U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
Commission file number: 0-27132
Terrace Food Group, Inc.
---------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Delaware 65-0594270
- -------------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1351 NW 22nd Street, Pompano Beach, FL 33069
- -------------------------------------- ----------------------------------
(Address of Principal Executive Officer) (Zip Code)
(954) 917-7272
------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
---------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for past 90 days. Yes X No .
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Check whether the registrant filed all documents and reports required to be
filed by Section 12 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___.
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of the date of this report, the
issuer had 948,342 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format:
Check one: Yes No X
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This is page 1 of 16 sequentially numbered pages.
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended June 30, 1999
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page
----
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet as of June 30, 1999 (Unaudited)... 3
Statements of Operations for the three months and
six months ended June 30, 1999 and 1998 (Unaudited).......... 4
Statements of Cash Flow for the six months ended
June 30, 1999 and 1998 (Unaudited)........................... 5&6
Notes to Financial Statements................................ 7-12
Item 2: Management's Discussion and Analysis......................... 13&14
Part II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K............................. 15
Signatures................................................... 16
. . . . . . . . . . . .
2
<PAGE>
Item 1.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Accounts Receivable (Less Reserve for
Doubtful Accounts of $110,860) $ 3,694,455
Inventory 2,070,307
Current Portion of Note Receivable - Stockholder 53,000
Other Current Assets 366,136
------------
Total Current Assets 6,183,898
Property and Equipment - At Cost,
(Net of Accumulated Depreciation of $659,821) 5,232,266
Note Receivable - Stockholder 53,000
Cost in Excess of Net Assets of Business Acquired
(Net of Accumulated Amortization of $425,694) 4,086,433
Other Assets - net 388,729
------------
Total Assets $ 15,944,326
============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 3,303,791
Cash Overdraft 1,010,049
Accrued Expenses 574,291
Current Portion of Long-Term Debt 623,672
Line of Credit 2,527,539
------------
Total Current Liabilities 8,039,342
Long-term Debt 2,126,294
Convertible Subordinated Notes 2,807,379
Other Non-Current Liabilities 159,166
------------
Total Liabilities 13,132,181
------------
Commitments and Contingencies
Preferred Stock 1,683,674
Stockholders' Equity:
Common Stock - $.001 Par Value, 25,000,000 Shares
Authorized, 948,342 Issued and Outstanding 948
Additional Paid-in Capital 10,658,239
Accumulated Deficit (9,530,716)
------------
Total Stockholders' Equity 1,128,471
------------
Total Liabilities and Stockholders' Equity $ 15,944,326
============
See Notes to Financial Statements.
3
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 9,768,011 $ 6,176,446 $ 20,865,006 $ 13,429,518
Cost of Sales 7,460,051 4,541,595 15,643,678 9,725,178
------------ ------------ ------------ ------------
Gross Profit 2,307,960 1,634,851 5,221,328 3,704,340
Operating Expenses:
Selling, General & Administrative 2,541,350 1,700,386 5,382,287 3,563,713
Provision for Doubtful Accounts 17,366 103,108 38,257 105,608
------------ ------------ ------------ ------------
Total Operating Expenses 2,558,716 1,803,494 5,420,544 3,669,321
Income (Loss) from Operations (250,756) (168,643) (199,216) 35,019
Other Income (Expense)
Royalty Income -- 26,000 -- 26,000
Interest Income 2,569 3,180 5,749 3,180
Interest Expense (411,831) (82,743) (724,336) (159,925)
------------ ------------ ------------ ------------
Other (Expense), Net (409,262) (53,563) (718,587) (130,745)
Loss from Continuing Operations (660,018) (222,206) (917,803) (95,726)
Income (Loss) from Discontinued Operations -- (7,465) -- 29
------------ ------------ ------------ ------------
Net Loss $ (660,018) $ (229,671) $ (917,803) $ (95,697)
============ ============ ============ ============
Income (Loss) Per Share of Common Stock
Loss from Continuing Operations $ (.77) $ (.42) $ (1.04) $ (.19)
Income (Loss) from Discontinued Operations -- (.02) -- --
------------ ------------ ------------ ------------
Basic and Diluted Net (Loss) $ (.77) $ (.44) $ (1.04) $ (.19)
============ ============ ============ ============
Weighted Average Shares of Common
Stock Outstanding 948,342 526,211 948,342 518,716
</TABLE>
Basic and Diluted Net Loss per Share of Common Stock include the effect of
$68,772, $(.07) Per Share, of accrued Preferred Stock dividends for each of the
three and six month periods ended June 30, 1999.
See Notes to Financial Statements.
4
<PAGE>
TERRACE FOOD GROUP, INC.
