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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 0-22432
DIPLOMAT DIRECT MARKETING CORPORATION
(Exact name of registrant as specified in its charter)
(Formerly Diplomat Corporation)
Delaware 13-3727399
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 Alfred Avenue
Teaneck, New Jersey 07666
(Address of principal executive offices) (Zip Code)
(201) 833-4450 (Registrant's telephone number, including area code)
Check 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, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
The number of shares outstanding of the Registrant's Common Stock,
$.0001 Par Value, on August 13, 1999 was 16,696,414 shares.
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DIPLOMAT DIRECT MARKETING CORPORATION
JUNE 30, 1999 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements .............................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 2. Changes in Securities and Use of Proceeds......................... 21
Item 3. Defaults Upon Senior Securities................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............... 21
Item 5. Other Information................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 23
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. We are
making these forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These include, among others:
o the availability of vendor credit;
o the successful expansion of product lines in our catalogs;
o consumer acceptance of our new products;
o price pressures and other competitive factors leading to a decrease
in anticipated revenues and gross profit margins; and
o a downturn in general economic conditions.
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks described above and the other cautionary statements in this
Quarterly Report.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and September
30, 1998........................................................ 5
Consolidated Statements of Operations
for the nine months and three months ended June 30, 1999
and 1998 ...................................................... 6
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1999 and 1998 .............. 7
Notes to Consolidated Financial Statements....................... 8-11
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Diplomat Direct Marketing Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30, 1999 September 30, 1998
------------- -------------------
ASSETS
Current:
Cash and cash equivalents $815,081 $322,778
Accounts receivable, net 1,745,555 1,921,209
Inventories 12,658,574 11,066,380
Prepaid catalogs 4,111,176 8,051,651
Prepaid expenses 1,866,007 1,379,567
Other current assets 887,646 837,946
----------- -----------
Total current assets 22,084,039 23,579,531
----------- -----------
Property and equipment, net 3,740,505 4,176,903
----------- -----------
Other Assets:
Goodwill, net of amortization 14,216,343 14,587,358
Customer list, net of amortization 6,500,000 7,100,000
Note receivable 870,000 870,000
Other 1,952,090 645,091
----------- -----------
Total assets $49,362,977 $50,958,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $13,411,570 $18,469,136
Loans payable-officers 15,000 225,000
Loans payable-bank 8,139,625 5,504,371
Open prepaid orders 709,588 1,211,165
Outstanding merchandise credit 2,048,516 1,892,148
Current maturities of long-term debt 1,811,758 939,816
----------- -----------
Total current liabilities 26,136,057 28,241,636
----------- -----------
Long term debt, less current maturities 9,127,847 6,383,585
----------- -----------
Stockholders' equity
Preferred stock, $.01 par value per share, shares authorized 1,000,000; issued
and outstanding 396,645 and 546,133
3,841 5,461
Common stock, $.0001 par value-shares authorized
50,000,000; issued and outstanding 15,980,316
and 11,162,372 1,601 1,112
Additional paid-in capital 31,838,781 25,835,445
Accumulated (deficit) (17,745,150) (9,508,356)
----------- -----------
Total stockholders' equity 14,099,073 16,333,662
----------- -----------
Total liabilities and stockholders' equity $49,362,977 $50,958,883
=========== ===========
See accompanying notes to consolidated financial statements.
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Diplomat Direct Marketing Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Nine For the Nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $56,442,962 $57,118,755 $15,380,425 $20,603,127
Cost of goods sold 28,613,001 26,029,624 8,074,566 9,000,300
----------- ----------- ----------- -----------
Gross profit 27,829,961 31,089,131 7,305,859 11,602,827
Selling, general and administrative expenses 33,769,557 28,018,329 9,954,294 10,947,665
----------- ----------- ----------- -----------
Operating income (loss) (5,939,596) 3,070,805 (2,648,435) 655,162
Interest expense (1,701,432) (958,501) (651,273) (316,252)
----------- ----------- ----------- -----------
Income (loss) before income tax (expense)
Benefit (7,641,028) 2,112,304 (3,299,708) 338,910
Income tax (expense) benefit -- -- -- --
----------- ----------- ------------ -----------
Income (loss) from continuing operations (7,641,028) 2,112,304 (3,299,708) 338,910
Loss on discontinued operations (37,386) (2,311,691) -- (239,593)
----------- ----------- ----------- -----------
Net income (loss) (7,678,414) (199,387) (3,299,708) 99,317
Preferred stock dividends (558,380) (236,250) (128,630) (78,750)
=========== =========== ========== ===========
Net income (loss) to common stockholders $(8,236,794) $(435,637) $(3,428,338) $20,567
============ =========== =========== ===========
Per common share-Basic:
Net income (loss) from continuing
operations $(0.63) $0.18 $(0.23) $0.02
Net income (loss) from discontinued
operations -- (0.22) -- $(0.02)
Net income (loss)-Basic $(0.63) $(0.04) $(0.23) $0.00
=========== =========== =========== ===========
Per common share-Diluted:
Net income (loss) from continuing
Operations $(0.61) $0.13 $(0.22) $0.02
Net income (loss) from discontinued
Operations -- (0.14) -- (0.01)
----------- ----------- ----------- -----------
Net income (loss)-Diluted $(0.61) $(0.01) $(0.22) $0.01
============ =========== =========== ===========
Average number of shares used in
Computation
Basic 13,021,731 10,596,513 14,712,778 11,049,872
Diluted 13,576,731 15,886,916 15,267,778 15,693,317
</TABLE>
See accompanying notes to consolidated financial statements.
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Diplomat Direct Marketing Corp and Subsidiaries
Consolidated Statements of Cash Flow
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months For the Nine
Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,678,414) $(199,385)
Adjustments to reconcile net income to net cash used in operating activities:
Amortization 971,015 841,569
Depreciation 583,019 566,495
Write off of goodwill of Biobottoms -- 3,659,245
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 175,654 (532,484)
(Increase) decrease in inventories (1,592,194) (4,202,862
(Increase) decrease in prepaid expenses (486,440) (3,001,261)
(Increase) decrease in prepaid catalogs 3,940,475 (3,217,538)
(Increase) decrease in other current assets (49,700) 478,311
(Increase) decrease in other assets (1,306,999) (6,076,819)
(Increase) decrease in assets held for sale -- (3,143,235)
Increase (decrease) in accounts payable and accrued liabilities (5,057,565) 7,481,115
Increase (decrease) in outstanding merchandise credits 156,368 1,118,170
Increase (decrease) in prepaid orders (501,577) 1,131,351
------------ ------------
Net cash used in operating activities (10,846,358) (5,097,328)
------------ ------------
- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of Biobottoms -- 1,000,000
Acquisition of subsidiary assets -- (5,181,596)
Purchase of property and equipment (146,622) (741,853)
------------ -----------
Net cash from investing activities (146,622) (4,923,449)
------------ -----------
Cash flows from financing activities:
Proceeds of loans -- 5,000,000
Increase (decrease) in long term debt and loans payable 4,000,000 --
Revolving credit loans 2,635,254 (233,173)
Preferred stock dividends paid (558,380) (284,140)
Issuance of preferred and common stock 6,002,205 5,893,794
Repayment of long-term debt and loan payables (593,796) (236,197)
------------ -----------
Net cash provided by financing activities 11,485,283 10,140,284
------------ -----------
Net increase (decrease) in cash 492,304 119,507
Cash at beginning of period 322,778 51,877
============ ===========
Cash at end of period $815,081 $171,384
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
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Diplomat Direct Marketing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) The consolidated financial statements include the accounts of
Diplomat Direct Marketing Corporation (the "Company") and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
(b) Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
(c) Property and equipment are stated at cost. Depreciation is provided
using primarily the straight-line method and accelerated methods (for machinery
and equipment) over the expected useful lives of the assets, which range from
31.5 years for the building and real property to between five and ten years for
machinery, furniture and equipment.
(d) The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109. Pursuant to SFAS No. 109, for income taxes, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse.
(e) For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
(f) 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(g) Statement of Financial Accounting Standards No. 128, "Earnings per
Share." ("SFAS No. 128") is effective for financial statements for fiscal
periods ending after December 15, 1997. The new standard establishes standards
for computing and presenting earnings per share. The effect of adopting SFAS No.
