<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1998
SEC FILE NO. 333-45195
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TERRACE HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
AMENDING THE FACING SHEET, PROSPECTUS (INCLUDING UPDATED FINANCIALS)
AND FILING CERTAIN EXHIBITS
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1) FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock..................... 5,310,150(2) $1.25(3) $ 6,637,687.50 $1,958.12
- ----------------------------------------------------------------------------------------------
Common Stock..................... 770,000(4) $2.44(5) $ 1,878,800.00 $ 554.25
- ----------------------------------------------------------------------------------------------
Common Stock..................... 3,047,650(6) $2.44(5) $ 7,436,266.00 $2,193.70
- ----------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase
Warrants........................ 2,922,650(7) $1.25(8) $ 3,653,312.50 $1,077.73
- ----------------------------------------------------------------------------------------------
TOTAL............................ $ $19,605,765.00 $5,783.70
- ----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Represents 1,637,500 shares issuable upon exercise of redeemable common
stock purchase warrants ("Warrants") issued by the Registrant prior to and
in connection with its initial public offering in December, 1995; and
3,672,650 shares issuable upon exercise of warrants for resale by the
holders thereof.
(3) Represents the proposed temporary exercise prices.
(4) Represents 570,000 shares issuable upon exercise of warrants (exercisable
at $1.1875 per share) and 200,000 shares for resale by the holders
thereof.
(5) In accordance with Rule 457(c), the price represents the average of the
closing bid and asked price of the Company's Common Stock as of January
22, 1998.
(6) Issuable upon conversion of Preferred Stock (issued as a component of
"Units" privately placed by the Registrant in July, 1997) for resale by
the holders thereof.
(7) Issued as a component of "Units" privately placed by the Registrant in
July, 1995, for resale by the holders thereof.
(8) Pursuant to Rule 457(c), the price represents the average of the closing
bid and asked price of the Warrants as of January 22, 1998.
----------------
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED JULY 8, 1998--SUBJECT TO COMPLETION
PROSPECTUS
TERRACE HOLDINGS, INC.
In December, 1995, Terrace Holdings, Inc., a Delaware corporation (the
"Company"), sold 1,437,500 redeemable common stock purchase warrants (the
"Public Warrants") and certain selling warrantholders sold 200,000 identical
warrants, which they had acquired in July 1995 ("Lenders Warrants"), to the
public. In August, 1997, the Company consummated a private placement of
1,523,825 units of its securities, including units issued as commissions, each
unit consisting of one share of preferred stock, $.001 par value ("Preferred
Stock"), each convertible into two shares of Common Stock, and two redeemable
common stock purchase warrants (the "Private Placement Warrants"), each to
purchase one share of common stock, $.001 par value ("Common Stock"). The
Private Placement Warrants are identical in all respects to the Public
Warrants, as are warrants to purchase 750,000 shares issued in July, 1997 to
Biltmore Securities, Inc., as an investment banking fee ("IB Warrants"). The
Public Warrants, Lenders Warrants, Private Placement Warrants and the IB
Warrants are sometimes hereinafter collectively referred to as the "Warrants".
This Prospectus covers the offer and sale of up to (1) 5,310,150 shares of
Common Stock reserved for issuance upon exercise of Warrants (of which
3,672,650 shares reserved for issuance on exercise of the Private Placement
Warrants and the IB Warrants are for resale), and (2) 3,047,650 shares of
Common Stock, reserved for issuance upon conversion of the Preferred Stock, for
resale. All of the Warrants are exercisable at $4.00 per share. See
"Description of Securities--Warrants," "Price Range of Securities," "Business--
Recent Financing" and "Plan of Distribution."
This Prospectus also covers the offer and sale by the holders thereof of the
2,922,650 Private Placement Warrants and up to an additional 200,000 shares of
Common Stock. See "Selling Securities Holders." Up to 570,000 additional shares
of Common Stock reserved for issuance upon exercise of warrants issued to (i)
Midas Investment Group, Inc. d/b/a Biltmore Securities, Inc., the Company's
initial underwriter (250,000 shares), (ii) the former members of DownEast
Frozen Desserts, LLC, in connection with the Company's acquisition of Deering
Ice Cream, Inc. (250,000 shares), and (iii) one of its directors (70,000
shares), are being registered so that if and when such warrants are exercised
such shares may be offered and resold to the public.
(Continued on following page)
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
INCLUDED IN THE UNITS AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OR THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TEMPORARY SOLICITATION PROCEEDS TO
EXERCISE PRICE FEE SELLING
OR PRICE TO OR SALES PROCEEDS TO SECURITIES
PUBLIC COMMISSIONS COMPANY(3) HOLDERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Warrant(2)........................ $1.25(1) $.05 $1.20 -0-
- ------------------------------------------------------------------------------------------------
Per Share(2).......................... various(2) various(2) -0- various(2)
- ------------------------------------------------------------------------------------------------
TOTAL(4).............................. $6,793,937 $271,757 $6,525,180 various(2)
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Holders of Warrants may exercise them at the $1.25 temporary exercise price
until , 1998, after which the exercise price will return to
the $4.00 per share exercise price stated in the Warrants. See "Description
of Securities--Warrants."
(2) Selling Securities Holders may sell their Warrants or shares of Common
Stock at any time at varying market prices and pay their respective brokers
various sales commissions charged by such brokers. The Company will not
receive any proceeds from such sales and will not pay any of the associated
brokerage commissions.
(3) Before deducting expenses of the offering payable by the Company estimated
at $120,000. See "Use of Proceeds."
(4) Assumes all 5,310,150 Warrants are exercised at the $1.25 temporary
exercise price. See "Use of Proceeds."
The Date of this Prospectus is July , 1998
<PAGE>
(Continued from previous page)
The Company will receive payments of the exercise prices of its various
outstanding warrants to the extent any of them are exercised. See "Use of
Proceeds from Warrant Exercises." There is no assurance, however, that any of
the various warrants will be exercised. Midas Investment Group Inc. d/b/a
Biltmore Securities, Inc., (the "Soliciting Agent"), will be paid a warrant
solicitation fee equal to 4% of the exercise price of Warrants with respect to
any Warrants exercised as a result of solicitation of the Warrant holders by
the Soliciting Agent, provided that such solicitation is in compliance with
applicable rules of the National Association of Securities Dealers, Inc.. See
"Use of Proceeds from Warrant Exercises," and "The Soliciting Agent." The
Company will not receive proceeds from resales of Warrants or shares of Common
Stock issued on exercises of its various warrants, although costs incurred in
connection with their registration for resale are being borne by the Company.
See "Selling Securities Holders."
During the 60-day period commencing on the date of this Prospectus, to and
including 5:00 p.m., New York time, on , 1998, subject to
extension in the sole discretion of the Company ("Temporary Exercise Period"),
the Company has temporarily reduced the exercise price of the Warrants from
$4.00 to $1.25. After the expiration of the Temporary Exercise Period, the
exercise price of the Warrants will return to the original $4.00 per share.
See "Description of Securities--Warrants."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information may be inspected and
copied at the public reference facilities maintained by the Commission, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the offices of
the Commission's New York Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048 and the Chicago Regional Office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of these materials
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers such as the Company that
file electronically with the Commission. The address of such site is
http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form SB-2
which the Company has filed with the Commission pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), relating to the Company's
securities (referred to herein, together with amendments and exhibits, as the
"Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and the securities offered
hereby, reference is hereby made to the Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its "entirety" by such reference. Copies of the Registration Statement and the
exhibits may be inspected, without charge, at the offices of the Commission,
or obtained at prescribed rates from the Public Reference Section of the
Commission at the address set forth above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........... 3
Risk Factors................. 6
Price Range of Securities.... 12
Dilution..................... 13
Use of Proceeds.............. 13
Capitalization............... 14
Dividend Policy.............. 14
Selected Financial Data...... 15
Management's Discussion and
Analysis.................... 16
Business..................... 19
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management......................... 24
Certain Relationships and Related
Transactions...................... 31
Selling Securities Holders......... 32
Description of Securities.......... 33
Plan of Distribution............... 36
Experts............................ 37
Legal Matters...................... 37
Additional Information............. 38
Index to Financial Statements...... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by reference to the more detailed
information and the financial statements and notes thereto appearing elsewhere
herein. Unless otherwise specified, all information in this Prospectus assumes
no exercise of the Warrants. See "Description of Securities," "Underwriting"
and "Management--Employment Agreements." Each prospective investor is urged to
carefully read this Prospectus in its entirety, including but not limited to
the Risk Factors.
THE COMPANY
Terrace Holdings, Inc., was incorporated under the laws of the State of
Delaware on June 15, 1995, to change the state of incorporation of Bon
Adventure Kosher Tours, Inc., a Florida corporation, formerly known as Embassy
Kosher Tours of South Florida, Inc. The Company currently has three wholly-
owned operating subsidiaries, having recently sold two in the "hospitality"
group and operating two in the "food services and distribution" group. The sold
hospitality subsidiaries are A&E Management Corp., which manages the food and
beverage operations of a non-kosher restaurant and catering operation at The
Club at Emerald Hills in Hollywood, Florida; and The Lasko Family Kosher Tours,
Inc., which operates Passover holiday vacations at three locations within the
United States. The Lasko Companies, Inc., which owns and operates on leased
property the Company's kosher, casual dining restaurant, Terrace Oceanside
Restaurant, in Hallandale, Florida, is the subject of an agreement of sale with
an unaffiliated third party, scheduled to close on or about June 15, 1998. See
"Business--Hospitality."
The food services and distribution subsidiaries are: A-One-A Produce &
Provisions, Inc. which is a Pompano Beach, Florida based produce distributor
that sells and distributes fresh fruit and vegetables and "dry" grocery
products to hotels, restaurants and other businesses in the south Florida
region; and Terrace Fresh Inc., which was organized to operate as an affiliate
of Terrace's A-One-A Produce & Provisions, Inc. subsidiary, to process and sell
fresh produce.
In December, 1997, the Company consummated the sale of the assets and related
liabilities of its wholly-owned subsidiary, Deering Ice Cream, Inc. for
$1,000,000, subject to later adjustment, in cash and certain royalty payments
over four years. At the closing of the sale, the purchase price was adjusted
down, as a result of working capital deterioration, to approximately $613,000.
Further, based on post-closing accounting, the Company has released to the
buyer the $200,000 of the purchase price held in escrow further reducing the
purchase price, and is in discussions with the buyer to finalize the purchase
price. As of the date of this Prospectus, the parties are still in final
negotiation over the assumption of certain liabilities and the Company
estimates it may have to refund up to an additional approximately $50,000 to
the buyer. While the Company believes such sale will not have a material
adverse effect on its longer term growth or ultimate profitability, there is no
assurance that the Company's belief will be borne out. See "Business--Frozen
Desserts."
The Company's executive offices are located at 1351 N.W. 22nd Street, Pompano
Beach, Florida 33069. Its telephone number is 954-917-7272.
SECURITIES
<TABLE>
<S> <C>
Common Stock to be Issued by the Company
Upon the the Exercise of the Warrants and
Conversion of the Preferred Stock(1)....... 8,357,800 shares
Other Securities Offered by Securities
Holders.................................... 200,000 shares of Common Stock
2,922,650 Warrants
570,000 shares of Common Stock(2)
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Securities Outstanding Prior to
this Prospectus
Common Stock(3)................. 5,270,348 Shares
Warrants (4)(5)................. 6,535,828 warrants
Preferred Stock(6).............. 1,523,825 Shares
NASDAQ SmallCap Marketsm Symbols.. Common Stock--THIS; Warrants--THISW
Use of Net Proceeds of Sale of For working capital and potential
Warrants......................... acquisitions
Risk Factors...................... The securities offered hereby are highly
speculative and involve a high degree of
risk and should be purchased only by
investors that can afford the loss of their
entire investment. See "Risk Factors." In
addition, there is immediate substantial
dilution. See "Dilution."
</TABLE>
- --------
(1) Represents 5,435,150 and 3,047,650 shares of Common Stock issuable upon
conversion of the Preferred Stock, respectively. Of the 8,482,800 shares,
6,845,300 shares are registered for resale by holders of the Private
Placement Warrants, IB Warrants and the Preferred Stock. See the Cover Page
of this Prospectus.
(2) To be issued upon exercise of certain warrants. See the Cover Page of this
Prospectus.
(3) Assumes that none of the various warrants are exercised and none of the
Preferred Stock is converted into shares of Common Stock.
(4) Includes 2,922,650 Private Placement Warrants and (i) 635,678 shares of
Common Stock issuable upon exercise of warrants issued to two executive
officers of the Company; (ii) 1,437,500 shares of Common Stock reserved for
issuance upon exercise of the Public Warrants; (iii) 250,000 shares of
Common Stock issuable upon exercise of warrants issued in connection with
the acquisition of DownEast Frozen Desserts, LLC; (iv) 90,000 shares of
Common Stock issuable upon exercise of warrants issued to two directors of
the Company; (v) 1,000,000 shares of Common Stock issuable upon the
exercise of warrants issued to an investment banking firm which was the
underwriter of the Company's initial public offering; and (vi) 200,000
shares of Common Stock issuable upon exercise of warrants acquired in July,
1995, by certain warrantholders prior to the Company's public offering and
resold subsequent to that offering. Does not include the possible issuance
of (i) 141,500 shares of Common Stock issuable upon exercise of an option
(the "Underwriter's Option") to purchase securities of the Company sold to
the Soliciting Agent in connection with the Company's initial public
offering in December, 1995 ("Initial Public Offering"); (ii) 125,000 shares
of Common Stock issuable upon exercise of the Warrants included in the
Underwriter's Option; (iii) 200,000 shares of Common Stock issuable upon
exercise of warrants ("Class B Warrants") which were issued immediately
following the effective date of the Company's Initial Public Offering (the
terms and conditions of the Class B Warrants are identical to the Warrants
except that the exercise price of the Class B Warrants is $10.00).
(5) Assuming the exercise of all of the Company's warrants listed in footnote 4
above and including the Class B Warrants, the Company will have outstanding
12,006,176 shares of Common Stock. This does not include conversion of the
Company's outstanding shares of Preferred Stock. See Note (6) below.
(6) Automatically converts on July 31, 1998 into 3,047,650 shares of Common
Stock unless earlier converted by the holders thereof. Assuming exercise of
the warrants described in Note (5) and the Preferred Stock conversion the
Company will have outstanding 15,053,826 shares of Common Stock. See
"Description of Securities--Preferred Stock."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial data set forth below is derived from, should be read in
conjunction with and is qualified in its entirety by the more detailed
financial statements and notes thereto, and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CONSOLIDATED FOR
THREE MONTHS ENDED PRO FORMA
MARCH 31, CONSOLIDATED
(UNAUDITED) YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED
-------------------- ------------------------ 12/31/97(2)
1998 1997 1997(1) 1996(1) (UNAUDITED)
---------- --------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $6,955,120 $ -- $ 8,929,464 $ -- $17,110,152
Gross Profit............ 2,070,868 -- 2,075,957 -- 4,485,353
Operating Expenses...... 1,867,206 164,469 3,430,480 478,265 5,402,109
Income (Loss) from
Continuing Operations.. 126,480 (152,928) (1,411,516) (458,927) (1,010,800)
Income (Loss) from
Discontinued
Operations............. 7,494 (248,476) (2,940,537) (697,100) --
Net Income (Loss)....... 133,974 (401,404) (4,352,053) (1,156,027) --
Net Income (Loss) per
Share.................. .03 (.09) (.98) (.35) (.23)
Weighted Average of
Common Shares
Outstanding............ 5,111,383 4,306,400 4,454,034 3,312,500 4,454,034
</TABLE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)............................ $(1,263,037) $(1,049,605)
Total Assets......................................... 8,542,786 6,927,342
Long-Term Debt....................................... 235,305 81,380
Total Liabilities.................................... 4,794,136 3,738,917
Shareholders' Equity................................. 3,748,650 3,188,425
</TABLE>
- --------
(1) Only two years are presented since all prior years' assets relate to
discontinued operations.
(2) Represents combined operations of Terrace Holdings, Inc. and A-One-A
Produce and Provisions, Inc. treating the latter as if it was a subsidiary
of Terrace for the full period then ended.
5
<PAGE>
UNLESS THE CONTEXT INDICATES OTHERWISE, ANY REFERENCE IN THIS PROSPECTUS TO
THE "COMPANY" MEANS AND REFERS TO THE COMPANY AND ITS WHOLLY-OWNED
SUBSIDIARIES.
RISK FACTORS
THE PURCHASE OF THE SECURITIES BEING OFFERED HEREBY IS SPECULATIVE AND
INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. THE PURCHASE OF THESE
SECURITIES SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A
TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY. PROSPECTIVE INVESTORS, PRIOR TO
ANY PURCHASE, SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN
THIS PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING FACTORS WHICH COULD
MATERIALLY AND ADVERSELY AFFECT THE OPERATIONS AND PROSPECTS OF THE COMPANY OR
AN INVESTMENT THEREIN, BEFORE MAKING A DECISION TO PURCHASE THE SECURITIES
BEING OFFERED HEREBY. THE FOLLOWING IS NOT INTENDED AS, AND SHOULD NOT BE
CONSIDERED, AN EXHAUSTIVE LIST.
1. No Assurance of Profitability. To date, the Company has generated net
losses. The total amount of the Company's accumulated deficit as of December
31, 1997, was $5,893,448. The Company's net losses from Continuing Operations
for each of the last three fiscal years were, $1,511,516, $458,927 and
$184,928, respectively. At December 31, 1997, the Company had a deficit in
cash and working capital of approximately $235,000 and $1,050,000
respectively. There is no assurance that the future operations of the Company
will result in revenues or will be profitable. Should the operations of the
Company be profitable, it is anticipated that the Company would retain all of
its earnings in order to finance future growth and expansion. See "Liquidity
and Capital Resources" "Dividend Policy" "Business" and "Financial
Statements."
2. No Dividends on Common Stock. The Company does not anticipate payment of
any cash dividends on its Common Stock for the foreseeable future; it being
anticipated that any earnings would be retained by the Company to finance its
operations and future growth and expansion. See "Dividend Policy."
3. Proposed Expansion. The Company intends to continue to pursue a strategy
of growth by acquisition. To date, it has made three material acquisitions:
the purchase, in January, 1996, of three additional Passover vacation venues
(one of which was not operated after 1996), the acquisition, in February,
1997, of Deering Ice Cream, Inc. ("Deering"), the assets of which were sold in
December, 1997, and the acquisition, in July, 1997, of A-One-A Wholesale
Produce, Inc. There can be no assurance that the Company will make any
additional acquisitions in the near future, or if made, that any such
acquisitions will add profitability to the Company. Contrary to its initial
strategy in December, 1995, the Company has determined that proposed expansion
by establishing additional kosher dining facilities geographically dispersed
would entail substantial financial costs and additional personnel.
Accordingly, the Company has determined to seek growth not by establishing
additional kosher dining facilities but by acquisition of existing food and
food related operations. There is no assurance any such acquisitions will be
available to the Company or that its acquiring such operations will add to the
Company's profitability. Furthermore, competition in the Company's current
principal businesses could significantly increase. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
4. Dependence on Proceeds of Warrant Exercises to Implement Proposed
Expansion. The Company is dependent on and intends to use a significant
portion of the proceeds received upon exercise of the Warrants for working
capital to implement its proposed expansion plans. The Company anticipates the
proceeds of the exercise of Warrants, together with projected cash flow from
operations, will be sufficient to fund the Company's operations, including its
proposed expansion, during the twelve months following the date of this
Prospectus, although there cannot be any assurance of this. Since any proceeds
in connection with this offering are dependent on the exercise of Warrants,
there can be no assurance that this offering will benefit the Company
financially. See "Use of Proceeds."
6
<PAGE>
5. Possible Need for Additional Financing; Possible Loss of Entire
Investment. In the event that the Company's plans change, there are any delays
in implementing the proposed expansion, its projections prove to be inaccurate
or the proceeds from the exercise of the Warrants prove to be insufficient,
the Company may be required to seek additional financing or curtail its
current and expansion activities. In such case, the Company will generally be
required to seek additional debt or equity financing to fund the costs of
continuing operations or to expand its operations. On May 29, 1998, the
Company received a commitment letter from an institutional lender to provide
to the Company and its wholly-owned subsidiaries an aggregate of $6,000,000 in
senior secured financing, the proceeds of which will be used for (i) repayment
of existing indebtedness, (ii) a possible acquisition, and (iii) ongoing
working capital. As of the date of this Prospectus, the new financing
arrangement is being documented. Prospective investors should be aware that if
the Company is not successful in its operations, future acquisitions or
facilities that it establishes, their entire investment in the Company could
become worthless. Even if the Company is successful in its expansion plans, no
assurances can be given that such expansion will be successful or that
investors will derive a profit from their investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Liquidity and Capital Resources," "Use of Proceeds" and
"Business."
6. Competition. The produce and grocery distribution industry is highly
competitive and there are numerous well-established competitors possessing
substantially greater financial, marketing, personnel and other resources than
the Company. These competitors include national, regional and local firms.
There can be no assurance that consumers will regard the Company's products
and services as significantly distinguishable from competitive products and
services, or that substantially equivalent products will not be introduced by
the Company's competitors or that the Company will be able to compete
successfully. See "Business--Competition."
7. Sale of Hospitality Subsidiaries. In February, 1997, the Company entered
into an Option Agreement with Samuel H. Lasko, the President, Treasurer and a
director of the Company, and Jonathan S. Lasko, the Executive Vice-President,
Secretary, Chief Operating Officer and a director of the Company, which gave
the Laskos, individually or collectively, the option to purchase all of the
stock or the assets, at their respective fair price, of The Lasko Companies,
Inc., A & E Management Corp., and The Lasko Family Kosher Tours, Inc., each of
which was a wholly-owned subsidiary of the Company. The fair price was
determined by an independent evaluation and was approved by a committee of
disinterested directors, and is subject to ratification by the stockholders of
the Company. Samuel H. Lasko indicated to the Company that he intended to
exercise this option on the first date that it was exercisable in accordance
with the Option Agreement. As of March 13, 1998, Samuel H. Lasko purchased The
Lasko Family Kosher Tours, Inc. and A&E Management Corp. for consideration
equal to $575,000. The sale of The Lasko Companies, Inc., however, to an
unaffiliated third party for a total purchase price of $90,000, was
consummated on May 29, 1998. Jonathan S. Lasko did not participate in the
purchases. Management of the Company believes, although such sales may have a
material short term adverse effect on the Company, there will not be material
long term effects from such sales. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations--
Hospitality," and "Business--Hospitality."
8. Resignation of Dr. Lasko. In connection with the sale of the hospitality
businesses, Samuel H. Lasko, an officer and director of the Company since its
inception, resigned as an officer of the Company effective on the ratification
of the sale by the Company's shareholders (currently scheduled for August,
1998). Dr. Lasko has also advised that he will not stand for re-election as a
Director at that time. No assurance can be given that such resignation will
not have an adverse effect if any, upon the Company.
9. Changes and Other Factors Affecting Business. The produce and grocery
distribution industries are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing facilities. In
addition, the labor intensiveness of these businesses, as well as factors such
as inflation, increased food, labor and employee benefit costs and
availability of experienced management and hourly employees may also adversely
affect the Company's operations. See "Business--Competition."