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STATEMENTS OF CASH FLOW
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
----------------
June 30,
--------
1999 1998
----------- -----------
Operating Activities:
<S> <C> <C>
Loss from Continuing Operations $ (917,803) $ (95,726)
Adjustments to Reconcile Loss to Net Cash
(Used For) Provided by Operating Activities
Depreciation and Amortization 676,204 225,265
Provision for Doubtful Accounts 38,257 58,000
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 275,440 (325,667)
Inventory (442,431) (276,167)
Other Current Assets (199,705) (355,636)
Due from Related Party -- 122,752
Note Receivable from Shareholder 53,000 (159,000)
Due on Sale of Discontinued Operations -- 90,000
Restricted Cash and Other Assets (34,879) (122,550)
Increase (Decrease) in:
Accounts Payable and Cash Overdrafts (179,055) 553,403
Accrued Expenses and other Current Liabilities (182,232) (153,491)
Other Liabilities (25,000) --
----------- -----------
Total Adjustments (20,401) (343,091)
Net Cash - Operating Activities (938,204) (438,817)
Investing Activities:
Acquisition of Equipment, Furniture & Fixtures (297,956) (712,316)
Purchase of Business Net of Cash Acquired -- (745,948)
----------- -----------
Net Cash - Investing Activities (297,956) (1,458,264)
----------- -----------
Financing Activities:
Net Borrowings Repayment Under Line of Credit (318,270) (289,355)
Proceeds From Warrants Exercised -- 156,250
Long-term Debt Borrowing (Repayment) (145,471) 198,316
Proceeds from Issuance of Preferred Stock and Warrants 1,699,901 --
Proceeds from Issuance of Convertible
Subordinated Notes -- 2,625,000
----------- -----------
Net Cash-Financing Activities 1,236,160 2,690,211
Net (Decrease) Increase in Cash & Cash Equivalents - 0 - 793,130
See notes to financial statements.
5
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOW, Sheet #2
(UNAUDITED)
- --------------------------------------------------------------------------------
Six months ended
----------------
June 30,
--------
1999 1998
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents -
Discontinued Operations - 0 - 29
Cash and Cash Equivalents - Beginning of Period - 0 - - 0 -
----------- -----------
Cash and Cash Equivalents - End of Period $ - 0 - $ 793,159
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Periods For:
Interest $253,388 $165,689
Taxes -0- -0-
</TABLE>
During the second quarter of 1999, the Company issued $630,292 of additional
Convertible Subordinated Notes. $280,292 of that amount was reclassified from
accrued expenses.
During the second quarter of 1999, the Company issued 19,618 shares of Preferred
Stock at a discount of $346,900 from redemption value. The discount is being
amortized to Additional Paid-in Capital over the term of the Preferred Stock.
See Notes to Financial Statements.
6
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) Basis of Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of Management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary in
order to make the financial statements not misleading. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full year.
The accompanying unaudited consolidated financial statements include the
accounts of Terrace Food Group, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes for the period ended December 31, 1998 included
in the Terrace Food Group, Inc. Form 10-KSB.
(2) Reverse Split of Common Stock
Effective March 15, 1999, the Shareholders of the Company approved a one for ten
reverse split of the Company's common stock without any other changes in
authorization par value or otherwise. All per share and share amounts for all
periods presented have been adjusted to reflect this reverse split.
(3) Name Change
In August 1998 the Company's shareholders approved the change of the Company's
name to Terrace Food Group, Inc.
(4) Loss Per Share
The computation of Loss per share of common stock is based on the weighted
average number of common shares outstanding for each period presented. There
were no potential common shares included for 1999 as they were considered
anti-dilutive. Securities that could potentially dilute earnings per share in
the future include warrants and options to purchase common stock representing
approximately 1,197,000 Common Shares. The Company has 948,342 shares of Common
Stock issued and outstanding at June 30, 1999. In 1998, the Company had
1,523,825 shares of Preferred Stock outstanding, which converted into 304,765
shares of Common Stock in July 1998.
7
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #2
(UNAUDITED)
- --------------------------------------------------------------------------------
(5) Inventories
Inventories for the Company's Food Distribution segment include produce, grocery
dry goods, and dairy products. Food Processing and Manufacturing inventories
include raw meat and seafood, other ingredients and processed products.
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
(6) Line of Credit and Term Loan
The Company and its subsidiaries maintain a financing arrangement with a bank
under which the bank provides a line of credit subject to available collateral
to a maximum of $4,000,000 and a term loan. The loans are collateralized by
virtually all assets of the Company. All cash received by the Company must be
remitted to the bank so long as there is an outstanding balance under the line
of credit, which will expire on July 15, 2001. The line of credit accrues
interest at .5% over the bank's prime lending rate. The term loan is payable in
thirty-six monthly installments of $23,810 plus annual interest of 1% above the
bank's prime rate through July 2001, with the remaining balance then due. At
June 30, 1999 the outstanding balance on the loan was $1,738,090.
(7) Convertible Subordinated Notes
In 1998, the Company issued to a private investor $2,625,000 principal amount of
Convertible Subordinated Notes ("Notes"), and warrants to purchase 40,000 shares
of Common Stock of the Company. The exercise price of the Warrants is the same
as the conversion rate of the Notes. The Notes could be converted at the option
of the Company, into Redeemable Convertible 8% Cumulative Preferred Stock
("Preferred Stock") of the Company. The Notes, Warrants and any Preferred Stock
issued to the private investor are subject to anti-dilution adjustments,
registration rights, interest and dividend adjustments and payment by the
Company of certain fees and expenses in connection with the transaction. The
Company received proceeds of $2,500,000, with $281,000 attributed to the
Warrants and Option and $2,219,000 to the Note. The Note discount of $406,000 is
being amortized over the term of the Note.