128 is not expected to be material.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards are components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of and enterprises about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance.
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Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of these standards is not
expected to have a material effect on the Company's financial position or
results of operations. The Company is currently reviewing SFAS No. 131 and has
of yet been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures.
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments. The Company has not in the past
or does it anticipate that it will engage in transactions involving derivative
instruments which will impact the financial statements.
(h) Long-lived assets, primarily property and equipment, goodwill and
customer lists are periodically reviewed by management to determine if there has
been a permanent impairment in their value by evaluating various factors,
including current and projected operating results. Based on this assessment,
management concluded that at June 30, 1999 and September 30, 1998, the Company's
long-lived assets were fully realizable.
(i) The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments.
(j) The Company accounts for stock transactions with employees in
accordance with APB No. 25, "Accounting for Stock Issued to Employees." In
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," the
Company has adopted the pro forma disclosure requirements contained therein.
(k) Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period in
which related revenues are expected to be realized, generally three to six
months. Advertising costs, principally the amortization of such prepaid catalog
costs attributable to continuing operations, included in the accompanying
statement of operations were $20,184,000 for the nine months ended June 30, 1999
and $5,684,000 for the three months ended June 30, 1999. Included in current
assets at June 30, 1999, is $4,111,000 and at September 30, 1998, $8,052,000 of
prepaid catalog costs.
(l) Revenue is recognized at the time merchandise is shipped to
customers. Proceeds received for merchandise not yet shipped are reflected as
"prepaid orders," a current liability.
(m) The Company issues merchandise credits for certain returns of
merchandise sold with substantial discounts. Because of Lew Magram's policy of
writing off unused credits issued with the return of sale merchandise, it may be
liable for future claims on such amounts previously written off.
2. Business
The Company is engaged in two continuing lines of business and,
accordingly, its operations are classified into two business segments: mail
order catalog retail operations, and the manufacturing, marketing and
distribution of infants' accessories principally to mass merchandisers. In 1998,
the Company sold the Biobottoms subsidiary. The operations of that company have
been accounted for as discontinued operations.
(a) Acquisition of Lew Magram
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On February 19, 1998, the Company (through its wholly owned subsidiary,
Magram Acquisition Corp.) closed on the acquisition of Lew Magram, Ltd. ("Lew
Magram"), a New York corporation with a place of business in Teaneck, New
Jersey, which is in the business of mail order catalog sales of women's
clothing. For accounting purposes, the acquisition was effected as of July 1,
1997, the date that the Company assumed effective control of Lew Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of 95,000 shares of the Company's $.01 par value, Series D
Preferred Stock, convertible into 3,166,667 shares of the Company's common stock
(which assumes a market value of $4.00 per share). The preferred stock does not
pay any dividends, but participates with common in any Company distributions.
The preferred stock has a liquidation preference of $100 per share. An
additional 250,000 shares of common stock were also given as consideration to
the sellers. The fair market value of the consideration was approximately $8.7
million and acquisition costs were approximately $646,000. The Company recorded
the carryover basis for certain selling stockholders of Lew Magram who are also
principal stockholders of the Company.
The net fair market value of identifiable assets acquired was
approximately $6.9 million, and included customer lists valued at $5 million.
The customer lists are being amortized over a period of 10 years. Cost in excess
of net assets acquired amounted to approximately $10 million and is being
amortized over 25 years.
(b) Acquisition of Brownstone
On October 30, 1997, the Company acquired out of bankruptcy all the
assets of Jean Grayson's Brownstone Studios, Inc., a mail order catalog company
for the assumption of approximately $10,000,000 in liabilities and an option to
the owners of Jean Grayson's Brownstone Studios, Inc. to purchase 200,000 shares
of Diplomat common stock at $3.9375 (market value) for a period of three years.
The acquisition was accounted for as a purchase, accordingly, the operating
results include the operations of Brownstone for the period November 1, 1997,
through October 30, 1998. The purchase price was allocated to assets acquired
based on their estimated fair value, including customer lists valued at
$3,000,000 which will be amortized on a straight line basis over ten years. This
treatment results in approximately $4,000,000 in cost in excess of net assets
acquired which will be amortized on a straight line basis over twenty-five
years. As a result of this acquisition, the scope of the Company's business has
expanded into the mature women's apparel and accessories markets primarily
through direct mail catalogs. Since Brownstone was in bankruptcy prior to its
acquisition in October 1997, presentation of financial information as if it had
been acquired on October 1, 1996 was not available and would not be meaningful.
(c) Sale of Biobottoms
On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to
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reduction depending on the net assets acquired as determined in a closing date
balance sheet. The amount of the reduction of the note is in dispute. The
Company, however, believes that the reduction will not be material. If the
amount of the net value of acquired assets is less than negative $778,000 or the
accrued expenses and customer liabilities included in the assumed liabilities
exceed $828,877, the greater of such deficiencies will reduce the amount of the
note.
The Company shall retain all claims for tax refunds, tax loss
carryforwards or carrybacks of tax credits of any kind applicable to the
business of Biobottoms prior to the closing of the asset sale. The Agreement
further specifies that certain intercompany and affiliated person liabilities
will not be assumed by the Buyer.
Following is a summary of net assets and the results of operations of
Biobottoms:
As of December 31, 1997
Assets
Current $5,206,854
Property and equipment 349,025
Other 3,493,295
Liabilities
Current 6,148,011
Long-term 67,301
----------
Net assets disposed of 2,833,862
==========
Periods Ended June 30,
1999 1998
---------------------------
Sales $ -- $7,539,651
---------- ----------
Cost of sales -- 5,105,414
Operating expenses 37,386 5,016,906
Interest -- 182,171
---------- ----------
37,386 10,304,491
---------- ----------
Loss before sale (37,386) (2,764,840)
Gain on sale of assets -- 4,101,693
---------- ----------
Net income (loss) $ (37,386) $1,336,853
========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report. Certain statements in this Quarterly Report which are not
statements of historical fact are forward-looking statements. See "Special Note
Regarding Forward-Looking Information" on Page 2.
Introduction
We are a prominent specialty retailer of quality women's fashion
apparel and accessories sold through mail order catalogs and we recently
commenced sales on the Internet. Currently, we target niche markets through our
two distinctive catalogs, Lew Magram, designed to appeal to fashion-oriented
women, and Brownstone Studio, designed to appeal to a broad range of fashions
for the affluent and mature woman. We recently acquired the Lew Magram and
Brownstone Studio catalogs. We acquired out of bankruptcy all of the assets of
Jean Grayson's Brownstone Studios, Inc. on October 30, 1997. We effectively took
control over Lew Magram in July 1997 and completed the acquisition on February
19, 1998.
We also manufacture and distribute, primarily to major mass
merchandisers, cloth diapers, diaper covers, layettes, infant and child travel
products and other infant accessories marketed primarily under the Ecology Kids
name. On April 17, 1998, we sold substantially all of the assets of our wholly
owned subsidiary Biobottoms, Inc. for $2,270,000 in cash and notes and
$5,749,000 in assumption of liabilities.
We are currently experiencing significant delays in fulfilling
merchandise orders. This is a result of our difficulty in obtaining timely
shipment of inventory from our vendors to meet customer demand. Some of our
vendors and their lending institutions have been reluctant to extend credit to
us in such amounts and upon such terms as to support timely delivery of
inventory as needed to meet orders. This reluctance is principally a result of
our working capital being insufficient.
Our inability to timely deliver merchandise has resulted in increased
order cancellations, which, for the last 18 months have been approximately 25%
of demand compared to 10% as the industry standard. For the nine months ended
June 30, 1999, order cancellations remained high at 25% of demand. As a result,
we have recognized increased charges in both the second quarter and third
quarter of fiscal 1999 for the write-off catalog expenditures disproportionate
to the net sales realized.