7
<PAGE>
10. Current Seasonal Nature of Certain Operations. The Company's current
operations are located in south Florida and are seasonal in nature since such
operations rely, to a certain degree, on tourism in the winter months to
sustain them. See "Business."
As indicated elsewhere in this Prospectus, the Company has recently disposed
of its frozen dessert business and its food service and vacation businesses
and to concentrate on its food distribution and produce processing operations.
There is no assurance that such dispositions will cause the Company to become
profitable. See "Business."
11. Government Regulation. Food and food related businesses are subject to
various federal, state and local laws and regulations. The failure to obtain
and retain licenses or any other governmental approvals would have a material
adverse effect on the Company. In addition, food processing and other
operating costs are affected by increases in the minimum hourly wage,
unemployment tax rates, sales taxes and similar matters over which the Company
has no control. See "Business--Government Regulation."
12. Loss of PACA Licenses. The Company's A-One-A Produce & Provisions, Inc.
subsidiary and its affiliate, Terrace Fresh, Inc., are subject to The
Perishable Agricultural Commodities Act ("PACA") which regulates "commission
merchants," "brokers" and "dealers" engaged in the business of shipping or
receiving perishable agricultural commodities in interstate commerce. A-One-A
Produce and Terrace Fresh currently maintain PACA licenses to distribute fresh
produce, fruits and vegetables. The ability of the Company to continue
successful distribution and sales of its fresh produce, fruits and vegetables
is dependent upon its continued compliance with PACA. Loss of its PACA license
would have a materially adverse effect on the Company. See "Business."
13. Potential Liability and Possible Insufficiency of Insurance; No Key-Man
Life Insurance. The Company's operations involve the offering of consumer
products and services to the public. The Company therefore may be exposed to a
significant risk of liability for property damage or personal injury. The
Company maintains general liability insurance (in the aggregate or per claim)
for its various businesses. The Company endeavors to contractually limit its
potential liability to the amount and terms of its insurance policies.
However, the Company is not always able to obtain such limitations on
liability, and such provisions, when obtained, may not adequately shelter the
Company from liability. Consequently, a partially or completely uninsured
claim, if successful and of sufficient magnitude, may have a material adverse
effect on the Company and its financial condition. The Company maintains no
Key-Man Life Insurance for any of its executive personnel. See "Business."
14. Risk Borne by Public Shareholders Disproportionate to Risk Borne by
Present Shareholders. Investors through this offering may have paid
substantially more than the initial or present shareholders, and, accordingly,
bear a disproportionate amount of risk because of the disparity in purchase
price. See "Dilution."
15. Immediate and Substantial Dilution. An investor exercising the Warrants,
at the temporary exercise reduced price, may experience immediate and
substantial dilution of $.67, or approximately 54%, per share because the
exercise price of the Warrants exceeds the pro forma net tangible book value
per share of the Company after giving effect to the exercises, purchases and
divestitures. See "Dilution."
16. Broad Discretion in Application of Proceeds. Management of the Company
has broad discretion to adjust the application and allocation of any net
proceeds of funds received upon exercise of the Warrants, which proceeds will
be added to the Company's working capital, in order to address changed
circumstances and opportunities. As a result of the foregoing, the success of
the Company will be substantially dependent upon the discretion and judgment
of the management of the Company with respect to the application and
allocation of such net proceeds. See "Use of Proceeds."
17. No Assurance of Continued Public Trading Market or Continued
Qualification for NASDAQ Inclusion. The Company's Common Stock and Warrants
are listed on the NASDAQ SmallCapsm Market ("NASDAQ"). If a public trading
market does not continue for the Company's securities, purchasers of the
Company's securities
8
<PAGE>
may have difficulty selling their securities should they desire to do so. If
the Company is unable to satisfy the requirements for continued quotation on
NASDAQ, trading, if any, in the securities offered hereby would be conducted
in the over-the-counter market in what are commonly referred to as the "pink
sheets" or on the NASD OTC Electronic Bulletin Board and may become subject to
the Commission's "Penny Stock" regulations. See "23. Penny Stock
Regulations."As a result, an investor may find it more difficult to dispose or
to obtain accurate quotations as to the price of the securities offered
hereby. The above-described rules may materially adversely affect the
liquidity of the market for the Company's securities. See "Description of
Securities."
18. Rule 144 Sales; Future Sales of Common Stock. 2,332,848 of the Company's
presently outstanding 5,270,348 shares of Common Stock are "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act and may only be sold pursuant to a registered offering or in
accordance with applicable exemptions from the registration requirements of
the Securities Act. Rule 144 provides for the sale of limited quantities of
restricted securities without registration under the Securities Act. In
general, under Rule 144, a person (or person whose shares are aggregated) who
has satisfied a one year holding period may, under certain circumstances,
sell, within any three month period, a number of shares which does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks prior to such
sale. Rule 144(k) also permits, under certain circumstances, the sale of
shares without any quantity limitation by a person who is not an affiliate of
the Company and who has satisfied a two-year holding period. The Company is
unable to predict the effects that future sales under Rule 144 may have on the
then prevailing market price of the Company's securities. Possible or actual
sales of the Company's outstanding Common Stock by certain of the present
shareholders under Rule 144 may, in the future, have a depressive effect on
the price of the Company's securities.
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Company's Common
Stock in any market and, therefore, the ability of any investor to sell his
securities may be dependent directly upon the number of securities that are
offered and sold. Affiliates of the Company may sell their securities during a
favorable movement in the market price of the Company's Common Stock which may
have a depressive effect on its price per share. See "Description of
Securities."
19. Future Issuances of Stock by the Company Without Shareholder Approval.
Assuming the exercise of all of the Company's various outstanding warrants and
conversion of the Preferred Stock, the Company will have outstanding
15,053,826 shares of Common Stock out of a total of 25,000,000 shares of
Common Stock authorized. The Company also has 10,000,000 shares of Preferred
Stock authorized, the rights, preferences, conversions, terms and conditions
of which may be set, from time to time, by the Board of Directors. There are
currently 1,523,825 shares of Preferred Stock outstanding which, unless
earlier converted at the option of the holders, on July 31, 1998, each
automatically convert into two shares of Common Stock, or an aggregate of
3,047,650 shares. The remaining shares of Common Stock not issued or reserved
for specific purposes and the remaining shares of Preferred Stock may be
issued without any action or approval of the Company's shareholders. Although
there are no present plans, agreements or undertakings involving the issuance
of such shares, except as disclosed in this Prospectus, any such issuance
could be used as a method of discouraging, delaying or preventing a change in
control of the Company or could significantly dilute the public ownership of
the Company, which could adversely affect the market. There can be no
assurance that the Company will not undertake to issue such shares if it deems
it appropriate to do so. Notwithstanding the foregoing, the current officers,
directors, shareholders and Private Placement Warrant holders have agreed not
to sell, transfer, assign or issue any securities of the Company prior to
July, 1998 without the consent of the Soliciting Agent. See "Dilution,"
"Description of Securities" and "Plan of Distribution."
20. Exercise of Warrants May Have Dilutive Effect on Market. The Warrants
provide, during their term, an opportunity for the holder to profit from a
rise in the market price, of which there is no assurance, with resulting
dilution in the ownership interest in the Company held by the then present
shareholders. Holders of the Warrants most likely would exercise them and
purchase the underlying Common Stock at a time when the
9
<PAGE>
Company may be able to obtain capital by a new offering of securities on terms
more favorable than those provided by such securities, in which event the
terms on which the Company may be able to obtain additional capital would be
affected adversely. See "Description of Securities."
21. Current Prospectus and State Blue Sky Registration Required to Exercise
Warrants. The Company is able to issue shares of its Common Stock upon the
exercise of Warrants only if there is a current prospectus relating to the
Common Stock issuable upon the exercise of the Warrants under an effective
registration statement filed with the Commission and such Common Stock is then
qualified for sale or exempt therefrom under applicable state securities laws
of the jurisdictions in which the various holders of Warrants reside. There
can be no assurance, however, that the Company will be successful in
maintaining a current registration statement. After a registration statement
becomes effective, it may require updating by the filing of a post-effective
amendment. A post-effective amendment is required (i) any time after nine
months subsequent to the effective date of the prospectus when any financial
information contained in the prospectus is over sixteen months old, (ii) when
facts or events have occurred which represent a fundamental change in the
information contained in the registration statement, or (iii) when any
material change occurs in the information relating to the plan or distribution
of the securities registered by such registration statement. The Company
anticipates that the Registration Statement, of which this Prospectus is a
part, will remain effective for not more than nine months following the date
of this Prospectus, assuming a post-effective amendment is not filed by the
Company. The Company intends to qualify the securities in a limited number of
states, although certain exemptions under certain state securities ("blue
sky") laws may permit the securities to be transferred to purchasers in states
other than those in which they were initially qualified. The Company will be
prevented, however, from issuing Common Stock upon exercise of the Warrants in
those states where exemptions are unavailable and the Company has failed to
qualify the Common Stock issuable upon exercise of the Warrants. The Company
may decide not to seek, or may not be able to obtain, qualification of the
issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants of those
purchasers will expire and have no value if such Warrants cannot be sold.
Accordingly, the market for the Warrants may be limited because of the
Company's obligation to fulfill the foregoing requirements. See "Description
of Securities."
22. Warrants Subject to Redemption; Temporary Exercise Price. The Warrants
are immediately exercisable. Each such Warrant entitles the holder to purchase
one share of Common Stock at $4.00 per share until December 5, 2000. The
Warrants are redeemable by the Company for $.05 per Warrant, at any time, upon
thirty days' prior written notice, if the last reported sale price or the
average closing bid price of the Common Stock, as reported by the principal
exchange on which the Common Stock is quoted, the NASDAQ or the National
Quotation Bureau Incorporated, as the case may be, equals or exceeds $9.00 per
share, for any twenty consecutive trading days ending within ten days of the
notice of redemption. Upon thirty days' written notice to all holders of the
Warrants, the Company shall have the right to reduce the exercise price or
extend the term of the Warrants, subject to the Company complying with
Commission Rule 13e-4. Notice of the redemption of the Warrants could force
the holders thereof to exercise the Warrants and pay the exercise price at a
time when it may be disadvantageous for them to do so, to sell the Warrants at
the current market price when they might otherwise wish to hold them or to
accept the redemption price which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities--Warrants."
During the sixty day period commencing on the date of this Prospectus to and
including 5:00 p.m. New York time on , 1998, subject to extension
in the sole discretion of the Company ("Temporary Exercise Period"), the
Company has temporarily reduced the exercise price of the Warrants from $4.00
to $1.25. After the expiration of the Temporary Exercise Period, the exercise
price of the Warrants will return to the original $4.00 per share. See
"Description of Securities--Warrants."
23. Soliciting Agent's Influence on the Market. A significant amount of
securities of the Company are held by customers of the Soliciting Agent. Such
customers may engage in transactions for the sale or purchase of such
securities through or with the Soliciting Agent. Although it has no obligation
to do so, the Soliciting Agent may make a market in the Company's securities
and may otherwise effect transactions in such securities. If it participates
in the market, the Soliciting Agent may exert a dominating influence on the
market for the securities
10
<PAGE>
of the Company. Such market activity may be discontinued at any time. The
price and liquidity of the Company's securities may be significantly affected
by the degree, if any, of the Soliciting Agent's participation in such market.
24. Relationship of Soliciting Agent to Trading. The Soliciting Agent may
act in a brokerage capacity with respect to the purchase or sale of the
Company's securities in the over-the-counter market. Unless exempt under
Regulation M promulgated by the Securities and Exchange Commission, the
Soliciting Agent, while engaged in any distribution of the Company's
securities, will be prohibited from engaging in any market making activity or
soliciting brokerage activities with regard to the Company's securities during
a period beginning five business days prior to the commencement of any such
activity and ending when its participation in such distribution ends. As a
result, the Soliciting Agent may be unable to continue to make a market for
the Company's securities during certain periods when the Warrants are
exercisable. Such a limitation, while in effect, could impair the liquidity
and market price of these securities.
25. "Penny Stock" Regulations. Securities laws require certain disclosures
in connection with trades in any stock defined as a "penny stock". Commission
regulations generally define a penny stock to be any equity security that has
a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include any equity security listed on NASDAQ. Unless an
exception is available, Commission regulations require the broker/dealer to
deliver, prior to effecting any transaction involving a penny stock, certain
information and disclosures regarding the penny stock market and the risks
associated therewith.
In addition, applicable Commission regulations provide that unless the
transaction involving a penny stock is exempt under the regulations, a
broker/dealer cannot effect a transaction in the penny stock unless certain
sales practice requirements are met, which include the determination by the
broker/dealer that transactions in penny stocks are suitable investments for
the prospective purchaser and receipt by the broker/dealer from such person of
a written agreement to the transaction.
As of the date of this Prospectus, by reason of inclusion on NASDAQ, the
Company's securities are exempt from the definition of penny stock. If any of
the Company's securities were subsequently to become characterized as a penny
stock, the market liquidity for the Company's securities could be severely
affected. In such an event, the regulations on penny stocks could limit the
ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities in this offering to sell
their securities in the secondary market.
26. Limitation on Director Liability. As permitted by the Delaware General
Corporation Law, the Company's Certificate of Incorporation limits the
liability of directors to the Company or its shareholders for monetary damages
for breach of a director's fiduciary duty except for liability for (i) any
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involved intentional
misconduct or knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock purchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of the Company's
charter provision and Delaware law, shareholders may have more limited rights
to recover against directors for breach of fiduciary duty. See "Management--
Limitation of Liability and Indemnification of Directors."
FOR ALL OF THE AFORESAID REASONS, AND OTHERS SET FORTH HEREIN, THESE
SECURITIES INVOLVE A HIGH DEGREE OF RISK. ANY PERSON CONSIDERING AN INVESTMENT
IN THE SECURITIES OFFERED SHOULD BE AWARE OF THESE AND OTHER FACTORS SET FORTH
IN THIS PROSPECTUS. THESE SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO
CAN AFFORD A TOTAL LOSS OF THEIR ENTIRE INVESTMENT IN THE COMPANY AND HAVE NO
IMMEDIATE NEED FOR A RETURN OF THEIR INVESTMENT.
11
<PAGE>
PRICE RANGE OF SECURITIES
MARKET INFORMATION
Since the Company's initial public offering in early December, 1995, the
Company's Common Stock and Warrants have been traded in the NASDAQ SmallCap
Market.
Set forth below is the range of high and low sales prices of the Common
Stock and Warrants for each quarter within the last two fiscal years as
reported by NASDAQ for those periods. The prices represent quotations between
dealers. The quotations do not include retail markups, markdowns, or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
TYPE OF SECURITY QUARTER ENDED
- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Common Stock.................................
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C> <C>
March 31, 1996 6 3/4 4 1/4
June 30, 1996 4 5/8 3
September 30, 1996 4 1/2 2 3/4
December 31, 1996 2 7/8 7/8
March 31, 1997 2 3/8 1
June 30, 1997 2 1/8 1 1/4
September 30, 1997 3 1/2 1 1/2
2
December 31, 1997 11/16 1 1/8
March 31, 1998 3 1/4 1 1/16
June 30, 1998 2 1/2 7/8
1
July 1-2 11/16 1 5/8
<CAPTION>
QUARTER ENDED
------------- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Warrants.....................................
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C> <C>
March 31, 1996 2 1/2 1 1/4
June 30, 1996 1 3/4 1
September 30, 1996 1 5/8 1/2
December 31, 1996 3/4 5/16
March 31, 1997 15/16 5/16
June 30, 1997 1 5/8
September 30, 1997 2 5/16 3/4
December 31, 1997 2 1/8 1
March 31, 1998 1 3/4 1
June 30, 1998 1 1/2 3/16
July 1-2 5/8 17/32
</TABLE>
HOLDERS
As of June 30, 1998, there were 44 and 40 holders of record of the Company's
Common Stock and
publicly-traded Warrants, respectively. The Company believes that it has a
substantially greater number of shareholders and Public Warrant holders
because the Company believes that a substantial amount of its Common Stock and
Public Warrants are held of record in street name by broker-dealers for their
customers.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
expect to pay a cash dividend in the foreseeable future, but intends to devote
all funds to the operation of its business.
12
<PAGE>
DILUTION
As of March 31, 1998, the net tangible negative book value of the Company
was $421,081, or approximately $(.08) per share of Common Stock. Net tangible
book value per share consists of total assets less intangible assets and
liabilities, divided by the total number of shares of Common Stock
outstanding. By giving effect to the exercise, at an assumed exercise price of
$1.25 per share, of the 5,310,150 shares of Common Stock issuable upon
exercise of the Warrants (resulting in net proceeds to the Company estimated
to be $6,637,687), the adjusted pro forma net tangible book value at March 31,
1998 would have been $6,216,606, or approximately $.60 per share. Thus, as of
March 31, 1998, the adjusted pro forma net tangible book value per share of
Common Stock owned by the Company's current shareholders would have increased
by approximately $.68 without any additional investment on their part and the
purchasers of the Common Stock upon conversion of the Preferred Stock and
exercise of the Warrants will incur an immediate dilution of approximately
$.57 per share from the exercise price.(1) "Dilution" means the difference
between the exercise price of the Warrants and the adjusted pro forma net
tangible book value per share after giving effect to the offering. Holders of
Common Stock may be subjected to additional dilution if (i) any additional
securities are issued as compensation or to raise additional financing, or
(ii) any of the securities set forth in footnote (1) below are issued. The
following table illustrates the dilution which investors participating in this
offering will incur and the benefit to current shareholders as a result of
this offering.
<TABLE>
<S> <C> <C>
Exercise price of the Warrants.............................. $1.25
Net tangible negative book value per share before
offering................................................. $(.08)
Increase in pro forma net tangible book value per share
attributable to Common Stock issued on exercise of
Warrants................................................. $ .60
-----
Net tangible book value per share after offering............ $ .68
-----
Dilution of net tangible book value per share to purchasers
exercising their Warrants(2)............................... $ .57(3)
=====
</TABLE>
- --------
(1) Does not reflect (i) 141,500 shares of Common Stock issuable upon exercise
of the Soliciting Agent's Purchase Option; (ii) 125,000 shares of Common
Stock issuable upon exercise of the Warrants included in the Soliciting
Agent's Purchase Option; (iii) 200,000 shares of Common Stock issuable
upon exercise of the Class B Warrants; or (iv) the issuance of any Options
under the 1997 Stock Option Plan. See "Description of Securities",
"Certain Transactions" and "Management".
(2) Assuming no exercise of the Soliciting Agent's Purchase Option, the
Warrants, the Class B Warrants or the issuance of any Options under the
1997 Stock Option Plan. See "Underwriting" and "Description of
Securities".
(3) Before deduction of warrant solicitation fee.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the resale of any of
the Common Stock or Warrants offered under this Prospectus by the Selling
Securities Holders. The Company, however, may receive net proceeds of
$6,405,180, if all of the Warrants to purchase Common Stock are exercised in
full, at the $1.25 temporary exercise price, after deducting the Soliciting
Agent's 4% Solicitation Fee ($271,757) and the estimated other expenses of
this offering ($120,000). Such net proceeds will be added to the working
capital of the Company. There is no assurance, however, that any of the
Warrants will be exercised. See "Risk Factors--4, Dependence on Proceeds of
Warrant Exercises to Implement Proposed Expansion."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998. This table should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<S> <C>
Long-Term Debt.................................................... $ 235,305
Shareholders' Equity:
Convertible Preferred Stock..................................... 1,524
Common Stock, 25,000,000 shares authorized, $.001 par value,
5,270,348 shares issued; 10,441,550 as adjusted................ 5,270
Additional Paid-in Capital...................................... 9,501,330
Retained Earnings (Deficit)..................................... (5,759,474)
-----------
Total Shareholders' Equity.................................... 3,748,650
-----------
Total Capitalization.......................................... $ 3,983,955
===========
</TABLE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as and
if declared by the Board of Directors out of funds legally available therefor.
The Company has not paid and does not intend to pay cash dividends in the
foreseeable future on the shares of Common Stock. Cash dividends, if any, that
may be paid in the future to holders of Common Stock will be payable when, as
and if declared by the Board of Directors of the Company, based upon the
Board's assessment of the financial condition of the Company, its earnings,
need for funds, capital requirements, and other factors, including any
applicable laws. The Company intends to retain earnings, if any, to finance
its operations as well as the development and expansion of its business. In
addition, any financing which the Company may obtain in the future may contain
provisions restricting the Company's ability to pay dividends. Accordingly,
there can be no assurance that dividends of any kind or amount will ever be
paid in the future. Investors needing immediate or future income by way of
dividends should not purchase the securities of the Company. The Company
currently may be restricted from the payment of dividends under its financing
agreements with Foothill Capital Corporation and there is no assurance that
the Company can or will attempt to renegotiate such restrictions in the
foreseeable future.
14
<PAGE>
SELECTED FINANCIAL DATA
The financial data set forth below is derived from, should be read in
conjunction with and is qualified in its entirety by the more detailed
financial statements and notes thereto, and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CONSOLIDATED FOR PRO FORMA
THREE MONTHS ENDED CONSOLIDATED
MARCH 31, (UNAUDITED) YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED
--------------------- ------------------------ 12/31/97(2)
1998 1997 1997(1) 1996(1) (UNAUDITED)
---------- ---------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $6,955,120 $ -- $ 8,929,464 $ -- $17,110,152
Gross Profit............ 2,070,868 -- 2,075,957 -- 4,485,353
Operating Expenses...... 1,867,206 164,469 3,430,480 478,265 5,402,109
Income (Loss) from
Continuing Operations.. 126,480 (152,928) (1,411,516) (458,927) (1,010,800)
Income (Loss) from
Discontinued
Operations............. 7,494 (248,476) (2,940,537) (697,100) --
Net Income (Loss)....... 133,974 (401,404) (4,352,053) (1,156,027) --
Net Income (Loss) per
Share.................. .03 (.09) (.98) (.35) (.23)
Weighted Average of
Common Shares
Outstanding............ 5,111,383 4,306,400 4,454,034 3,312,500 4,454,034
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
1998 DECEMBER 31,
(UNAUDITED) 1997
------------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)...................... $(1,263,037) $(1,049,605)
Total Assets................................... 8,542,786 6,927,342
Long-Term Debt................................. 235,305 81,380
Total Liabilities.............................. 4,794,136 3,738,917
Shareholders' Equity........................... 3,748,650 3,188,425
</TABLE>
- --------
(1) Only two years are presented since all prior years' assets relate to
discontinued operations.
(2) Represents combined operations of Terrace Holdings, Inc. and A-One-A
Produce and Provisions, Inc. treating the latter as if it was a subsidiary
of Terrace for the full period then ended.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
historical financial statements and footnotes thereto and with the Pro Forma
Combined Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
TERRACE HOLDINGS, INC. (CONSOLIDATED)
Year ended December 31, 1997, compared to year ended December 31, 1996.
The Company's consolidated net loss for 1997 was approximately $4,352,000,
compared to a net loss of approximately $1,156,000 for 1996. The substantial
increase was due to several factors. The primary factor was the loss on the
disposition of several of the Company's operating subsidiaries. In November,
1997, Management and the Board of Directors restructured the focus and
objective of the Company going forward. A major part of this restructuring
included the concentration on the processing and distribution of produce and
other food related items. The Company's plan called for the sale of its ice
cream and hospitality units. For the year ended December 31, 1997, the sale of
these operations resulted in losses on disposal of approximately $2,127,000.