The Note agreement required the Company to attain a specified earnings level for
1998, which was not attained. Accordingly, the Company has issued the private
investor additional warrants to purchase 25,000 shares of Common Stock of the
Company that are exercisable at $6.00 per share and the interest rate of the
notes was increased to 14%.
On April 13, 1999, the Company and the private investor agreed to amend the
terms of the Notes. The maturity date extended to March 31, 2000, the Conversion
Price of the Notes to either Common or Preferred Shares and the Exercise Price
of the Warrants was set at $6.00 per share through the maturity date. Any
default which may have occurred under the agreement was waived or deemed cured.
The Company has issued the private investor an additional $631,000 in Notes as
payment for accrued and unpaid interest on the Notes through April 13, 1999 and
other considerations. The Company has also issued the private investor 25,000
additional Warrants to purchase the Company's Common Stock at $9.00 per share.
8
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #3
(UNAUDITED)
- --------------------------------------------------------------------------------
(8) Commitments
In connection with the acquisition of A-One-A Produce & Provisions, Inc., the
Company entered into 5- year employment agreements with two of its officers,
effective July 1, 1997. The employment agreements call for aggregate annual
compensation of $240,000.
In connection with the acquisition of Banner Beef and Seafood, Inc., the Company
entered into a 5-year employment agreement with its Operations Vice President at
an annual base salary of $200,000.
The Company has an employment agreement with Jonathan S. Lasko, Executive Vice
President, through August 31, 2000, for a base salary of $125,000 per year.
Additionally, the agreement provides that certain other benefits be made
available to the Executive.
(9) Preferred Stock
As of April 23, 1999, the Company issued 19,618 shares of a newly authorized
Series of Preferred Stock together with Warrants to purchase 340,000 shares of
the Company's Common Stock. The shares and warrants were purchased by a private
investor group that included three of the Company's Directors. The Company
received proceeds of approximately $1,700,000 in this transaction that are being
used for operating purposes.
The Preferred Stock was issued at a discount, calculated yield an effective
annual dividend of approximately 15%. The Preferred Stock is redeemable, in
cash, at the option of the Company through March 30, 2000, when it becomes
mandatorily redeemable either in cash or through conversion into 17% Senior
Notes which would mature on March 31, 2003. The stock purchase warrants, which
expire four years from their date of issue, provide for the purchase of
Company's Common Stock at $9.00 per share during the first year, $7.50 per share
during the second year and $6.00 per share thereafter. The discount of $346,900
from the redemption value of $1,961,800 is being amortized to Additional Paid-in
Capital to March 31,2000.
(10) Segment Data
The Company's two business units have distinct management teams and
infrastructures, offer different products and are evaluated separately in
assessing performance and allocating resources. These units are being reported
as two segments: Food Distribution and Food Processing and Manufacturing. Each
segment is managed separately, has a distinct customer base and requires
different strategic and marketing efforts. Food Distribution includes the
operations of the Company's A-One-A Produce and Provisions, Inc. and Fresh, Inc.
subsidiaries and Food Processing and Manufacturing is represented by Banner Beef
and Seafood Co. Inc.
Terrace evaluates performance based on operating profit before interest and
taxes. Accordingly, interest has not been allocated to the operating segments.
9
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #4
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
Quarter ended June 30, 1999
- ---------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $8,755,829 $1,012,182 $ 9,768,011
Depreciation and amortization 139,288 39,837 179,125
Operating income (loss) 362,072 (349,912) 12,170
Segment assets 9,507,183 5,809,708 15,316,891
Expenditures for segment property
and equipment 111,885 108,153 220,038
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total segments $ 12,170
Interest expense (411,831)
Amortization of deferred financing costs (107,862)
Interest income 2,569
Corporate expenses (155,064)
----------
Total $ (660,018)
==========
Assets:
Total segments $15,316,961
Note Receivable 106,000
Other Assets 388,729
Other current assets 132,636
----------
Total $15,944,326
==========
Quarter ended June 30, 1998
Food
Distribution Total
------------ -----
Sales $6,176,446 $ 6,176,446
Depreciation and amortization 112,555 112,555
Operating income (147,333) (147,333)
Segment assets 8,620,283 8,620,283
Expenditures for segment property
and equipment 163,696 163,696
</TABLE>
10
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #5
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
Reconciliation of segment amounts to consolidated amounts:
Income (Loss) from continuing operations:
Segment $ (147,333)
Interest expense (79,563)
Corporate expenses 4,690
-----------
Total $ (222,206)
===========
Assets:
Segment $ 8,525,786
Other Assets 298,424
Notes Receivable 159,000
Restricted cash 94,497
Other current assets 1,114,062
-----------
Total $10,191,769
===========
Six Months ended June 30, 1999
- ------------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $18,771,224 $2,093,782 $20,865,006
Depreciation and amortization 274,744 274,744
Operating income (loss) 894,724 (641,373) 253,351
Segment assets 8,718,816 5,766,354 14,485,170
Expenditures for segment property
and equipment 163,696 134,260 297,956
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total segments $ 253,351
Interest expense (724,336)
Amortization of deferred financing costs (215,784)
Interest income 5,749
Corporate expenses (236,783)
----------
Total $ (917,803)
==========
</TABLE>
11
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #6
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
<TABLE>
<CAPTION>
Six months ended June 30, 1998
- ------------------------------
Food
Distribution Total
------------ -----
<S> <C> <C>
Sales $13,429,518 $13,429,518
Depreciation and amortization 211,962 211,962
Operating income 217,347 217,347
Segment assets 8,620,283 8,620,283
Expenditures for segment property
and equipment 163,696 163,696
Reconciliation of segment amounts to consolidated amounts:
Income (Loss) from continuing operations:
Segment $ 217,347
Interest expense (156,745)
Corporate expenses (156,328)
----------
$ (95,726)
===========
</TABLE>
12
<PAGE>
Item 2.
