (7,925,840) 347,254 (8,800,951)
Effect of dilutive securities:
Accrued preferred stock dividends.................. ---- 94,120 ----
Interest on notes payable to stockholder........... ---- 300,000 ----
------------------ --------- --------------
Numerator for diluted earnings (loss) per share
available to common stockholders after
assumed conversions.......................... (7,925,840) 741,374 (8,800,951)
Extraordinary item 353,490
Net income (loss) available to common ------------------ --------- --------------
stockholders after assumed conversions............. $(7,925,840) $1,094,864 $(8,800,951)
============ ========== ============
Denominator:
Weighted average shares (denominator for basic
earnings (loss) per share)......................... 3,741,235 2,857,247 2,854,283
--------- --------- ---------
Effect of dilutive securities:
Employee stock options............................. -- 168,469 --
Convertible preferred stock........................ -- 1,842,963 --
Convertible note payable to stockholder............ -- 5,300,000 --
---------------- --------- --------------
Dilutive potential common shares................... -- 7,311,432 --
----------------- --------- --------------
Denominator for diluted earnings (loss) per
share-adjusted weighted average shares after
assumed conversions............................... 3,741,235 10,168,679 2,854,283
========= ========== =========
Basic earnings (loss) per share:
Before extraordinary item................... $ (2.09) $ .15 $ (3.05)
Extraordinary item.......................... --- .12 ---
Accrued preferred stock dividends (.03) (.03) (.03)
----------------- ----------------- -----------------
Basic earnings (loss) per share............. $ (2.12) $ .24 $ (3.08)
================ ================ ==============
Diluted earnings (loss) per share:
Before extraordinary item................... $ (2.09) $ .08 $ (3.05)
Extraordinary item.......................... --- .03 ---
Accrued preferred stock dividends (.03) (.01) (.03)
------------------ ----------------- -----------------
Diluted earnings (loss) per share............. $ (2.12) $ .10 $ (3.08)
================ ================ ==============
Basic weighted average shares outstanding... 3,741,235 2,857,247 2,854,283
Diluted weighted average shares outstanding. 3,741,235 10,168,769 2,854,283
At March 31, 2001, the following antidilutive potential common shares were not
included in the diluted EPS calculation as a result of the net loss for the
period (i) options to purchase 63,500 shares of common stock, (ii) 229,131
shares of Series B Preferred Stock, (iii) 175,000 shares of Series C Preferred
Stock, and, (iv) 199,666 common equivalents as a result of certain debt to
equity transactions.
48
At March 31, 2000, the following antidilutive potential common shares were not
included in the diluted EPS calculation as a result of the net loss for the
period: (i) options to purchase 271,794 shares of common stock, (ii) 232,407
shares of Series B Preferred Stock, (iii) 175,000 shares of Series C Preferred
Stock, (iv) and 99,478 common equivalents as a result of certain debt to equity
transactions.
At March 31, 1999, the following antidilutive potential common shares were not
included in the diluted EPS calculation as a result of the net loss for the
period: (i) options to purchase 326,751 shares of common stock, (ii) 175,000
shares of Series C preferred stock (iii) 235,299 shares of Series B Preferred
Stock and (iv) 99,478 common equivalents as a result of certain debt to equity
transactions.
16. Convertible Preferred Stock
Azul is authorized under its certificate of incorporation to issue up to
25,000,000 shares of common stock, par value $.03 per share, and 3,000,000
shares of preferred stock, par value $1.00 per share. Preferred stock may be
issued in one or more series with such powers, preferences, relative rights,
qualifications, limitations and restrictions as designated by the board of
directors. As of March 31, 2001 and March 31, 2000, there were 300,000 and
1,000,000 shares designated and authorized for issuance as Series B preferred
stock and Series C preferred stock, respectively.
Series B - As discussed in Note 7, shares of Series B preferred stock have been
issued in connection with restructuring transactions whereby certain holders of
15% Promissory Notes have generally exchanged those notes for a combination of
4% Promissory Notes, shares of common stock and shares of Series B preferred
stock.
Series C - As discussed in Note 8, 175,000 shares of Series C preferred stock
were issued to Tudor Trust on December 31, 1998 in connection with the
conversion by Tudor Trust of $1,750,000 of outstanding indebtedness under Azul's
line of credit with Tudor Trust.
Conversion - Each share of Series B preferred stock and Series C preferred stock
may, at the option of the holder, be converted at any time into fully paid and
nonassessable shares of Azul common stock. The conversion rate in effect at any
time is the quotient obtained by dividing $10.00 by the applicable conversion
price. The conversion prices are subject to adjustment to avoid dilution of the
Series B preferred stock and Series C preferred stock. As of March 31, 2001and
March 31, 2000, the conversion prices for the Series B preferred stock and
Series C preferred stock were $1.00 and $25.00, respectively, and thus the
applicable conversion rates were two-for-five and ten-for-one, respectively.