We are taking steps to improve our working capital. We have recently
restructured our asset based credit facility to improve our working capital
position, which we anticipate will strengthen our ability to obtain improved
credit availability on more favorable terms, timely deliver merchandise to our
customers, reduce order cancellations, and improve initial customer response. It
is too early, however, to determine whether such additional capital will yield
such
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results. To raise additional equity capital, we plan to sell in a public
offering 1.9 million shares of our common stock after giving effect to a 1-for-6
reverse stock split. We plan to close the offering in September 1999. The public
offering will be made only by means of a prospectus. We can not determine at
this time whether the public offering will be completed or that net proceeds
obtained from a public offering, if completed, will be sufficient to obtain
necessary vendor credit.
Results of Operations
Comparison of Our Nine Months Ended June 30, 1999 to Our Nine Months
Ended June 30, 1998
Net Sales
Consolidated net sales from continuing operations for the nine months
ended June 30, 1999, decreased slightly by 1% to $56.4 million from $57.1
million for the nine months ended June 30, 1998. Net sales for Brownstone
increased from $15.7 to $22.5 primarily because we owned Brownstone for less
than nine months for the nine month period ended June 30, 1998. Net sales for
Lew Magram decreased from $35.9 to $30.0 during this period. This is primarily
due to increased order cancellations and sellouts as a result of our inability
to timely ship merchandise in this period. Net sales for Ecology Kids decreased
from $5.6 million to $3.9 million also due to our inability to ship merchandise
in a timely fashion to our customers.
Gross Profit
Consolidated gross profit from continuing operations decreased by 10%
from $31.1 million for the nine months ended June 30, 1998 to $27.8 million for
the nine months ended June 30, 1999. Gross profit from continuing operations as
a percentage of net sales decreased from 54% for the nine months ended June 30,
1998 to 49% for the nine months ended June 30, 1999 due to a decrease in margins
on goods sold. This decrease was primarily a result of a higher proportion of
clearance merchandise sales due to an increase in returns of late delivered
merchandise resulting from our inability to obtain vendor credit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations
as a percentage of net sales increased from 49% for the nine months ended June
30, 1998 to 60% for the nine months ended June 30, 1999. The increase in
expenses is attributable to the increase in catalog production costs which are
typically written off over the sales life of the catalog. The life of the
catalog in this period was reduced as a result of our inability to mail books
over a normal catalog schedule. For the nine months ended June 30, 1999, these
costs were $20.2 million as compared to $15.7 million for the nine months ended
June 30, 1998.
Interest expense as a percent of net sales increased from 2% for the
nine months ended
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June 30, 1998 as compared to 3% for the nine months ended June 30, 1999. This
increase is due primarily to the interest expense attributable to the Finova
debentures.
Income (Loss) from Continuing Operations
Loss from continuing operations before income taxes for the nine months
ended June 30, 1999 was approximately $7.6 million as compared to income from
continuing operations of $2.1 million for the nine months ended June 30, 1998
primarily due to the increase in catalog production costs chargeable to that
period and to lower margins attributable to unshipped backorders.
Net Income (Loss)
Net loss for the nine months ended June 30, 1999 was approximately $7.7
million, as compared to net loss for the nine months ended June 30, 1998 of $0.2
million. This increase in net loss is principally due to the decrease in net
revenues and the increase in catalog production costs, both discussed above.
Three Months Ended June 30, 1999 Compared to Three Months Ended June
30, 1998
Net Sales
Consolidated net sales from continuing operations for the three months
ended June 30, 1999, decreased by 25% to $15.4 million from $20.6 million for
three months ended June 30, 1998. Financial constraints have caused reductions
and delays to printing and distributing catalogs during the quarter ended June
30, 1999. Our sales historically vary proportionate to the catalogs mailed. We
distributed 8 million Lew Magram and Brownstone catalogs during the third
quarter of fiscal 1999 as compared to 14 million catalogs during the same
quarter of fiscal 1998. Net revenues also declined as a result of an increase in
order cancellations and sellouts as a result of our inability to timely ship
merchandise in this period.
Gross Margin
Consolidated gross profit from continuing operations decreased by 37%
from $11.6 million for the three months ended June 30, 1998 to $7.3 million for
the three months ended June 30, 1999. Gross profit from continuing operations as
a percentage of net sales decreased from 56% for the three months ended June 30,
1998 to 48% for the three months ended June 30, 1999 due to a decrease in
margins on goods sold. This decrease was primarily a result of a higher
proportion of clearance merchandise sales due to an increase in returns of late
delivered merchandise resulting from our inability to obtain vendor credit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations
as a percentage
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of net sales increased from 53% for the three months ended June 30, 1998 to 65%
for the three months ended June 30, 1999. The increase is attributable to the
catalog production costs for the third quarter of fiscal 1999 remaining
substantially the same as the third quarter of fiscal 1998, even though net
sales substantially declined between the same periods. For the three months
ended June 30, 1999, these costs were $5.7 million as compared to $6.1 million
for the three months ended June 30, 1998.
Interest expense as a percent of net sales increased from 2% for the
three months ended June 30, 1998 as compared to 4% for the three months ended
June 30, 1999. This increase is due to the decline in revenues and the increase
in interest expense attributable to the Finova debentures.
Income from Continuing Operations
Loss from continuing operations before income taxes for the three
months ended June 30, 1999 was approximately $3.3 million as compared to income
from continuing operations of approximately $0.3 million for the three months
ended June 30, 1998 primarily due to the decline in net revenues.
Net Income (Loss)
Net loss for the three months ended June 30, 1999 was approximately
$3.3 million, as compared to net income for the three months ended June 30, 1998
of $0.1 million. This increase in net loss is primarily due to the decrease in
net revenues, as discussed above.
Liquidity and Capital Resources
Our principal source of working capital has historically been asset
based loan facilities provided by Congress Financial Corporation. On May 12,
1999, we entered into a Secured Credit Agreement with First Source Financial LLP
providing us with a $17 million asset based loan facility replacing our existing
asset based loan facilities provided by Congress.
The First Source loan facility provides us with a $13 million revolving
loan with an interest rate at prime plus 1 1/2%, a $3 million three year term
loan with an interest rate at prime plus 2% and a $1 million three year term
loan with an interest rate at prime plus 2% increasing to prime plus 3% on
November 15, 1999. We may convert any or all of the loans to a LIBOR (London
interbank offer rate)-based rate. The revolving loan may be converted to LIBOR
plus 3 1/4%, the $3 million term loan may be converted to LIBOR plus 4% and the
$1 million term loan may be converted to LIBOR plus 4% increasing to LIBOR plus
5% on November 15, 1999.
The loan facility is secured by substantially all of our assets, a
personal guarantee by Robert M. Rubin, our Chairman of the Board, up to $1
million and an additional $1 million cash collateral deposit by Mr. Rubin.
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The amount of funds available for us to borrow under the revolving loan
is based on a percentage of our inventory and qualified receivables plus 100% of
Mr. Rubin's cash collateral. As of May 12, 1999, the aggregate availability
under the revolving loan was approximately $8.5 million.
We have amended the Secured Credit Agreement to allow for an additional
$2.0 million in additional funds available under the loan facility and to waive
certain financial and other covenant defaults. The additional availability was
secured by a pledge by the Rubin Family Irrevocable Stock Trust of 900,000
shares of Tadeo Holdings, Inc. common stock. As of August 13, 1999, the
aggregate availability under the revolving loan was approximately $10,000,000.
Under the Secured Credit Agreement, we are obligated to comply with
numerous covenants including (i) providing current information to First Source;
(ii) maintaining corporate status, books and records and minimum insurance;
(iii) complying with tax and other laws and regulations; (iv) maintaining our
real estate; (v) maintaining a minimum net worth of $14 million increasing
periodically to $16.5 million; (vi) maintaining an interest coverage ratio of 2
to 1; and (vii) maintaining a fixed charge coverage ratio of 1.1 to 1.
We are also prohibited, except under certain circumstances, to (i)
redeem any of our outstanding common or preferred stock; (ii) prepay any
subsidiary's debt; (iii) pay dividends on our common stock; (iv) make
investments in other companies; (v) acquire other companies; (vi) amend our
charter; (vii) engage in other types of businesses; (viii) engage in
transactions with our officers, directors, control persons and other affiliates;
(ix) incur debt other than debt in the ordinary course of business and purchase
money debt of more than $1 million; (x) create any liens against our property
with certain exceptions; (xi) move our assets; (xii) sell our assets other than
in the ordinary course of business; (xiii) hire management consultants; (xiv)
make capital expenditures in excess of $500,000 per year; or (xv) incur lease
obligations in excess of $1.5 million per year.
