Edgar Filing: AZUL HOLDINGS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
---------------- ---------------

Commission file number: 000-14747

AZUL HOLDINGS INC.
(Exact name of registrant as specified in its charter)

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

4450 Arapahoe Avenue, Suite 100, Boulder, CO 80303
(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code (303) 448-8833

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 1, 2001

Common Stock, $.03 par value 4,022,105
(Title of each class) (number of shares)

Form 10-Q

Table of Contents

Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets
as of December 31, 2000 and March 31, 2000...................................3

Consolidated Statements of Operations for the three and
nine month periods ended December 31, 2000 and 1999.........................4

Consolidated Statements of Cash Flows for the
nine month periods ended December 31, 2000 and 1999.........................5

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

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................8

Item 3. Quantitative and Qualitative Disclosures About Market Risk...............11

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

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The important factors discussed
below under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including risks related to the Company's
credit line availability and debt restructuring efforts, investment in 2001
Investment LLC realization matters, and the risk factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000,
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 SHEETS
(In thousands, except per share amounts)

December 31, March 31,
2000 2000
------------ ------------
ASSETS (Unaudited)

Current assets:
Cash and cash equivalents ....................................................... $ 1,751 $ 6,890
Accounts receivable, trade, less allowance for doubtful accounts
of $151 at December 31, 2000 and $224 at March 31, 2000 ........................ 1,781 1,747
Notes receivable including $100 of accrued interest ............................. 2,550 --
Other current assets ............................................................ 799 360
------------ ------------
Total current assets ........................................................ 6,881 8,997
Property and equipment, net ....................................................... 641 548
Investment in unconsolidated entity ............................................... 126 --
Note receivable ................................................................... 500 --
Other assets, net, ................................................................ 153 326
------------ ------------
Total assets .............................................................. $ 8,301 $ 9,871
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholder .................................................... $ 15,462 $ 12,357
Current portion of long-term debt ............................................... 1,962 1,872
Accounts payable and accrued expenses ........................................... 3,297 3,592
Other current liabilities ....................................................... 2,927 2,937
------------ ------------
Total current liabilities ................................................... 23,648 20,758
------------ ------------
Notes payable to stockholder - long term .......................................... -- 1,850
------------ ------------
Total liabilities ........................................................... 23,648 22,608
------------ ------------
Minority interest in subsidiary ................................................... 986 2,072
------------ ------------
Commitments and contingencies ..................................................... -- --
------------ ------------
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700 shares authorized;
no shares issued ............................................................. -- --
Series B convertible preferred stock, $1.00 par value; 300 shares
authorized; 232 shares issued and outstanding at December 31, 2000 and
March 31, 2000 (aggregate liquidation preference of $3,375) .................. 232 232
Series C convertible preferred stock, $.01 par value; 1,000 shares
authorized; 175 shares issued and outstanding at December 31, 2000 and
March 31, 2000 ............................................................... 1,750 1,750
Common stock, $.03 par value; 25,000 shares authorized; 3,997 and 2,991
shares issued at December 31, 2000 and March 31, 2000,
respectively, including treasury stock ....................................... 124 90
Additional paid-in capital ...................................................... 55,744 51,347
Accumulated deficit ............................................................. (73,014) (67,059)
------------ ------------
(15,164) (13,640)
Treasury stock, at cost; 95 shares at December 31, 2000 and
March 31, 2000 ............................................................... (1,169) (1,169)
------------ ------------
Total stockholders' deficit .................................................... (16,333) (14,809)
------------ ------------
Total liabilities and stockholders' deficit ............................... $ 8,301 $ 9,871
============ ============

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

AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)