- --------------------------------------------------------------------------------
TERRACE FOOD GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The Company's distribution and produce processing subsidiary A-One-A Produce and
Provisions, Inc. distributes fresh produce and dairy products to the
foodservice, cruise ship and export customers in South Florida. The Company's
manufacturing and processing subsidiary Banner Beef and Seafood Company, Inc.
operates in the value added Home Meal Replacement sector and sells to the retail
and foodservice markets. The Company's consolidated revenues for the six months
ended June 30, 1999 were approximately $20, 865,000 compared to $13,429,00 for
the same period in 1998 or an increase of approximately 55%. The Company's
operating segment income from operations increased approximately $36,000 for the
six months ended June 30, 1999 from the prior year period.
Management believes that as its plan for growth in its newly acquired
manufacturing subsidiary continues to be implemented profitable operating levels
will be obtained at both A-One-A and Banner Beef.
SEGMENT ANALYSIS
- ----------------
Food Distribution
- -----------------
The Company's food distribution segment is comprised of its A-One-A Produce and
Provisions, Inc. and Fresh, Inc. operations which distribute and process fresh
produce and dairy products throughout South Florida as well as export and cruise
ship customers from the local ports. Revenues for this segment reached
$18,771,224 for the six months ended June 30, 1999 compared to $13,429,519 for
the six months ended June 30, 1998 and increase of approximately 40%. Operating
income was $892,000 for the first six months of 1999 compared to $217,000 for
the same period in 1998. This increase of approximately 311% resulted from the
large revenue increase in A-1-A sales as well as managements continued directive
towards expense control. During the first six months the company was successful
in many of its bids for large Hotels, Hospitals and Cruise Ship accounts which
had a large impact on sales. Through continued sales growth and further expense
control, the Company's A-One-A segment will maintain and build on its current
levels of profitability. Management believes that as the year further progresses
and into future periods the investment made into technology and plant upgrades
will continue to pay off. The current customer mix has helped smooth A-One-A's
cyclical history and by continuing the current push towards larger volume
accounts, this out of season sales trend should continue.
Food Processing and Manufacturing
- ---------------------------------
The Company's food processing and manufacturing segment is comprised of its
Banner Beef and Seafood subsidiary. The company purchased Banner to enter the
higher margin, value added segment of the food industry. Management sees a
strong opportunity to participate in the Home Meal Replacement segment of the
industry. Revenues for the six months ended June 30, 1999 were $2,093,782 with
an operating loss of $641,000. There are no comparable results for 1998, as the
Company did not own Banner Beef and Seafood. The test marketing that the Company
has been through in the first six months has been successful with major chains
around the Country.
13
<PAGE>
Item 2.
- --------------------------------------------------------------------------------
TERRACE FOOD GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS, Sheet #2
- --------------------------------------------------------------------------------
The Company's current prospect exposure encompasses over five thousand retail
and club markets that represent over $150 billion in annual sales. Initial
feedback and startup has already begun to take place and initial consumer
response has been very positive. As these Home Meal Replacement opportunities
continue to materialize, management believes Banner sales will be dramatically
impacted. In addition, as revenues continue to grow manufacturing efficiencies
and overhead absorption will be realized which should result in positive
earnings for the Company.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1999 the Company had a cash deficit of approximately $1,010,000 and
a working capital deficit of approximately $1,855,000.
During the first six months of 1999, management believes the food distribution
operations have improved with the securing of substantial new business,
particularly with high volume institutional accounts. Management intends to
continue its aggressive marketing efforts in these areas as well as to cruise
line and export customers.
Management further believes that a key element in its plan is to substantially
increase sales volume at Banner, where the Company has developed the capability
of producing high quality innovative products for the home meal replacement
("HMR") market.
In April 1999, the Registrant issued 19,618 shares of a newly authorized
Preferred Stock together with Warrants to purchase 340,000 shares of the
Registrant's Common Stock. The shares and warrants were purchased by a private
investor group that included three of the Registrant's Directors. The Registrant
received proceeds of approximately $1,700,000 in this transaction which are
being used for working capital.
Management believes that the transactions described above and operating
improvements will be sufficient to provide for its continuing operations.
14
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
4.1 Certificate of Designations for Series C Preferred Stock
=======================================
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated April 26, 1999 to report a press
release announcing the completion of its $1.6 million preferred equity financing
and issuance of its Series C Preferred Stock.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TERRACE FOOD GROUP, INC.
(Registrant)
Dated: August 16, 1999 By: /s/Jonathan S. Lasko
-------------------------------
Jonathan S. Lasko,
Executive Vice President &
Chief Operating Officer
Dated: August 16, 1999 By: /s/William P. Rodrigues, Jr.