The loan facility will terminate and the loans become due and payable
in the event of a default. Events of default include, with limited exceptions,
(i) failure to pay any of the loans when due, (ii) failure to pay any other
debts when due; (iii) breach of certain material agreements; (iv) insolvency;
(v) breach of any guaranty under the loan facility; (vi) breach of a covenant in
the loan facility; (vii) breach of a representation in the loan facility; (viii)
change to our pension plan; (ix) breach of any of the other agreements delivered
in connection with the loan facility; (x) suffering judgments or levies of more
than $50,000; (xi) destruction of our assets representing more than 15% of our
revenues; (xii) any event resulting in any lien securing the loan facility to
cease to have a first priority position; or (xiii) a change in control. A change
in control includes (i) more than one-half of our voting stock is transferred;
(ii) two-thirds of our board is removed or not re-elected; or (iii) any two of
Warren H. Golden, Mark McSweeney or Irving Magram resigns or is terminated
without cause.
On June 29, 1998, we issued $5,000,000 principal amount of our 12%
subordinated secured debentures to Finova Mezzanine Capital, formerly known as
Sirrom Capital Corporation,
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d/b/a Tandem Capital. The debentures are due June 29, 2003, and bear interest at
12%, payable quarterly. The debentures are secured by all of our personal
property and include certain restrictive covenants, including restrictions on
dividends and distributions, additional debt financing and transactions between
us and our affiliates. We also issued warrants in connection with the issuance
of the debentures. At the time of the loan, we issued a warrant to purchase up
to 208,300 shares of our common stock exercisable at $2.35 per share for five
years. The exercise price is to be adjusted downward if our common stock price
is below this exercise price to an exercise price equal to the greater of 80% of
the market price on June 29, 1999 or $2.00 per share. On June 29, 1999, the
warrants were repriced to $2.00 per share. Because the debentures were
outstanding on February 28, 1999, we issued an additional warrant to purchase
416,600 shares of common stock exercisable at $1.59 per share for five years.
Because the debentures were outstanding on June 29, 1999, we issued to Finova an
additional warrant to purchase 200,000 shares of common stock exercisable at
$2.00 per share. Finova will also receive 200,000 warrants each June 29
commencing in 2000 while the debentures remain outstanding.
During the third fiscal quarter, we received a cash investment of
$1,050,000 by issuing our Series G Preferred Stock. The Series G Preferred Stock
is convertible into common stock based on the average of the closing bid prices
for the lowest five of the twenty trading days immediately preceding the date of
conversion. For example, assuming a conversion price of $0.75, the Series G
Preferred Stock holders would receive on conversion an aggregate of 1,400,000
shares of common stock. The Series G Preferred Stock is redeemable at our
option, but must be redeemed out of the proceeds of any public offering in
excess of $9 million.
We, however, continue to experience working capital shortages and
require additional capital resources to fund our existing operations. We have
borrowed the maximum amounts available under the First Source loan facility as
of the date hereof and there is no unused loan availability.
We are pursuing a number of financing alternatives, although there can
be no assurance that such efforts will result in necessary financing or that the
terms of such financing will be on terms favorable to us or our stockholders.
The failure to secure additional working capital could materially adversely
affect our business and financial condition. Insufficient working capital may
require us to alter operations significantly.
We can not guaranty that we will be able to operate profitably in the
future or that cash from operations will become the principal source of funds
for operations.
Seasonality
Our business does not follow the seasonal pattern typical of the retail
apparel industry, but is, instead, more closely related to the timing and
distribution of catalog mailings. Through 1997 there were significant variations
in our seasonal sales volume with the largest volume period being first quarter,
ending December 31. In 1998, the Lew Magram and Brownstone acquisitions helped
to spread out the volume evenly throughout the year since mail order volume
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varies only in proportion to the orders generated and merchandise shipped.
Accordingly, we are now less susceptible to seasonable variations. The combined
net sales of Lew Magram, Brownstone and Ecology Kids for each quarter of the
fiscal years ended September 30, 1996, September 30, 1997, and September 30,
1998, presented as a percentage of net sales for each such year, were as
follows:
Percentage of Annual Sales
First Second Third Fourth
Fiscal Year Quarter Quarter Quarter Quarter
- ----------- ------- ------- ------- -------
September 30, 1996......... 27% 24% 30% 19%
September 30, 1997......... 33% 25% 24% 18%
September 30, 1998......... 24% 23% 28% 25%
Inflation
There was no significant impact on our operations as a result of
inflation during fiscal year 1996, fiscal year 1997 or fiscal year 1998.
Year 2000
Year 2000 Compliance
Beginning in the Year 2000, the data fields coded in some software
products and computer systems will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance issues.
State of Readiness
We have developed a remediation plan for the Year 2000 issue that
involves identification, assessment and testing of the equipment and systems
affected:
o an assessment of information technology (IT) equipment and systems
has been done;
o an assessment of non-information technology (non-IT) embedded systems
such as telephones, voice mail and building security systems has been completed;
and
o the readiness of significant third party vendors and suppliers of
services is being analyzed.
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The evaluation, which is expected to be completed by December 1999,
covers the following phases:
o development of an inventory of all IT equipment and systems and
non-IT systems that are potentially affected (100% complete);
o determination of those systems that require repair or replacement
(70% complete);
o repair or replacement of those systems (25% complete); and
o creation of contingency plans in the event of Year 2000 failures (25%
complete).
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based on
this evaluation, we do not believe that our systems and programs present Year
2000 issues, and generally believe that we will be Year 2000 compliant.
Although we believe that we will be Year 2000 compliant, third party
equipment and software is used that may not be Year 2000 compliant. An
evaluation of the Year 2000 compliance of the third party products used in our
internal systems and major vendors have begun, but we are unable to predict the
extent to which:
o the Year 2000 issue will affect suppliers; or
o we would be vulnerable to the suppliers' failure to remediate any
Year 2000 issues on a timely basis.
All our vendors and suppliers have been placed in a priority category
according to their importance to our business. Letters will be sent to all
vendors and suppliers with an operating impact seeking details of the status of
their Year 2000 program. Vendor and supplier readiness is being assessed and
tracked. Vendors have generally indicated that they are making best efforts
toward Year 2000 compliance. We expect to have certification that all vendors
and suppliers with an operating impact are Year 2000 compliant by December 1999.
Plans are being developed to ensure continued availability of service through
alternate channels in the event that satisfactory commitments are not received
from vendors and suppliers with an operating impact. For the highest priority
vendors and suppliers, where business risk warrants it, we are planning to
conduct, in the fourth quarter, an integration test of Y2K compliance where
specific dates are simulated. These vendors and suppliers include merchandise
suppliers such as Call Center Services, Convergys Group, CommercialWare, Inc.
and Clairicom and package delivery services such as United Parcel Service and
the United States Postal Service. The failure of one of these highest priority
vendors or suppliers to convert its systems on a timely basis or in a manner
compatible with our systems could cause us to incur unanticipated expenses to
remedy any
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problems and could adversely affect its business. In addition, the software and
hardware products used by affiliate Web sites, advertisers, customers,
governmental agencies, public utilities, telecommunication companies and others,
may not be Year 2000 compliant. If these products are not Year 2000 compliant,
customers' ability to use our Web site may be disrupted.
Costs to Address Year 2000 Compliance
To date, we have incurred approximately $100,000 in connection with
identifying or evaluating Year 2000 compliance issues. Most of these expenses
have related to the opportunity cost of time evaluating software, the current
versions of our products and Year 2000 compliance matters generally. We expect
that our future Year 2000 costs will be approximately $250,000 and will be
funded out of cash on hand. However, the full impact of the Year 2000 issues
cannot be determined at this time. The failure by certain third parties to
address their Year 2000 issues on a timely basis could adversely affect our
business.
Contingency Plan
We have not yet completed our Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. We expect to have such plans in place by the end
of December 1999. The worst case scenario related to Year 2000 issues would
involve a major shutdown of the telecommunication companies, which would result
in the loss of our principal revenue source until the shutdown was resolved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, we issued to one investor 100,000 shares of our common
stock and an option to purchase up to 100,000 shares of our common stock at an
exercise price of $1.00 per share for a cash investment of $100,000. The
proceeds were used for working capital purposes.