Revenues:
Systems ............................................ $ 843 $ 656 $ 1,509 $ 2,041
Service ............................................ 1,472 1,637 4,558 5,206
---------- ---------- ---------- ----------
Total revenues ................................. 2,315 2,293 6,067 7,247
---------- ---------- ---------- ----------
Cost of sales:
Systems ............................................ 137 244 386 747
Service ............................................ 1,082 973 3,069 3,325
---------- ---------- ---------- ----------
Total cost of sales ............................ 1,219 1,217 3,455 4,072
---------- ---------- ---------- ----------
Gross margin ........................................ 1,096 1,076 2,612 3,175
---------- ---------- ---------- ----------
Operating expenses:
Research and development ........................... 881 754 2,623 2,460
Marketing, general and administrative .............. 1,809 1,362 4,973 4,202
---------- ---------- ---------- ----------
Total operating expenses ....................... 2,690 2,116 7,596 6,662
---------- ---------- ---------- ----------
Loss from operations ................................ (1,594) (1,040) (4,984) (3,487)
Minority interest share of loss from operations ..... 676 -- 2,036 1,750
---------- ---------- ---------- ----------
Loss from operations after minority interest ........ (918) (1,040) (2,948) (1,737)
---------- ---------- ---------- ----------
Other income (expense), net:
Gain on capital transaction of subsidiary .......... -- -- 900 --
Interest income .................................... 104 2 268 13
Interest expense - third party ..................... (31) (43) (93) (115)
Interest expense - stockholder ..................... (403) (408) (1,218) (1,209)
---------- ---------- ---------- ----------
Total other (expense), net ..................... (330) (449) (143) (1,311)
---------- ---------- ---------- ----------
Loss before extraordinary item ...................... (1,248) (1,489) (3,091) (3,048)
Extraordinary gain on extinguishments of debt ....... -- -- -- 353
Extraordinary (loss) on settlement of accrued
interest by issuance of common stock ............... -- -- (2,793) --
---------- ---------- ---------- ----------
Net loss ............................................ (1,248) (1,489) (5,884) (2,695)
Accrued preferred stock dividends ................... 24 23 71 71
---------- ---------- ---------- ----------
Net loss allocable to common stockholders ........... $ (1,272) $ (1,512) $ (5,955) $ (2,766)
========== ========== ========== ==========
Basic and diluted earnings (loss) per share:
Before extraordinary items ........................ $ (.32) $ (.53) $ (.84) $ (1.09)
Extraordinary items ............................... -- -- (.74) .12
---------- ---------- ---------- ----------
Net loss per share ................................ $ (.32) $ (.53) $ (1.58) $ (.97)
========== ========== ========== ==========
Basic and diluted weighted average common and
equivalent shares outstanding ..................... 3,997 2,854 3,764 2,854
========== ========== ========== ==========

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

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5

AZUL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Nine Months Ended,
December 31,
------------------
2000 1999
------- -------
(Unaudited)

Operating activities:
Net loss ................................................................... $(5,884) $(2,695)
Adjustments to reconcile net loss to net cash used for operating
activities:
Gain on early extinguishments of debt .................................... -- (353)
Gain on capital transaction of subsidiary ................................ (900) --
Depreciation and amortization ............................................ 504 464
Common stock and warrants issued in settlement of accrued interest
and other expense obligations ........................................ 2,998 --
Minority interest share of loss of subsidiary ............................ (2,036) (1,750)
Interest expense related to warrants ..................................... 157 510
Provisions for losses on accounts receivable ............................. (73) (110)
Operating assets and liabilities:
Accounts receivable ...................................................... 39 41
Inventories .............................................................. -- 502
Other assets ............................................................. (257) (144)
Accounts payable and accrued expenses .................................... 665 415
Other current liabilities ................................................ (11) (150)
------- -------
Net cash used for operating activities ..................................... (4,798) (3,270)
------- -------
Investing activities:

Increases in notes receivable .............................................. (2,950) --
Investment in unconsolidated entity ........................................ (126) --
Additions to property and equipment ........................................ (370) (261)
------- -------
Net cash used for investing activities ..................................... (3,446) (261)
------- -------
Financing activities:

Proceeds from line of credit from a stockholder ............................ 3,105 2,962
Repayment of line of credit to a stockholder ............................... -- (80)
Proceeds from sale of subsidiary's Series A Preferred Stock ................ -- 750
------- -------
Net cash provided from financing activities ................................ 3,105 3,632
------- -------
Net increase (decrease) in cash and cash equivalents ....................... (5,139) 101
Cash and cash equivalents at the beginning of the period ................... 6,890 446
------- -------
Cash and cash equivalents at the end of the period ......................... $ 1,751 $ 547
======= =======
Supplemental Financing Information:

Conversion of debt to equity by stockholder ............................... $ 1,850 $ --
Accrued preferred stock dividends ......................................... 71 71
Payment of prior periods' accrued interest by issuance of common stock .... 1,040 --
Extinguishment of 4% note payable ......................................... -- 347
Extinguishment of Debenture ............................................... -- 25

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 financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the consolidated financial position as of December 31, 2000, the
consolidated results of operations for the quarter and nine-month periods ended
December 31, 2000 and 1999 and consolidated cash flows for the nine-month
periods ended December 31, 2000 and 1999 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 consolidated balance sheet as of March
31, 2000 is excerpted from the Company's audited financial statements for the
fiscal year then ended. The Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2000 should be read in conjunction with these interim financial statements.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and could impact future results
of operations and cash flows.

The results of consolidated operations for the quarter and the nine-month period
ended December 31, 2000 are not necessarily indicative of the results of
consolidated operations that may be expected for the fiscal year ending March
31, 2001.

Note 2. Nature of Business

Azul provides financial and management support to high technology companies. The
Company provides financial capital and managerial and advisory consulting to
these emerging, early stage and mid-stage companies.

To date Azul's principal portfolio company is XyEnterprise, an information
content management and delivery solutions company which previously was a
wholly-owned subsidiary of Azul and in which Azul as of December 31, 2000 held a
54% ownership interest. Tudor Trust, the majority stockholder of Azul, also has
a significant direct ownership interest in XyEnterprise. On February 12, 2001,
XyEnterprise issued 25,000 shares of its Class A common stock, along with
approximately $100,000 in cash, subject to adjustments, to acquire Lightbinders,
Inc., a content management systems consulting firm. On February 20, 2001,
XyEnterprise issued 923,077 shares of its Series A Preferred Stock to Cadmus
Communications Corporation for $3,000,000 in cash. As a result of these
transactions, Azul's ownership interest in XyEnterprise has been reduced to
49%.

During the second quarter of the current fiscal year, Azul became the senior
lender to PlazaBlue Inc. ("PlazaBlue"), a fine art, antique and collectibles
Internet storefront and auction house, formerly known as Antiqnet.com Inc. Tudor
Trust separately controlled PlazaBlue and also had made significant loans to

PlazaBlue. During the second quarter, Azul loaned to PlazaBlue $2,450,000, with
the loan bearing interest at 10% and which had a due date of September 30, 2000,
subsequently extended to November 30, 2000. PlazaBlue was not able to secure
equity funding to enable it to repay the debt and the loan went into default.
This loan was collateralized by all the assets of PlazaBlue, which included
substantially all the shares of PlazaBlue's subsidiaries, Antique Networking
Inc. ("ANI") and Sloan's Auction Galleries Ltd. ("Sloan's"). The Company
believes the value of the collateral is greater than the principal and interest
amounts owed to the Company as senior creditor as of December 31, 2000. During
January 2001, certain creditors of PlazaBlue, including Azul and Tudor Trust,
foreclosed on the PlazaBlue collateral securing their loans, which resulted in
the acquisition of ANI and Sloan's by 2001 Investments LLC ("TIL"), which was
formed by those creditors for the foreclosure and in which Azul has an
approximate 22% equity interest and Tudor Trust has a controlling interest. In
connection with the foreclosure, Tudor Trust agreed to indemnify Azul for the
principal amount of Azul's original loan to PlazaBlue. Shortly thereafter, TIL
sold ANI to GoAntiques.com Inc. ("GAC") for an approximate 20% interest in GAC.
GAC serves the antiques and design industries as a total solution provider,
having created a large virtual warehouse of quality antiques. GAC provides an
Internet-based outlet for antiques and collectibles owned by its dealer
participants.