-------------------------------
William P. Rodrigues, Jr.,
Principal Financial Officer
16
EXHIBIT 4.1
CERTIFICATE OF DESIGNATIONS
OF
TERRACE FOOD GROUP, INC.
Pursuant to Section 151 of the Delaware General Corporation
Law (the "GCL"), TERRACE FOOD GROUP, INC., a Delaware corporation (the
"Corporation"), certifies as follows:
FIRST: Under the authority contained in Article FOURTH of the
Certificate of Incorporation of the Corporation, the Board of Directors of the
Corporation has classified an aggregate of 19,000 shares of the authorized but
unissued shares of Preferred Stock of the Corporation into a series which shall
be designated Series C Preferred Stock.
SECOND: The following resolution was adopted by the Board of
Directors on April 13, 1999 and such resolution has not been modified and is in
full force and effect on the date hereof:
RESOLVED, that the Board of Directors hereby creates, from the
authorized but unissued shares of Preferred Stock of the Corporation, a series
of preferred stock designated as Series C Preferred Stock, par value $.001 per
share (the "Preferred Stock"), and hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of such
series, as follows:
Section 1. Preferred Stock Dividends.
1.1 General Dividend Obligation. When, as and if declared by
the Board of Directors of the Corporation, the Corporation shall pay to the
holders of record of the Preferred Stock, out of the funds of the Corporation
legally available for the payment of dividends under the General Corporation Law
of the State of Delaware, preferential dividends at the times and in the amounts
provided for in this Section 1.
1.2 Payments of Dividends; Payments in Additional Shares. (a)
When declared by the Board of Directors of the Corporation, dividends on the
Preferred Stock shall be payable on whole shares of Preferred Stock on each
Dividend Payment Date (capitalized terms not otherwise defined herein being used
in this Certificate of Designations with the definitions set forth in Section
11) to the holders of Preferred Stock on the record date determined by the Board
of Directors of the Corporation in accordance with the by-laws of the
Corporation. Dividends shall
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be paid by mailing the Corporation's good check in the proper amount to each
holder of record of Preferred Stock at such holder's address as it appears on
the Corporation's stock legend at least five (5) days prior to the due date of
each dividend or by wire transfer of immediately available funds so as to be
received by such holder on the due date of such dividend.
(b) If at any time dividends on the outstanding Preferred
Stock at the rate set forth herein shall not have been fully paid or declared
and set aside for payment, no dividends or other distributions shall be declared
or paid upon or set apart for payment on the shares of any other class of Junior
Securities.
1.3 Calculation of Dividends. Dividends on each share of
Preferred Stock shall be calculated cumulatively at the rate and in the manner
prescribed herein from and including the date of issuance of such share of
Preferred Stock, whether or not such dividends shall have been declared and
whether or not there shall be (at the time such dividends are calculated or
become payable or at any other time) profits, surplus or other funds or assets
of the Corporation legally available for the payment of dividends. For purposes
of this Section 1.3, the date on which the Corporation shall initially issue any
share of Preferred Stock shall be deemed to be its "date of issuance" regardless
of the number of times transfer of such share of Preferred Stock shall be made
on the stock register maintained by or for the Corporation and regardless of the
number of certificates which may be issued to evidence such share of Preferred
Stock (whether by reason of transfer of such share or for any other reason).
1.4 Dividend Rates. Dividends shall be cumulative, and shall
accrue on a daily basis on each Outstanding share of Preferred Stock at the rate
per annum (computed on the basis of a 360-day year having twelve thirty-day
months and counting actual days elapsed) of thirteen percent (13%) of the
Liquidation Value of each share of Preferred Stock. To the extent not paid, on a
Dividend Payment Date all unpaid dividends accrued on each share of Preferred
Stock Outstanding during such quarter (or from and including the original date
of issuance of such share in the case of the initial quarter-end after the date
of issuance) shall be added to the Liquidation Value of such share and shall
remain a part thereof until such dividends are paid.
Section 2. Liquidation Preferences.
Subject to the provisions of applicable law, upon any
liquidation (complete or partial), dissolution or winding up of the Corporation,
or any similar distribution of its assets to its stockholders which results in a
return of capital, whether voluntary or involuntary, the Preferred Stock will be
pari passu with any other Outstanding shares of the Corporation's Convertible
Preferred Stock, and the holders of the Preferred Stock shall be entitled,
before any distribution or payment is made upon any Junior Securities of the
Corporation, to be paid out of the assets of the Corporation available for
distribution to its stockholders (whether from capital, surplus or earnings) an
amount in cash equal to the sum of (i) the aggregate Liquidation Value of all
shares of Preferred Stock then Outstanding, plus (ii) all accrued unpaid
dividends on such shares, and shall not be entitled to any further payment.
Written notice of such liquidation,
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dissolution, winding up or other distribution of assets, stating a payment date,
the amount of the payment and the place where the amounts distributable shall be
payable, shall be mailed by certified or registered mail, return receipt
requested, not less than sixty (60) days prior to the payment date stated
therein, to each record holder of any share of Preferred Stock entitled thereto
at the address for such record holder shown on the Corporation's records.