In May 1999, we granted to two consulting firms common stock purchase
warrants to purchase up to an aggregate of 125,000 shares of common stock at
$1.15625 per share for consulting services.
In June 1999, we issued to Finova Mezzanine Capital a common stock
purchase warrant to purchase 200,000 shares of common stock at $2.00 per share
as required by the Debenture Purchase Agreement dated June 29, 1998.
In June 1999, we entered into agreements with two investors to issue an
aggregate of 500 shares of Series G Preferred Stock and common stock purchase
warrants to purchase up to 120,000 shares of common stock at $1.00 per share for
an aggregate cash investment of $50,000. The transaction closed in July 1999.
The proceeds were used for working capital purposes.
In June 1999, we entered into an agreement with Tadeo E-Commerce, Inc.
to issue to it 10,000 shares of Series G Preferred Stock for a cash investment
of $1,000,000. In addition, we issued 1,066,098 shares of our common stock for
285,715 shares of Tadeo Holdings, Inc. common stock, the parent of Tadeo
E-Commerce, Inc. The transaction closed in July 1999. The proceeds were used for
working capital purposes.
In July 1999, we granted to a director an option to purchase 50,000
shares of common stock at $1.00 per share for his continuing to serve as a
director.
Each of the above issuances of securities was exempt from registration
under the 1933 Act by virtue of the exemption under Section 4(2).
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 10, 1999, we held our 1999 Annual Meeting of Stockholders. At
the meeting,
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our stockholders elected six directors and voted on six proposals presented at
the meeting upon the recommendation of our Board.
The following persons were elected to the Board for the next year and
the number of voting shares voted for each nominee:
Robert M. Rubin 10,383,996 For 91,651 Abstain
Warren H. Golden 10,385,496 For 90,151 Abstain
Stuart Leiderman 10,388,422 For 87,225 Abstain
Julia Aryeh 10,385,246 For 90,401 Abstain
Howard B. Katz 10,388,922 For 86,725 Abstain
David Abel 10,388,922 For 86,725 Abstain
The following proposals were presented to the stockholders at the
Annual Meeting and how the voting shares were voted on each proposal:
Proposal Number 1 - the stockholders approved an amendment to our
Certificate of Incorporation to effect a 1-for-6 reverse split of our common
stock -- 10,198,556 For; 0 Against; 0 Abstain. The Board originally proposed a
1-for-5 reverse split of our common stock. At the Annual Meeting, the proposal
was amended to provide for a 1-for-6 reverse split. The proposal was approved by
stockholders attending the meeting in person holding a majority of the
outstanding voting shares.
Proposal Number 2 - the stockholders approved an amendment to our
Certificate of Incorporation to change our name to StyleSite Marketing, Inc. --
10,467,872 For; 5,500 Against; 2,275 Abstain.
Proposal Number 3 - the stockholders approved an amendment to our
Certificate of Incorporation to increase the maximum size of our Board of
Directors from seven members to nine -- 10,360,746 For; 102,251 Against; 12,650
Abstain.
Proposal Number 4 - the stockholders approved an increase in the number
of shares reserved for future issuance under our November 1996 Stock Option Plan
from 1,500,000 to 2,500,000 -- 10,343,826 For; 124,696 Against; 7,125 Abstain.
Proposal Number 5 - the stockholders ratified BDO Seidman, LLP as our
independent certified public auditors for the next fiscal year -- 10,459,696
For; 6,526 Against; 9,425 Abstain.
Proposal Number 6 - the stockholders approved the conversion and
exchange offer to our preferred stockholders -- 10,367,146 For; 93,826 Against;
14,675 Abstain.
ITEM 5. OTHER INFORMATION
On July 26, 1999, we amended the Secured Credit Agreement dated May 12,
1999 with
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First Source Financial LLP, our secured asset-based lender, to allow for an
additional $1.1 million in additional funds available under the loan facility.
This additional availability was secured by a pledge by the Rubin Family
Irrevocable Stock Trust of 400,000 shares of Tadeo Holdings, Inc. common stock.
We reported this on Form 8-K filed on August 9, 1999.
On August 9, 1999, we again amended the Secured Credit Agreement with
First Source Financial LLP to allow for an additional $900,000 in additional
funds available under the loan facility. This additional availability was
secured by a pledge by the Rubin Family Irrevocable Stock Trust of 500,000
shares of Tadeo Holdings, Inc. common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
3.1 Amended and Restated Certificate of Incorporation
10.1 Third Amendment to Secured Credit Agreement and Waiver
27 Financial Data Schedule
(b) Reports on Form 8-K.
On August 9, 1999, we filed a Current Report on Form 8-K under Item 5
disclosing the strategic alliance with Tadeo Holdings, Inc. and the amendment to
the Secured Credit Agreement with First Source Financial LLP. The date of the
Report was July 27, 1999.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIPLOMAT DIRECT MARKETING CORPORATION
Dated: August 13, 1999 By: /s/ WARREN H. GOLDEN
-------------------------------
Warren H. Golden
President and Chief Executive Officer
By: /s/ MARK J. McSWEENEY
--------------------------------
Mark J. McSweeney
Chief Financial Officer
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EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation
10.1 Third Amendment to Secured Credit Agreement and Waiver
27 Financial Data Schedule
0
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIPLOMAT DIRECT MARKETING CORPORATION
Under Section 245
of the
Delaware General Corporation Law
We, the President and the Secretary of Diplomat Direct Marketing
Corporation, a corporation existing under the laws of the state of Delaware, do
hereby certify as follows:
First: That the name of the corporation is Diplomat Direct Marketing
Corporation.
Second: That the Certificate of Incorporation of the corporation was
filed with the Delaware Secretary of State on June 23, 1993, and amended on July
23, 1993, and amended on October 29, 1993, and amended on November 12, 1993, and
amended on September 13, 1995, and amended on June 9, 1998.
Third: That at a meeting of the Board of Directors of the corporation
resolutions were adopted setting forth proposed amendments of the Certificate of
Incorporation of said corporation, declaring said amendments and restatement of
the Certificate of Incorporation to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendments is as follows:
RESOLVED, that the Certificate of Incorporation of the
corporation be amended by changing Articles 1 and 5 so that, as
amended, said Articles shall be and read as follows:
1. Name. The name of the Corporation is StyleSite
Marketing, Inc. the "Corporation").
* * *
5. Management of Business. The following provisions are
inserted for the management of the business and for the conduct of
the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of
its directors and stockholders.
5.1 By-Laws. The original By-Laws of the Corporation
shall be adopted by the sole incorporator. In furtherance and
not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
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5.2 Number and Election of Directors. The number of its
directors shall be not less than three nor more than nine.
Directors need not be stockholders.
Fourth: That thereafter, pursuant to resolutions of the Board of
Directors, a meeting of the stockholders of the corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
at which meeting the necessary number of shares as required by statute were
voted in favor of the amendments.
Fifth: That said amendments and the restatement of the certificate of
incorporation were duly adopted in accordance with Section 242 of the General
Corporation Law of the state of Delaware by an affirmative vote of the holders
of a majority of all outstanding shares entitled to vote at a meeting of
stockholders.
Sixth: That the text of the certificate of incorporation of the
corporation, as amended, is hereby restated as further amended by this
certificate, to read as follows:
1. Name. The name of the corporation is StyleSite Marketing,
Inc. (the "Corporation").
2. Registered Office and Registered Agent. The registered office
of the Corporation in the State of Delaware is located at 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name and
address of the Corporation's registered agent is The Corporation Trust
Company.
3. Corporate Purposes. The purpose of the Corporation is to
engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware
(the "Corporation Law").