In October, 2000, Azul agreed to purchase at least an 11.67% interest in
Nanoframes, LLC ("Nanoframes") for $350,000. Tudor Trust also has an interest in
Nanoframes. As of December 31, 2000, $126,000 has been paid. NanoFrames is an
emerging biotechnology company operating in the field of nanotechnology,
involving the assembly of structures with physical dimensions in the nanometer
(molecular level) range. Using proteins with particular qualities, Nanoframes'
scientists are modifying these components in order to make "structures" that
might have applications in reinforcement, separation and material design
technologies. Nanotechnology has become the new horizon of research in applied
technologies as diverse as electronics, optics, materials, medicine and
pharmaceuticals.

Note 3. Note Payable to Stockholder

Azul has a line of credit with Tudor Trust. The grantor, sole trustee, and sole
current beneficiary of Tudor Trust also serves as Chairman of the Board of
Directors and President of Azul, and as an executive officer and director of
XyEnterprise and Sloan's. The line of credit, which is payable on March 31,
2001, has a maximum loan amount of $17,500,000 and is collateralized by the
shares of XyEnterprise stock held by the Company. This line of credit has been
used for working capital and general business purposes, and during the nine
month period ended December 31, 2000 an additional $3,105,000 was advanced to
the Company, and used primarily to make the loan to PlazaBlue discussed in Note
2. Interest on the line of credit is payable on March 31, 2001 in cash; however,
Tudor Trust has the option to receive interest on a quarterly basis, payable in
shares of common stock of the Company based on the fair market value as
determined at the end of each quarter. Since the line of credit's inception on
June 30, 1992, there have been numerous amendments to the line of credit, with
each amendment increasing the maximum loan amount thereunder and providing other
terms and provisions.

Note 4 Gain on Capital Transaction of Subsidiary

During the quarter ended September 30, 2000, Tudor Trust converted an
outstanding loan of $1,850,000 owed by XyEnterprise into 649,123 shares of
XyEnterprise common stock at the rate of $2.85 per share, the rate at which
shares were sold to third parties during February 2000, and which approximates
the fair market value at the date of conversion. Accordingly, the Company's
proportionate interest in XyEnterprise decreased from 57.4% to 53.8% at that
time. As a result of this increase in the equity of XyEnterprise, the Company
recognized a gain of $900,000.

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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED DECEMBER 31, 2000 AND 1999

RESULTS OF OPERATIONS

Revenues for the third quarter of fiscal 2001 were $2,315,000, which was
approximately the same level of $2,293,000 during the third quarter of fiscal
2000. For the nine month period ended December 31, 2000, revenues of $6,067,000
were down from the comparable prior year period by approximately $1,180,000 or
16%. Revenues reported for each period were all generated by XyEnterprise.
During the first nine months of fiscal 2000, revenue from a single contract,
system license fees and related services to one customer accounted for
$1,445,000, which accounted for 20% of total revenues for the first nine months
of fiscal 2000. There have been no comparable large individual transactions in
fiscal 2001. Revenue from licensing of Systems increased during the third
quarter by $187,000, or 29%, and decreased by $532,000, or 26%, for the nine
month period. Content@XML was introduced during August 2000 and XML Professional
Publisher ("XPP") v.7.0 was introduced during October 2000. As a result of the
acceptance by the market of these two products, Systems revenue for the third
quarter, compared to the second quarter of fiscal 2001, increased by $586,000 or
225%. Services revenues, which generally lag increases in system revenues,
decreased by $165,000, or 10%, during the third quarter and by $648,000, or 12%,
for the nine month period.

Cost of sales for the current quarter remained level with that of the
previous year's third quarter. Cost of sales for Systems Revenue decreased by
$103,000 even though the revenues increased by $187,000, Cost of sales for the
prior year contained an unusually high component of third party software that
was resold to the XyEnterprise customer. Gross margins as a percent of revenues
also remained relatively level between the third quarters of the current and
previous year. For the third quarter of fiscal 2001, gross margin as a percent
of revenue was 47%, the same percentage as for the third quarter of fiscal 2000.
For the nine month periods, gross margin as a percent of revenues was 43% in
fiscal 2001 and 44% in fiscal 2000.

