Edgar Filing: AZUL HOLDINGS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ____ to _____

Commission file number 000-14747

Azul Holdings Inc.
(Exact name of small business issuer as specified in its charter)

Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)

6672 Gunpark Drive, Suite 100, Boulder, CO 80301
(Address of principal executive offices)

(303) 448-9441 (Issuer's telephone number)

State the number of shares outstanding of each of the issuer's classes of common
stock, as of June 30, 2001

Common Stock, $.03 par value 5,142,883
(Title of each class) (number of shares)

Transitional Small Business Disclosure Format (check one): Yes [ ] No[x]

Form 10-QSB

Explanatory Note:

The periodic reports filed by Azul Holdings Inc. with the SEC for previous
fiscal periods through the fiscal year ended March 31, 2001 have been filed
under the disclosure framework of SEC Regulations S-K and S-X. As of March 31,
2001, Azul met all of the criteria for filing its reports for periods during the
fiscal year ending March 31, 2002, under the disclosure framework of SEC
Regulation S-B, which applies to small business issuers. Accordingly, beginning
with this Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001,
Azul will file its periodic reports in accordance with Regulation S-B.

Table of Contents

Page

Part I - FINANCIAL INFORMATION..................................................................................3

ITEM 1. Financial Statements....................................................................................3

Unaudited Consolidated Balance Sheet as of June 30, 2001........................................................3

Unaudited Consolidated Statements of Operations for the three month periods
ended June 30, 2001 and 2000...............................................................................4

Unaudited Consolidated Statements of Cash Flows for the three month periods
ended June 30, 2001 and 2000...............................................................................5

Notes to Unaudited Consolidated Financial Statements............................................................6

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................9

PART II OTHER INFORMATION.....................................................................................12

Item 2. Changes in Securities.................................................................................12

Item 3. Defaults Upon Senior Securities........................................................................12

Item 6. Exhibits and Reports on Form 8-K.......................................................................12

This Quarterly Report on Form 10-QSB 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 are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The important factors discussed
below under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including risks related to the Company's
credit line availability and debt restructuring efforts, and the risk factors
set forth in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2001, among others, could cause actual results to differ materially
from those expressed or implied 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 materially from
management's expectations.

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements

AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(in thousands, except per share amounts)
(Unaudited)

June 30, 2001
ASSETS
Current assets:

Cash and cash equivalents................................................... $ 2,934
Accounts receivable:
Trade, less allowance for doubtful accounts of $155....................... 2,229
Other current assets........................................................ 843
---------

Total current assets........................................................ 6,006
Property and equipment, net................................................. 597
Goodwill.................................................................... 1,576
Investment in unconsolidated entity......................................... 193
Other assets, net, principally capitalized software costs................... 302
----------
Total assets................................................................ $ 8,674
========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholder................................................ $14,508
Convertible subordinated debentures and promissory notes ................... 1,779
Accounts payable and accrued expenses....................................... 1,850
Accrued interest............................................................ 1,243
Deferred service revenues................................................... 1,766
Other current liabilities................................................... 678
---------
Total current liabilities................................................... 21,824
-------

Minority interest in subsidiary............................................. 3,093
-------

Commitments and contingencies
Stockholders' deficit:
Capital stock:
Series B convertible preferred stock, $1.00 par value; 300 shares
authorized; 213 shares issued and outstanding (aggregate liquidation
preference of $3,167)................................................. 213
Series C convertible preferred stock, $1.00 par value; 1,000 shares
authorized; 175 shares issued and outstanding (aggregate liquidation
preference of $1,750)................................................. 175
Common stock, $.03 par value; 25,000 shares authorized;
5,238 shares issued and outstanding................................... 157
Additional paid-in capital.................................................. 59,976
Accumulated deficit......................................................... (75,595)
--------
(15,074)
Less: Treasury common stock, at cost; 95 shares............................. (1,169)
---------

Total stockholders' deficit................................................. (16,243)
--------

Total liabilities and stockholders' deficit................................. $ 8,674
=======

The accompanying notes are an integral part of the
consolidated financial statements.

AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands, except per share amounts)
(Unaudited)

2001 2000
---- ----
Revenues:

Systems.............................................. $880 $409
Service.............................................. 1,933 1,684
------ ------
Total revenues..................................... 2,813 2,093
------ ------
Cost of sales:
Systems.............................................. 134 182
Service.............................................. 1,312 998
------ -------
Total cost of sales................................ 1,446 1,180
------ ------
Gross margin........................................... 1,367 913

Operating expenses:
Research and development............................. 1,175 840
Marketing, general, and administrative............... 1,940 1,505
------ ------
Total operating expenses........................... 3,115 2,345
------ ------

Loss from operations................................... (1,748) (1,432)
------- -------
Other income (expense), net:
Loss on settlement of an accrued interest
liability - stockholder............................ --- (2,793)
Interest income...................................... 49 60
Interest expense - third party....................... (30) (31)
Interest expense - stockholder....................... (332) (425)
Loss from equity method investee..................... (128) ---
------- ---------
Total other expense, net........................... (441) (3,189)
------- -------
Loss before minority interest share.................... (2,189) (4,621)
Minority interest share of loss........................ 1,603 578
------ -------
Net loss............................................... (586) (4,043)
Accrued preferred stock dividends...................... (24) (24)
-------- --------
Net loss allocable to common stockholders.............. $(610) $(4,067)
===== ========
Basic and diluted loss per share:
Before accrued preferred stock dividends............. $(.11) $(1.22)
Accrued preferred stock dividends.................... (.01) (.01)
------- ----------
Basic and diluted loss per share..................... $(.12) $ (1.23)
====== ========
Basic and diluted weighted average shares
Outstanding.......................................... 5,140 3,298
===== ======

The accompanying notes are an integral part of the
consolidated financial statements.

AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)

2001 2000
---- ----
Operating Activities:

Net loss................................................................ $(586) $(4,043)

Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization........................................... 163 146
Common stock and warrants issued to a shareholder in payment of interest
and as consideration for extension of credit facility................... --- 2,793
Share of loss of equity method investee................................. 128 ---
Minority share of loss of subsidiary.................................... (1,603) (578)
Interest expense related to warrants.................................... 23 163
Provision for losses on accounts receivable............................. --- 23
Changes in operating assets and liabilities:
Accounts receivable................................................... (337) (1)
Other assets.......................................................... 41 (7)
Accounts payable and accrued expenses................................. 224 (570)
Accrued interest...................................................... 279 292
Deferred service revenues............................................. 126 70
Other current liabilities............................................. 11 92
------- -------
Net cash used by operations....................................... (1,531) (1,620)
------- -------
Investing Activities:
Additions to property and equipment..................................... (81) (107)
Investment in Nanoframes, LLC........................................... (72) ---
-------- --------
Net cash used by investments............................................ (153) (107)
-------- --------
Financing Activities:
Proceeds from credit facility from a stockholder, net................... 200 ---
------- --------
Net cash provided from financing........................................ 200 ---
------- --------
Net decrease in cash and cash equivalents............................... (1,484) (1,727)
Cash and cash equivalents at the beginning of the period................ 4,418 6,890
------- ------
Cash and cash equivalents at the end of the period...................... $2,934 $5,163
======= ======
Supplemental cash flow information:
Accrued dividends on preferred stock.................................... 24 24
Issuance of common stock in payment of prior periods' accrued interest.. --- 1,871
Issuance of warrants to purchase common stock and fair value of debt
conversion as consideration for extension of credit facility....... --- 119

The accompanying notes are an integral part of the
consolidated financial statements.

Azul Holdings Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Unaudited Interim Information

In the opinion of management, the accompanying consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the consolidated financial position as of June 30, 2001 and
the consolidated results of operations and consolidated cash flows for the
quarters ended June 30, 2001 and 2000 of Azul Holdings Inc. ("Azul" or the
"Company") and its majority-owned subsidiary, Xyvision Enterprise Solutions,
Inc. ("XyEnterprise"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by SEC rules for
interim period financial statements. The Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2001 should be read in conjunction with these interim
financial statements.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and could impact future results
of operations and cash flows. 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 as previously reported in Note 7 to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended 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. There have been no material
changes with respect to these items as previously reported.

The consolidated results of operations for the quarter ended June 30, 2001 are
not necessarily indicative of the results of consolidated operations that may be
expected for the fiscal year ending March 31, 2002.

The Company accounts for its 14% equity interest held in the form of preferred
units in NanoFrames, LLC ("NanoFrames") using the equity method since the
Company is able to exercise significant influence over the financial and
operating policies of NanoFrames. The Company holds the only preferred interest
in NanoFrames. In applying the equity method, the Company recognizes losses with
respect to its preferred interest after all common equity interests have been
fully eliminated by losses. During the three months ended June 30, 2001, the
Company recognized all losses of NanoFrames because the common interests had
been fully eliminated. The Company applies the equity method with respect to the
operating results of NanoFrames using a three-month lag. Accordingly, the
operating results of NanoFrames for the three months ended March 31, 2001 have
been used in applying the equity method in the financial statements of the
Company for the three months ended June 30, 2001.