4. Authorized Capital. The aggregate number of shares of which
the Corporation shall have the authority to issue is 51,000,000, of
which 50,000,000 shares shall be common stock, par value of $0.0001 per
share (the "Common Stock") and 1,000,000 shares shall be preferred
stock, par value of $0.01 per share (the "Preferred Stock"). All shares
shall, when issued, be issued as fully paid and nonassessable shares
and the holders thereof shall not be liable for any further payment in
respect thereof.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof of the Preferred
Stock are as follows:
The Board of Directors is authorized, subject to the
limitations prescribed by law and the provisions of this
Article 4, to provide for the issuance of the Preferred Stock
in series and by filing a Certificate pursuant to the Delaware
General Corporation Law to establish the number of shares to
be included in each such series. The Preferred Stock
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may be issued either as a class without series, or, as do
determined by the Board of Directors, either in whole or in
part in one or more series, each series to be appropriately
designated by a distinguishing number, letter or title prior
to the issue of the shares thereof. Whenever the term
"Preferred Stock" is used in this Article 4, it shall be
deemed to mean and include Preferred Stock issued as a class
without series, or one or more series thereof, or both, unless
the context shall otherwise require. There is hereby expressly
granted to the Board of Directors of the Corporation
authority, subject to the limitations provided by law, to fix
the voting power, the designations, and the relative
preferences, powers, qualifications, limitations or
restrictions thereof, of the shares of each series of
Preferred Stock and the variations in the relative powers,
rights, preferences and limitations as between series, and to
increase the number of shares constituting each series, and to
decrease such number of shares (but not to less than the
number of outstanding shares of the series), in the resolution
or resolutions adopted by the Board of Directors providing for
the issue of said Preferred Stock.
The authority of the Board of Directors of the
Corporation with resect to each series shall include, but
shall not be limited to, the authority to determine the
following:
1. The designation of the series;
2. The number of shares initially constituting such series;
3. The increase, and the decrease to a number not less than
the number of the outstanding shares of such series, of the
number of shares constituting such series theretofore
fixed;
4. The rate or rates and the times and conditions under which
dividends on the shares of such series shall be paid, and,
(i) if such dividends are payable in preference to, or in
relation to, the dividends payable on the other class or
classes of stock, the terms and conditions of such payment,
and (ii) if such dividends shall be cumulative, the date or
dates from and after which they shall accumulate;
5. Whether or not the shares of such series shall be
redeemable, and, if such series shall be redeemable, the
terms and conditions of such redemption, including, but not
limited, to the date or dates upon or after which such
shares shall be redeemable and the amounts per share which
shall be payable upon such redemption, which amount may
vary under conditions and at different redemption dates;
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6. The amount payable on the shares of such series in the
event of the dissolution of, or upon any distribution of
the assets of, the Corporation;
7. Whether or not the shares of such series may be convertible
into, or exchangeable for, shares of any other class or
series and the price or prices and the rates of exchange
and the terms of any adjustments to be made in connection
with such conversion or exchange;
8. Whether or not the shares of such series shall have voting
rights in addition to the voting rights provided by law,
and, if such shares shall have such voting rights, the
terms and conditions thereof, including, but not limited
to, the right of the holders of such shares to vote as a
separate class either alone or with the holders of shares
of one or more other series of Preferred Stock and the
right to have more or less than one vote per shares;
9. Whether or nor a purchase fund shall be provided for the
redemption of the shares of such series and if a sinking
fund shall be provided, the terms and conditions thereof;
and
10. Any other powers, preferences and the relative
participating, optional, or other special rights, and
qualifications, limitations or restrictions thereof, as
shall not be inconsistent with the provisions of this
Article 4 or the limitations provided by law.
5. Management of Business. The following provisions are inserted for
the management of the business and for the conduct of the affairs of the
Corporation, and for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders.
5.1 By-Laws. The original By-Laws of the Corporation shall be
adopted by the sole incorporator. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors
is expressly authorized to adopt, amend or repeal the By-Laws of the
Corporation.
5.2 Number and Election of Directors. The number of its
directors shall be not less than three nor more than nine. Directors
need not be stockholders.
6. Indemnification by the Corporation; Liability of Directors.
The directors of the Corporation shall be entitled to the benefits of
all limitations on
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the liability of directors generally that are now or hereafter become
available under the Corporation Law, and the Corporation shall
indemnify all persons whom it is permitted to indemnify to the full
extent permitted by Section 145 of the Corporation law, as amended
from time to time. Without limiting the generality of the foregoing,
no director shall be liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the
Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of
this Section 6 shall be prospective only, and shall not affect, to
the detriment of any director, any limitation on the personal
liability of a director of the Corporation existing at the time of
such repeal or modification.
Seventh: That the capital of the corporation shall not be reduced
under or by reason of said amendments.
Eighth: This certificate shall become effective on August 24, 1999.
[Signatures on following page]
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IN WITNESS WHEREOF, the undersigned affirms, under penalty of perjury,
that the foregoing instrument is the act and deed of the corporation and that
the facts stated therein are true.
Date: August 11, 1999 /s/ Warren H. Golden
--------------------------------------
Warren H. Golden
President and Chief Executive Officer
Date: August 11, 1999 /s/ James G. Smith
-------------------------------------
James G. Smith
Secretary
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THIRD AMENDMENT TO
SECURED CREDIT AGREEMENT
AND WAIVER
This THIRD AMENDMENT TO SECURED CREDIT AGREEMENT (this "Amendment"),
dated as of August 9, 1999, is among BROWNSTONE HOLDINGS, INC., a Delaware
corporation ("Brownstone"), ECOLOGY KIDS, INC., a Delaware corporation ("Ecology
Kids"), DIPLOMAT HOLDINGS, INC., a California corporation ("Diplomat") and LEW
MAGRAM LTD., a New York corporation ("Lew Magram"); Brownstone, Ecology Kids,
Diplomat and Lew Magram are hereinafter referred to, collectively, as
"Borrowers" and individually, as a "Borrower"), FIRST SOURCE FINANCIAL LLP, an
Illinois registered limited liability partnership ("Lender") and DIPLOMAT DIRECT
MARKETING CORPORATION, a Delaware corporation, in its capacity as funds
administrator and borrowing agent for the Borrowers (in such capacity, the
"Funds Administrator") (this and all other capitalized terms used herein are
defined in Section 1 of the Credit Agreement defined below).
R E C I T A L S:
A. Borrowers, Parent and Lender are parties to that certain Secured
Credit Agreement dated as of May 12, 1999, as amended (the "Credit Agreement"),
subject to the terms and conditions of which Lender has agreed to make loans and
other financial accommodations to Borrowers.
B. Borrowers have requested Lender to increase availability under the
Borrowing Base by providing an advance against additional Collateral pledged by
The Rubin Family Irrevocable Stock Trust U/A Dated April 30, 1997 (the "Trust").
C. Subject to the terms and conditions of this Amendment, Lender has
agreed to include the additional Collateral pledged by the Trust in the
Borrowing Base.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, and subject to the terms and conditions hereof,
Funds Administrator, Borrowers and Lender hereby agree as follows:
1. Definitions. All capitalized terms used but not elsewhere defined in
this Amendment shall have the respective meanings ascribed thereto in the Credit
Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is amended as
follows:
2.01. Section 1.1 of the Credit Agreement is hereby amended by amending
and restating the following definitions in their entirety:
"Borrowing Base" shall mean, at any time with respect to any Borrower,
an amount equal to the sum at such time of:
<PAGE>
For Brownstone:
(1) eighty-five percent (85%) of the face amount (less maximum
discounts, credits, allowances and reserves which may have been taken by or
granted to Account Debtors in connection therewith) of existing Eligible
Accounts owing to such Borrower, plus
(2) the lesser of (a) $325,000 and (b) seventy percent (70%) of the face
amount (less maximum discounts, credits, allowances and reserves which may have
been taken by or granted to Account Debtors in connection therewith) of existing
Eligible Deferred Billing Program Accounts owing to such Borrower, plus
(3) the lesser of (a) $275,000 and (b) one hundred percent (100%) of the
amount of such Borrower's existing Cash In Transit, plus
(4) the lesser of (a) $4,000,000 and (b) the sum of (i) fifty-seven and
one-half percent (57 1/2%) of the book value of all then existing Eligible
Inventory (excluding Store Inventory) of such Borrower and determined at the
lower of cost (determined on a first-in-first-out ("FIFO") basis) or market and
(ii) the lesser of (A) $275,000 and (B) twenty percent (20%) of the book value
of all then existing Eligible Inventory consisting of Store Inventory of such
Borrower determined on a discounted cost (FIFO) basis, plus
(5) fifty-seven and one-half percent (57 1/2%) of the book value of all
then existing Eligible LC Inventory of such Borrower determined at the lower of
cost (determined on a FIFO basis) or market, plus
(6) during the Overadvance Period, fifty percent (50%) of Pledged Cash
Collateral, plus
(7) during the Overadvance Period, fifty percent (50%) of the lesser of
(a) sixty percent (60%) of Pledged Restricted Tadeo Stock and (b) $900,000, plus
(8) during the Overadvance Period, fifty percent (50%) of the lesser of
(a) Pledged Unrestricted Tadeo Stock and (b) $1,100,000.