Research and development expenses incurred by XyEnterprise increased to
$881,000 in the current year's third quarter from $754,000 in the third quarter
of fiscal 2000. When compared with the previous quarter of fiscal 2001, these
expenses remained level. At this expense level, XyEnterprise continues to
maintain increased systems development and quality assurance efforts. For the
nine-month year to date period research and development expenses increased by
$163,000 or 7%, to $2,623,000, from $2,460,000 in the first nine months of
fiscal 2000. No software costs were capitalized during the reporting periods.

Marketing, general and administrative expenses increased in fiscal 2001
over levels for the comparable periods of fiscal 2000. The increases resulted
primarily from increased general and administrative costs in Azul operating
expenses, and increased expenditures incurred as a result of expanding
XyEnterprise's sales and marketing team and the related costs of marketing.

During the quarter ended September 30, 2000, Tudor Trust converted an
outstanding loan of $1,850,000 owed by XyEnterprise into 649,123 shares of
XyEnterprise common stock at the rate of $2.85 per share, the rate at which
shares were sold to third parties during February 2000 and which represents the
fair market value at the date of conversion. Accordingly, the Company's
proportionate interest in XyEnterprise decreased from 57.4% to 53.8% at that
time. As a result of this increase in the equity of XyEnterprise, the Company
recognized a gain of $900,000, which is included in the statement of operations
for the nine month period ended December 31, 2000.

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9

Tudor Trust and the Company, on May 24, 2000, agreed that the interest
payable of $1,040,000 for the period from January 1, 1999 through March 31, 2000
would be paid by the issuance to Tudor Trust of 984,624 shares of the common
stock of the Company and that interest for subsequent periods would, at the
option of Tudor Trust, be paid in cash or in shares of the common stock of the
Company valued for such purposes based upon their public trading market price at
the end of each quarterly interest payment period. The Company also agreed that
on or before March 31, 2001 interest for the period July 1, 1998 through
December 31, 1998 be convertible into 158,266 shares of common stock of the
Company at the request of Tudor. The Company recorded an extraordinary charge of
$2,793,000 to earnings in the first quarter of fiscal 2001 as a result of the
settlement of this interest obligation by the issuance of common stock.

The Company accrued dividends of $23,500 and $71,000 during the third
quarters and nine month year to date periods of both fiscal 2001 and 2000 with
respect to the Azul Series B Preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, the Company's cash balance was $1,751,000. Cash used
in operations during the nine month period ended December 31, 2000 amounted to
$4,798,000 primarily as a result of operational costs from at XyEnterprise,
incurred principally in the sales and product development areas. Investments in
notes receivable of $2,950,000, investment in an unconsolidated entity of
$126,000, and additions to plant, property and equipment at XyEnterprise of
$370,000 accounted for the $3,446,000 cash used in investing activities during
the nine month period. Cash of $3,105,000 was provided during this period by
advances under the line of credit from Tudor Trust, the Company's largest
shareholder. Total cash used for operating and investing activities during the
nine month period amounted to $8,244,000.

Minority interest in subsidiary decreased from $2,072,000 at March 31,
2000 to $986,000 at December 31, 2000, as a result of recording the
proportionate share of the operating loss at XyEnterprise to the interests of
the minority shareholders. Tudor Trust converted its debt from XyEnterprise of
$1,850,000 to 649,123 shares of common stock in XyEnterprise during the quarter
ended September, 2000 at the same stock price as the sale of shares to third
parties during February 2000. As a result of this transaction, there was an
increase in the Company's proportionate share of XyEnterprise's book value.
Minority interest was increased by $950,000 and the Company recorded a gain of
$900,000 on the capital transaction of its majority-owned subsidiary,
XyEnterprise.

As of December 31, 2000, 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 $15,462,000 was outstanding at December
31, 2000. The grantor, sole trustee and sole current beneficiary of Tudor Trust
also serves as Chairman of the Board of Directors of Azul and XyEnterprise and
holds other executive officer and director positions with Nanoframes and
Sloan's. This line of credit, which is payable March 31, 2001, is collateralized
by the shares of XyEnterprise stock held by the Company and has been used for
working capital, general business purposes, and to fund the loan to PlazaBlue
and Azul's 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.