The Company has committed to purchase a preferred interest in NanoFrames for
$500,000, which is being provided as needed by NanoFrames. Through June 30,
2001, the Company has provided $315,592 and has agreed to fund an additional
$184,408. At June 30, 2001, the carrying amount of the Company's investment in
NanoFrames approximated its share of the book value of the net assets of
NanoFrames. If the Company's investment in NanoFrames is reduced to zero in the
Company's balance sheet, any further losses of NanoFrames would be recognized by
the Company to the extent that the Company is still obligated to make future
capital contributions.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations".
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 may have
been diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company implemented SFAS No. 141 as of July 1,
2001, but has not initiated any business combinations subject to the new
provisions.

In July 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 changes the accounting for goodwill from requiring amortization to
an impairment-only approach without periodic amortization. Amortization of
goodwill recorded for past business combinations will cease upon adoption of
SFAS No. 142. 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.

Note 2. Nature of Business

Azul was incorporated under Delaware law in 1981. At this time, Azul's principal
asset is its ownership of a 52.5% equity interest in 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
fiscal 2001, Azul made an initial investment in NanoFrames and now has a 14%
preferred ownership interest. NanoFrames is in the early stages of the research
and development of nanotechnology using the principles of molecular biology.

From time to time Azul may make additional investments in the above referenced
companies and may make investments in other companies. 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 frequently control of, other companies. In those
instances an investment by Azul is approved by its independent directors with
independent legal and financial advice.

Note 3. Note Payable to Stockholder

Azul has a line of credit with Tudor, 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, Chairman of
the Board of Directors of XyEnterprise, and Chairman of NanoFrames. The line of
credit, which is due on 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 a quarterly basis in
cash; however, Tudor 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 and the Company agreed that the interest payable equal to $1,158,998 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 does not
elect within ten days of the end of each quarter to receive such interest in the
form of capital stock of the Company. Subsequent to June 30, 2001, Tudor did not
elect to receive interest payable as of June 30, 2001 in stock, and such
interest has been added to the principal balance during July 2001. 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.
Subsequent amendments and agreements between Azul and Tudor 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.

During June 2000 Tudor 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 common stock of the Company at the option of Tudor at a price
of $3.25 per share.

During the quarter ended June 30, 2000, Tudor Trust and the Company executed an
amendment to their loan agreement increasing the aggregate amount of the loan by
approximately $175,000 to $12,500,000, signed a separate $5,000,000 loan
facility, and changed the maturity date of the original loan agreement to March
31, 2001. 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 in the first quarter of fiscal 2001 in the amount of $2,793,000 as a
result of the settlement of this interest obligation by the issuance of common
stock.

As of June 30, 2001, the Company had an outstanding loan balance of $14,508,000
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.

Note 4. 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 previously disclosed, 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 2

Management's Discussion and Analysis of Financial Condition and Results
of Operations For the three month periods ended June 30, 2001 and 2000

Results of Operations

Revenues for the first quarter of fiscal 2002 were $2,813,000, an
increase of approximately $720,000, or 34%, from the first quarter of fiscal
2001. All the revenues reported for each period were generated by XyEnterprise.
During the first quarter of fiscal 2002, revenue from system licenses increased
by $470,000 due to the licensing of products introduced during the second and
third quarter of the prior fiscal year. Further, during the current quarter one
client, that acquired a multi-site license, accounted for 32% of system revenue
and 15% of total revenue. Revenue from consulting services increased by $249,000
or 15%. Changes in service revenues general lag changes in system licensing
revenues by at least one quarter. XyEnterprise believes that this increase in
revenues reflects customers' continuing acceptance of its new products.
Content@XML was introduced during November 2000 and Version 7.0 of XPP was
introduced in October 2000.

Cost of sales for systems licensing decreased during the first quarter
of fiscal 2002 even though revenue increased due primarily to a decrease in the
sale of third party products and an increase in XyEnterprise products sold as
compared to the first quarter of fiscal 2001. Gross margin as a percent of
revenues improved significantly to 48.6% overall from 43.6% for the comparable
quarter in the prior year. Gross margins for system licensing increased to 84.8%
while the gross margin on consulting services declined to 32% during the quarter
as compared to 55.5% and 40.7% during the first quarter of fiscal 2001. The
change in gross margin for service revenues is attributed principally to the
additional staffing hired in anticipation of the additional consulting work
generated by the increases in licensing revenue.

Research and development expenses by XyEnterprise in the first quarter
of fiscal 2002 increased by $335,000, or 40%, from the first quarter of fiscal
2001 due primarily to the expansion of the quality assurance department and
additional consulting staff within the engineering department. These expenses
represented 42% and 40% of revenues during the first quarter of fiscal 2002 and
2001, respectively. No software costs were capitalized during the reporting
periods.