Each outstanding share of Series B preferred stock shall be automatically
converted into shares of Azul common stock, based on the then-effective
conversion rate, if the average of the last reported sale price of the common
stock on the applicable trading system for the common stock exceeds $25.00 per
share over a period of 15 consecutive trading days. There are no automatic
conversion provisions for the Series C preferred stock.
Liquidation Rights - Upon any liquidation, dissolution, merger or winding up of
Azul, before any distribution or payment is made to the common stockholders the
holders of Series B preferred stock and Series C preferred stock are entitled,
on proportionate parity with each other, to liquidation preferences of $12.50
per share plus any accrued but unpaid dividends (the "Series B Liquidation
Preference") and $10.00 per share (the "Series C Liquidation Preference"),
respectively. After payment of the liquidation preferences, the holders of
Series B preferred stock and Series C preferred stock are not entitled to any
remaining assets available for distribution to stockholders.
Redemption - Azul may, at its option, to the extent legally permissible and upon
prior written notice redeem the outstanding shares of Series B preferred stock
or Series C preferred stock by paying the Series B Liquidation Preference or the
Series C Liquidation Preference, respectively.
49
Voting Rights - Holders of Series B preferred stock and Series C preferred stock
generally have the same voting rights as common stockholders on an as-if
converted basis. Except as provided by law, or as discussed below, or by
provisions establishing any other series of preferred stock, the holders of
Series C preferred stock and Series B preferred stock vote together with the
holders of common stock as a single class.
Azul cannot take action to amend, alter or repeal the preferences, special
rights, or other powers of the Series B preferred stock that affects adversely
the Series B preferred stock without the written consent or affirmative vote of
the holders of a majority of the then outstanding shares of Series B preferred
stock, voting as a separate class. Such action includes the authorization of any
shares of capital stock with preference or priority over the Series B preferred
stock as to the right to receive either dividends or amounts distributable upon
liquidation, dissolution or winding up of Azul.
The affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of Series C preferred stock is required to effect the
following actions by Azul: (i) any amendment, waiver or repeal of any provision
of the Azul certificate of incorporation or bylaws that affects adversely the
voting powers, preferences, or other special rights or privileges,
qualifications, limitations or restrictions of the Series C preferred stock,
(ii) any authorization or any designation of any new class or series of stock or
any other securities convertible into equity securities of Azul ranking on a
parity with or senior to the Series C preferred stock in right of redemption,
liquidation preference, voting or dividends, or any increase in the authorized
or designated number of any such new class or series, (iii) any issuance of
additional shares of Series C preferred stock, other than up to 500,000 shares
issued in connection with conversions of debt outstanding as of December 30,
1998, or in excess of an additional 64,701 shares of Series B preferred stock
after December 30, 1998, (iv) any declaration or payment of any dividends or any
distributions with respect to any securities of Azul, other than to holders of
Series B preferred stock as provided in the certificate of incorporation, (v)
any redemption, purchase or acquisition for value of any securities of Azul,
other than pursuant to redemption or conversion of the Series B preferred stock
or Series C preferred stock as provided in the certificate of incorporation, and
(vi) any liquidation, dissolution, winding up, sale, lease, license, assignment,
transfer or other disposition of all or substantially all of the assets of Azul
or of any subsidiary of Azul, or any share exchange, consolidation or merger
involving Azul or any subsidiary of Azul, or any reclassification or other
change of any stock or recapitalization of Azul.
Dividend Rights - The holders of Series B preferred stock are entitled to
receive, out of funds that are legally available, cumulative dividends of $.40
per share per year, payable quarterly. As of March 31, 2001 cumulative accrued
but unpaid dividends on the outstanding shares of Series B preferred stock
totaled $493,000. Holders of Series C preferred stock are not entitled to
receive any dividends. Azul cannot pay any dividends on shares of its common
stock until the holders of Series B preferred stock receive the dividends to
which they are entitled, or at any time while shares of Series C preferred stock
are outstanding.