The balance of the operating losses primarily resulted from the
underperfomance of the ice cream unit due to increased cost associated with
production as well as increased selling, general, and administrative costs.
In November of 1997, the Company determined to focus its resources on its
distribution and processing operations. The Company's continuing operations
distribute produce, dairy, frozen and dry grocery items to food service
customers in the south Florida area. In addition, the Company's newly acquired
subsidiary, Fresh, Inc. operates a "value added" precut produce operation
which sells prepared, ready to use products to the food service sector. In
January 1998, the Company purchased a customer list and certain inventory for
retail distribution and has since consolidated all of its distribution
operations into its warehouse facility in Pompano Beach, Florida. The Company
intends to continue its growth as a distributor and value added processing
company. The Company's consolidated net profit for the period ended March 31,
1998, was approximately $126,000. The income for the period was a result of
the Company's continuing operations performance. Revenues from the Company's
continuing operations for the period were approximately $6,955,000.
In addition, the Company incurred losses from its A-One-A Produce and
Provisions, Inc. subsidiary in the six-months it was owned by the Company in
1997. These losses were due primarily to costs associated with its moving into
its new facility, increased labor costs and the increased cost in selling,
general, and administrative expenses. See Below.
Continuing Operations:
A-One-A Produce and Provisions, Inc., the Company's largest operating
subsidiary with respect to sales volume, that distributes produce, dairy, and
other grocery items, operates in Pompano Beach, Florida, out of its 55,000 sq.
ft. warehouse. There are no comparable results for 1996, as A-One-A Produce &
Provisions, Inc. was not part of the Company's organization. For the six-month
period ended December 31, 1997, A-One-A Produce and Provisions, Inc. sustained
a loss of approximately $437,000. This loss, was primarily due to costs
associated with moving into its new facility, increased labor costs and the
increased cost in selling, general, and administrative expenses due to the
Company's plan to develop the business in a very aggressive manner. In
addition, the Company moved into its new facility September 7, 1997, and
incurred additional costs of approximately $150,000 as a result of
inefficiency within its operations. The Company has taken steps to increase
efficiency, including technological upgrades, to overcome initial
inefficiencies and realize greater profitability from its distribution sector.
The Company also purchased two small distribution companies in late 1997 and
early 1998 to expand and consolidate with A-One-A's current operation. For the
three months ended March 31, 1998,
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A-One-A had revenues of approximately $6,500,000. Net Income from this
subsidiary for that period was approximately $237,000. Management believes
that both revenues and income will continue to increase as the Company
furthers its plan for consolidation, increased efficiency, and internal sales
growth. There are no comparable financial results for the same period in 1997
since the Company did not own this subsidiary until July 1997.
Terrace Fresh, Inc. ("Fresh") is the Company's value added produce
processing subsidiary. The Company purchased Fresh in January, 1998, and its
financial results are included in the first quarter unaudited consolidated
results. Fresh manufactures custom cut produce that is cleaned, processed and
packaged in a ready to use form for its customers. This higher margin sector
of the produce industry is rapidly growing as food service establishments
attempt to cut labor expenses as well as the associated costs. Fresh maintains
its own customers and also sells through A-One-A's distribution system to A-
One-A's accounts. Fresh's revenues for the period ended March 31, 1998, were
approximately $262,000 with net income of approximately $55,000. Management
believes that Fresh, Inc. will continue to experience internal sales growth
and will benefit from the apparent continued industry move toward processed,
"ready to use" produce. Management also believes that as it continues to
attempt to increase value, both through increased produce sales as well as
varying its product lines, the Company will realize greater profitability.
Discontinued Operations:
Passover Holiday Segments:
For the Passover season in 1997, the Company operated three venues, the
Registry Resort & Spa in Fort Lauderdale, Florida, the Fountainbleau Hotel in
Miami Beach, Florida, and the Rye Town Hilton in Westchester, New York.
Revenue for this segment was approximately $3,475,000, in 1997 compared to
$3,750,000 in 1996. The Company originally acquired the contracts to operate
vacation venues at the Fountainbleau, Rye Town Hilton and Tamiment Resort in
1996 for $675,000. The full amount was recorded as intangible assets. The
decrease in revenue was a result of the Company's decision not to renew 1997
operations at the Tamiment Hotel in Pennsylvania. As a result of non-operation
at this facility, the Company expensed the remainder of the amortized value
directly associated with that hotel. Management decided that the growth and
income trend of this segment was not in the ultimate plans of the Company, and
accordingly decided to exit this segment of the Company's business. Subsequent
to the year ended December 31, 1997, the Company sold these operations
retroactive to the beginning of 1998 and subject to shareholder ratification.
These operations and one of the food services subsidiaries were sold to Samuel
H. Lasko, President, pursuant to Mr. Lasko's exercise of his option to
purchase the hospitality subsidiaries for an aggregate purchase price of
$575,000, which is the value of the businesses as determined by an independent
fairness opinion.
Food Service Segment
The Company decided in November, 1997 to discontinue its food service units.
For 1997, the Company's reported loss for its A & E Management Corp. and The
Lasko Companies, Inc. subsidiaries was approximately $98,000 compared to a
loss of approximately $189,000 in 1996. The substantial decrease was due
primarily to cost cutting measures taken by the Company at the end of 1996.
The Company's decision to discontinue these operations was primarily a result
of Management's belief that it would be unable to reach a level of
profitability in either 1998 or 1999. In addition, the Company has also sold
the Terrace Oceanside Restaurant (the "Restaurant"), which is the only
business of The Lasko Companies, Inc. subsidiary, to an unaffiliated third
party for total purchase price of $90,000. This sale took place on May 29,
1998.
Revenues for The Lasko Companies, Inc. for the period ended March 31, 1998,
were $199,421 compared to approximately $272,600 for the same period in 1997.
Net income for the period ended March 31, 1998, was approximately $7,500
compared to $48,000 for the same period in 1997. The substantial decrease in
both revenues and net income was due to a poor winter season in south Florida.
The Lasko Companies, Inc. experienced approximately a 20% decrease in
customers in the Restaurant and Management believes this to be a major factor
in the decrease in revenues as well as net income.
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Deering Ice Cream, Inc.
In February, 1997, the Company purchased the assets and related liabilities
of DownEast Frozen Desserts, LLC. The loss incurred for the year ended
December 31, 1997, was approximately $738,000. The losses were incurred from
operations as well as from the disposal of the ice cream business. Management
decided to dispose of this segment because the revenues in the ice cream
subsidiary took a downturn. As a result, profitability was not obtained.
Management of the Company believed it would have had to infuse substantial
funding to compete with some of the larger competition, whether in the form of
equity capital or debt financing. Such financing did not appear to be
reasonably available. See "Prospectus Summary--The Company."
The Company's Management believes that with the 1997 year end and early 1998
dispositions of its non-core subsidiaries and with its organizational
restructuring now basically complete, the Company is positioned to continue
its projected profitability through 1998, although there is no assurance that
this will occur.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a deficit in cash and working capital
of approximately $(372,000) and $(1,050,000), respectively. At March 31, 1998,
the cash deficit was approximately $(441,000) and the working capital deficit
was approximately $(1,260,000). The Company, A-One-A Produce & Provisions,
Inc. and Terrace Fresh, Inc. have relied principally on internally generated
funds to fund their working capital needs.
On May 29, 1998, the Company received a commitment letter from an
institutional lender to provide to the Company and its wholly-owned
subsidiaries an aggregate of $6,000,000 in senior secured financing, the
proceeds of which will be used for (i) repayment of existing senior
indebtedness, (ii) an acquisition (see "Business--Pending Acquisition"), and
(iii) ongoing working capital. As of the date of this Prospectus the new
financing arrangement is being documented.
The Company, by this Prospectus is offering to its Warrantholders the
opportunity to exercise their Warrants and purchase common stock at a
temporarily reduced exercise price.
In addition, as of June 25, 1998, the Company issued to a private investor
$2,625,000 principal amount of 12% Convertible Subordinated Notes ("Notes"),
and Warrants to purchase 400,000 shares of Common Stock of the Company. The
Notes convert and the Warrants are exercisable at $1.25 per share. The funds
evidenced by the Note will be used for working capital and will be repaid if
sufficient proceeds are realized by the Company from the Warrant exercises. If
the Note is not repaid it will be converted into preferred stock. See
"Business--Recent Financing."
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern. However, the success of Management's
plans is not assured.
SEASONALITY
The continuing operations of the Company are seasonal due to the increased
business in south Florida during the winter months. However, the Company's
Management believes that continuing operations will be less seasonal than the
hospitality and ice cream units have been. Additionally, Management believes
that through additional acquisitions in the food processing and distribution
areas it may minimize these seasonal effects, though there is no assurance
that any further acquisitions will be successfully made or that less seasonal
effects will be accomplished.
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BUSINESS
GENERAL
Terrace Holdings, Inc., was incorporated under the laws of the State of
Delaware on June 15, 1995, to change the state of incorporation of Bon
Adventure Kosher Tours, Inc., a Florida corporation, formerly known as Embassy
Kosher Tours of South Florida, Inc. The Company currently has two wholly-owned
operating subsidiaries, having recently sold three in the "hospitality" group
and two in the "food services and distribution" group. The sold hospitality
subsidiaries are A&E Management Corp., which manages the food and beverage
operations of a non-kosher restaurant and catering operation at The Club at
Emerald Hills in Hollywood, Florida; The Lasko Family Kosher Tours, Inc.,
which operates Passover holiday vacations at three locations within the United
States; and The Lasko Companies, Inc., which owns and operates on leased
property the Company's kosher, casual dining restaurant, Terrace Oceanside
Restaurant, in Hallandale, Florida. See "Hospitality." The food services and
distribution subsidiaries are: A-One-A Produce & Provisions, Inc. which is a
Pompano Beach, Florida based produce distributor that sells and distributes
fresh fruit and vegetables and "dry" grocery products to hotels, restaurants
and other businesses in the southern Florida region; and Terrace Fresh Inc.,
which was organized to operate as an affiliate of Terrace's A-One-A Produce &
Provisions, Inc. subsidiary. In December, 1997, the Company disposed of its
frozen desserts manufacturing business. See "Frozen Desserts."
FOOD SERVICES AND DISTRIBUTION
Produce. In August, 1997, but effective as of July 1, 1997, the Company's
wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-One-A
Produce") acquired the assets and related liabilities of A-One-A Wholesale
Produce, Inc. ("A-One-A Wholesale"). Effective January, 1998, the Company
acquired the assets and related liabilities of A One A Wholesale's affiliate,
Fresh, Inc. Both corporations were unaffiliated with the Company. A-One-A
Produce distributes fresh produce, fruits and vegetables to restaurants,
country clubs, hotels, airline food service, and other institutional food
service providers in the south Florida region. A-One-A Produce's warehouse
encompasses 55,000 square feet on 3.5 acres, with 24 loading docks, 1,700
pallet locations and includes 30,000 square feet of refrigerated warehouse
space. A-One-A Produce also operates a fleet of 28 refrigerated delivery
trucks.
Frozen Desserts. In February, 1997, in consideration of the issuance of
918,900 shares of the Company's Common Stock, warrants to purchase an
additional 250,000 shares of Common Stock at $1.1875 per share and
approximately $114,000 in cash, the Company's wholly owned subsidiary, Deering
Ice Cream, Inc., acquired all of the assets and related liabilities of
DownEast Frozen Desserts, LLC, a Delaware limited liability company
unaffiliated with the Company, which manufactured and marketed frozen desserts
under the names Deering Ice Cream and Howard Johnson, as well as co-packing
for approximately 15 other unaffiliated companies. The Company also issued
warrants to purchase 250,000 shares at $1.1875 to Midas Investment Group, Inc.
d/b/a Biltmore Securities, Inc., and 75,000 shares of Common Stock to Barclay
Partners, L.L.C. as investment banking and finder's fees, and warrants to
purchase 50,000 shares at $1.1875 to Bruce S. Phillips, a director of the
Company, in recognition of his efforts successfully to negotiate and
consummate the acquisition. In December, 1997, however, the Company
consummated the sale of the assets and certain liabilities of its wholly-owned
subsidiary, Deering Ice Cream, Inc. to a subsidiary of Fieldbrook Farms, Inc.,
Dunkirk, New York, for approximately $613,000 cash at closing, subject to
later adjustment, plus certain royalties over four years. See "Prospectus
Summary--The Company." During the relatively short period in which the Company
owned and operated Deering Ice Cream, Inc., it became evident that the Company
could not effect profitable operations without a substantial increase of
financial resources to frozen dessert manufacturing, which resources have not
been available to the Company. Additionally, the Company's management
determined that concentrating on food distribution and processing would better
serve its overall goals over time. Accordingly, the Company determined to
dispose of its frozen dessert manufacturing operations and concentrate on its
food distribution businesses in an attempt to enhance shareholder value over
the longer term. There is no assurance, however, that the Company will be
successful in accomplishing this.
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HOSPITALITY
Restaurant. From October, 1993 through May, 1995, the founders of the
Company owned and operated the Terrace-on-the-Lake Restaurant, a casual,
upscale kosher restaurant in Hollywood, Florida. In its short existence,
Terrace-on-the-Lake developed a following among tourists visiting south
Florida who observe the Jewish dietary laws. Because both the kitchen and the
facilities were not large enough to serve adequately the needs of this
restaurant, it was closed at the end of May, 1995, and in October, 1995, the
Company opened a new restaurant, "Terrace Oceanside Restaurant", in
Hallandale, Florida. The Company's initial plan was to establish a chain of
kosher restaurants, which were (the "Restaurant") to be called Terrace
restaurants, along the Eastern seaboard and possibly later in the Midwestern
United States. During 1996, however, Management of the Company determined that
the proposed expansion by establishing additional kosher Terrace restaurants
would entail substantial financial costs and additional personnel, and
determined, instead, to seek possible acquisitions of going concerns in the
food--or food distribution--related industries.
On May 29, 1998, the restaurant business was sold to an unaffiliated third
party for an aggregate purchase price of $90,000. See "Sale of Hospitality
Segments."
Food and Beverage Management. The Company, until March 13, 1998, through its
wholly-owned subsidiary, A&E Management Corp., managed a non-kosher restaurant
and catering operation at The Club at Emerald Hills, an upscale country club
in Hollywood, Florida. See "Sale of Hospitality Segments."
Holiday Vacations. The Company, until March 13, 1998, through its wholly-
owned subsidiary, The Lasko Family Kosher Tours, Inc., operated kosher
Passover holiday vacation venues. Passover occurs each spring. See "Sale of
Hospitality Segments."
In January, 1996, the Company consummated an agreement with an unaffiliated
entity, to assume operation of the annual Passover vacation venues at the
Fontainebleau Hilton Hotel, Miami Beach, the Rye Town Hilton Hotel, Rye, New
York, and the Tamiment Resort & Conference Center, Tamiment, Pennsylvania. As
a result, for the 1996 Passover holiday, the Company operated holiday
vacations at four different locations. The contract to operate a Passover
vacation at the Tamiment Hotel expired after the 1996 Passover holiday and was
not renewed for the 1997 Passover holiday.
Sale of Hospitality Segments. In November, 1997, Samuel H. Lasko, President,
notified the Company of his intention to exercise his option to purchase the
hospitality subsidiaries of the Company at a purchase price equal to the "fair
value" of the subsidiaries. Dr. Lasko's exercise of his option was subject to
the Company securing an independent fair value opinion and the affirmative
vote of the majority of the Company's shareholders (currently scheduled for
August, 1998). A committee of disinterested members of the Board of Directors
retained an independent consulting and valuation firm to render such an
opinion and that opinion was acceptable to Dr. Lasko. Accordingly, on March
13, 1998, the A&E Management, Corp., and The Lasko Family Kosher Tours, Inc.
subsidiaries of the Company were sold to him effective as of January 1, 1998,
subject to the affirmative shareholder vote required, for consideration
aggregating $575,000 in accordance with the independent fair value opinion
received by the Company. The consideration consisted of Dr. Lasko tendering
his employment agreement with the Company having approximately three years
remaining (independently valued at $417,807) and 114,322 of his warrants to
purchase Common Stock at $1.1875 per share (independently valued at $157,193).
Additionally, on May 29, 1998, the Company consummated an agreement for the
sale of The Lasko Companies, Inc. (The Terrace Oceanside Restaurant) with an
unaffiliated third party for an aggregate sales price of $90,000.
As disclosed elsewhere in this Prospectus, during the second half of 1997,
the Board of Directors of the Company determined that its initial strategy of
attempting to expand by establishing additional kosher dining facilities and
Passover vacation venues geographically dispersed would entail substantial
financial costs and additional personnel. Accordingly, the Board of Directors
determined to seek Company growth by acquisition of existing food services and
distribution operations. Thus, on November 12, 1997, the Board of Directors
determined to discontinue the "hospitality" segments of its business and
shortly thereafter Dr. Lasko notified
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the Board of Directors of his intention to acquire those segments. In
connection with that transaction, Dr. Lasko has submitted his resignation as
President of the Company effective immediately upon the affirmative vote of
the Company's stockholders at its upcoming Annual Meeting ratifying the
transaction. In accordance with the agreement, Dr. Lasko ceased drawing salary
from the Company effective as of January 1, 1998. See "Management--Directors
and Officers."
FOOD SERVICES AND DISTRIBUTION
A-One-A Produce & Provisions, Inc. Effective July 1, 1997, the Company's
wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-One-A
Produce") acquired the assets and related liabilities of A-One-A Wholesale
Produce, Inc. ("A-One-A Wholesale") for a purchase price of $3,100,000 in cash
and the issuance of a total of 500,000 shares of Common Stock to the two
shareholders of A-One-A Wholesale. Effective January, 1998, the Company
acquired the assets and related liabilities of A-One-A Wholesale's affiliate,
Fresh, Inc. for a purchase price of $105,000 and the issuance of a total of
138,948 shares of Common Stock. Both corporations were unaffiliated with the
Company. A-One-A Produce distributes fresh produce, fruits and vegetables to
restaurants, country clubs, hotels, airline food service, and other
institutional food service providers in the South Florida region.
A-One-A Wholesale was founded in 1987 by Virgil D. Scarbrough and Scott
Davis. Messrs. Scarbrough and Davis are now Co-Chief Operating Officers of A-
One-A Produce under employment agreements expiring on June 30, 2002. See
"Management--Employment Agreements and Aggregate Options Holdings." The
business is located in Pompano Beach, Florida and is currently housed in
55,000 square feet of rented space. In addition, the Company incorporated
Terrace Fresh, Inc. to operate the business of A-One-A Wholesale's affiliate,
Fresh, Inc. Revenue in 1996, prior to the Company's acquisition, for A-One-A
Wholesale was approximately $14.5 million dollars. A-One-A Produce employs
approximately 105 people.
A-One-A Produce delivers seven days per week and its customers rely on daily
deliveries. The served area reaches southward to Homestead, Florida, and as
far as Jupiter, Florida, to the north, principally on the east coast of the
state. Service is a major component of the business' competitive strength. A-
One-A Produce does not attempt to be the low cost provider, but, rather, seeks
to distinguish itself as a provider of high quality products and exceptional
service. Most orders are received in the afternoon and delivered the next
morning. Customers are supported by a sales manager and nine regional sales
representatives to ensure optimum service and communication. A-One-A Produce
operates a fleet of 28 delivery trucks, all of which are refrigerated and
equipped with two-way radios.
Mr. Davis is primarily responsible for buying produce, pricing the produce
to the customers and identifying and selling the new larger accounts. Mr.
Scarbrough generally is responsible for office administration, personnel,
warehouse and delivery operations. For the most part, each of Messrs. Davis
and Scarbrough is capable of performing the other's basic day-to-day duties.
Jonathan S. Lasko, Executive Vice-President and Chief Operating Officer of the
Company is the President and Chief Executive Officer of A-One-A Produce.
Produce is purchased through approximately six brokers. The Company has also
recently joined a produce buying co-operative, Pro*Act, and is currently
buying a portion of its requirements through it. The Company also purchases
directly from farmers in the Florida market depending upon seasonal
availability. Pricing to customers is set on a weekly basis in accordance with
market conditions. The Company's pricing formulas are very complex and take
into effect a number of qualitative factors. Pricing is set at a detailed item
by item level for each type of produce by customer. A small number of the
larger accounts, in terms of sales, have pricing arrangements that represent a
margin above cost. Some of the Company's larger customers currently include
TGI Friday's, Darden (Red Lobster and Olive Garden), and Applebee's. No
individual customer accounts for more than 7% of the Company's produce sales.
Terrace Fresh, Inc. ("Fresh") supplies cut produce through A-One-A Produce
and also to process food manufacturers directly. This business is
approximately two years old. Its revenues in 1996 were approximately
$1,500,000; approximately $1,000,000 of which represents sales to A-One-A for
resale. The produce is processed
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by Fresh primarily by means of washing or peeling and cutting. The produce is
then vacuum sealed in dated plastic bags and boxed for immediate delivery. The
pre-cut, pre-packaged produce market is currently in its infancy in southern
Florida. Although there can be no assurance, it is anticipated that this
business segment will contribute material growth in revenues and profits in
the future.
A-One-A Produce leases a building housing its offices, warehouse and
processing operations in Pompano Beach, Florida. This property is a 55,000
square foot warehouse on 3.5 acres and should allow for further expansion. The
building has 24 loading docks (approximately half of which are refrigerated),
1,700 pallet locations, and includes 30,000 square feet of refrigerated
warehouse space. The building is leased from an affiliate of Messrs.
Scarbrough and Davis. The lease was negotiated in connection with the
acquisition of A-One-A Wholesale and Fresh.
In September, 1997, the Company acquired the assets of Dry Dock
Distributors, Inc. a Florida corporation d/b/a Bay Purveyors ("Bay
Purveyors"), which distributes "dry" grocery items in the south Florida
region. The purchase price was $310,000. The business of Bay Purveyors is
conducted as part of A-One-A Produce.
In January, 1998, the Company acquired the assets of D.M.S. Food
Distributors, Inc., a Florida corporation, d/b/a Gourmet Distributors
("Gourmet Distributors"), which distributes "dry" grocery items in the south
Florida region. The purchase price was $125,000. The business of Gourmet
Distributors is conducted as part of A-One-A Produce.
SALE OF FROZEN DESSERTS BUSINESS
In December, 1997, the Company's wholly-owned subsidiary, Deering Ice Cream,
Inc. ("Deering"), sold substantially all of its assets and related liabilities
to a subsidiary of Fieldbrook Farms, Inc. ("Fieldbrook"), for an aggregate
purchase price of $1,000,000, subject to later adjustment. In conjunction with
the sale, Milton Namiot, Chief Executive Officer of the Company and President
of Deering, and Joseph Dane, Controller of the Company and Chief Financial
Officer of Deering, resigned their respective positions with the Company.