During the second quarter of fiscal 2001, Azul loaned funds to
PlazaBlue Inc. ("PlazaBlue") in the amount of $2,450,000 to fund working
capital. PlazaBlue owned Antique Networking Inc. ("ANI"), a developer of a web
portal serving a network of antique dealers, and Sloan's Auction Galleries,

9
10

Ltd., one of the largest auction houses in the U.S., located in Washington,
D.C. and Miami, Florida. The loan accrued interest at 10% and was due on the
extended date of November 30, 2000. PlazaBlue was unable to secure equity
funding to enable it to repay the debt and the loan went into default. During
January 2001, certain creditors of PlazaBlue, including Azul and Tudor Trust,
foreclosed on the PlazaBlue collateral securing their loans, which resulted in
the acquisition of ANI and Sloan's by 2001 Investments LLC ("TIL"), which was
formed by those creditors for the foreclosure and in which Azul has an
approximate 22% equity interest and Tudor Trust has a controlling interest. In
connection with the foreclosure, Tudor Trust agreed to indemnify Azul for the
principal amount of Azul's original loan to PlazaBlue. Shortly thereafter, TIL
sold ANI to GoAntiques.com Inc. ("GAC") for a 20% common stock interest in GAC
and associated warrants. GAC serves the antiques and design industries as a
total solution provider, having created a large virtual warehouse of quality
antiques. GAC provides an Internet-based outlet for antiques and collectibles
owned by its dealer participants.

In a separate transaction, during October 2000 Azul agreed to purchase at
least an 11.67% interest in Nanoframes, LLC ("Nanoframes") for $350,000. As of
December 31, 2000, $126,000 has been paid. NanoFrames is an emerging
biotechnology company operating in the field of nanotechnology, involving the
assembly of structures with physical dimensions in the nanometer (molecular
level) range. Tudor Trust also holds a large equity interest in Nanoframes.

Separately, XyEnterprise has advanced to HyperVision, Ltd. $500,000 under a
line of credit which was used for the completion of the development of WorX, a
proprietary software product used to create XML versions of Microsoft Word
files. Under this agreement, XyEnterprise has certain rights to convert this
loan to common shares of Hypervision, Ltd., under certain conditions.

On February 12, 2001, XyEnterprise acquired all the equity interests of
Lightbinders, Inc. ("Lightbinders") a consulting firm experienced in the
implementation of content management systems. The operations of Lightbinders
have been integrated in the consulting operations of XyEnterprise and the former
employees of Lightbinders are currently working on XyEnterprise consulting
projects. The acquisition was completed for approximately $100,000 in cash,
subject to adjustments, and the issuance of 25,000 shares of XyEnterprise Class
A common stock. On February 20, 2001, XyEnterprise issued 923,077 shares of its
Series A Preferred Stock to Cadmus Communications Corporation for $3,000,000 in
cash. As a result of these transactions, Azul's ownership interest in
XyEnterprise has been reduced to 49%.

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 4% Promissory Notes. The
Company, however, anticipates that its cash requirements for fiscal 2001 will be
satisfied mainly from its credit lines, or otherwise from Tudor Trust, assuming
the continued forbearance by the holders of Azul's Debentures, 15% Notes and 4%
Notes. As previously reported in Note 8 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2000, certain defaults exist with respect to the Debentures, 15% Notes
and 4% Notes, and there is 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not currently use derivative financial instruments. The
Company generally places its 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. The Company does not expect any material loss
from its marketable security investments and therefore believes that its
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.
XyEnterprise does not currently enter into foreign currency hedge transactions.
Through December 31, 2000, foreign currency fluctuations have not had a material
impact on the Company's financial position or results of operations.

PART II - OTHER INFORMATION

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

As previously reported in Note 8 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2000, 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) Exhibits. None.

(b) Reports on Form 8-K. During the quarter for which this report is filed, Azul
filed one report on Form 8-K dated December 11, 2000 which reported under Item 4
the dismissal of Richard A. Eisner & Co. as independent accountants for the
Company. Azul has also 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.

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)

February 20, 2001

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