17. Related Party Transactions
The Company was indebted to Tudor Trust at March 31, 2001 in the aggregate
principal amount of $14,308,000. During the year, Tudor Trust converted its
indebtedness from XyEnterprise in the principal amount of $1,850,000 to
approximately 649,000 shares of common stock of XyEnterprise. The President and
Chairman of the Board of Directors of the Company, Chairman of the Board of
Directors of XyEnterprise, and Chairman of NanoFrames is the sole trustee and
beneficiary of Tudor Trust. He holds the foregoing positions in those companies
without compensation. Through shares of common stock of the Company owned by
Tudor Trust and shares which Tudor Trust has the right to acquire by the
conversion of debt, Tudor Trust controls the Company. Tudor Trust also directly
holds a minority stock interest in XyEnterprise. The transactions among the
Company, XyEnterprise, and NanoFrames and between any of the entities and Tudor
Trust have been unanimously approved by the independent members of the Board of
Directors of each company with independent legal and financial advice.
Opportunities to be considered by Azul have generally been provided to Azul by
Tudor Trust ("Tudor"), the majority shareholder of the Company, as a result of
Tudor's existing investments in, and frequent control of, other companies. In
those instances investment by Azul are approved by its independent Directors
with independent legal and financial advice.
50
Other opportunities may be identified by the Company through various sources
including contacts of the Company's officers with other investment companies,
brokers, and by direct contact with principals of potential investees. As a
result of the foregoing, Azul entered into a loan agreement with PlazaBlue Inc.
("PlazaBlue") (formerly Antiqnet.com, Inc.), a company in which Tudor Trust had
a 70% ownership. During the fiscal year, the Company provided a $2,450,000 loan
to PlazaBlue Inc. Tudor Trust held a majority interest in PlazaBlue Inc. as a
result of stock owned and stock which it had a right to acquire through the
conversion of debt. As a result of default by PlazaBlue in the repayment of its
debts, the lenders, including Tudor Trust and Azul, foreclosed on the assets of
PlazaBlue. Effective March 31, 2001, the Company, at the election of Azul, sold
its entire interest the assets to Tudor Trust for its carrying value in the
company.
Effective March 31, 2001, the Company entered into an agreement with Tudor Trust
to purchase shares of XyEnterprise from Tudor Trust such that the Company's
interest in XyEnterprise would exceed 50%. Accordingly, the Company acquired an
additional 575,000 shares of XyEnterprise common stock in exchange for the
issuance of 1,092,500 shares of Azul common stock. The transaction was based
upon the values of the XyEnterprise and Azul common stocks at the last sales
price for XyEnterprise common shares and the value of the Azul shares at the
close of business on March 31, 2001, the effective date of the agreement.
In October 2000, Azul agreed to invest up to $500,000 in NanoFrames, LLC. Tudor
Trust holds a majority interest in NanoFrames. As of March 31, 2001, $245,894
had been advanced to NanoFrames. These funds were used for the purchase of
laboratory equipment and supplies, salaries, and rent and office expenses.
51
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
As previously reported in Current Reports on Form 8-K dated December 11, 2000,
and January 10, 2001, during fiscal year 2001 the Company changed accountants
from Richard A. Eisner & Company, LLP to Deloitte & Touche LLP. As previously
reported in a Current Report on Form 8-K dated February 28, 2000, during fiscal
year 2000 the Company changed accountants from PricewaterhouseCoopers LLP to
Richard A. Eisner and Company LLP. There were no disagreements with the
Company's current and predecessor accountants on any accounting and financial
disclosure matters.
52
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item (i) will be included under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Information Statement for its 2001
Annual Meeting of Stockholders (the "2001 Information Statement to
Stockholders"), which information is incorporated herein by reference, and (ii)
is included in Part I of this Annual Report on Form 10-K under the heading
"Executive Officers of the Registrant," which information is incorporated herein
by reference.
ITEM 11. Executive Compensation
Information required by this item will be included under the headings "Director
Compensation" and "Executive Compensation" in the 2001 Information Statement to
Stockholders, which information is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item will be included under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 2001 Information
Statement to Stockholders, which information is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions
Information required by this item will be included under the heading "Certain
Transactions" in the 2001 Information Statement to Stockholders, which
information is incorporated herein by reference.
53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. (1) Financial Statements
The following financial statements of Azul Holdings Inc. are included in Part
II, Item 8.
Page(s) in
Form 10-K
Independent Auditors' Report.................................................................................. 23
Independent Auditors' Report.................................................................................. 24
Report of Independent Accounts................................................................................ 25
Consolidated Balance Sheets-March 31, 2001 and 2000.......................................................... 26
Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999...................... 27
Consolidated Statements of Changes in Stockholders' Deficit for the years ended March 31, 2001, 2000 and
1999 28
Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999...................... 29
Notes to Consolidated Financial Statements................................................................... 31
a. (2) Financial Statement Schedules
Financial statement schedules have been omitted because they are either not
required, not applicable or because the required information has been
included elsewhere in the financial statements or notes thereto.
a. (3) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K.
b. Reports on Forms 8-K
Azul filed a report on Form 8-K dated January 10, 2001, which reported
under Item 4 the appointment of Deloitte & Touche LLP as independent
accountants for the Company.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AZUL HOLDINGS INC.