Neither the consolidation nor merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation of all
or any part of its assets, shall be deemed to be a liquidation, dissolution,
winding up or similar distribution of the Corporation within the meaning of any
of the provisions of this Section 2, provided that such transaction does not
effect a return of capital (as defined in the General Corporation Law of the
State of Delaware) to the Corporation's stockholders.
Section 3. Redemptions of Preferred Stock.
3.1 Redemption Price. For each share of Preferred Stock which
is to be redeemed by the Corporation at any time and for any reason in a
redemption pursuant to this Section 3, the Corporation shall be obligated on the
Redemption Date, regardless of whether the Corporation shall be able or legally
permitted to make such payment on the Redemption Date, to pay to the holder
thereof (upon surrender by such holder at the Corporation's principal of lice of
the certificate representing such share of Preferred Stock duly endorsed in
blank or accompanied by an appropriate form of assignment) the Redemption Price
for such share of Preferred Stock, payable in cash, except as otherwise
specified in Section 3.5 hereof
3.2 Redeemed or Otherwise Acquired Shares Not to be Reissued.
Any shares of Preferred Stock redeemed pursuant to this Section 3 or otherwise
acquired by the Corporation shall not be reissued, sold or transferred by the
Corporation and shall be retired.
3.3 Determination of Number of Each Holder's Shares to be
Redeemed. The number of shares of Preferred Stock to be redeemed from each
holder thereof in each redemption under this Section 3 shall be determined by
multiplying the total number of shares of Preferred Stock to be redeemed times a
fraction, the numerator of which shall be the total number of shares of
Preferred Stock then held by such holder and the denominator of which shall be
the total number of shares of Preferred Stock then Outstanding, rounded if the
result is fractional to the nearest whole number of shares.
3.4 Optional Redemption by Corporation. Subject to applicable
law, the Corporation shall have the right, at any time and from time to time, to
redeem, in whole or in part, shares of the Preferred Stock at the Redemption
Price, on at least thirty (30) days' notice.
3.5 Scheduled Redemptions of Preferred Stock. On March 31,
2000, the Corporation shall purchase and redeem all of the shares of Preferred
Stock then Outstanding. At the option of the Corporation, upon a redemption as
set forth in this Section 3.5, the Redemption Price payable to a holder of
Preferred Stock may be paid in whole or in part in cash or by the
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<PAGE>
issuance to such holder of a promissory note in the form of Exhibit A hereto, in
a principal amount equal to such Redemption Price.
3.6 Redemption Upon Corporate Change. (a) In the event any
Corporate Change is to occur, any holder of shares of Preferred Stock may
require the Corporation to redeem all or any portion of the Preferred Stock
owned by such holder immediately prior to, or concurrently with, the
consummation of such Corporate Change. Written notice of any impending Corporate
Change, and the substance and intended date of consummation thereof, shall be
mailed by certified or registered mail, return receipt requested, not more than
sixty (60) nor less than ten (10) days prior to the date of consummation
thereof, to each record holder of shares of Preferred Stock at the address for
such record holder shown on the Corporation's records. Each such holder shall
have ten (10) days from the date of receipt of such notice to request (by
written notice mailed to the Corporation) redemption of all or any portion of
the Preferred Stock owned by such holder. Immediately prior to the consummation
of such Corporate Change, the Corporation shall redeem all Preferred Stock as to
which requests under this Section 3.6(a) have been made.
(b) "Corporate Change" means (i) a public offering of the
Corporation's securities registered under the Securities Act of 1933, as
amended, (ii) the sale, exchange or transfer of all or substantially all of the
Corporation's assets, or (iii) any transaction or series of related transactions
in which one (1) or more persons (other than a holder of Preferred Stock or an
affiliate thereof) shall directly or indirectly acquire ownership of or control
over capital stock (not including shares held or controlled by them on the date
of initial issuance of the Preferred Stock) of the Corporation (or securities
exchangeable for or convertible into such stock) entitled to elect fifty percent
(50%) or more of the Corporation's Board of Directors and representing at least
fifty percent (50%) of the number of shares of Common Stock Deemed Outstanding.
3.7 Other Mandatory Redemptions. The Corporation shall apply
to the redemption of Preferred Stock and any outstanding Convertible Preferred
Stock, pro rata from the holders thereof, all proceeds received from any sale of
its securities or any indebtedness incurred to banks or other financial
institutions subsequent to the original issuance date, until redeemed.
3.8 Notice of Redemption. Except as otherwise expressly
provided herein, notice of any redemption of Preferred Stock, specifying the
time and place of redemption, the Redemption Price and the Section and paragraph
pursuant to which such redemption is being made, shall be mailed by certified or
registered mail, return receipt requested, to each holder of record of shares of
Preferred Stock to be redeemed, at the address for such holder shown on the
Corporation's records, not more than sixty (60) nor less than thirty (30) days
(ten (10) days, in the case of a redemption pursuant to Section 3.5) prior to
the date on which such redemption is to be made. The notice shall also specify
the number of shares of Preferred Stock and the certificate numbers thereof
which are to be redeemed. With respect to redemptions made pursuant to Section
3.4, upon mailing any such notice of redemption the Corporation shall become
obligated to redeem at the time of redemption specified therein all shares of
Preferred Stock therein specified. In case less than all the shares of Preferred
Stock represented by any certificate are
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<PAGE>
redeemed, a new certificate representing the unredeemed shares of Preferred
Stock shall be issued to the holder thereof without cost to such holder.