Under the agreement with Fieldbrook, $200,000 of the purchase price was
placed in escrow for 60 days pending receipt by the parties of a post-closing
accounting of Deering, any third party claims against Deering relating to
matters prior to the closing and certain other matters. In addition, there was
a downward adjustment of the purchase price made at closing of $387,142 as a
result of the working capital deterioration at Deering from September 30,
1997, to closing. On March 20, 1998, the Company released the full escrow
amount to Fieldbrook and is currently in discussion to finalize the purchase
price based on the post-closing accounting and final negotiation over the
assumption of certain liabilities. The Company presently estimates it may have
to refund approximately $50,000 more of the purchase price.
The Company will receive annual royalties from Fieldbrook for four years at
the rates of 2%, 2%, 1% and 1%, respectively, of net sales by Fieldbrook of
products under the Howard Johnsons and Deering labels. At this time, the
Company cannot estimate whether or if such royalties, if received, will be
material.
ADVERTISING AND MARKETING
The Company currently markets its products and services through the use of
mailing lists and various trade publications. The Company presently is
considering engaging in the future outside professional marketing firms to
conduct its marketing activities, none of whom yet have been engaged. Such
marketing activities may include an evaluation of all aspects of the Company's
products and services. Depending upon the outcome of any such marketing
evaluations, the Company may decide to make changes with respect to the
marketing of its products and services.
COMPETITION
The wholesale fresh produce and grocery businesses are very competitive, and
the Company's subsidiaries face competition from other low-cost produce
providers. However, A-One-A Produce and Fresh strive to
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maintain high quality and exceptional service in the market by making quality
products and efficient service its priority. Food related businesses are often
affected by arbitrary changes in consumer tastes, national, regional and local
economic conditions, demographic trends, traffic patterns, the number and
locations of competing businesses and employment trends.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its businesses. Each of the Company's food service operations is subject to
licensing regulation by numerous governmental authorities which may include
building, health and safety and fire agencies. Difficulties in obtaining or
failures to obtain or maintain the necessary licenses or approvals could have
a material adverse effect on the Company's operations.
A-One-A Produce and Fresh maintain licenses under the Perishable
Agricultural Commodities Act ("PACA") which regulates "commission merchants,"
"brokers," and "dealers" engaged in the business of shipping or receiving
perishable agricultural commodities in interstate commerce.
EMPLOYEES
The Company employs approximately 170 people which includes approximately 20
administrative, 40 transportation, 28 sales and customer service
representatives, 75 warehouse and processing personnel, and 5 executive
management. None of the Company's employees are represented by a union, nor
have there been any work stoppages.
PROPERTIES
Fresh leases from an unaffiliated third party approximately 8,000 square
feet at 2001 N.W. 15th Avenue, Pompano Beach, Florida, for its offices,
processing and warehouse. The lease is for a term of five years with an option
to extend for an additional five years at an average annual rental of $70,000.
Fresh may terminate the lease at its option on one year's notice.
A-One-A Produce & Provisions, Inc. leases approximately 55,000 square feet
at 1351 N.W. 22nd Street, Pompano Beach, Florida, for use as its principal
offices and warehouse. The lease term is for five years with two five year
options to extend expiring July 31, 2002, at a rental of $220,000 per year.
The Pompano Beach facility is owned by an affiliate of Messrs. Scarbrough and
Davis. A lease for this facility was negotiated as part of the A-One-A
transaction. Under the lease, the Company has an option to purchase the land
and building in Pompano Beach, Florida at a purchase price of $2,000,000 until
December, 1998, though there is no assurance that such will be the case. The
Company's executive offices are located in the A-One-A Produce facility in
Pompano Beach, Florida. Management believes that the above facilities will be
sufficient for its operations in the foreseeable future.
RECENT FINANCING
In August, 1997, the Company guaranteed payment on a Loan and Security
Agreement between Foothill Capital Corporation of Mechanicsville, Virginia
("Foothill") and the Company's wholly-owned subsidiaries, Deering Ice Cream,
Inc. and A-One-A Produce & Provisions, Inc. under which Foothill has provided
revolving loans in a total amount of approximately $4,200,000, which were
being used to refinance the principal accounts receivable and inventory
financing with respect to Deering Ice Cream, Inc., and also to provide for the
ongoing working capital needs of A-One-A Produce & Provisions, Inc. In
connection with the sale of the Deering subsidiary's business in December,
1997, these loans were paid down in the amount of $1,396,913, leaving a
principal balance of approximately $1,400,000. As a result of the foregoing
transaction, the Company's guaranty was adjusted accordingly.
On May 29, 1998, the Company received a commitment letter from an
institutional lender, IBJ Schroder Credit Corp. ("Schroder"), to provide to
the Company and its wholly-owned subsidiaries an aggregate of $6,000,000 in
senior secured financing, the proceeds of which will be used for (i) repayment
of the existing
23
<PAGE>
senior indebtedness to Foothill, (ii) an acquisition (see "Pending
Acquisition"), and (iii) ongoing working capital. As of the date of this
Prospectus, the new financing arrangement is being documented.
On June 25, 1998, the Company issued to a private investor $2,625,000
principal amount of 12% Convertible Subordinated Notes ("Notes"), and warrants
to purchase 400,000 shares of Common Stock of the Company. The proceeds of the
Notes have been added to the working capital of the Company. The Notes will be
repaid from the first net proceeds, if any, received by the Company from the
exercise of its $4.00 warrants at the temporary $1.25 per share exercise
price. At any time subsequent to the expiration of the 60-day Temporary
Exercise Period, the Notes are convertible at the option of the private
investor, at the rate of one share of Common Stock for each $1.25 of principal
and accrued but unpaid interest, and the warrants are exercisable at a price
of $1.25 per share of Common Stock. At any time subsequent to the Temporary
Exercise Period, any Notes not then converted or repaid, will be converted by
the Company, into $1.25 Redeemable Convertible 8% Cumulative Preferred Stock
("Preferred Stock") of the Company. The Notes, warrants and 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. In
addition, the Company has granted to such private investor an option expiring
no later than December 31, 1998 to purchase 500,000 shares of the Company's
Common Stock at a price determined on the basis of the average closing price
for the Company's Common Stock for the ten trading days immediately following
the expiration of the Temporary Exercise Period. See "Risk Factors--Warrants
Subject to Redemption; Temporary Exercise Price."
While the issuance of the Notes and warrants do not require shareholder
approval under the Delaware General Corporation Law, the NASDAQ Stock Market
Rules ("NASDAQ") require a listed company to secure such shareholder approval
unless the Audit Committee of the Board of Directors expressly approves an
exception. On June 23, 1998, the Audit Committee unanimously approved such an
exception and determined that the delay in securing shareholder approval would
seriously jeopardize the financial viability of the Company.
PENDING ACQUISITION
On June 25, 1998, the Company signed an agreement with Banner Beef and
Seafood Co., Inc. ("Banner") to acquire substantially all the assets and to
assume substantially all the liabilities of Banner for an aggregate purchase
price of $1,800,000. The acquisition is scheduled to close no later than July
31, 1998 and will be financed by the Company with a portion of the Schroder
financing. See "Recent Financing."
Banner is a custom value-added processor of meat, seafood and poultry
operating out of two facilities in the Miami, Florida area. It has
approximately 90 employees. Banner manufactures food products customized to
customer specifications in the retail and discount store, airline, restaurant
and other industries. Assuming the acquisition is consummated, the Company
plans to operate the Banner business through a wholly-owned subsidiary.
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceeding.
24
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Dr. Samuel H. Lasko(1).. 52 President, Treasurer and Director
Jonathan S. Lasko....... 27 Executive Vice-President, Secretary, Chief Operating
Officer and Director
Bruce S. Phillips....... 54 Director
Steven Shulman.......... 57 Chairman of the Board of Directors and Chief
Executive Officer
Richard Power........... 49 Director
Bernard Rubin, M.D...... 49 Director
Fred A. Seigel.......... 42 Director
Houssam T. 27 Director-Nominee
Aboukhater(2)...........
</TABLE>
- --------
(1) In connection with the sale of the "hospitality" businesses, Dr. Lasko has
resigned as an officer of the Company effective on the ratification of the
sale by the Company's shareholders (currently scheduled for August, 1998).
Dr. Lasko has also advised that he will not stand for re-election as a
director at that time.
(2) Mr. Aboukhater is a director-nominee standing for election by the
Company's shareholders at the Annual Meeting scheduled to take place in
August, 1998.
Directors are elected on an annual basis. All directors of the Company hold
office until the next annual meeting of the shareholders or until their
successors are elected and qualified. At present, the Company's by-laws
provide for not less than one director nor more than seven. Until the DownEast
acquisition in February, 1997, there were five directors, and since February
17, 1997, there have been seven directors. The Company's by-laws permit the
Board of Directors to fill any vacancy and such director may serve until the
next annual meeting of shareholders or until his successor is elected and
qualified. Officers are elected to serve, subject to the discretion of the
Board of Directors, until their successors are appointed.
DR. SAMUEL H. LASKO, age 52, has been President, Treasurer and a director of
the Company since its inception in October, 1988, and was Chairman of the
Board of Directors and Chief Executive Officer from August, 1995, until
February 17, 1997, immediately following the DownEast transaction. Dr. Lasko
has also been president of A&E Management Corp. since October 27, 1993, The
Lasko Companies, Inc. since May 11, 1995, and Prime Concern Kosher Foods, Inc.
since December, 1995. Dr. Lasko holds a B.A. from Yeshiva University in New
York City and received his Ed.D. in 1984 from the University of Maryland. Dr.
Lasko is the father of Jonathan S. Lasko, currently the Executive Vice-
President, Secretary, the Chief Operating Officer of the Company and one of
its directors, and the brother-in-law of Bruce S. Phillips, a director of the
Company. See the Note (1) above.
JONATHAN S. LASKO, age 27, has been a director of the Company since
September, 1994, and its Chief Operating Officer and Secretary since August,
1995. He has also been the Company's Executive Vice-President since May, 1993.
Mr. Lasko has also been vice-president of A&E Management Corp. since October
27, 1993, The Lasko Companies, Inc. since May 11, 1995, and Prime Concern
Kosher Foods, Inc. since December, 1995. He is also President and Chief
Executive Officer of A-One-A Produce and Provisions, Inc. Mr. Lasko attended
Yeshiva University, New York, New York, in 1988 and 1989, and Bernard Baruch
College of City University of New York, New York in 1990 and 1991. From
January, 1990 until October, 1993, when he became a full-time employee of the
Company, Mr. Lasko was a part-time employee of the Company and managed its
food and
25
<PAGE>
beverage operations for its Passover holiday vacation. Mr. Lasko is the son of
Dr. Samuel H. Lasko, the President and Treasurer of the Company and one of its
directors, and the nephew of Bruce S. Phillips, a director of the Company.
BRUCE S. PHILLIPS, age 54, has been a director of the Company since August,
1995. He is a graduate of City College of New York. From April, 1988 until
August, 1994, Mr. Phillips was president and director of Frem Corp., a
plasticware manufacturer. Since August, 1994, Mr. Phillips has owned PFS
Venture Group, a business management and financial consulting firm. Mr.
Phillips is the brother-in-law of Dr. Samuel H. Lasko, a director of the
Company and its President and Treasurer, and the uncle of Jonathan S. Lasko, a
director of the Company and its Executive Vice-President, Secretary and Chief
Operating Officer. Mr. Phillips is not standing for re-election at the Annual
Meeting of Shareholders to be held on July 9, 1998.
STEVEN SHULMAN, age 57, is a Managing Director of Latona Associates, Inc.,
an investment banking firm involved in advisory services and principal
investments. He serves as a director of a number of public and private
companies and is currently a director of WPI Group, Inc., Ermanco
Incorporated, Beacon Capital Partners, L.P. and Corinthian Directory, Inc. Mr.
Shulman holds an M.S. in Industrial Management from the Stevens Institute of
Technology, where he currently serves as Vice Chairman of its Board. Since
February, 1997, Mr. Shulman has served as the Chairman of the Board of
Directors and since February 18, 1998, has also served as the Chief Executive
Officer of the Company.
RICHARD POWER, age 49, has been Vice-President of Tyco Fire and Safety
Services since May, 1997, and the President of Carlisle Plastics, Inc., from
January, 1997, to May 1997, both divisions of Tyco International Ltd., a New
York Stock Exchange listed corporation. He served as a consultant to Tyco in
Mergers and Acquisitions from 1995 through 1996, Vice President and Chief
Financial officer of Abex Inc. a New York Stock Exchange listed corporation
between 1994 and 1995, and was the Managing Director of a private investment
company from 1992 through 1994. Mr. Power holds a B.S. and an M.B.A. from
Boston College. Since February, 1997, Mr. Power has served as a director of
the Company.
BERNARD RUBIN, M.D., age 49, was a director of the Company from August,
1995, to February 17, 1997, when he voluntarily resigned. He was re-elected a
director at the Company's 1997 Annual Meeting of Shareholders. For the past
approximately 19 years, Dr. Rubin has been a practicing cardiologist in
Baltimore, Maryland, where, for the past six years he has been the President
of Baltimore Heart Associates, an 18-member cardiology group. Dr. Rubin has
served as President of the Medical Staff and is currently Chief of Cardiology
and Medical Director of the Critical Care Unit at Northwest Hospital Center in
Baltimore. He holds undergraduate degrees from Yeshiva University and a
medical degree from New York Medical College, both in New York. Dr. Rubin is a
Fellow in the American College of Cardiology. Dr. Rubin is not standing for
re-election at the Annual Meeting of Shareholders scheduled on July 9, 1998.
FRED A. SEIGEL, age 42, was elected a Director on February 18, 1998, to fill
a vacancy. Mr. Seigel is a founder, President and a Director of Energy Capital
Partners, a privately-held, Boston-based company organized in September, 1993,
providing financing for energy efficiency projects for commercial, industrial
and institutional property owners throughout the United States. He has more
than twenty years experience in the energy field. From January, 1988, to
October, 1994, he served as a limited partner in two large-scale energy co-
generation projects in New York state, representing a total investment of
$350,000,000. From March, 1984, to November, 1986, Mr. Seigel was a project
manager for Wheelabrator-Frye, Inc., in that company's Resource Recovery
Division. From January, 1981, to January, 1993, he was the Director of the
Executive Office for Energy for the State of New Hampshire. Mr. Seigel holds a
B.A. from New England College, Henniker, New Hampshire.
HOUSSAM T. ABOUKHATER, age 27, a director-nominee of the Company, is Vice
President of Prestolite Wire, a privately-held, Southfield, Michigan based
company, which is a leading producer of telecommunications wire. From 1993 to
1996, Mr. Aboukhater served as Vice President of Balcrank Products, an
automotive components division of the General Chemical Group, a New York Stock
Exchange listed corporation. Mr. Aboukhater also currently serves as Director
of Market Analysis for Latona Associates, an investment banking firm involved
in
26
<PAGE>
advisory services and principal investments. Mr. Aboukhater holds a B.A. in
business administration from the University of San Diego, San Diego,
California.
DIRECTOR COMPENSATION
Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors and commencing in fiscal 1996,
non-employee directors were paid $750 for each directors' meeting attended. In
addition to the foregoing, directors are also granted 20,000 options annually
under the Company's 1997 Stock Option Plan. The Company anticipates that the
Board of Directors will continue to meet at least four times a year.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or distributions made
during the fiscal years ended December 31, 1997, 1996 and 1995, by the Company
or any of its subsidiaries to the Chief Executive Officer of the Company and
to each of its most highly compensated executive officers, other than the
Chief Executive Officer, whose compensation exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
YEAR ENDED ANNUAL OTHER
NAME & PRINCIPAL POSITION DECEMBER 31 SALARY COMPENSATION OPTIONS
- ------------------------- ----------- -------- ------------ -------
<S> <C> <C> <C> <C>
Samuel H. Lasko.............. 1995 $ 31,403 $169,081(1) 750,000(4)
President and Treasurer 1996 $125,000 $ 9,517(2)(3)
1997 $150,000 $ 22,502(2) 125,000(7)
Jonathan S. Lasko............ 1995 $ 24,592 $169,081(1) 750,000(4)
Executive Vice President,
Secretary and 1996 $ 70,000 $ 7,255(2)
Chief Operating Officer 1997 $ 95,000 $ 21,727(2) 125,000(7)
Steven Shulman............... 1997 $ 0 $ 0 130,000(7)
Chief Executive Officer(5)
Milton Namiot................ 1997 $175,000 $ 9,500(2) 125,000(7)
Chief Executive Officer(6)
</TABLE>
- --------
(1) Represents combined "S" corporation distributions in the nature of
dividends through December 5, 1995, when the Company first offered and
sold its securities to the public.
(2) Represents amounts paid for lease of automobile, automobile insurance,
cell phone and health insurance.
(3) Does not include repayments of loans from A&E, The Lasko Companies, Inc.
and the Company.
(4) In connection with the DownEast acquisition in February, 1997, each of
Samuel Lasko and Jonathan Lasko surrendered their respective right to
performance options, contained in their respective employment agreements
and, in lieu thereof, the Company issued to each of Samuel H. Lasko and
Jonathan D. Lasko warrants to purchase 375,000 shares of the Company's
common stock at $1.1875 per share exercisable immediately and expiring
August 31, 2000. Dr. Lasko tendered to the Company 114,322 of such
warrants in partial consideration of his purchase of the Company's
"hospitality" businesses.
(5) Steven Shulman became Chief Executive Officer of the Company in February,
1998, subsequent to the resignation of former CEO Milton Namiot (in
connection with the closing of the Deering transaction).
(6) In connection with the sale of the Company's Deering Ice Cream, Inc.
business, Mr. Namiot resigned as an officer. He was an officer and
director of the Company from February 17, 1997, until the closing of the
Deering transaction. In connection with his resignation and the
termination of this three year employment contract, 50% of the options
theretofore granted Mr. Namiot, or options to purchase 125,000 shares of
the Company's common stock, were made immediately exercisable. They have
since expired unexercised.
(7) Represents options granted to directors and executive officers under the
Company's 1997 Stock Option Plan.
27
<PAGE>
EMPLOYMENT AGREEMENTS AND AGGREGATE OPTIONS HOLDINGS
The Company has 5-year employment agreements, ending August 31, 2000, with
each of Dr. Samuel H. Lasko and Jonathan S. Lasko. Dr. Samuel H. Lasko
tendered to the Company the balance of his employment agreement in partial
consideration of his purchase of the Company's "hospitality" segments. See
"Business--Sale of Hospitality Segments."
Under his employment agreement, Dr. Samuel H. Lasko received an annual base
salary of $95,000 for the first two years and was to receive $125,000 for the
third year, $150,000 for the fourth year and $175,000 for the fifth year of
his employment. Under his employment agreement, Jonathan S. Lasko receives an
annual base salary of $70,000 for the first two years, $95,000 for the third
year, $115,000 for the fourth year and $125,000 for the fifth year of his
employment. In connection with the DownEast transaction, by amendments dated
February 17, 1997, to their respective employment agreements, Dr. Lasko and
Jonathan Lasko each voluntarily surrendered their one-time performance based
options under their respective employment agreements to purchase up to an
aggregate of 750,000 shares of common stock, and in lieu thereof, the Company
issued to each of Dr. Lasko and Jonathan Lasko, warrants to purchase 375,000
shares of its common stock at an exercise price of $1.1875 per share. (Dr.
Lasko tendered to the Company 114,322 of such warrants in partial
consideration of his purchase of the Company's "hospitality" businesses.) The
employment agreements also entitle the individuals to the use of an automobile
and to employee benefit plans, such as group life, health, hospitalization and
life insurance. Under each of these employment agreements, employment
terminates upon death or total disability of the employee and may be
terminated by the Company for "cause," which is defined, among other things,
as the willful failure to perform duties, embezzlement, conviction of a
felony, or breach of the employee's covenant not to compete or maintain
confidential certain information. On February 18, 1998, the Board of Directors
accepted the recommendation of its Compensation Committee and increased
Jonathan S. Lasko's base compensation for 1998 to $125,000.
In connection with the DownEast transaction, the Company entered into a 3-
year employment agreement, effective February 17, 1997, and ending August 31,
2000, with Milton Namiot under which Mr. Namiot served as the President and
Chief Executive Officer of Deering and Chief Executive Officer of the Company.
As a result of the sale of the Deering business, Mr. Namiot resigned from his
positions as an officer and director of the Company.
In connection with the A-One-A transaction, the Company entered into 5-year
employment agreements, effective July 1, 1997, and ending July 30, 2002, with
both Virgil D. Scarbrough and Scott Davis under which Messrs. Scarbrough and
Davis will serve as Co-Chief Operating Officers of the Company's wholly-owned
subsidiaries A-One-A Produce & Provisions, Inc. and Terrace Fresh, Inc. Under
their respective employment agreements, Messrs. Scarbrough and Davis each
receive an annual base salary of $120,000.
In connection with the Bay Purveyors acquisition, the Company's wholly-owned
subsidiary, A-One-A Produce, entered into a 5-year employment agreement
effective September 1, 1997, with Kenneth Cohen under which Mr. Cohen will
serve in an upper level management position for A-One-A Produce. Under his
employment agreement, Mr. Cohen receives an annual base salary of $65,000.
In connection with the Gourmet Distributors acquisition, the Company entered
into a 3-year consulting agreement with Phyllis Forstein, to assist in and
consult concerning the business acquired. Ms. Forstein receives an annual
consulting fee of approximately $92,000.
THE 1997 STOCK OPTION PLAN AND PARTICIPANTS
The Company recently adopted the 1997 Stock Option Plan (the "Plan") which
enables it to grant options for shares of its Common Stock. The Plan
authorizes the grant of options to purchase up to an aggregate of 1,250,000
shares of the Company's Common Stock, to (i) officers, directors, and other
full-time salaried employees of the Company and its subsidiaries with
managerial, professional or supervisory responsibilities, and
28
<PAGE>
(ii) consultants and advisors who render bona fide services to the Company and
its subsidiaries, in each case, where the Compensation Committee determines
that such officer, director, employee, consultant or advisor has the capacity
to make a substantial contribution to the success of the Company. As used
herein with respect to the Plan, references to the Company include
subsidiaries of the Company.
The purposes of the Plan are to enable the Company to attract and retain
persons of ability as officers, directors, and other key employees with
managerial, professional or supervisory responsibilities, to retain able
consultants and advisors, and to motivate such persons to use their best
efforts on behalf of the Company by providing them with an equity
participation in the Company. The full text of the Plan is set forth as an
exhibit to this Registration Statement, and the following description is
qualified in its entirety by reference thereto.
The Plan is administered by the Compensation Committee, which was appointed
by the Company's Board of Directors, and consists of three members of the
Board of Directors, two of whom are "disinterested" persons within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934. Under the terms of
the Plan, the Committee will have the authority to determine, subject to the
terms and conditions of the Plan, the persons to whom options are granted, the
number of options granted to each optionee, and the terms and conditions of
each option, including its duration.
The Plan can be amended, suspended, reinstated or terminated by the Board of
Directors; provided, however, that without approval of the Company's
shareholders, no amendment shall be made which (i) increases the maximum
number of shares of Common Stock which may be subject to stock options granted
under the Plan, except for specified adjustment provisions, (ii) extends the
term of the Plan, (iii) materially increases the benefits accruing to
optionees under the Plan, (iv) materially modifies the requirements as to
eligibility for participation in the Plan, or (v) will cause stock options
granted under the Plan to fail to meet the requirements of Rule 16b-3. Unless
previously terminated or extended by the Board of Directors, the Plan will
terminate on February 20, 2007.