For Diplomat: $-0-
For Ecology Kids:
(1) seventy-five percent (75%) of the face amount (less maximum
discounts, credits, allowances and reserves which may have been taken by or
granted to
<PAGE>
Account Debtors in connection therewith) of existing Eligible Accounts owing to
such Borrower, plus
(2) the lesser of (a) $800,000 and (b) fifty-seven and one-half percent
(57 1/2%) of the book value of all then existing Eligible Inventory of such
Borrower determined at the lower of cost (determined on a FIFO basis) or market,
plus
(3) during the Overadvance Period, ten percent (10%) of Pledged Cash
Collateral, plus
(4) during the Overadvance Period, ten percent (10%) of the lesser of
(a) sixty percent (60%) of Pledged Restricted Tadeo Stock and (b) $900,000, plus
(5) during the Overadvance Period, ten percent (10%) of the lesser of
(a) Pledged Unrestricted Tadeo Stock and (b) $1,100,000.
For Lew Magram:
(1) eighty-five percent (85%) of the face amount (less maximum
discounts, credits, allowances and reserves which may have been taken by or
granted to Account Debtors in connection therewith) of existing Eligible
Accounts owing to such Borrower, plus
(2) the lesser of (a) $1,175,000 and (b) seventy percent (70%) of the
face amount (less maximum discounts, credits, allowances and reserves which may
have been taken by or granted to Account Debtors in connection therewith) of
existing Eligible Deferred Billing Program Accounts owing to such Borrower, plus
(3) the lesser of (a) $225,000 and (b) one hundred percent (100%) of the
amount of such Borrower's existing Cash In Transit, plus
(4) the lesser of (a) $3,200,000 and (b) the sum of (i) fifty-seven and
one-half percent (57 1/2%) of the book value of all then existing Eligible
Inventory (excluding Store Inventory) of such Borrower and determined at the
lower of cost (determined on a FIFO basis) or market and (ii) the lesser of (A)
225,000 and (B) twenty percent (20%) of the book value of all then existing
Eligible Inventory consisting of Store Inventory of such Borrower consisting of
Store Inventory and determined on a discounted cost (FIFO) basis, plus
(5) fifty-seven and one-half percent (57 1/2%) of the book value of all
then existing Eligible LC Inventory of such Borrower determined at the lower of
cost (determined on a FIFO basis) or market, plus
<PAGE>
(6) during the Overadvance Period, forty percent (40%) of Pledged Cash
Collateral, plus
(7) during the Overadvance Period, forty percent (40%) of the lesser of
(a) sixty percent (60%) of Pledged Restricted Tadeo Stock and (b) $900,000, plus
(8) during the Overadvance Period, forty percent (40%) of the lesser of
(a) Pledged Unrestricted Tadeo Stock and (b) $1,100,000.
"Pledged Cash Collateral" shall mean any certificates of
deposit or other Cash Equivalent deposits or cash in depositary accounts (i)
pledged by Robert Rubin or Trust to Lender and maintained at the Master Account
Bank pursuant to a pledge or security agreement in form and substance
satisfactory to the Lender and the Master Account Bank and (ii) in which Lender
shall have a valid and perfected first priority Lien."
2.02. Section 1.1 of the Credit Agreement is hereby amended by inserting
the following new definitions in the alphabetically appropriate places therein:
"Overadvance Period" shall mean the period beginning June 30,
1999 and ending the earlier of (a) October 15, 1999 and (b) the date Parent
receives Equity Sale Proceeds from a secondary offering of its common stock.
"Pledged Restricted Tadeo Stock" shall mean, at any time the
same is to be determined, the value, calculated based upon the bid price
reported as of the previous Business Day by the Securities Intermediary, of
500,000 shares of common stock of Tadeo Holdings, Inc. which shall be eligible
for resale under Rule 144 of the Securities Act of 1933, as amended (the "Act"),
commencing on October 27, 1999, pledged by Trust pursuant to the Pledge
Agreement executed by Trust dated as of July 26, 1999, as amended; provided that
(i) such stock continues to be actively traded on the Nasdaq stock market and
(ii) the bid price of such stock is never less than $2.00.
"Pledged Unrestricted Tadeo Stock" shall mean, at any time the
same is to be determined, the value, calculated based upon the bid price
reported as of the previous Business Day by the Securities Intermediary, of
400,000 shares of common stock of Tadeo Holdings, Inc. which are eligible for
resale under Rule 144(k) of the Act, pledged by Trust pursuant to the Pledge
Agreement executed by Trust dated as of July 26, 1999, as amended; provided that
(i) such stock continues to be actively traded on the Nasdaq stock market and
(ii) the bid price of such stock is never less than $2.00.
"Pledged Tadeo Stock" shall mean the Pledged Restricted Tadeo
Stock and the Pledged Unrestricted Tadeo Stock."
2.02. The Credit Agreement is hereby amended by striking subsection
2.5(b) thereof and substituting the following new subsection 2.5(b) in lieu
thereof:
<PAGE>
"(b) Mandatory Prepayments. Additionally, upon receipt by any
Borrower or any Subsidiary of any Borrower or Parent of (i) with respect to the
Borrowers and their respective Subsidiaries, any Unapplied Insurance or
Condemnation Proceeds (except as to Inventory), Asset Sale Proceeds, and (ii)
with respect to Borrowers, their Subsidiaries and Parent, Equity Sale Proceeds,
Borrowers shall make a mandatory prepayment of the Term Loans as set forth below
in the amount thereof, subject to Lender's right to otherwise apply such
payments after the occurrence and during the continuance of an Event of Default.
Each such payment shall be accompanied by accrued interest on such principal
amount. So long as no Event of Default exists, each such payment shall be
applied to reduce, first, the remaining regularly scheduled principal
installments of the Term B Loan in inverse order of their maturity until the
Term B Loan is paid in full, and second, the remaining regularly scheduled
principal installments of the Term A Loan in inverse order of their maturity
until the Term A Loan is paid in full. Notwithstanding the foregoing to the
contrary, with respect to Equity Sale Proceeds, (i) the first $1,000,000 of any
Equity Sale Proceeds shall be applied to the Term B Loan as aforesaid, (ii) the
next $4,000,000 of Equity Sale Proceeds shall be applied to the extent necessary
to reduce the Total Revolving and LC Exposure such that the aggregate Borrowing
Availability for all Borrowers (calculated as of the date such Equity Sale
Proceeds are received) and eliminating from each Borrowing Base the Pledged Cash
Collateral and Pledged Tadeo Stock components is $1,000,000, (the amount
necessary to accomplish the foregoing shall be applied to the Revolving Loans as
a mandatory prepayment in accordance with Section 7.3) with any excess to be
retained by the Borrowers and the Parent for uses consistent with this Agreement
and the Related Documents, (iii) the next $1,000,000 of Equity Sale Proceeds
shall be applied to the Term A Loan as aforesaid, and (iv) any Equity Sale
Proceeds in excess of $6,000,000 may be retained by the Borrowers and the Parent
for uses consistent with the terms of this Agreement and the Related Documents."
3. Conditions to Effectiveness. The effectiveness of this Amendment
shall be subject to the satisfaction of all of the following conditions in a
manner, form and substance satisfactory to Lender:
(a) Second Amendment. The conditions precedent to the effectiveness
of the Second Amendment to Secured Credit Agreement and Waiver have been
fully satisfied.