Date: July 13, 2001
By: /s/ Jeffery L. Neuman
---------------------
JEFFREY L. NEUMAN
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the date indicated.
Signature Title Date
/s/ Jeffery L. Neuman Chairman of the Board of Directors, July 13, 2001
----------------------
JEFFREY L. NEUMAN President
/s/ Edward S. Wittman Vice President, Chief Financial Officer, July 13, 2001
---------------------
EDWARD S. WITTMAN Treasurer and Secretary (Principal
Financial and Accounting Officer)
/s/ Lance Laifer Director July 13, 2001
----------------
LANCE LAIFER
55
EXHIBIT INDEX
Exhibit No. Description
2.1 Asset Purchase Agreement, dated as of September 18, 1998, by and
between the Registrant and Barco, Inc. is incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K, dated
September 18, 1998
2.2 Agreement dated as of December 22, 1998, by and among the Registrant,
Xyvision Enterprise Solutions, Inc. and Jeffrey L. Neuman, as trustee
of the Tudor Trust u/d/t December 12, 1997 is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current Report on Form
8-K, dated December 31, 1998.
2.3 Contribution and Assumption Agreement, dated as of December 31, 1998,
by and between the Registrant and Xyvision Enterprise Solutions, Inc.
is incorporated herein by reference to Exhibit 2.2 to the Registrant's
Current Report on Form 8-K, dated December 31, 1998.
3.1 Restated Certificate of Incorporation of the Registrant is incorporated
herein by reference to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 1988
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant is incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1993
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant is incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1996
3.4 Certificate of Designation to Certificate of Incorporation of the
Registrant designating Series B preferred stock is incorporated herein
by reference to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1996
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant is incorporated herein by reference to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996
3.6 Certificate Eliminating the Series A Junior Participating preferred
stock of the Registrant is incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998
3.7 Certificate of Designations of the preferred stock of the Registrant to
be Designated Series C preferred stock is incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998
3.8 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant
3.9 Amended and Restated By-laws of the Registrant, as amended, are
incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1990
3.10 Certificate of Ownership and Merger merging Xyvision Design Systems
into Xyvision, Inc. and changing the name of Xyvision, Inc. to Azul
Holdings Inc. is incorporated by reference to the Registrant's
Quarterly Report on Form 10Q for the quarter ended September 30, 1999.
56
Exhibit No. Description
4.1 Indenture dated as of May 5, 1987 between the Company and Bankers Trust
Company, as Trustee, regarding the Company's $25,000,000 principal
amount of 6% Convertible Subordinated Debentures Due 2002 is
incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1987
*10.1 1992 Stock Option Plan of the Registrant is incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1992
*10.2 1997 Stock Incentive Plan of the Registrant is incorporated herein by
reference to Annex A to the Registrant's Preliminary Schedule 14A filed
August 4, 1997
*10.3 1992 Director Stock Option Plan is incorporated herein by reference to
the Registrant's Registration Statement on Form S-8 (File No. 33-54018)
*10.4 Employee Severance Benefit Plan is incorporated herein by reference to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1990
*10.5 Employee Stock Ownership Plan and Trust is incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1990
*10.6 Xyvision Enterprise Solutions, Inc. 1998 Stock Incentive Plan is
incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998
10.7 Second Amended and Restated Advance Facility Loan Agreement, dated as
of July 1, 1998, by and between the Registrant and Tudor Trust is
incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
10.8 Letter Agreement and Promissory Note, dated as of November 30, 1998, by
and between the Registrant and Jeffrey L. Neuman, as trustee of the
Tudor Trust u/d/t December 12, 1997 is incorporated by reference to
Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998
10.9 First Amendment to Second Amended and Restated Secured Advance Facility
Loan Agreement, dated as of December 31, 1998, by and between the
Registrant and Jeffrey L. Neuman, as trustee of the Tudor Trust u/d/t
December 12, 1997 is incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998
10.10 Secured Advance Facility Loan Agreement, dated as of December 31, 1998,
by and between Xyvision Enterprise Solutions, Inc. and Jeffrey L.