Stock options may be granted to purchase Common Stock under the Plan at not
less than the fair market value of the shares as of the date of grant. The
maximum number of shares for which options may be issued to an employee of the
Company during any calendar year may not exceed 250,000. Other than the limit
of 250,000 options per year, there is no limitation on the aggregate number of
stock options which may be granted to any optionee pursuant to the Plan.
As of the date hereof, 758,000 options have been granted, including 380,000
to Samuel H. Lasko, Jonathan S. Lasko, and Steven Shulman.
Stock options may be granted for a term of up to ten years. The Plan
provides that if a stock option, or portion thereof, expires, lapses without
being exercised or is terminated, canceled or surrendered for any reason
without being exercised in full, the unpurchased shares of Common Stock which
were subject to such stock option or portion thereof shall be available for
future grants of stock options under the Plan.
Pursuant to the terms of the Plan, the option price for all options must be
paid in cash, by check, bank draft or money order payable in United States
dollars to the order of the Company, or with Common Stock of the Company owned
by the optionee and having a fair market value on the date of exercise equal
to the aggregate exercise price of the shares to be so purchased, or a
combination thereof.
Options granted pursuant to the Plan will not be assignable or transferable
except by will or the laws of intestate succession. Options acquired pursuant
to the Plan may be exercised by the optionee (or the optionee's legal
representative) only while the optionee is employed by the Company, or within
six months after termination of employment due to a permanent disability, or
within three months after termination of employment due to a permanent
disability, or within three months after termination of employment due to
retirement. The executor or administrator of a deceased optionee's estate or
the person or persons to whom the deceased optionee's rights thereunder have
passed by will or by the laws of descent or distribution shall be entitled to
exercise the option
29
<PAGE>
within the sixth month after the decedent's death. Options expire immediately
in the event an optionee is terminated with or without cause or resigns;
provided, however, in the event the Company terminates the employment of an
optionee who at the time of such termination was an officer of the Company and
had been continuously employed by the Company during the two year period
immediately preceding such termination, for any reason except "good cause" (as
defined in the Plan), each stock option held by such optionee (which had not
then previously lapsed or terminated and which had been held by such optionee
for more than six months prior to such termination) shall be exercisable for a
period of three months after such termination to the extent otherwise
exercisable during that period. All of the aforementioned exercise periods set
forth in this paragraph are subject to the further limitation that an option
shall not, in any case, be exercisable beyond its stated expiration date.
The purchase price and the number and kind of shares that may be purchased
upon exercise of options granted pursuant to the Plan, and the number of
shares which may be granted pursuant to the Plan, are subject to adjustment in
certain events, including stock splits, recapitalizations, mergers, and
reorganizations.
In February, 1997, the following officers, directors, significant employees
and other employees have received the number of options as is designated
opposite their respective names:
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS(1)
---- --------------------
<S> <C>
Samuel H. Lasko.................................... 125,000
Jonathan S. Lasko.................................. 125,000
Steven Shulman..................................... 130,000(2)
Bruce S. Phillips.................................. 20,000(2)
Richard Power...................................... 20,000(2)
Other Employees(3)................................. 188,000
-------
TOTAL............................................ 608,000(4)
=======
</TABLE>
- --------
(1) Unless otherwise stated, these options were granted at an exercise price
of $1.185 per share, such options become exercisable one third per year
over three years from the date granted.
(2) All of Mr. Phillips' and Mr. Power's options, as well as 30,000 of Mr.
Shulman's options, became exercisable at the time they were granted.
(3) Includes options granted to four of the Company's employees at an exercise
price of $1.185 per share and 20 individual employees of the Company's
subsidiaries at an exercise price of $2.31 per share. All such options
become exercisable one third per year over three years from the date
granted.
(4) Does not include options granted to Milton Namiot, a former director and
Chief Executive Officer, and Joseph Dane, former Corporate Controller of
the Company. In February, 1997, Messrs. Namiot and Dane were granted
250,000 and 25,000 options, respectively. Although they were no longer
affiliated with the Company subsequent to the sale of the Company's
Deering Ice Cream business, the Compensation Committee determined to make
immediately exercisable 125,000 of Mr. Namiot's options and all of Mr.
Dane's options for a total of 120 days beyond the date of the cessation of
their employment by the Company. All of such options have expired
unexercised.
30
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information concerning the beneficial ownership
of Common Stock of the Company by each director, certain executive officers,
and by all directors and officers of the Company as a group as of May 22,
1998. In addition, the table provides information concerning the beneficial
owners known to the Company to hold more than 5 percent of the outstanding
Common Stock of the Company as of May 22, 1998.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(1)(2) OWNERSHIP CLASS
- ------------------------ ------------ ----------- --------------- ----------
<S> <C> <C> <C> <C>
Dr. Samuel H. Lasko(3).... 383,750(4) 7.3% -0- -0-
Jonathan S. Lasko......... 380,000 7.2% 12,500(5) *
Richard Power............. 204,154 * 50,000 *
Steven Shulman............ 346,154 6.6% 50,000 *
Bernard Rubin, M.D........ -0- -0- 15,000 *
Fred A. Seigel............ 64,577 * -0- -0-
Bruce S. Phillips......... -0- -0- -0- -0-
Houssam T. Aboukhater(6).. -0- -0- 50,000 *
All Directors and
Executive Officers as a
Group
(8 persons).............. 1,378,635(7) 26.1% 177,500 11.6%
</TABLE>
- --------
*Less than five percent
(1) In each case the beneficial owner has sole voting and investment power
except that shares held by Dr. Samuel H. Lasko are held in joint tenancy
with his wife Arlene Lasko and the shares held by Jonathan S. Lasko are
held in joint tenancy with his wife Ellen J. Lasko.
(2) The calculation of percent of class is based upon the number of shares of
Common Stock outstanding as of May 22, 1998.
(3) In connection with the sale of the "hospitality" businesses, Dr. Lasko has
resigned as an officer of the Company effective on the ratification of the
sale by the Company's shareholders and is not standing for re-election as
a director.
(4) Includes 3,750 shares held for the benefit of Dr. Lasko's minor child.
(5) Held for the benefit of Jordana Lasko, a minor.
(6) Mr. Aboukhater is director-nominee standing for election at the Company's
annual meeting scheduled to take place on July 9, 1998.
(7) Does not include stock options granted. See "1997 Stock Option Plan and
Participants." Also does not include Warrants to purchase Common Stock at
a price of $1.1875 in the following amounts: Samuel H. Lasko--260,678;
Jonathan S. Lasko--375,000; Steven Shulman--36,666.7; Richard Power--
31,666.7; Fred A. Seigel--15,833.3; Bernard Rubin, M.D.--20,000; and Bruce
S. Phillips--70,000.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
As permitted by the Delaware General Corporation Law ("DGCL"), the Company
has included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. The effect of this
provision in the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a Director
for breach of the fiduciary duty of care as a Director except in the
situations described in (i) through (iv) above.
31
<PAGE>
This provision does not limit nor eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a Director's duty of care. These provisions will not
alter the liability of Directors under federal securities laws.
The Certificate of Incorporation and the by-laws of the Company provide that
the Company is required and permitted to indemnify its officers and directors,
employees and agents under certain circumstances. In addition, the Company is
required to advance expenses to its officers and directors as incurred in
connection with proceedings against them for which they may be indemnified
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such person is not
entitled to indemnification. At present, the Company is not aware of any
pending or threatened litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification would be required or
permitted. The Company may obtain directors and officers insurance in amounts
it deems necessary. The Company believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors and officers of
the Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Samuel H. Lasko loaned Terrace Holdings, Inc., The Lasko Companies, Inc. and
A&E Management Corp. the sums of $7,276, $42,715 and $235,558, respectively,
or an aggregate of $285,549. Each loan provided interest at the prime rate of
interest and principal and interest due on demand. $100,000 of principal of
these loans was repaid from the proceeds of the Company's offering. Pursuant
to agreements, the remaining principal of $185,549, together with all accrued
interest, was payable out of the Company's working capital in twelve equal
monthly installments commencing in December, 1995. At December 31, 1996, the
principal balance of these loans was paid in full.
In connection with the DownEast acquisition, the Company issued to each of
Samuel H. Lasko and Jonathan D. Lasko (collectively the "Laskos") warrants to
purchase 375,000 shares of the Company's common stock at $1.1875 per share.
The Laskos surrendered their respective performance options to purchase up to
750,000 shares of the Company's common stock, contained in their respective
employment agreements. In addition, they entered into an option agreement to
purchase the businesses, assets or capital stock of three of the Company's
wholly owned subsidiaries, The Lasko Family Kosher Tours, Inc., The Lasko
Companies, Inc. and A&E Management Corp. at the fair market value thereof to
be independently determined. The option was exercised by Samuel H. Lasko alone
and on March 13, 1998, he purchased The Lasko Family Kosher Tours, Inc. and
A&E Management Corp. for consideration equal to $575,000 in accordance with a
"fairness opinion" received by the Company and Dr. Lasko from an independent
valuation firm. The sale is subject to shareholders' approval. See "Business--
Sale of Hospitality Segments."
A-One-A Produce & Provisions, Inc. leases approximately 55,000 square feet
at 1351 N.W. 22nd Street, Pompano Beach, Florida, for use as its principal
offices and warehouse. The lease term is for five years with two five year
options to extend expiring July 31, 2002 at an annual rental of $220,000. The
Pompano Beach facility is owned by an affiliate of Messrs. Scarbrough and
Davis. A lease for this facility was negotiated as part of the A-One-A
acquisition. Under the lease, the Company has an option to purchase the land
and building in Pompano Beach, Florida at a purchase price of $2,000,000 until
December, 1998.
In July, 1997, the Company loaned $30,000 to its then wholly-owned
subsidiary, Deering Ice Cream, Inc. As a result of the consummation of the
sale of the assets of Deering to a subsidiary of Fieldbrook Farms, Inc., this
loan was terminated.
All of the foregoing transactions had at least two disinterested directors
at the time of those transactions. In addition, of the transactions that are
currently ongoing, all have been ratified by independent, disinterested
directors.
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<PAGE>
All future material transactions and loans made with and by the Company will
be on terms no less favorable to the Company than those that can be obtained
from unaffiliated third parties. In addition, any forgiveness of loans will be
approved by a majority of the Company's independent directors who do not have
an interest in the transactions and who have access, at the Company's expense,
to the Company's or independent counsel.
SELLING SECURITIES HOLDERS
The following table sets forth the record and beneficial ownership by each
of the Selling Securities Holders, the number of shares of Common Stock or
Warrants to be offered for resale by each as of the date of this Prospectus.
No person owned of record or beneficially more than 10% of the Common Stock of
the Company. The Selling Securities Holders will not pay any of the expenses
incident to the offering made by this Prospectus other than any sales,
commissions or concessions applicable to the securities offered by them
hereby.
<TABLE>
<CAPTION>
COMMON
NAME STOCK(/1/) WARRANTS(/2/)
- ---- ---------- -------------
<S> <C> <C> <C> <C> <C>
Abresch, John P........................ 25,000 25,000
Anom Trust, The........................ 50,000 50,000
Boca Raton Synagogue................... 250,000(3)
Carpionato, Alfred..................... 250,000 250,000
Feinberg, Michael...................... 200,000(4)
Gelfand, Mark E........................ 25,000 25,000
Haber, Sidney and Linda................ 50,000 50,000
Healthcare Financial Corporation, LLC.. 50,000 50,000
Herman, Bryan.......................... 125,000 125,000
Katz Investments II.................... 100,000 100,000
Kaufman, Howard........................ 250,000 250,000
Kraut, Dr. Irving...................... 250,000 250,000
Kulman, Craig.......................... 25,000 25,000
Lipsky, Alan........................... 125,000 125,000
Loewenstern Properties, Inc.(5)........ 562,650(6) 812,650
Lyons Community Property Trust, Phillip
N. Lyons, Trustee..................... 300,000 300,000
Masada I Limited Partnership........... 25,000 25,000
NAC Group, Inc......................... 50,000 50,000
Namiot, Milton(7)...................... 25,000 25,000
Phillips, Bruce S...................... 70,000(8)
Pronesti, Thomas M..................... 25,000 25,000
Rothstein, Martin...................... 200,000 200,000
Sitzer, Marc J......................... 25,000 25,000
Waldman, Cory.......................... 50,000 50,000
--------- ---------
TOTAL................................ 2,857,650 3,087,650
========= ========= ===
</TABLE>
- --------
(1) Unless otherwise indicated, includes Common Stock issuable upon conversion
of preferred stock. See "Description of Securities--Preferred Stock."
(2) Represents Warrants or, upon exercise of the Warrants, the Common Stock
underlying such Warrants.
(3) Received as a charitable contribution from Loewenstern Properties, Inc.
(4) Represents shares of Common Stock previously issued for resale by the
holder thereof.
(5) Received the Company's securities through various assignments from Midas
Investment Group, Inc. d/b/a Biltmore Securities, Inc., the Underwriter of
the Company's initial public offering in 1995 and its Warrant Soliciting
Agent.
(6) Includes 250,000 shares underlying Warrants exercisable at $1.1875.
Loewenstern Properties, Inc. has notified the Company that it intends to
exercise the warrants to purchase these shares.
(7) Former director and Chief Executive Officer of the Company.
(8) Current director exercising warrants at $1.1875.
33
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.001 per share, of which 5,270,348 shares are currently outstanding.
Assuming exercise of all the Warrants, there will be 10,580,498 shares of
Common Stock outstanding.
Holders of Common Stock are entitled to dividends when, as and if declared
by the Board of Directors out of funds available therefor, subject to any
priority as to dividends for any preferred stock that may be outstanding. The
Preferred Stock currently authorized and outstanding is non-voting stock
unless or until it is converted into Common Stock. Each share of Preferred
Stock is convertible into two shares of Common Stock. Holders of Common Stock
are entitled to cast one vote for each share held at all shareholder meetings
for all purposes, including the election of Directors. The holders of more
than fifty percent of the Common Stock issued and outstanding and entitled to
vote, present in person or by proxy, constitute a quorum at all meetings of
shareholders and the vote of the holders of a majority of Common Stock present
at such a meeting will decide any question brought before such meeting, except
for certain actions such as the election of directors, amendments to the
Company's Certificate of Incorporation, mergers or dissolutions which require
the vote of the holders of a majority of the outstanding Common Stock. Upon
liquidation or dissolution, the holder of each outstanding share of Common
Stock will be entitled to share equally in the assets of the Company legally
available for distribution to such shareholder after the payment of all debts
and other liabilities and after distributions to preferred shareholders, if
any, legally entitled hereto. No holder of Common Stock has any preemptive or
preferential rights to purchase or subscribe for any part of any unissued or
any additional authorized stock or any securities of the Company convertible
into shares of its stock. The outstanding shares of Common Stock are, and the
Common Stock offered hereby will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$.001 par value, of which 1,523,825 shares are currently outstanding. The
Preferred Stock may be issued in one or more series at such time or times and
for such consideration as shall be authorized from time to time by the Board
of Directors. The Board of Directors is authorized to fix the designation of
each series of Preferred Stock and the relative rights, preferences,
limitations, qualifications, powers or restrictions thereof, including the
number of shares comprising each series, the dividend rates, redemption
rights, rights upon voluntary or involuntary liquidation, provisions with
respect to a retirement or sinking fund, conversion rights, voting rights, if
any, preemptive rights, other preferences, qualifications, limitations,
restrictions and the special or relative rights of each series not
inconsistent with the provisions of the Certificate of Incorporation. The
outstanding shares of Preferred Stock are each convertible into two shares of
Common Stock at the option of the holder and automatically are converted on
July 31, 1998, if not converted prior to that date.
WARRANTS
In addition to the 5,310,150 Warrants currently outstanding, an aggregate of
250,000 warrants were issued by the Company in connection with the DownEast
transaction ("DownEast Warrants"), 90,000 warrants have been issued to two
directors in recognition of their services to the Company ("Directors
Warrants") 635,678 warrants were issued to two executive officers in
connection with their employment agreements ("Executive Officers' Warrants"),
250,000 warrants were issued to the Company's initial underwriter in
connection with its initial public offering ("Underwriter's Warrants"), and
200,000 Class B Warrants were issued prior to the Company's initial public
offering. All of these warrants are identical to the Warrants, except that the
exercise price of the DownEast Warrants, the Directors Warrants, the Executive
Officers' Warrants and the Underwriter's Warrants is $1.1875, and the exercise
price of the Class B Warrants is $10.00. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $4.00 per share,
subject to adjustment, until December 5, 2000. No holder, as such, of Warrants
shall be entitled to vote or receive dividends or be deemed the holder of
shares of Common Stock for any purpose whatsoever until such Warrants have
been duly exercised
34
<PAGE>
and the purchase price has been paid in full. Each Warrant is redeemable by
the Company for $.05 per Warrant, at any time, upon thirty days' prior written
notice, if the last reported sale price or average closing bid price of the
Common Stock, as reported by the principal exchange on which the Common Stock
is traded, NASDAQ or the National Quotation Bureau Incorporated, as the case
may be, exceeds $9.00 per share for twenty consecutive trading days ending
within ten days prior to the date of the notice of redemption. Any right to
exercise a Warrant will terminate at 5:00 p.m. (New York time) on the business
day immediately preceding the date of redemption.
Upon thirty days' written notice to all holders of Warrants, the Company has
the right, subject to compliance with applicable Commission rules, to reduce
the exercise price or extend the term of the Warrants. The Warrants will be
entitled to the benefit of adjustments in the exercise price of the Warrants
and in the number of shares of Common Stock or other securities delivered upon
the exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
During the 60-day period commencing on the date of this Prospectus, to and
including 5:00 p.m., New York time, on July , 1998, subject to extension in
the sole discretion of the Company ("Temporary Exercise Period"), the Company
has reduced temporarily the exercise price of the Warrants from $4.00 to
$1.25. After the expiration of the Temporary Exercise Period, the exercise
price of the Warrants will return to the original $4.00 per share. See "Plan
of Distribution."
The fundamental business reasons for the temporary reduction in the exercise
price of the Warrants are, first, to attempt to secure additional cash
liquidity for immediate working capital and, second, to increase the Company's
equity capital base. Management believes that temporarily reducing the Warrant
exercise price is a substantially less expensive alternative to additional
borrowings for its current and future cash and capital needs. There is no
assurance, however, that the temporary exercise price reduction will
successfully cause material exercises or that any resulting cash liquidity
will benefit the Company. See "Risk Factors--Warrants Subject to Redemption;
Temporary Exercise Price."
The Warrants may be exercised when there is a current effective registration
statement covering the shares of Common Stock underlying the Warrants. If the
Company does not or is unable to maintain a current effective registration
statement, the Warrant holders will be unable to exercise the Warrants and the
Warrants may become valueless. Moreover, if the shares of Common Stock
underlying the Warrants are not registered, or qualified for sale in the state
in which a Warrant holder resides, such Warrant holder might not be permitted
to exercise the Warrants.
Warrant certificates may be exchanged for new certificates of different
denominations and may be exercised or transferred by presenting them at the
office of the transfer agent. Holders of the Warrants may sell the Warrants if
a market exists rather than exercise them. However, there can be no assurance
that a market will continue as to such Warrants. If the Company is unable to
qualify its Common Stock underlying such Warrants for sale in any state,
holders of the Warrants in those states will have no choice but to either sell
such Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the formal election to purchase on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price
to the Warrant Agent. Prior to their expiration or redemption by the Company,
the Warrants may be exercised in whole or, from time to time, in part. If less
than all of the Warrants evidenced by a Warrant certificate are exercised, a
new Warrant certificate will be issued for the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of Common Stock upon occurrence
of certain events, including, but not limited to, issuance of stock dividends.
If the Company merges, reorganizes or is acquired in such a way as to
terminate the Warrants, they may be exercised immediately prior to such
action. In the event of liquidation, dissolution or winding up of the Company,
holders of the Warrants are not entitled to participate in any distribution of
the Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity,
at nominal cost, to profit from a rise in the market price of the Common Stock
of the Company. The exercise of the Warrants will result in the
35
<PAGE>
dilution of the then book value of the Common Stock of the Company held by the
public investors and will also result in a dilution of their percentage
ownership of the Company. The terms upon which the Company may obtain
additional capital may be adversely effected through the period that the
Warrants remain exercisable. The holders of these Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain equity capital on terms more favorable than those provided for by the
Warrants.
Because the Warrants may be transferred, it is possible that they may be
acquired by persons residing in states where the Company has not registered,
or is exempt from registration, such that the shares of Common Stock
underlying the Warrants may not be sold or transferred upon exercise of the
Warrants. Warrant holders residing in those states would have no choice but to
attempt to sell their Warrants or let them expire unexercised. Also, it is
possible that the Company may be unable, for any reason, to cause a
registration statement covering the Common Stock underlying the Warrants to be
in effect when they are exercisable. In such event, the Warrants may expire
unless extended by the Company because a registration statement, including
audited financial statements, must be in effect in order for Warrant holders
to exercise their Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
2,332,848 of the 5,270,348 shares of Common Stock currently are "restricted
securities" as that term is defined under the Securities Act and in the future
may only be sold in compliance with Rules 144 and 144A promulgated under the
Securities Act or pursuant to an effective registration statement. Rule 144
provides, in essence, that a person (including a group of persons whose shares
are aggregated) and including any person who may be deemed an "affiliate" of
the Company, as that term is defined under the Securities Act, who has
satisfied a one-year holding period for such restricted securities may sell
within any three-month period, under certain circumstances, an amount of
restricted securities which does not exceed the greater of 1% of that class of
the Company's outstanding securities or the average weekly trading volume of
that class of securities during the four calendar weeks prior to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
the Company. In addition, pursuant to Rule 144, persons who are not affiliated
with the Company and who have held their restricted securities for at least
two years are not subject to the quantity limitations or the manner of sale
restrictions of the rule.
Sales of shares by the Company's current shareholders, whether pursuant to
Rule 144 or otherwise, may have a depressing effect upon the market price of
the Common Stock in any market for the Company's securities that may develop.
To the extent that these shares enter the market, the value of the Common
Stock in the over-the-counter market may be reduced. See "Risk Factors" and
"Description of Securities."
Commission Rule 144A permits unlimited resales of restricted securities of
any issuer provided that the purchaser is a qualified institutional buyer (as
that term is defined therein) that at the end of its most recent fiscal year
has assets invested in securities of non-affiliated entities that were
purchased for a total of more than $100 million. Rule 144A allows holders of
restricted shares of the Company to sell such shares to such institutions
without regard to any volume or other restrictions.
In the event that shares of Common Stock which are not currently saleable
become saleable by means of registration, eligibility for sale under Rule 144
or otherwise and the holders of such shares of Common Stock elect to sell such
shares of Common Stock in the public market, there is likely to be a negative
effect on the market price of the Company's securities and on the ability of
the Company to obtain additional equity financing. No predictions can be made
as to the effect, if any, that sales of the Common Stock or the exercise of
the Warrants or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
the foregoing could adversely affect prevailing market prices. See "Risk
Factors" and "Description of Securities."
Sales of substantial amounts of shares of Common Stock, pursuant to Rule
144, Rule 144A or otherwise, could adversely affect the market prices of the
Common Stock, and/or the Warrants, and may make it more difficult for the
Company to sell equity securities in the future at a time and price that it
deems appropriate. See "Risk Factors."