3.9 Rights After Redemption Date. Provided that the Redemption
Price is paid in full on the applicable Redemption Date, no share of Preferred
Stock shall be entitled to any dividends accrued after its Redemption Date, and
ori such Redemption Date, except as otherwise provided herein or by law, all
rights of the holder of such share of Preferred Stock as a stockholder of the
Corporation, by reason of the ownership of such share, shall cease, except the
right to receive the Redemption Price of such share upon presentation and
surrender of the certificate representing such share, and such share shall not
after such Redemption Date be deemed to be Outstanding.
3.10 Other Redemptions. The Corporation shall neither redeem
nor otherwise acquire any shares of any class of Preferred Stock except (i) as
expressly authorized in this Certificate of Designations, or (ii) pursuant to
any offer of redemption made to the holders of Preferred Stock of such class pro
rata according to the shares held by them.
3.11 Deposit of Redemption Price. If on or before the date of
redemption specified in any notice of redemption of any share of Preferred
Stock, the Corporation shall irrevocably deposit the amount of the Redemption
Price thereof with a bank or trust company having an of lice in the City of New
York, designated in such notice of redemption, in trust for the benefit of the
holder of such share of Preferred Stock, such share of Preferred Stock shall be
deemed to have been redeemed on the date so specified, whether or not the
certificate for such share shall be surrendered for redemption and canceled.
Section 4. Voting Rights of Preferred Stock.
4.1 General. The holders of the Preferred Stock are entitled
to cast one vote for each share held at all meetings of stockholders for all
purposes, including the election of directors.
4.2 Preferred Director. The holders of Preferred Stock, voting
as a class, shall be entitled to elect one (1) director to serve on the Board of
Directors of the Corporation.
Section 5. Registration of Transfer.
The Corporation shall keep at its principal of rice (or such other place as the
Corporation reasonably designates) a register for the registration of shares of
Preferred Stock. Upon the surrender of any certificate representing Preferred
Stock at such place, the Corporation shall, at the request of the registered
holder of such certificate, execute and deliver (at the Corporation's expense) a
new certificate or certificates in exchange therefor representing the aggregate
number of shares represented by the surrendered certificate, subject to the
requirements of applicable securities laws. Each such new certificate shall be
registered in such name and shall represent
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<PAGE>
such number of shares as shall be requested by the holder of the surrendered
certificate, shall be substantially identical in form to the surrendered
certificate, and the holders of the shares represented by such new certificate
shall be entitled to receive all theretofore payable but unpaid dividends on the
shares represented by the surrendered certificate.
Section 6. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of the Preferred Stock and, in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the registered holder is an
institutional investor its own agreement of indemnity, without bond, shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expensed execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares represented by such lost, stolen, destroyed or mutilated certificate, and
the shares represented by such new certificate shall be entitled, among other
things, to receive all theretofore payable but unpaid dividends on the shares
represented by the lost, stolen, destroyed or mutilated certificate.
Section 7. Restrictions on Corporate Action.
So long as any shares of Preferred Stock shall be Outstanding,
and in addition to any other approvals or consents required by law, without the
prior affirmative vote or written consent of the holders of at least
seventy-five percent (75%) of all shares of the Preferred Stock then
Outstanding:
(a) The Corporation shall not authorize, create or issue any
shares, or securities convertible into such shares, of any class of
stock having preference over, or being on a parity with, the Preferred
Stock with respect to either the payment of dividends or rights upon
dissolution, liquidation, winding up or similar distribution of the
Corporation or distribution of assets to its shareholders by way of
return of capital, whether voluntary or involuntary; provided, however,
that notwithstanding anything in this Section 7 to the contrary, the
prior affirmative vote or written consent of each holder of shares of
Preferred Stock then Outstanding shall be not required with respect to
the issuance of the Convertible Preferred Stock.
(b) Subject to the provisions of applicable law, the
Corporation shall not liquidate, dissolve or wind up its affairs;
provided, however, that notwithstanding anything in this Section 7 to
the contrary, the prior affirmative vote or written consent of each
holder of shares of Preferred Stock then Outstanding shall be not
required with respect to any such transaction if, prior to or
simultaneously with the consummation of such transaction, the
Corporation shall purchase or redeem all of the Preferred Stock then
Outstanding in accordance with the provisions of this Certificate of
Designations.
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<PAGE>
(c) The Corporation shall not sell, lease, or convey all or
substantially all of the property or business of the Corporation, or be
a party to any merger, consolidation or other transaction which would
result in a Corporate Change, as that term is defined in Section 3.6(b)
hereof; provided, however, that notwithstanding anything in this
Section 7 to the contrary, the prior affirmative vote or written
consent of each holder of shares of Preferred Stock then Outstanding
shall be not required with respect to any such transaction if, prior to
or simultaneously with the consummation of such transaction, the
Corporation shall purchase or redeem all of the Preferred Stock then
Outstanding in accordance with the provisions of this Certificate of
Designations.