Neuman, as trustee of the Tudor Trust u/d/t December 12, 1997 is
incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998
10.11 Letter Agreement, dated December 31, 1998, by and between the
Registrant and Jeffrey L. Neuman, as trustee of the Tudor Trust u/d/t
December 12, 1997 is incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998
57
Exhibit No. Description
10.12 Series A Convertible preferred stock Purchase Agreement, dated as of
December 31, 1998, by and between Xyvision Enterprise Solutions, Inc.
and Tudor Trust is incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998
10.13 Services Agreement, dated as of December 31, 1998, by and between the
Registrant and Xyvision Enterprise Solutions, Inc. is incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998
10.14 Letter Agreement, dated as of December 31, 1998, by and between
Xyvision Enterprise Solutions, Inc. and Jeffrey L. Neuman, as trustee
of the Tudor Trust u/d/t December 12, 1997 is incorporated by reference
to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998
10.15 Form of Exchange Agreement for 15% Promissory Notes is incorporated
herein by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994
10.16 Form of Exchange Agreement for 4% Promissory Notes is incorporated
herein by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
10.17 Form of Exchange Agreement for 6% Convertible Subordinated Debentures
due 2002 is incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
10.18 Sublease Agreement, dated as of September 18, 1997, by and between the
Company and TASC, Inc. is incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997
10.19 Fifth Amendment dated as of March 31, 2001,to Second Amended and
Restated Secured Advance Facility Loan Agreement, dated July 1, 1998,
by and between the Registrant and Jeffrey L. Neuman, as trustee of the
Tudor Trust u/d/t December 12, 1997.
10.20 Warrant No. A for the purchase of 500,000 shares of common stock,
whereby Tudor Trust u/t/d is entitled, subject to the provisions of the
Warrant, to purchase from the Company, at any time after March 31,
2000, and continuing until March 31, 2001, up to the number of fully
paid and non-assessable shares of common stock of the Company.
10.21 Amendment dated June 19, 2001, effective as of March 31, 2001, between
the Registrant and Tudor Trust with respect to the Azul Warrant No. A
dated as of March 31, 2000, for the purchase of 500,000 shares.
10.22 Share Purchase and Sale Agreement dated June 5, 2001, between the
Registrant and Tudor Trust.
10.23 Agreement dated May, 2001, between the Registrant and Tudor Trust, a
trust of which Jeffrey L. Neuman is the sole trustee and current
beneficiary, to assign, sell and transfer to Tudor Trust Registrant's
entire membership interest in 2001 Investments LLC.
10.24 Secured Advance Facility Loan Agreement effective as of June 19, 2000,
by and among the Registrant, Antiqnet.com Inc., Sloans Auction
Galleries Ltd., and Antique Networking, Inc. (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, and incorporated herein by reference).
58
Exhibit No. Description
10.25 Series A Preferred Stock Purchase Agreement between Xyvision Enterprise
Solutions, Inc. and Cadmus Communications Corporation dated February
16, 2001.
10.26 First Amendment dated July 1, 1999 to Secured Advance Facility Loan
Agreement dated December 31, 1998 between Xyvision Enterprise
Solutions, Inc. and Jeffrey L. Neuman as trustee of the Tudor Trust
u/d/t December 12, 1997 (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
and incorporated herein by reference)
10.27 Series A Convertible Preferred Stock Purchase Agreement dated July 1,
1999 between Xyvision Enterprise Solutions, Inc. and Tudor Trust (filed
as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 and incorporated herein by
reference)
10.28 Second Amendment dated December 7, 1999 to Second Amended and Restated
Secured Advance Facility Loan Agreement dated July 1, 1998 between the
Registrant and Jeffrey L. Neuman as trustee of the Tudor Trust u/d/t
December 12, 1997 (filed as Exhibit 99 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999 and
incorporated herein by reference)
10.29 Third Amendment dated March 31, 2000 to Second Amended and Restated
Secured Advance Facility Loan Agreement dated July 1, 1998 between the
Registrant and Jeffrey L. Neuman as trustee of the Tudor Trust u/d/t
December 12, 1997 (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference)
10.30 Fourth Amendment dated June 19, 2000 to Second Amended and Restated
Secured Advance Facility Loan Agreement dated July 1, 1998 between the
Registrant and Jeffrey L. Neuman as trustee of the Tudor Trust u/d/t
December 12, 1997 (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference)
16.1 Letter from Richard A. Eisner & Company, LLP to the Securities and
Exchange Commission dated December 15, 2000 (filed as Exhibit 16.1 to
the Registrant's Current Report on Form 8-K dated December 11, 2000 and
incorporated herein by reference).
21 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Richard A. Eisner & Company, LLP
23.3 Consent of PricewaterhouseCoopers LLP
* Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K
59