36
<PAGE>
TRADING SYMBOLS
The Common Stock and the Warrants are listed for quotation on NASDAQ under
the symbols "THIS" and "THISW", respectively. There can be no assurances that
an active trading market will continue. See "Risk Factors--No Assurance of
Continued Public Trading Market or Continued Qualification for NASDAQ
Inclusion."
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Company's Common Stock and its Warrant Agent for
the Public and Preferred Warrants is American Stock Transfer and Trust
Company, New York, New York.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is not subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exemptions, that
a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate or associate of such person who is an
"interested shareholder" for a period of three years from the date that such
person became an interested shareholders unless: (i) prior to such date the
board of directors of the corporation approved either the business combination
or the transaction which resulted in the shareholder becoming an interested
shareholder, or (ii) upon consummation of the transaction which resulted in
the shareholder becoming an interested shareholder, the interested shareholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
shareholder. An "interested shareholder" is defined to include any person, and
the affiliates and associates of such person that (i) is the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the three-
year period immediately prior to the date on which it is sought to be
determined whether such person is an interested shareholder.
PLAN OF DISTRIBUTION
WARRANT SOLICITATION FEE
To the extent not inconsistent with the guidelines of the National
Association of Securities Dealers, Inc. and the rules and regulations of the
Commission, the Company has agreed to pay to the Soliciting Agent a warrant
solicitation fee equal to 4% of the then current exercise price for each
solicited Warrant exercised, payable upon exercise of the Warrant. However, no
compensation will be paid to the Soliciting Agent in connection with the
exercise of the Warrants if (a) the market price of the underlying shares of
Common Stock is lower than the then current exercise price of the Warrants,
(b) the Warrants are held in a discretionary account, except where prior
specific written approval for the exercise has been received, (c) the Warrants
are exercised in an unsolicited transaction, (d) the Soliciting Agent has not
provided bona fide services in connection with the solicitation of the
Warrant, (e) the holder of the Warrant has not in writing designated the
Soliciting Agent as the party to receive the solicitation fee, or (f) these
compensation arrangements have not been disclosed at the time of the exercise.
In addition, unless exempt from Regulation M promulgated by the Commission,
the Soliciting Agent will be prohibited from engaging in any market making
activities or solicited brokerage activities with regard to the Company's
securities until the later of the termination of such solicitations activities
or the termination by waiver or otherwise of any right the Soliciting Agent
may have to receive a fee for the exercise of the Warrants following such
solicitation.
37
<PAGE>
RECENT PRIVATE PLACEMENT AND INVESTMENT BANKING AGREEMENT
On July 1, 1997, the Company entered into an Investment Banking Agreement
with Midas Investment Group, Inc. d/b/a Biltmore Securities, Inc. ("Midas"),
under which for a period of three years Midas is to provide services
including, without limitation, (i) review of business plans and projections;
(ii) review of financial data as it relates to raising financing; (iii)
advising on the Company's capital structure and on alternatives for raising
capital; (iv) reviewing and advising on prospective mergers and acquisitions,
and on any financing required to complete such transactions; (v) advising on
issues relating to public offerings;(vi) providing fairness opinions; (vii)
reviewing managerial needs; and (viii) advising on issues relating to
financial public relations. In consideration, the Company issued to Midas and
its assignees Warrants to purchase 750,000 shares of Common Stock of the
Company.
As the Company's investment banker, Midas, was its placement agent with
respect to the private offer and sale to accredited investors of 1,352,500
Units, each Unit consisting of one share of convertible Preferred Stock and
two Warrants. Each share of Preferred Stock is convertible into two shares of
the Company's Common Stock. In connection with this placement of its
securities the Company issued an additional 156,325 Units to Midas, and 15,000
Units to Westport Capital Markets, LLC. See "Selling Securities Holders."
SALES OF SHARES OF COMMON STOCK
Certain current shareholders of Common Stock or persons who become
shareholders of Common Stock upon exercise of warrants or conversion of
Preferred Stock may sell their shares from time to time following the date of
this Prospectus through the Soliciting Agent or any other registered
broker/dealer. Any commissions paid to such broker/dealers will be paid by
those certain current shareholders and not the Company. Any of those certain
current shareholders may be required to deliver a copy of this Prospectus with
such sales. Accordingly, the Company may be required to update and amend this
Prospectus to keep it current in accordance with applicable laws, rules and
regulations. See "Selling Securities Holders."
EXPERTS
The financial statements included in this Prospectus have been audited by
Moore Stephens, P.C., New York, New York, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the
securities offering hereby, are being passed upon for the Company by Fishman,
Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C., 125 South Wacker
Drive, Suite 2800, Chicago, Illinois 60606.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
registration statement under the Securities Act on Form SB-2 ("Registration
Statement") with respect to the securities offered hereby. No distribution of
these securities will be made until the Registration Statement, as it may be
amended, has been declared effective. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits
thereto. All of these documents may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10007
38
<PAGE>
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies may be obtained at the prescribed rates from the Public
Reference Section of the Commission at its principal office in Washington,
D.C. In addition, the Commission maintains a website that contains reports,
proxy and information statements and other information regarding issuers such
as the Company that file electronically with the Commission. The address of
such site is http://www.sec.gov. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
39
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
Pro Forma Condensed Combined Financial Statements (Unaudited)......... P-2
Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1997.............................................. P-3
Notes to Pro Forma Financial Statement................................ P-4
Report of Independent Auditors (Terrace Holdings, Inc.)............... F-1
Financial Statements
Consolidated Balance Sheets.......................................... F-2
Consolidated Statements of Operations................................ F-3
Consolidated Statements of Stockholders' Equity...................... F-4
Consolidated Statements of Cash Flows................................ F-5-F-6
Notes to Consolidated Financial Statements........................... F-7-F-21
</TABLE>
P-1
<PAGE>
TERRACE HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed combined statement of operations for the
year ended December 31, 1997, give effect to the following:
(1) A-One-A Wholesale Produce, Inc. Acquisition--On July 1, 1997, the
Registrant acquired all of the assets and related liabilities of A-One-A
Wholesale Produce, Inc. ["A-One-A"]. In consideration for the acquisition,
the Registrant issued to A-One-A 500,000 unregistered shares of the
Company's common stock valued at $1,000,000. The asset purchase agreement
also provides for contingent consideration based upon the achievement of
specified earnings levels in future periods. The Registrant also paid A-
One-A $3,130,000 in cash. The total cost of the acquired company was
approximately $4,100,000. The acquisition was accounted for as a purchase
effective July 1, 1997. The operations of A-One-A will be included in the
Registrant's results of operations from that date. Goodwill of $3,534,242
was recorded as part of this acquisition. The excess purchase price is
allocated to goodwill because the amounts are in effect inseparable from
goodwill. The items sold by A-One-A are not unique in any way and the asset
represents the relationships, reputation and the value of past services
rendered provided to its customers.
The pro forma condensed combined statement of operations gives effect to
these transactions as if they had occurred at the beginning of the fiscal year
presented and were carried forward through the period presented.
The pro forma combined statement has been prepared by the Company's
management based upon the historical financial statements of the Company and
A-One-A Wholesale, Inc. This pro forma statement may not be indicative of the
results that actually would have occurred if the divestments had been in
effect on the dates indicated or which may be obtained in the future. The pro
forma financial statements should be read in conjunction with the historical
financial statements and notes contained elsewhere herein.
P-2
<PAGE>
TERRACE HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997.
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICALS
-----------------------
A-ONE-A
TERRACE WHOLESALE,
HOLDINGS, INC. SIX
INC. YEAR MONTHS
ENDED ENDED
DECEMBER JUNE 30, PRO FORMA PRO FORMA
31, 1997 1997* ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue................... $ 8,929,464 $8,180,688 $ -- $17,110,152
Cost of Sales............. 6,853,507 5,771,292 -- 12,624,799
----------- ---------- --------- -----------
Gross Profit.............. 2,075,957 2,409,396 -- 4,485,353
----------- ---------- --------- -----------
Selling, General and
Administrative Expenses.. 3,370,480 1,883,273 88,356(2) 5,342,109
Bad Debts................. 60,000 -- -- 60,000
Total Operating
Expenses............... 3,430,480 1,883,273 88,356 5,402,109
----------- ---------- --------- -----------
(Loss) Income from
Operations............... (1,354,523) 526,123 (88,356) (916,756)
Other Income (Expense):
Interest (Expense)........ (56,993) (17,432) (19,619)(3) (94,044)
----------- ---------- --------- -----------
(Loss) Income from
Continuing Operations
Before Income Taxes...... (1,411,516) 508,691 (107,975) (1,010,800)
Income Taxes.............. -- 203,476 (203,476)(1) --
----------- ---------- --------- -----------
(Loss) Income from
Continuing Operations.... $(1,411,516) $ 305,215 $ 95,501 $(1,010,800)
=========== ========== ========= ===========
(Loss) Per Share.......... $ (.32) $ (.23)
=========== ===========
Weighted Average Shares
Outstanding.............. 4,454,034 4,454,034
=========== ===========
</TABLE>
- --------
* The Registrant's December 31, 1997 statement of operations includes the
statement of operations for A-One-A Wholesale, Inc. for the six months then
ended.
P-3
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
As of December 17, 1997, the Company sold its Deering Ice Cream, Inc.
subsidiary and anticipates the sale of its Hospitality Subsidiaries during the
second quarter of 1998.
INCOME STATEMENT ADJUSTMENTS:
<TABLE>
<S> <C>
(1) To reflect reduction of income tax expense as computed on a
consolidated basis. $203,476
--------
(2) To reflect six months' amortization of goodwill associated
with the A-One-A acquisition. The total amount of goodwill,
$3,534,242, has been amortized over 20 years using the
straight-line method. $ 88,356
--------
(3) To reflect six months of interest cost incurred for the
acquisition of A-One-A approximately $356,700 @ 11%. $ 19,619
--------
</TABLE>
P-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Terrace Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Terrace
Holdings, Inc. and its subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Terrace Holdings, Inc. and its subsidiaries as of December 31, 1997, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Moore Stephens, P. C.
Certified Public Accountants
New York, New York
March 13, 1998
F-1
<PAGE>
TERRACE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Accounts Receivable (Less Allowance for Doubtful
Accounts of $62,500 and $60,000 at March 31, 1998,
and December 31, 1997, respectively).............. $2,313,851 $1,869,198
Inventories........................................ 579,361 280,458
Due from Related Party............................. -- 122,752
Restricted Cash.................................... 65,439 137,701
Due on Sale of Discontinued Operations............. 90,000 90,000
Other Current Assets............................... 247,143 107,823
---------- ----------
Total Current Assets............................. 3,295,794 2,607,932
Property and Equipment--Net.......................... 1,054,589 665,282
Intangible Assets--Net of Accumulated Amortization of
$141,422 at March 31, 1998, and Cost in Excess of
Net Assets of Businesses Acquired--Net of
Accumulated Amortization of $88,148 at December 31,
1997................................................ 4,169,731 3,639,882
Net Assets of Discontinued Operations................ 7,494 --
Other Assets......................................... 15,178 14,246
---------- ----------
Total Assets..................................... $8,542,786 $6,927,342
========== ==========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash Overdraft..................................... $ 440,818 $ 372,451
Accounts Payable................................... 2,189,743 892,742
Accrued Expenses................................... 588,732 805,890
Current Portion of Long-Term Debt.................. 97,940 162,370
Line of Credit..................................... 1,108,163 1,354,084
Provision for Phase-Out Costs...................... 20,000 20,000
Other Current Liabilities.......................... 113,435 50,000
----------- -----------
Total Current Liabilities........................ 4,558,831 3,657,537
----------- -----------
Long-Term Debt....................................... 235,305 81,380
----------- -----------
Total Liabilities................................ 4,794,136 3,738,917
----------- -----------
Commitments and Contingencies........................ -- --
----------- -----------
Stockholders' Equity:
Convertible Preferred Stock, $.001 Par Value,
10,000,000 Shares Authorized, 1,523,825 Shares Is-
sued and Outstanding.............................. 1,524 1,524
Common Stock--$.001 Par Value, 25,000,000 Shares
Authorized, 5,270,348 and 5,006,400 Issued and
Outstanding at March 31, 1998 and December 31,
1997, respectively................................ 5,270 5,006
Additional Paid-in Capital......................... 9,501,330 9,075,343
Accumulated Deficit................................ (5,759,474) (5,893,448)
----------- -----------
Total Stockholders' Equity....................... 3,748,650 3,188,425
----------- -----------
Total Liabilities and Stockholders' Equity....... $ 8,542,786 $ 6,927,342
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
TERRACE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER
(UNAUDITED) 31,
--------------------- ------------------------
1998 1997 1997 1996
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales..................... $6,955,120 $ 0 $ 8,929,464 $ --
Cost of Sales................. 4,884,252 0 6,853,507 --
---------- --------- ----------- -----------
Gross Profit................ 2,070,868 0 2,075,957 --
---------- --------- ----------- -----------
Operating Expenses:
Selling, General and
Administrative Expenses.... 1,864,706 164,469 3,370,480 348,439
Loss on Disposal............ -- -- -- 129,826
Provision for Doubtful
Accounts................... 2,500 0 60,000 --
---------- --------- ----------- -----------
Total Operating Expenses.. 1,867,206 164,469 3,430,480 478,265
---------- --------- ----------- -----------
Income (Loss) from
Operations................. 203,662 (164,469) (1,354,523) (478,265)
---------- --------- ----------- -----------
Other (Expense) Income:
Interest Expense............ (77,182) 0 (79,594) --
Interest Income............. -- 11,541 22,601 19,338
---------- --------- ----------- -----------
Total Other (Expense)..... (77,182) 11,541 (56,993) 19,338
---------- --------- ----------- -----------
Income (Loss) From
Continuing Operations...... 126,480 (152,928) (1,411,516) (458,927)
Discontinued Operations:
Income (Loss) from
Operations of Discontinued
Business Segments (Net of
Income Taxes of $-0-)...... 7,494 (248,476) (813,795) (697,100)
(Loss) on Disposal of
Business Segments,
including Provision of
$20,000 for Operating Loss
during the Phase Out Period
(Net of Income Taxes of
$-0-)...................... (2,126,742) --
---------- --------- ----------- -----------
Net Income (Loss)......... $ 133,974 $(401,404) $(4,352,053) $(1,156,027)
========== ========= =========== ===========
Income (Loss) Per Share of
Common Stock:
Income (Loss) from
Continuing Operations...... $ .03 $ (.03) $ (.32) $ (.14)
Income (Loss) from
Operations of Discontinued
Business Segments (Net of
Income Tax of $-0-)........ -0- (.06) (.18) (.21)
(Loss) on Disposal of
Discontinued Business
Segments................... (.48) --
---------- --------- ----------- -----------
Basic Net Income (Loss) Per
Share of Common Stock........ $ .03 $ (.09) $ (.98) $ (.35)
========== ========= =========== ===========
Diluted Net Income (Loss) Per
Share of Common Stock........ $ .02 $ (.09) (.98) (.35)
========== ========= =========== ===========
Weighted Average Shares of
Common Stock Outstanding..... 5,111,383 4,306,400 4,454,034 3,312,500
========== ========= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TERRACE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 1,
1996................... -- $ -- 3,312,500 $3,313 $3,945,948 $ (385,368) $ 3,563,893
Net (Loss).............. -- -- -- -- -- (1,156,027) (1,156,027)
--------- ------ --------- ------ ---------- ----------- -----------
Balance--December 31,
1996................... -- -- 3,312,500 3,313 3,945,948 (1,541,395) 2,407,866
Asset Acquisition-
Deering -- -- 918,900 918 763,081 -- 763,999
Finders Fee............. -- -- 75,000 75 88,238 -- 88,313
Asset Acquisition
A-One-A................ -- -- 500,000 500 999,500 -- 1,000,000
Private Placement....... 1,523,825 1,524 -- -- 2,671,776 -- 2,673,300
Stock Issuances......... -- -- 200,000 200 219,800 -- 220,000
Stock Based
Compensation........... -- -- -- -- 387,000 -- 387,000
Net (Loss).............. -- -- -- -- -- (4,352,053) (4,352,053)
--------- ------ --------- ------ ---------- ----------- -----------
Balance--December 31,
1997................... 1,523,825 $1,524 5,006,400 5,006 9,075,343 (5,893,448) 3,188,425
Asset Acquisition-Fresh,
Inc. .................. -- -- 138,948 138 269,862 -- 270,000
Warrants Exercise....... -- -- 125,000 126 156,125 -- 156,251
Net Income.............. -- -- -- -- -- 133,974 133,974
--------- ------ --------- ------ ---------- ----------- -----------
Balance--March 31, 1998. 1,523,825 $1,524 5,270,348 $5,270 $9,501,330 $(5,759,474) $ 3,748,650
========= ====== ========= ====== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TERRACE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER
(UNAUDITED) 31,
----------------------- ----------------------
1998 1997 1997 1996
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Activities:
Net Income (Loss) from
Continuing Operations...... $ 126,480 $ (152,928) $(1,411,516) $(458,927)
---------- ----------- ----------- ---------
Adjustments to Reconcile Net
Income (Loss) to Net Cash
(Used for) Provided by
Operating Activities:
Depreciation and
Amortization............. 99,407 157,613 --
Stock Based Compensation.. 180,000 --
Provision for Doubtful
Accounts................. 2,500 60,000 --
Changes in Assets and
Liabilities:
(Increase) Decrease in:
Accounts Receivable..... (444,853) (541,699) --
Inventory............... (298,903) (102,069) --
Other Current Assets.... (139,319) 17,638 --
Due from Related Party.. 122,752
Other Assets............ (35,601) (1,728) --
Increase (Decrease) in:
Accounts Payable.......... 1,297,002 182,082 --
Accrued Expenses.......... (189,625) 338,955 --
---------- ----------- ----------- ---------
Total Adjustments..... 413,360 290,792 --
---------- ----------- ----------- ---------
Net Cash--Continuing
Operations--Forward.. 539,840 (152,928) (1,120,724) (458,927)
---------- ----------- ----------- ---------
Discontinued Operations:
Income (Loss) From
Discontinued Business
Segments................... 7,494 (248,476) (2,940,537) (697,100)
Adjustments to Reconcile
Income to Net Cash:
Depreciation and
Amortization............. 9,614 52,968 180,115 340,086
(Loss) on Disposal of
Business Segments
(Including Provision of
$20,000 for Operating
Loss During Phase Out
Period).................. -- -- 1,974,742 --
Changes in Net Assets,
Liabilities.............. (21,365) 91,308 (1,787,219) (165,304)
---------- ----------- ----------- ---------
Net Cash--Discontinued
Operations--Forward.. (4,257) (104,200) (2,572,899) (522,318)
---------- ----------- ----------- ---------
Investing Activities--
Continuing Operations:
Acquisition of Assets....... (274,086) (201,744) (179,308)
Purchase of Business--Net of
Cash Acquired.............. (340,814) (3,616,993) --
---------- ----------- ----------- ---------
Net Cash--Investing
Activities--
Continuing
Operations--Forward.. (614,900) (3,818,737) (179,308)
---------- ----------- ----------- ---------
Investing Activities--
Discontinued Operations:
Acquisition of Intangible
Assets..................... -- (675,000)
Purchase and Disposal of
DownEast Frozen Desserts,
LLC--Net of Cash Acquired.. 288,900 --
Acquisition of Assets....... (2,703) (59,837) (40,933) --
---------- ----------- ----------- ---------
Net Cash--Investing
Activities--
Discontinued
Operations--Forward.. $ (2,703) $ (59,837) $ 247,967 $(675,000)
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TERRACE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER
(UNAUDITED) 31,
--------------------- ------------------------
1998 1997 1997 1996
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Cash--Continuing
Activities--Forwarded........ $ 539,840 $ (152,928) $(1,120,724) $ (458,927)
--------- ---------- ----------- -----------
Net Cash--Discontinued
Operations--Forwarded........ (4,257) (104,200) (2,572,899) (522,318)
--------- ---------- ----------- -----------
Net Cash--Investing
Activities--Continuing
Operations--Forwarded........ (614,900) (3,818,737) (179,308)
--------- ---------- ----------- -----------
Net Cash--Investing
Activities--Discontinued
Operations--Forwarded........ (2,703) (59,837) 247,967 (675,000)
--------- ---------- ----------- -----------
Financing Activities--
Continuing Operations:
Proceeds from Notes Payable. 132,464 100,000 --
Payment of Notes Payable.... (64,467) (10,000)
Payments of Demand Notes
Payable--Stockholders and
Related Parties............ (27,265) -- (185,549)
Proceeds from Line of
Credit..................... (245,921) 1,354,085 --
Restricted Cash............. 72,262 (137,701) --
Bank Overdrafts............. 68,367 372,448 --
Proceeds from Issuance of
Convertible Preferred
Stock...................... 2,673,300 --
Proceeds from Issuance of
Common Stock............... 220,000 --
Current Portion of Long Term
Debt....................... (64,430)
Proceeds from Warrants
Exercised.................. 156,250
Payments of Term Loan....... (16,667)
--------- ---------- ----------- -----------
Net Cash--Financing
Activities--
Continuing
Operations........... 75,060 4,517,665 (195,549)
--------- ---------- ----------- -----------
Financing Activities--
Discontinued Operations:
Proceeds of Demand Notes
Payable.................... 1,175,821 --
Payment of Demand Notes
Payable.................... (19,408)
--------- ---------- ----------- -----------
Net (Decrease) in Cash
and Cash Equivalents. (6,960) (336,373) (1,570,907) (2,031,102)
Cash and Cash Equivalents--
Beginning of Periods and
Years, respectively.......... (6,960) 1,570,907 1,570,907 3,602,009
--------- ---------- ----------- -----------
Cash and Cash Equivalents--End
of Periods and Years,
respectively................. $ -- $1,234,534 $ -- $ 1,570,907
========= ========== =========== ===========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the periods
and years for:
Interest.................. $ 77,182 $ 36,719 $ 51,093 $ 9,020
Income Taxes.............. $ -- $ 33,426 $ -- $ --
</TABLE>
Supplemental Disclosures of Non-Cash Financing Activities:
During the quarter ending March 31, 1997, the Company issued 993,900 shares
of common stock valued at approximately $853,000 in connection with the
acquisition of DownEast Frozen Desserts, LLC.
During the third quarter, the Company issued 500,000 shares of its common
stock valued at $1,000,000 in connection with the acquisition of A-One-A
Wholesale Produce, Inc.
During the three months ended March 31, 1998, the Company issued 138,948
shares of Common Stock in connection with the acquisition of Fresh, Inc.
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Terrace Holdings, Inc. ("Terrace" or the "Company"), was incorporated under
the laws of the State of Delaware on June 15, 1995, to change the state of
incorporation of Bon Adventure Kosher Tours, Inc., a Florida corporation,
formerly known as Embassy Kosher Tours of South Florida, Inc. During 1997, the
Board of Directors determined to dispose of the net assets of the Company's
frozen dessert and hospitality business segments (See Note 3). The Company's
continuing operations focus on the food services and distribution business
through its wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-
One-A"). A-One-A is a Pompano Beach, Florida based produce distributor that
sells and distributes fresh fruit and vegetables and dry grocery products to
hotels, restaurants and other businesses in southern Florida.