Marketing, general and administrative expenses increased in fiscal 2002
over levels for the comparable periods of fiscal 2001, principally as a result
of changes in the marketing and sales organization at XyEnterprise. The
increases resulted primarily from increased sales and marketing costs with the
hiring of new sales representatives in the UK, France, Australia and in the
United States. Further, XyEnterprise created a new group within the marketing
department to assist in the development of market specific packaged solutions
for various significant vertical markets as well as to support the efforts of
XyEnterprise's new channel partners.

During the first quarter of fiscal 2001, Tudor Trust and the Company
executed an amendment to their loan agreement increasing the aggregate amount of
the loan by approximately $175,000 to $12,500,000, signed a separate $5,000,000
loan facility, and changed the maturity date of the original loan agreement to
March 31, 2001. 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 in the first quarter of fiscal 2001 in the amount of
$2,793,000 as a result of the settlement of this interest obligation by the
issuance of common stock.

Liquidity and Capital Resources

At June 30, 2001, the Company's cash balance was $2,934,000. During the
first quarter of fiscal 2002, the Company's cash balance decreased by
$1,484,000, primarily as a result of funding operational costs from growth in
staffing at XyEnterprise, principally in the sales and development areas. The
Company invested $81,000 in capital expenditures during the first quarter of
fiscal 2002.

Minority interest in subsidiary decreased from $4,696,000 at March 31,
2001 to $3,093,000 at June 30, 2001. The decrease in the minority interest of
$1,603,000 resulted from the allocation of the entire operating loss of
XyEnterprise for the period of April 1, 2001 to June 30, 2001 to the minority
interest as a result of the carrying value of the majority equity interest
having been previously reduced to zero. Common and preferred stock of
XyEnterprise held by parties other than Azul 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 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.

As of June 30, 2001, Azul has an amended line of credit pursuant to
which it may borrow up to $17,500,000 from Tudor Trust, the largest stockholder
of the Company, of which approximately $14,508,000 was outstanding at June 30,
2001. The grantor, sole trustee and sole current beneficiary of Tudor also
serves as Chairman of the Board of Directors of Azul and XyEnterprise and holds
other executive officer and director positions with NanoFrames, LLC. This line
of credit, which is payable March 31, 2002, is collateralized by the shares of
XyEnterprise stock and the interest in NanoFrames held by the Company, and has
been used for working capital, general business purposes, and to fund the
investment in NanoFrames. 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. Further, the amounts outstanding in excess of
$12,500,000 are convertible at the option of the note holder into common shares
of Azul at the rate of $3.25 per share.

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, 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. The Company, however, anticipates that its cash requirements for fiscal
2002 will be satisfied mainly from its credit lines, or otherwise from Tudor
Trust, assuming the continued forbearance by the holders of Azul's 6%
Debentures, 15% Notes and 4% Notes. As previously reported in Note 7 to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001, there are certain defaults
in effect with respect to the Debentures, 15% Notes and 4% Notes and an
arrearage in the payment of dividends on the Azul Series B preferred stock.
There has been no material change with respect to these items as previously
reported.

Recent Accounting Pronouncements

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.

PART II OTHER INFORMATION
Item 2. Changes in Securities.

(c) During the quarter ended June 30, 2001, Azul issued a total of 6,594 shares
of common stock that were not registered under the Securities Act of 1933, in
exchange for conversions of outstanding shares of Azul's Series B preferred
stock by holders of those shares. No commission or other remuneration was paid
or given directly or indirectly for soliciting these exchanges. The shares of
common stock were issued in reliance on the exemption from registration provided
by Section 3(a)(9) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

As previously reported in Note 7 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2001, there exists certain defaults with respect to Azul's outstanding
Debentures, 15% Notes and 4% Notes and an arrearage in the payment of dividends
on the Azul Series B Preferred stock. There has been no material change with
respect to these items as previously reported.

Item 6. Exhibits and Reports on Form 8-K.

(a) No exhibits are required to be filed as part of this report.

(b) Azul filed a report on Form 8-K dated July 19, 2001, solely for the purpose
of filing the consent of Richard A. Eisner & Company, LLP related to its
Independent Auditors' Report included in the registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 2001 filed on July 16, 2001. This
consent was inadvertently omitted from the Form 10-K filing.

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

Azul Holdings Inc.
(Registrant)

August 13, 2001
/s/ Edward S. Wittman
---------------------
Edward S. Wittman
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)