(d) The Corporation shall not amend, alter or repeal any of
the provisions of this Certificate of Designations, nor shall it amend,
alter or repeal any of the other provisions of its Certificate of
Incorporation or the by-laws of the Corporation in any manner which
adversely affects the preferences and rights and the qualifications,
limitations or restrictions of the Preferred Stock or the holders
thereof, nor shall the Corporation increase the number of shares of the
Preferred Stock which the Corporation is authorized to issue; provided,
however, that notwithstanding anything in this Section 7 to the
contrary, the prior affirmative vote or written consent of holders of
at least ninety percent (90%) of the shares of Preferred Stock then
Outstanding shall be required with respect to any amendment, alteration
or repeal of any of the provisions of this Certificate of Designations
or the Corporation's Certificate of Incorporation or the by-laws of the
Corporation relating to or affecting dividend payments on Preferred
Stock or any such provisions relating to or affecting redemption of
Preferred Stock.
(e) The Corporation shall not declare or pay any dividend or
make any other distribution on any Junior Securities, other than
dividends or distributions payable solely in Junior Securities, or
purchase, redeem, or otherwise acquire for any consideration, or set
aside as a sinking fund or other fund for the redemption or repurchase
of any Junior Securities or any warrants, rights or options to purchase
the same.
(f) The Corporation shall not declare or pay any dividend or
make any other distribution on the Convertible Preferred Stock, other
than dividends or distributions payable solely in Convertible Preferred
Stock, or purchase, redeem, or otherwise acquire for any consideration,
or set aside as a sinking fund or other fund for the redemption or
repurchase of the Convertible Preferred Stock or any warrants, rights
or opritons to purchase the same, unless after giving effect to any
such dividend, distribution, purchase, redemption or other action all
accrued dividends on the Preferred Stock then Outstanding have been
paid in full and any redemption obligations with respect to the
Preferred Stock have been paid or performed in full.
Section 10. Closing Books.
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The Corporation will not close its books against the transfer
of any share of Preferred Stock.
Section 11. Definitions.
As used in this Certificate of Designations the following
terms shall have the following meanings, which meanings shall be equally
applicable to the singular and plural forms of such terms:
"Business Day" means any day which is not a Saturday or a
Sunday or a day on which banks are permitted to close in New York, New York.
"Common Stock" means the Common Stock, par value $0.001 per
share, of the Corporation, and any capital stock of any class of the Corporation
hereafter authorized which shall not be limited to a fixed sum or percentage of
par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution, winding up or similar distribution of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time
(exclusive of any shares of Common Stock owned or held by or for the account of
the Corporation).
"Convertible Preferred Stock" means the Corporation's 8%
Convertible Preferred Stock, $.001 par value.
"Dividend Payment Date" means, with respect to Preferred
Stock, the last day of March, June, September and December in each year (or if
any such day is not a Business Day the immediately preceding Business Day).
"Junior Security" means (a) the Corporation's Common Stock and
(b) any other equity security of any kind which the Corporation or any
Subsidiary shall at any time issue or be authorized to issue other than
Preferred Stock, other than the Company's Convertible Preferred Stock.
"Liquidation Value" of any share of Preferred Stock as of any
particular date means an amount equal to the sum of $100.00 plus any accrued and
unpaid dividends on such share of Preferred Stock.
"Outstanding" when used with reference to shares of Preferred
Stock as of any particular time shall mean shares thereof issued and outstanding
at such time and shall not include any shares of Preferred Stock represented by
any certificate in lieu of which a new
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<PAGE>
certificate has been executed and delivered by the Corporation in accordance
with Section 7 or Section 8, but shall include only those shares represented by
such new certificate.
"Person" means and includes an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization and a
government or any department or agency thereof.
"Redemption Date" as to any share of Senior Preferred Stock
means the date specified in the notice of redemption delivered pursuant to
Section 3.9; provided that for purposes of Section 3.9, the Redemption Date
shall be the date on which the applicable Redemption Price is actually paid to
the holder of such share of Preferred Stock or deposited in trust for the
benefit of such holder pursuant to Section 3.11.
"Redemption Price" as to any share of Preferred Stock means
the Liquidation Value of such share.
"Subsidiary" means each corporation or other entity, if any,
of which the Corporation or another Subsidiary shall own at least fifty percent
(50%) of (x) the stock of any class having power under ordinary circumstances to
vote for the election of directors or (y) the capital or equity, however named.
Section 12. Miscellaneous.
(a) The unenforceability or invalidity of any provision or
provisions of this Certificate of Designations shall not render invalid or
unenforceable any other provision or provisions herein contained.
(b) Section and paragraph headings herein are for convenience
only and shall not be construed as a part of this Certificate of Designations.
(c) All notices to holders of Preferred Stock required or
permitted hereunder shall be sent by overnight courier service, prepaid,
addressed to each such holder at the address for such holder shown on the books
of the Corporation.
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<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed on this
14th day of April, 1999, and the signature of the undersigned shall constitute
the affirmation and acknowledgment of the undersigned, under penalties of
perjury, that this Certificate is the act and deed of the undersigned and that
the facts stated in the Certificate are true.
TERRACE FOOD GROUP, INC..
By:/s/ Steven Shulman
-----------------------------------
ATTEST:
/s/ Gerald L. Fisherman
--------------------------------------
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AS
OF JUNE 30, 1999 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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