Consolidation Policy--The consolidated financial statements include the
accounts of Terrace and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The consolidated financial statements as of and for the year ended December
31, 1997, include the accounts of Terrace and its wholly-owned subsidiaries,
A&E Management Corp. ("A&E"), The Lasko Family Kosher Tours, Inc. ("LFKT"),
The Lasko Companies ("Lasko") (together, the "Hospitality Group"), and A-One-
A. A-One-A's fiscal year ends on the Saturday nearest to December 31. LFKT was
incorporated on February 14, 1997 for the purpose of managing and operating
the Passover holiday vacation business, which was subsequently disposed of in
December 1997 (See Note 3B). On February 10, 1997, Deering Ice Cream, Inc.
("Deering") was incorporated to acquire certain assets and related liabilities
from DownEast Frozen Desserts, LLC ("DownEast"), to manufacture and market
frozen desserts. This subsidiary was disposed of in December 1997 (See Note
3A).
The consolidated financial statements for the year ended December 31, 1996,
include the accounts of Terrace, A&E, Lasko and Prime Concern Kosher Foods,
Inc. ["Prime"]. In July 1996, the Company disposed of all of the operating
assets of Prime which operated a kosher delicatessen/fast food operation in
Boca Raton, Florida incurring a loss of $129,826.
Cash and Cash Equivalents--The Company considers certain highly liquid
investments, with a maturity of three months or less when purchased to be cash
equivalents. The Company did not have any cash equivalents at December 31,
1997.
Inventories--Inventories are recorded at the lower of cost or market. Cost
is determined on the first-in, first-out ("FIFO") basis. Inventories consist
of fresh fruit, vegetables and dry goods.
Property and Equipment--Property and equipment are recorded at cost.
Expenditures for normal repairs and maintenance are charged to earnings as
incurred. When assets are retired or otherwise disposed, their costs and
related accumulated depreciation are removed from the accounts and the
resulting gains or losses are included in operations. Depreciation is recorded
using the straight-line method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
<TABLE>
<S> <C>
Transportation Equipment....................................... 7-10 Years
Equipment, Furniture and Fixtures.............................. 5- 7 Years
Leasehold Improvements......................................... 5-10 Years
</TABLE>
Cost in Excess of Net Assets of Businesses Acquired--The cost in excess of
net assets of businesses acquired is being amortized on a straight-line basis
over 20 years. Amortization expense amounted to $88,148 for the year ended
December 31, 1997.
F-7
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
Impairment--The Company's policy is to record an impairment loss against the
balance of a long-lived asset in the period when it is determined that the
carrying amount of the asset may not be recoverable. This determination is
based on an evaluation of such factors as the occurrence of a significant
event, a significant change in the environment in which the business assets
operate or if the expected future non-discounted cash flows of the business
was determined to be less than the carrying value of the assets. If impairment
is deemed to exist, the assets will be written down to fair value. Management
also evaluates events and circumstances to determine whether revised estimates
of useful lives is warranted. As of December 31, 1997, management expects its
long-lived assets to be fully recoverable.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk include cash and cash equivalents
and accounts receivable arising from its normal business activities. The
Company places its cash and cash equivalents with high credit quality
financial institutions. The Company had approximately $452,000 at December 31,
1997 in a financial institution subject to normal credit risk beyond insured
amounts. The Company does not require collateral on its financial instruments.
The Company extends credit to its customers, which results in accounts
receivable arising from its normal business activities. The Company routinely
assesses the financial strength of its customers and, based upon factors
surrounding the credit risk of its customers, believes that its receivable
credit risk exposure is limited. The Company's estimate of the financial
strength of its customers may be subject to change in the near term.
Other Concentrations--In December 1997, A-One A became a full-time member of
a cooperative of independent distribution specialists (the "Cooperative")
which enables the Company to enter group negotiations which results in better
pricing on purchases. Although the Company purchased approximately 37% through
the Cooperative, management believes that there is no business vulnerability
regarding this concentration of purchases from the Cooperative as the produce
purchased is available from other sources.
Business Risk--The Company is subject to the Perishable Agricultural
Commodities Act ("PACA") which regulates certain entities engaged in the
business of shipping or receiving perishable agricultural commodities in
interstate commerce. Currently, the Company maintains a PACA license to
distribute fresh produce, fruits and vegetables. The ability of the Company to
continue distribution and sales of its fresh produce, fruits and vegetables is
dependent upon its continued compliance with the PACA statute. Loss of its
PACA license would have a materially adverse effect on the Company.
Advertising--Advertising costs, which were not material at December 31, 1997
and 1996, are expensed as incurred.
Earnings Per Share--The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128. Prior period earnings per share data have been
recalculated as necessary to conform prior year data to SFAS No. 128.
F-8
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share," and replaces its primary earnings per share with a new
basic earnings per share representing the amount of earnings for the period
available to each share of common stock outstanding during the reporting
period. SFAS No. 128 also requires a dual presentation of basic and diluted
earnings per share on the face of the statement of operations for all
companies with complex capital structures. Diluted earnings per share reflects
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period, such as
common shares that could result from the potential exercise or conversion of
securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e., increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options
and warrants will have a dilutive effect only when the average market price of
the common stock during the period exceeds the exercise price of the options
or warrants. Securities that could potentially dilute earnings per share in
the future are disclosed in Notes 13 and 14.
(2) BUSINESS ACQUISITIONS
In August 1997, but effective as of July 1, 1997, the Company acquired all
of the assets and related liabilities of A-One-A in a transaction accounted
for as a purchase. The operations of A-One-A have been included in the
Company's results of operations from that date.
In consideration for the acquisition, the Company issued 500,000
unregistered shares of its common stock valued at $1,000,000, and paid
$3,130,000 in cash. Additionally, an adjustment to the purchase price of
approximately $148,000 was made subsequent to the acquisition date and has
been accrued at December 31, 1997.
In connection with the acquisition, the Company entered into 5 year
employment agreements with two officers, effective July 1, 1997, and ending
July 30, 2002. The employment agreements, call for aggregate annual
compensation of $240,000.
Also in connection with the A-One-A acquisition, the Company entered into an
agreement to lease space for use as its principal offices and warehouse. The
lease term is for ten years with three five year options to extend expiring
June 30, 2007, at an annual rental of approximately $222,000 including sales
tax. The Pompano Beach facility is owned by an affiliate of A-One-A officers.
Under the lease, the Company has an option to purchase the land and building
at a purchase price of $2,000,000 until December, 1998 (See Note 12A).
During 1997, the Company acquired all of the assets and related liabilities
of Dry Dock Distributors, Inc. d/b/a Bay Purveyors, ("Bay Purveyors") a Miami,
Florida based dry goods distributor which sells and distributes dry goods and
dairy goods to various restaurants and other business in Southern Florida. The
acquisition was deemed immaterial by management of the Company. Bay Purveyors
has operated as a division of A-One-A since its October 1, 1997 effective
purchase date. In connection with the Bay Purveyors acquisition, the Company
entered into an employment agreement with an uppper level manager.
F-9
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
In consideration for the acquisition, the Company paid the shareholders of
Dry Dock Distributors, Inc. $340,000. The acquisition has been accounted for
as a purchase.
A summary of the allocation of the aggregate consideration paid for
aforementioned acquisitions to the fair market value of the assets acquired
and liabilities assumed is as follows:
<TABLE>
<S> <C>
Current Assets:
Cash........................................................ $ 20,445
Accounts Receivables........................................ 1,383,703
Inventories................................................. 178,389
Other....................................................... 123,082
----------
Total..................................................... 1,705,619
----------
Property, Plant and Equipment................................. 545,475
Cost in Excess of Net Assets Acquired (Including Acquisition
Costs of $239,725)........................................... 3,728,030
Other Assets.................................................. 4,366
----------
Total..................................................... 5,983,490
----------
Current Liabilities:
Accounts Payable and Accrued Expenses....................... 914,206
Other....................................................... 221,960
----------
Total..................................................... 1,136,166
----------
Aggregate Consideration Paid.................................. $4,847,323
==========
</TABLE>
The cost in excess of net assets acquired recorded for the acquisitions is
to be amortized over 20 years using the straight-line method.
The following pro forma information presents the results of the combined
operations of Terrace and A-One-A, treating the latter as if it was a
subsidiary of the Terrace for the full period then ended. This pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been completed as of January 1, 1996 or results which may
occur in the future.
Pro forma unaudited information:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total Revenues................................. $17,110,152 $14,497,109
Net (Loss) Income.............................. $(1,010,800) $ (179,669)
Basic and Diluted Net (Loss) Income Per Share
of Common Stock............................... $ (.23) $ (.05)
</TABLE>
(3) DISCONTINUED OPERATIONS
(A) Frozen Desert Business Segment--On February 17, 1997, the Company
acquired certain of the assets and related liabilities of DownEast, which
manufactured and marketed frozen desserts under the name Deering Ice Cream.
The assets acquired included accounts receivable, inventories, and certain
furniture and equipment. The stated liabilities assumed were principally trade
payables and certain long-term debt.
F-10
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
In consideration for the acquisition, the Company issued: (1) 993,900 shares
of its common stock, including 75,000 shares of common stock issued for
investment banking and finders fees, valued at approximately $853,000 and (2)
warrants to purchase 250,000 additional shares of the Company's common stock
at an exercise price of $1.1875 per share, (exercisable commencing February
17, 1997, through August 31, 2000), and paid approximately $114,000 in cash.
The acquisition was accounted for as a purchase, effective January 1, 1997.
The total cost of the consideration tendered and the liabilities assumed in
excess of the assets purchased, including acquisition costs, was approximately
$1,800,000.
In November 1997, the Company adopted a formal plan to sell Deering. The
disposal occurred in December 1997. The net proceeds on disposal was
approximately $373,000. The loss on disposal was approximately $1,385,000
(including estimated disposal costs of $50,000 and $152,000 of liabilities not
assumed by the Purchaser).
Operating results of Deering, including net sales of approximately
$6,360,000 are included in discontinued operations, in the statement of
operations for the year ended December 31, 1997.
Assets and liabilities disposed of consisted of the following at the
disposal date:
<TABLE>
<S> <C>
Cash.......................................................... $ 43,784
Accounts Receivable........................................... 573,808
Inventories................................................... 581,648
Property, Plant and Equipment--Net............................ 1,667,520
Intangible Assets--Net........................................ 922,790
Other......................................................... 486,281
----------
Total Assets.............................................. 4,275,831
----------
Accounts Payable and Accrued Expenses......................... 1,543,930
Notes Payable and Lines of Credit............................. 1,175,821
----------
Total Liabilities............................................. 2,719,751
----------
Net Assets Disposed of.................................... $1,556,080
==========
</TABLE>
(B) Hospitality Business Segment--In November 1997, the Company adopted a
formal plan to sell the Hospitality Group to Samuel H. Lasko ("Dr. Lasko")
(See Note 11) and to an unrelated party (See Notes 16 and 17). The disposal is
expected to be completed within one year. The assets of the Hospitality Group
to be sold consist primarily of accounts receivable, inventories, property and
equipment and intangible assets.
The estimated loss on the disposal of the Hospitality Group of approximately
$742,000, includes a provision of $20,00 for expected losses during the phase-
out period. The Company is to receive $90,000 from the unrelated party. Dr.
Lasko relinquished his employment contract and certain warrants (See Note 11).
Operating results, including net sales of approximately $4,853,000 and
$4,557,000, respectively, of the Hospitality Group for the years ended
December 31, 1997 and 1996 are included in discontinued operations, in the
statements of operations. The statement of operations for 1996 has been
restated. For the two years ended December 31, 1997, the Hospitality Group
operated kosher Passover holiday vacation venues, kosher and non-kosher
restaurants and a catering operation in southern Florida and New York. The
Passover holiday usually occurs in the second quarter of the calendar year.
The Company managed and operated three Passover holiday vacation venues in
1997 and four in 1996.
F-11
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
Assets and liabilities of the Hospitality Group to be disposed of consisted
of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts Receivable............................................ $ 164,929
Intangible Assets--Net......................................... 335,000
Other Current Assets........................................... 105,540
Property and Equipment--Net.................................... 469,277
---------
Total Assets............................................... 1,074,746
---------
Accounts Payable and Accrued Expenses.......................... 149,512
Deferred Revenue............................................... 113,750
---------
Total Liabilities.......................................... 263,262
---------
Net Assets to Be Disposed of................................... $ 811,484
=========
</TABLE>
Assets are shown at their expected net realizable values and payables and
deferred revenue are shown at their face amounts.
There is no income tax benefit on the loss from operations of discontinued
business segments or on the loss on disposal of discontinued business
segments.
(4) GOING CONCERN CONSIDERATIONS AND RELATED PROPOSED FINANCING
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has suffered recurring
losses from operations and has a working capital deficiency of approximately
$1,050,000 at December 31, 1997. These factors had raised substantial doubt
about the ability of the Company to continue as a going concern. Such
substantial doubt has been alleviated primarily due to management's plans for
dealing with the possible adverse effects of these factors.
Management has initiated a financing plan with a bank and a number of its
investors to provide the necessary funds to continue to operate its businesses
and to provide additional capital for a possible acquisition.
The Company has received a letter of intent from a bank to provide financing
to the Company. The bank has commenced its normal due diligence investigation
which should be completed shortly. Management is not presently aware of any
matter which would prevent the completion of the financing.
The Company has a pending registration statement covering a proposed offer
to its warrantholders to exercise their warrants and purchase common stock at
a temporarily reduced exercise price. In addition, if so requested by the
Company, a private investor has indicated his intent to purchase equity
capital in the Company if sufficient proceeds are not realized by the Company
from such warrant exercises.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern. However, the success of management's
plans is not assured.
F-12
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
(5) RESTRICTED CASH
In connection with a financing agreement (See Note 8) the Company entered
into a trust indenture with a bank, pursuant to which, the bank debits monthly
principal and interest loan payments.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value, to the extent practicable,
for financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled,
nor does the fair value amount consider the tax consequences of realization or
settlement.
In assessing the fair value of these financial instruments, the Company used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
trade receivables, amounts due on sale of discontinued operations, related
party balances, trade payables and bank line of credit, it was assumed that
the carrying amount approximated fair value for these instruments because of
their short maturities. It was estimated that the carrying amount of the
Company's long-term debt approximated its fair value based on quoted market
prices for similar issues.
(7) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<S> <C>
Transportation Equipment........................................ $608,820
Office Equipment, Furniture and Fixtures........................ 113,696
Leasehold Improvements.......................................... 12,231
--------
Total....................................................... 734,747
Less: Accumulated Depreciation.................................. 69,465
--------
Property and Equipment--Net..................................... $665,282
========
</TABLE>
Depreciation expense related to property and equipment amounted to $69,465
for the year ended December 31, 1997.
(8) LINE OF CREDIT
During 1997, the Company had a working capital line of credit with Suntrust
Bank, South Florida, N.A. amounting to $300,000, at a variable interest rate
at .75% over the bank's prime-based rate. The working capital revolver was
secured by a blanket lien on all Company assets, excluding amounts due from
affiliates. The principal was paid in full on March 31, 1997, and the account
was closed.
In August 1997, the Company guaranteed payment on a Loan and Security
Agreement between Foothill Capital Corporation of Mechanicsville, Virginia
("Foothill") and the Company's then wholly-owned subsidiaries, Deering and A-
One-A under which Foothill agreed to provide revolving loans subject to
available collateral to a maximum of $3,200,000. The principal balance of
approximately $1,360,000 at December 31, 1997 represents substantially all
credit available under the facility at that date. The balance incurs interest
at 2.5% above the bank's prime rate. The prime rate at December 31, 1997, was
8.5%. The loan is collateralized by virtually all assets of the Company.
F-13
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
(9) LONG-TERM DEBT
At December 31, 1997, long-term debt consisted of the following:
<TABLE>
<S> <C>
Note payable in thirty-six monthly total installments of
$6,583, including interest at 9.1% per annum, through June
1999, collateralized by certain transportation equipment...... $110,370
Note payable in thirty-six monthly total installments of
$1,154, including interest at 9.8% per annum, through December
1999, collateralized by certain transportation equipment...... 25,071
Note payable in thirty-six monthly total installments of
$1,150, including interest at 9.8% per annum, through December
1999, collateralized by certain transportation equipment...... 24,976
Note payable--bank in eighteen monthly total installments of
$5,556, plus interest of 2.5% above a variable interest rate
(prime rate), per annum, through February 1999, collateralized
by certain transportation equipment........................... 83,333
--------
Total...................................................... 243,750
Less: Current Portion.......................................... 162,370
--------
Total...................................................... $ 81,380
========
</TABLE>
Long-term debt at December 31, 1997, matures as follows:
<TABLE>
<S> <C>
1998............................ $162,370
1999............................ 81,380
2000............................ --
2001............................ --
2002............................ --
Thereafter...................... --
--------
Total....................... $243,750
========
</TABLE>
The Company is subject to restrictive covenants including restrictions on
the use of proceeds, and collateral, and assurance of the maintenance of
marketable title to collateral. Management believes the Company was in
compliance with all debt covenants at December 31, 1997.
The weighted average interest rate on short-term borrowings as of December
31, 1997, was 11%.
(10) INCOME TAXES
Under generally accepted accounting principles, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which temporary differences are expected to
be recovered or settled. Temporary differences include different tax and book
bases of property and equipment and intangible assets. Generally accepted
accounting principles requires the establishment of a deferred tax asset for
all deductible temporary differences and operating loss carryforwards. The
operating loss carryforwards at December 31, 1997, (assuming all operating
loss carryforwards will be available) amount to
F-14
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
approximately $5,550,000. Such loss carryforwards will expire at the rate of
$4,000,000 in 2012, $1,200,000 in 2011 and $350,000 in 2010. At December 31,
1997, based on the amount of operating loss carryforwards, the Company would
have had a deferred tax asset of approximately $1,900,000. However, because of
the uncertainty that the Company will generate income in the future sufficient
to fully or partially utilize these carryforwards, a valuation allowance of
$1,900,000 has been established representing an increase of $1,374,000 from
December 31, 1996. Accordingly, no deferred tax asset is reflected in these
financial statements.
(11) RELATED PARTIES TRANSACTIONS
During 1996, the Hospitality Group paid off an outstanding loan due to a
stockholder, which was payable on demand plus interest. The interest rate on
the loan was 8.5%. Interest expense related to this loan amounted to $7,667
for the period ended December 31, 1996.
A-One-A had sales to a related entity whose shareholders include
shareholders of the Company. Sales to the related entity totaled $203,327 for
the period July 1 (effective purchase date) to December 27, 1997.
A-One-A also purchased goods from the same related party totaling $357,425
for the period July 1 (effective purchase date) to December 27, 1997. The
Company had net receivables of $122,752 (net of a payable of $56,964) due from
the related party at December 27, 1997, which will be collected and paid
within one year, during the normal course of business. The Company purchased
the related entity in February 1998 (See Note 16).
In February 1997, the Company entered into an option agreement with Dr.
Lasko, the President, Treasurer, and a Director of the Company and his son,
Jonathan S. Lasko, the Executive Vice-President, Secretary, Chief Operating
Officer and a Director of the Company, which gave the Laskos, individually or
together, the option to purchase the businesses, assets or capital stock of
the Hospitality Group at the fair market value thereof. The option is
exercisable for approximately three years commencing April 1, 1998 until
February 17, 2001, or earlier under certain circumstances, exercise of the
option, is subject to shareholders' approval. The Company and Dr. Lasko agreed
to accelerate the exercise of his option, and in March 1998, he purchased
(subject to shareholder approval) LFKT and A&E in exchange for the
relinquishment of his employment contract and certain warrants. Dr. Lasko did
not purchase The Lasko Companies, Inc. however, but has agreed to manage it
for the Company (See Notes 16 and 17).
(12) COMMITMENTS AND CONTINGENCIES
(A) Operating Leases--The Company's operating facilities are leased from an
affiliate of A-One-A's officers. Future minimum rentals payments under
operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998.......................... $ 240,852
1999.......................... 228,492
2000.......................... 221,544
2001.......................... 221,544
2002.......................... 221,544
Thereafter.................... 996,948
----------
Total..................... $2,130,924
==========
</TABLE>
F-15
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
Rent expense related to the leases for the years ended December 31, 1997 and
1996 was $142,630 and $15,900, respectively.
(B) Employment Agreements--In addition to the A-One-A employment agreements
(See Note 2), the Company has an employment agreement with Jonathan S. Lasko,
through August 31, 2000, for a base salary of $125,000 per year. The
employment agreement was amended in February 1997. The amendment eliminated
certain options in the agreement in consideration of the issuance of warrants
to purchase 375,000 shares of the Company's common stock. Additionally, the
agreement was amended to provide that certain other benefits be made available
to the executive.
In connection with the Bay Purveyors acquisition (See Note 2), A-One-A
entered into a 5-year employment agreement effective September 1, 1997 with an
upper level manager for a base salary of $65,000 per year.
(C) Standby Letter of Credit--The Company has available a standby letter of
credit in the amount of $100,000, which is being maintained as security for
payments related to purchases of inventory. The letter of credit expires May
1, 1998 and is collateralized by a blanket lien on the Company's assets. At
December 31, 1997, there was no balance outstanding pursuant to the letter of
credit.
(13) DESCRIPTION OF SECURITIES
(A) Convertible Preferred Stock--The Company is authorized to issue
10,000,000 shares of convertible preferred stock (the "Convertible Preferred
Stock"), par value $.001 per share. Pursuant to an offering memorandum dated
July 7, 1997, the Company offered 1,750,000 units of its securities at $2 per
unit (the "Preferred Units"). Each Preferred Unit consisted of one share of
Convertible Preferred Stock and two warrants, each to purchase one share of
Company common stock at an exercise price of $4 per share. As of December 31,
1997, 1,523,825 Preferred Units (including 171,325 Units issued as investment
banking placement fees) were issued for aggregate consideration of $2,673,300
net of offering costs. Each share of Convertible Preferred Stock is non-
voting, unless converted into common stock of the Company. The Convertible
Preferred Stock is entitled to preference in the declaration of dividends if
and when any dividends are declared or paid. There were no dividends declared
or paid on the Convertible Preferred Stock at December 31, 1997. The
Convertible Preferred Stock is entitled to preference over the common stock in
the event of dissolution, liquidation or winding-up the Company. Each share of
Convertible Preferred Stock is convertible into two shares of common stock of
the Company at the option of the holder. All shares of the Convertible
Preferred Stock not converted on or prior to July 31, 1998 will be
automatically converted, based on that ratio, into shares of common stock of
the Company on that date. The Company issued 156,325 Preferred Units to
Biltmore Securities, Inc., and 15,000 Preferred Units to Westport Capital
Markets, LLC, as placement fees (accounted for as offering costs) in
connection with the offering. Additionally, the Company issued to Biltmore and
its assignees, warrants to purchase 750,000 shares of Company common stock at
a price of $4.00 per share, exercisable through and including December 4,
2000.
(B) Common Stock--The Company is authorized to issue 25,000,000 shares of
common stock, par value $.001 per share.