(b) Delivery of Documents. The following shall have been delivered to
Collateral Agent, each duly authorized and executed:
(1) this Amendment;
(2) a First Amendment to Guaranty between Robert Rubin and Lender in
form and substance satisfactory to the Lender;
<PAGE>
(3) a First Amendment to Pledge Agreement between Robert Rubin and
Lender in form and substance satisfactory to the Lender together with
UCC financing statements relating thereto;
(4) a First Amendment to Limited Recourse Guaranty between Trust and
Lender in form and substance satisfactory to the Lender;
(5) a First Amendment to Pledge Agreement between Trust and Lender in
form and substance satisfactory to the Lender together with UCC
financing statement amendments relating thereto;
(6) stock certificates for 500,000 shares of the common stock of
Tadeo Holdings, Inc. together with stock powers relating thereto;
(7) counsel to Trust shall have rendered an opinion to Lender
regarding the execution and delivery of the Related Documents executed
by Trust in form and substance satisfactory to Lender;
(8) such other instruments, documents, certificates, consents,
waivers and opinions as Lender reasonably may request.
(c) Payment of Fee. The Borrowers shall have paid to Lender a fee in
the amount $25,000 as consideration for including the Pledged Restricted
Tadeo Stock in the Borrowing Base. Lender and Borrowers agree such fee
shall be paid from the proceeds of a Revolving Loan which the Funds
Administrator hereby requests Lender to make on the date hereof. The
Borrowers acknowledge that the $25,000 and $50,000 fees required by the
first and second amendments to the Credit Agreement, respectively, have
not yet been paid and are in addition to the fee required by this
Amendment. Borrowers confirm that the foregoing fees constitute
Liabilities under the Credit Agreement and may, at Lender's option at
any time, be converted to Revolving Loans.
(d) No Material Adverse Effect. No Material Adverse Effect shall have
occurred since the date of the most recent financial statements for
Parent and Borrowers received by Lender.
(e) Payment of Costs. Borrowers shall have paid or caused to be paid
to Lender all out of pocket expenses of Lender relating to this
Amendment and the transactions contemplated herein, including, without
limitation, the expenses and reasonable fees of Lender's counsel.
(f) Satisfaction of Lender's Counsel. All legal matters incident to
the transactions contemplated hereby shall be reasonably satisfactory to
counsel for Lender.
<PAGE>
The date on which all of the conditions set forth in this Paragraph 3 have been
satisfied (or waived by Lender) is referred to herein as the "Effective Date."
Regardless of the Effective Date of this Amendment, the Related Documents
(whether delivered prior hereto or in connection herewith) shall be effective
upon execution and delivery thereof.
4. References. From and after the Effective Date, all references to the
Credit Agreement shall be deemed to refer to the Credit Agreement as amended
hereby. From and after the date hereof, all references to the Related Documents
shall be deemed to refer to the Related Documents as amended by the agreements
contemplated in Section 3 of this Amendment.
5. Representations and Warranties. Each Borrower hereby confirms to
Lender that the representations and warranties set forth in the Credit Agreement
and the Related Documents to which it is a party are true and correct as of the
date hereof after giving effect to this Amendment, except to the extent such
representations and warranties expressly relate to an earlier date and except as
disclosed in the schedules attached to the most recent Notice Prime Rate
Activity, Notice of LIBOR Activity or LC Guaranty Request. Each Borrower
represents and warrants to Lender that (a) it has full power and authority to
execute and deliver this Amendment and to perform its obligations hereunder, (b)
upon the execution and delivery hereof, this Amendment will be valid, binding
and enforceable upon it in accordance with its terms, (c) the execution and
delivery of this Amendment does not and will not contravene, conflict with,
violate or constitute a default under (A) the organizational documents or
operating agreement of any Borrower or (B) any applicable law, rule, regulation,
judgment, decree or order of which any Borrower has knowledge or any agreement,
indenture or instrument to which any Borrower is a party or is bound or which is
binding upon or applicable to all or any portion of its property, and (d) no
Material Adverse Effect has occurred since the date of the last financial
statements delivered by Borrowers to Lender.
6. Costs and Expenses. Borrowers agree, jointly and severally, to
reimburse Lender for all out of pocket expenses incurred in the preparation,
negotiation and execution of this Amendment and the consummation of the
transactions contemplated hereby, including, without limitation, the expenses
and fees of counsel for Lender.
7. No Further Amendments; Ratification of Liability. Except as amended
hereby, the Credit Agreement and each of the Related Documents shall remain in
full force and effect in accordance with their respective terms. Each Borrower
hereby ratifies and confirms its liabilities, obligations and agreements under
the Credit Agreement and the Related Documents to which it is a party, all as
amended by this Amendment, and the liens and security interests created thereby,
and each acknowledges that (a) it has no defenses, claims or set-offs to the
enforcement of such liabilities, obligations and agreements, (b) Lender has
fully performed all obligations to Borrowers which it may have had or have on
and as of the date hereof and (c) other than as specifically set forth herein,
Lender does not waive, diminish or limit any term or condition contained in any
of the Credit Agreement or the Related Documents. Lender's agreement to the
terms of this Amendment or any
<PAGE>
other amendment of the Credit Agreement or Related Documents shall not be deemed
to establish or create a custom or course of dealing among Lender on the one
hand, and the Borrowers on the other hand. This Amendment and the documents
executed and delivered pursuant to this Amendment contain the entire agreement
among Lender and Borrowers with respect to the transactions contemplated by this
Amendment.
8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
9. Further Assurances. Each Borrower covenants and agrees that it will
at any time and from time to time do, execute, acknowledge and deliver, or will
cause to be done, executed, acknowledged and delivered, all such further acts,
documents and instruments as reasonably may be required by Lender in order to
effectuate fully the intent of this Amendment.
10. Severability. If any term or provision of this Amendment or the
application thereof to any party or circumstance shall be held to be invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction,
the validity, legality and enforceability of the remaining terms and provisions
of this Amendment shall not in any way be affected or impaired thereby, and the
affected term or provision shall be modified to the minimum extent permitted by
law so as most fully to achieve the intention of this Amendment.
11. Captions. The captions in this Amendment are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Amendment or any of the provisions hereof.
[remainder of page left intentionally blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment at Chicago, Illinois as of the day and year first above written.
DIPLOMAT DIRECT MARKETING CORPORATION, in
its capacity as Funds Administrator
By: /s/ Warren H. Golden
---------------------------------------
Name Printed: Warren Golden
Its: President and Chief Executive Officer
BROWNSTONE HOLDINGS, INC.
By: /s/ Warren H. Golden
---------------------------------------
Name Printed: Warren Golden
Its: Vice President
ECOLOGY KIDS, INC.
By: /s/ Warren H. Golden
---------------------------------------
Name Printed: Warren Golden
Its: Chief Financial Officer
DIPLOMAT HOLDINGS, INC.
By: /s/ Warren H. Golden
---------------------------------------
Name Printed: Warren Golden
Its: Chief Financial Officer
LEW MAGRAM LTD.
By: /s/ Warren H. Golden
---------------------------------------
Name Printed: Warren Golden
Its: Executive Vice President
FIRST SOURCE FINANCIAL LLP
Third Amendment
<PAGE>
By: First Source Financial, Inc.
Its: Manager
By: /s/ Chester R. Zara
---------------------------------------
Name Printed: Chester R. Zara
Its: Senior Vice President
Third Amendment
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 815,081
<SECURITIES> 0
<RECEIVABLES> 1,849,648
<ALLOWANCES> (104,093)
<INVENTORY> 12,658,574
<CURRENT-ASSETS> 22,084,039
<PP&E> 8,095,872
<DEPRECIATION> (4,355,367)
<TOTAL-ASSETS> 49,362,977
<CURRENT-LIABILITIES> 26,136,057
<BONDS> 0
0
3,841
<COMMON> 1,601
<OTHER-SE> 14,093,631
<TOTAL-LIABILITY-AND-EQUITY> 49,362,977
<SALES> 56,442,962
<TOTAL-REVENUES> 56,442,962
<CGS> 28,613,001
<TOTAL-COSTS> 33,769,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,701,432
<INCOME-PRETAX> (7,641,028)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,641,028)
<DISCONTINUED> (37,386)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,678,414)
<EPS-BASIC> (0.63)
<EPS-DILUTED> (0.61)
</TABLE>