Holders of common stock are entitled to dividends when, as and if declared
by the Board of Directors, subject to any priority as to dividends for any
preferred stock that may be outstanding. Holders of common stock are entitled
to cast one vote for each share held at all stockholder meetings for all
purposes, including the election of Directors.
F-16
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
In November 1997, the Company sold 200,000 shares of unregistered common
stock to an unrelated party for $1.10 per share. The issuance of these shares
resulted in a charge to operations of $180,000.
(C) Options and Warrants--In December 1995, the Company completed a public
offering (the "Offering") of 1,437,500 units ("Units") of its securities at
$3.75 per Unit.
Each Unit consisted of one share of common stock and one redeemable common
stock purchase warrant exercisable at $4.00 per share during the four year
period commencing one year after the December 5, 1995 effective date of the
Offering. The warrants ("Public Warrants") are redeemable under certain
conditions. The Offering resulted in net proceeds of approximately $4,347,000
to the Company. In connection with the Offering, the underwriter purchased an
option from the Company to purchase up to 125,000 Units (each Unit identical
to the Units sold in the Offering) and up to 16,500 shares of common stock.
The option is exercisable for a four-year period, which commenced December 5,
1996, and entitles the underwriter to purchase each unit and each share of
common stock at an exercise price of $4.50, subject to adjustment under
certain circumstances.
During 1995, prior to the Offering, the Company received an aggregate of
$400,000 in bridge loans. The loans were repaid from the proceeds of the
Offering. As additional consideration, solely for making the loans, the
Company granted the lenders the right to receive an aggregate of 200,000 units
("Bridge Units") which were substantially similar to the units sold in the
Offering.
Additionally, at December 31, 1997, the Company also had warrants
outstanding (the "Bridge Warrants") to purchase 200,000 shares of its common
stock at ten dollars ($10.00) per share. The terms and conditions of the
Bridge Warrants (other than the exercise price) are identical to the terms and
conditions of the Public Warrants.
On February 17, 1997, in connection with the Deering acquisition, the
Company issued; (i) warrants to purchase 250,000 shares of its common stock to
Biltmore Securities, Inc. as its investment banking fee; and (ii) warrants to
purchase 50,000 shares of its Common Stock to Bruce S. Phillips, a director of
the Company, in recognition of his efforts successfully to negotiate and
consummate this transaction. These warrants have an exercise price of $1.1875
exercisable commencing February 17, 1997, the closing date of the transaction,
and expiring on August 31, 2000.
(D) Reduction in Warrant Price--During a 60-day period ("Temporary Exercise
Period") commencing with the effective date of a pending registration
statement, the Company will temporarily reduce the exercise price of certain
warrants with an exercise price of $4.00 per share to $1.25 to attempt to
secure additional cash liquidity for immediate working capital and to increase
the Company's equity capital base. After the expiration of the Temporary
Exercise Period, the exercise price of the warrants will return to the
original $4.00 per share for the balance of the term of the warrants.
(14) STOCK OPTION PLAN AND WARRANTS
The Company adopted the 1997 Stock Option Plan (the "Plan") which enables
its Board of Directors to grant options for the purchase of shares of its
common stock. The Plan authorizes the grant of options to purchase up to an
aggregate of 1,250,000 shares of the Company's Common Stock, to (i) officers
and other full-time salaried employees of the Company and its subsidiaries
with managerial, professional or supervisory
F-17
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
responsibilities, and (ii) consultants and advisors who render bona fide
services to the Company and its subsidiaries, in each case, where the
compensation committee of the Board of Directors determines that such officer,
employee, consultant or advisor has the capacity to make a substantial
contribution to the success of the Company. The purposes of the Plan are to
enable the Company to attract and retain persons of ability as officers and
other key employees with managerial, professional or supervisory
responsibilities, to retain able consultants and advisors, and to motivate
such persons to use their best efforts on behalf of the Company by providing
them with an equity participation in the Company.
Pursuant to the Plan, in February 1997, the Board of Directors granted
certain officers, directors and significant employees 630,000 options to
purchase Company common stock at an exercise price of $1.185 per share. The
options of which the majority vest over a 3 year period, one-third per year
and expire on February 20, 2007.
In July and September 1997, the Board of Directors granted certain employees
108,000 options to purchase Company common stock at an exercise price of $2.31
per share. The options vest over a 3 year period , one-third per year and
expire on June 30, and September 21, 2007.
As per the amended employment agreements with an executive, he received
warrants to purchase 375,000 shares of Company common stock at $1.1875 per
share which warrants are immediately exercisable at any time through August
31, 2000.
The Company also issued two directors warrants to purchase 40,000 shares of
the Company common stock at $1.1875 per share which are exercisable at any
time through August 31, 2000.
During 1997, the Company issued 300,000 stock options to consultants at an
exercise price of $1.1875 at the date of grant, and having a weighted average
exercise price of $1.1875. The total cost of issuing these stock options to
consultants during 1997 is approximately $207,000 which is being charged to
operations for the year ended December 31, 1997. The weighted average fair
value of stock options granted to consultants during 1997 is estimated at $.69
using the Black-Scholes option-pricing model and using a weighted average
risk-free interest rate of 6% and a weighted average expected life of 3.8
years with an estimated volatility of 75%. No dividends are expected to be
paid during the expected life of the options.
A summary of the options and warrants is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995............... -- $ --
Granted...................................... -- --
Exercised.................................... -- --
Expired/Canceled............................. -- --
--------- -----
Outstanding at December 31, 1996............... -- --
Granted...................................... 1,453,000 1.27
Exercised.................................... -- --
Expired/Canceled............................. -- --
--------- -----
Outstanding at December 31, 1997............... 1,453,000 $1.27
========= =====
Exercisable at December 31, 1997............... 717,667 $1.24
========= =====
</TABLE>
F-18
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
If compensation cost (totaling approximately $890,000), for options issued
under the Plan had been determined based on the fair value at the grant dates
for awards under Plan, consistent with the alternative method set forth under
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
of common stock would have been reduced on a pro forma basis as indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net Loss:
As Reported................................. $(4,352,053) $(1,156,027)
Pro Forma................................... $(5,242,053) $(1,156,027)
Basic and Diluted Net Loss Per Share of Common
Stock:
As Reported................................. $ (.98) $ (.35)
Pro Forma................................... $ (1.18) $ (.35)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants awarded in 1997 and 1996, respectively:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
--------- ----
<S> <C> <C>
Dividend Yields.......................................... 0% -- %
Expected Volatility...................................... 76% -- %
Risk-Free Interest Rate.................................. 6.0% -- %
Expected Lives........................................... 4.0 Years --
</TABLE>
The weighted-average fair value of options granted was $.76 and $-0- for the
years ended December 31, 1997 and 1996, respectively.
The following table summarizes information about stock options and warrants
at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------------------------ --------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.185-$1.1875.......... 1,345,000 9.2 Years $1.186 681,667 $1.186
$2.31................... 108,000 9.5 Years $ 2.31 36,000 $ 2.31
--------- --------- ------ ------- ------
Totals.............. 1,453,000 9.3 Years $ 1.27 717,667 $ 1.40
========= ========= ====== ======= ======
</TABLE>
(15) NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in annual financial statements and requires the
reporting of selected information about operating segments in interim
financial reports issued to
F-19
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
shareholders. SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated.
SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will have no impact
on the Company's consolidated results of operations; financial position or
cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997. The modified disclosure requirements
are not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
(16) SUBSEQUENT EVENTS
In January 1998, the Company entered into an employment agreement with its
Chief Financial Officer. The compensation for services rendered under this
agreement is $90,000 per annum and includes an incentive bonus. The agreement
also includes options to purchase the Company's stock and a severance package.
In January 1998, the Company purchased certain non-cash assets of D.M.S.
Food Distributors, Inc., a Florida Corporation d/b/a Gourmet Distributors
("Gourmet"). Gourmet is a wholesaler of dry goods. In consideration for the
purchase, the Company paid approximately $254,000 including inventory and
furniture and fixtures, which resulted in costs in excess of net assets of
approximately $125,000 which will be allocated to intangible assets.
In February 1998, the Company purchased all of the outstanding stock of
Fresh, Inc., ("Fresh") a related entity (See Note 11). Fresh is a wholesaler
which sells packaged and cut fresh produce. In consideration for the purchase,
the Company paid $105,000 in cash and issued 138,948 shares of common stock
valued at $270,000. The acquisition resulted in costs in excess of net assets
of approximately $350,000 which will be allocated to intangible assets.
On March 13, 1998, the Company sold its A&E Management Corp. and The Lasko
Family Kosher Tours, Inc., subsidiaries to Samuel H. Lasko for consideration
aggregating $575,000 in accordance with an independent fair value opinion
received by the Company, subject to the affirmative vote of shareholders at
the next annual meeting. On that date the Company also entered into a
management agreement with Dr. Lasko to operate and manage the business and
activities of The Lasko Companies, Inc. ("TLC") which operates a restaurant
business (the "Restaurant"). The agreement will terminate upon the sale or
other disposition of the Restaurant or the The Lasko Companies. (See Notes 3
and 17).
(17) SUBSEQUENT EVENTS--UNAUDITED (SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT AUDITORS)
On March 23, 1998, the Company entered into a contract to sell its wholly-
owned subsidiary, The Lasko Companies, Inc. The sale price $90,000 to be paid
as follows, with $25,000 paid at the execution of the agreement (currently
held in escrow by the seller's attorney) and $65,000 to be paid by cash or
certified check upon execution and delivery of Bill of Sale. The sale was
completed on May 29, 1998.
On May 29, 1998, the Company received a commitment letter from an
institutional lender, to provide to the Company and its wholly-owned
subsidiaries an aggregate of $6,000,000 in senior secured financing, the
proceeds
F-20
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
yof which will be used for (i) repayment of existing senior indebtedness, (ii)
a possible acquisition, and (iii) ongoing working capital. As of the date of
this Prospectus, the new financing arrangement is being documented.
On June 25, 1998, the Company issued to a private investor $2,625,000
principal amount of 12% Convertible Subordinated Notes ("Notes"), and warrants
to purchase 400,000 shares of Common Stock of the Company. The proceeds of the
Notes have been added to the working capital of the Company. The Notes will be
repaid from the first net proceeds, if any, received by the Company from the
exercises of its $4.00 warrants at the temporary $1.25 per share exercise
price. At any time subsequent to the expiration of the 60-day Temporary
Exercise Period, the Notes are convertible at the option of the private
investor, at the rate of one share of Common Stock for each $1.25 of principal
and accrued but unpaid interest, and the warrants are exercisable at a price
of $1.25 per share of Common Stock. At any time subsequent to the Temporary
Exercise Period, any Notes not then converted or repaid, will be converted by
the Company, into $1.25 Redeemable Convertible 8% Cumulative Preferred Stock
("Preferred Stock") of the Company. The Notes, warrants and 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. In
addition, the Company has granted to such private investor an option expiring
no later than December 31, 1998 to purchase 500,000 shares of the Company's
Common Stock at a price determined on the basis of the average closing price
for the Company's Common Stock for the ten trading days immediately following
the expiration of the Temporary Exercise Period. See "Risk Factors--Warrants
Subject to Redemption; Temporary Exercise Price."
On June 25, 1998, the Company signed an agreement to acquire the assets and
liabilities of a privately held south Florida company engaged in the business
of processing meat, seafood and poultry. The base purchase price is $1,800,000
and is to be financed through the Company's new senior secured financing
arrangement described above. Closing of this acquisition is scheduled for no
later than July 31, 1998.
(18) UNAUDITED INTERIM PERIODS
The unaudited consolidated and combined 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.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 27. EXHIBITS.
<TABLE>
<C> <S>
4.1 Form of Specimen Preferred Stock Certificate
5.1 Opinion, as revised, of Fishman, Merrick, Miller, Genelly,
Springer, Klimek & Anderson P.C., regarding the legality of the
securities being registered
10.1 Employment Agreement, dated as of September 1, 1995, and
amendment thereto, between Terrace Holdings, Inc. and Samuel H.
Lasko.*
10.22 Option Agreement, dated as of February 17, 1997, between Terrace
Holdings, Inc. and Samuel H. Lasko and Jonathan S. Lasko
10.28 Agreement dated as of June 25, 1998, between Terrace Holdings,
Inc. and Network Funds II, Ltd.
10.29 Asset Acquisition Agreement dated as of June 25, 1998 between
Terrace Holdings, Inc. and Banner Beef and Seafood Co., Inc.
23.1 Consent of Moore Stephens, P.C. (located on page II-3)
23.2 Consent of Fishman, Merrick, Miller, Genelly, Springer, Klimek &
Anderson P.C. (included in Exhibit 5.1)
</TABLE>
--------
* Incorporated by reference to the Registrant's registration statement
on Form SB-2 (Commission File No. 33-96892A), or the Registrant's
reports on Form 8-K filed on March 4, 1997.
II-1
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOLLYWOOD, STATE OF FLORIDA, ON THE
6TH DAY OF JULY, 1998.
Terrace Holdings, Inc.
/s/ Samuel H. Lasko
By: _________________________________
Samuel H. Lasko
President
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Samuel H. Lasko President and Director July 6, 1998
____________________________________
Samuel H. Lasko
/s/ Jonathan S. Lasko* Executive Vice-President, July 6, 1998
____________________________________ Secretary, Chief Operating
Jonathan S. Lasko Officer, Principal
Financial Officer and
Director
/s/ Bruce S. Phillips Director July 6, 1998
____________________________________
Bruce S. Phillips
/s/ Steven Shulman* Director, Principal July 6, 1998
____________________________________ Executive Officer
Steven Shulman
/s/ Bernard Rubin, M.D. Director July 6, 1998
____________________________________
Bernard Rubin, M.D.
/s/ Richard Power* Director July 6, 1998
____________________________________
Richard Power
/s/ Mario Jacobs Principal Accounting Officer July 6, 1998
____________________________________
Mario Jacobs
/s/ Fred A. Seigel Director July 6, 1998
____________________________________
Fred A. Seigel
<CAPTION>
</TABLE>
/s/ Samuel H. Lasko
*By: __________________________
Samuel H. Lasko, pursuant
to Power of Attorney
heretofore filed
II-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2
(File No. 333-45195) of our report dated March 13, 1998, on our audits of the
financial statements of Terrace Holdings, Inc. We also consent to the
reference to our firm under the captions "Experts."
/s/ Moore Stephens, P.C.
By: _________________________________
MOORE STEPHENS, P.C.
Certified Public Accountants
New York, New York
July 6, 1998
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT NUMBER
------- -------- ----------
<C> <S> <C>
4.1 Form of Specimen Preferred Stock Certificate
4.3 Certificate of Resolutions designating rights and
preferences of Preferred Stock
5.1 Opinion of Fishman, Merrick, Miller, Genelly, Springer,
Klimek & Anderson P.C., regarding the legality of the
securities being registered
10.1 Employment Agreement, dated as of September 1, 1995 and
amendment thereto, between Terrace Holdings, Inc. and
Samuel H. Lasko.*
10.22 Option Agreement, dated as of February 17, 1997, between
Terrace Holdings, Inc. and Samuel H. Lasko and Jonathan
S. Lasko.
10.28 Agreement dated as of June 25, 1998, between Terrace
Holdings, Inc. and Network Funds III, Ltd.
10.29 Asset Acquisition Agreement dated as of June 25, 1998
between Terrace Holdings, Inc. and Banner Beef and
Seafood Co., Inc.
23.1 Consent of Moore Stephens, P.C. (located on page II-3)
23.2 Consent of Fishman, Merrick, Miller, Genelly, Springer,
Klimek & Anderson, P.C. (included in Exhibit 5.1)
</TABLE>
- --------
* Incorporated by reference to the Registrant's registration statement on Form
SB-2, (Commission File No. 33-96892A), and the Registrant's reports on Form
8-K filed on March 4, 1997.
<PAGE>
JT 1335 1/2 COPYRIGHT, 1930. BY
DWIGHT & M. H. JACKSON
CHICAGO
PATENT PENDING
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
- --------------------------------------------------------------------------------
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
This Certifies that SPECIMEN is the owner of
----------------------------------------------
SPECIMEN
- ----------------------------------------------------full paid and non-assessable
SHARES OF THE PREFERRED STOCK OF Terrace Holdings, Inc.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon the surrender of this Certificate properly
endorsed.
The corporation will furnish without charge to each stockholder who so
requests, the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation, this day of A.D. 1997.
------------------- ----------------- ----
- ----------------------------- ---------------------------
Jonathan S. Lasko SECRETARY Samuel H. Lasko PRESIDENT
<PAGE>
For Value Received, hereby sell, assign and transfer unto
---- -------------------
- ------------------------------------------------------------------------Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated 19
----------------------- ------
In presence of
--------------------------- ---------------------------------
-----------------------------
THIS SPACE IS NOT TO BE
COVERED IN ANY WAY
-----------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 5.1
FISHMAN, MERRICK, MILLER, GENELLY,
SPRINGER, KLIMEK &
ANDERSON. P.C.
125 South Wacker Drive
Suite 2800
Chicago, IL 60606-4402
(312) 726-1224
FACSIMILE (312) 726-2649
EMAIL: [email protected]
July 6, 1998
Terrace Holdings, Inc.
1351 N.W. 22nd Street
Pompano Beach, FL 33069
Attention: President
Re: Terrace Holdings, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
Terrace Holdings, Inc. (the "Company") has filed with the United States
Securities and Exchange Commission (the "Commission") a Registration Statement
as amended, on Form SB-2 (Commission Registration No. 333-45195), with respect
to which this opinion is to be an exhibit, relating to the proposed sale by the
Company and resale by certain selling securities holders of shares of the
Company's common stock, $.001 par value ("Common Stock") and redeemable warrants
to purchase Common Stock at $4.00 per share (collectively, "Warrants")
consisting of:
1. Up to 5,310,150 shares of its Common Stock underlying Warrants
consisting of:
(a) Up to 1,637,500 shares of Common Stock for original
issuance;
(b) Up to 3,672,650 previously unissued shares of its
Common Stock for resale.
2. Up to 770,000 shares of its Common Stock for resale, consisting
of:
(a) 570,000 shares underlying certain other previously
issued warrants to purchase Common Stock at various prices; and
(b) 200,000 shares previously issued shares of its Common
Stock.
<PAGE>
Terrace Holdings, Inc.
July 6, 1998
Page 2
3. 3,047,650 previously unissued shares of its Common Stock,
reserved for issuance upon conversion of its previously issued 1,523,825
shares of Preferred Stock, $.001 par value ("Preferred Stock") for resale;
and
4. 2,922,650 previously issued Warrants for resale.
The Registration Statement, as amended, is herein referred to as the
"Registration Statement".
We have acted as securities counsel for the Company in connection with the
transactions that are the subject matter of the Registration Statement and are
familiar with the various corporate proceedings relating thereto. In connection
with the Registration Statement, we have examined such corporate records of the
Company and such other instruments, documents and certificates as we have deemed
necessary as a basis for this opinion. For purposes of this opinion, we have
assumed (i) the accuracy and completeness of all data supplied by the Company,
its officers, directors or agents, (ii) that the Commission shall have issued an
order under the Securities Act of 1933, as amended, declaring effective the
Registration Statement, and (iii) that all requisite authorizations, approvals,
consents or exemptions under the securities laws of the various states and other
jurisdictions of the United States of America shall have been obtained.
Based upon the foregoing, we are of the opinion that, the Common Stock and
the Warrants, to be sold in accordance with the Registration Statement, are duly
authorized and issued, or upon issuance, delivery and sale thereof, for the
consideration specified in the Registration Statement, are or will be legally
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as a part of, or as an exhibit to, any document that
may be filed with respect to the proposed transactions under the securities laws
of the various states and other jurisdictions of the United States. We also
consent to be named in the Registration Statement and in the Prospectus which
constitutes a part thereof as the counsel that will pass upon certain legal
matters for the Company in connection with the sale of the Company's securities.
Very truly yours,
/s/ Fishman, Merrick, Miller, Genelly,
Springer, Klimek & Anderson, P.C.
FM/BJS/cak
<PAGE>
EXHIBIT 10.22
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT ("Agreement") made as of the 17th day of February,
1997, by and among Terrace Holdings, Inc., a Delaware corporation (the
"Optionor"), and Samuel H. Lasko and Jonathan S. Lasko (individually and
collectively, the "Optionee").
RECITALS
--------
WHEREAS, the Optionor is the owner of all of the issued and outstanding
Stock of The Lasko Companies, Inc. and A&E Management, Inc. and is or will be
the owner of all of the issued and outstanding stock of a subsidiary to be
formed in which all of the business of the Optionor's operations currently
conducted under the name "The Lasko Family Kosher Tours" will continue to be
conducted (each of such companies are hereinafter individually and collectively
referred to as the "Company" and the stock of each Company is hereinafter
individually and collectively referred to as the "Option Stock"); and
WHEREAS, the Optionee may desire to acquire all of the Option Stock or all
or substantially all of the business and assets (the "Subject Business") of the
Company (the "Subject Acquisition"); and
WHEREAS, the Optionee and Optionor each believe that the Subject
Acquisition on the terms and conditions herein set forth will be in the best
interests of the stockholders of the Optionor, and the Optionor is willing to
grant to the Optionee the right, on the terms and conditions set forth in this
Agreement, to acquire the Option Stock or the Subject Business as the Optionee,
in the Optionee's sole discretion; and
WHEREAS, in accordance with the provisions of, and as part of the
consideration of the transactions consummated pursuant to the provisions of,
that certain Asset Acquisition Agreement by and between Optionor, or its
assignee, and DownEast Frozen Desserts LLC, dated as of the 9th day of December,
1996, and amended as of February 7, 1997 (the "Acquisition Agreement"), Optionor
is hereby granting the Option (hereinafter defined);
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements set forth, and other good and valuable considerations,
the receipt and adequacy of which are hereby acknowledged, the parties,
intending to be legally bound, do hereby agree as follows:
<PAGE>
The Option. Optionee shall have the right (the "Call" or the "Option")
during the Option Period to purchase all but not less than all of either (i) the
Option Stock at the Option Price or (ii) the Subject Business at the Purchase
Price.
For purposes of this Option Agreement, the following terms shall have the
following respective meanings:
(a) The term "Option Period" shall mean (i) the period during which
the Option is exercisable which shall commence on April 1, 1998 (or
earlier, as provided below) and end on the earlier of (i) four years after
the date hereof, or (ii) the voluntary surrendering or cancellation hereof
by Optionee.
(b) The terms "Option Price" and "Purchase Price" shall mean and
refer to the price to be paid by Optionee for the Subject Acquisition. The
Option Price (which is the price for the Option Stock) and the Purchase
Price (which is the price for the Subject Business) shall each be the fair
market value of the Subject Acquisition at the time the Option is
exercised, and shall be subject to the acceptance of such fair market value
determination by Optionee and shall be subject to the prior approval and
recommendation thereof by a committee of disinterested directors of the
Optionor appointed therefor. Such fair market value shall be determined by
an independent investment banking firm or other appropriate financial
services entity expert in and engaged for such purpose at Optionor's sole
expense, determining the fair market value of the Option Stock or Subject
Business and such Option Price or Purchase Price (the "Fairness Opinion").
1. Exercise.
--------
(a) The Option shall be exercisable by the Optionee, or either of
them, upon the first to occur of (i) termination of either of their
respective employments by Optionor regardless of the reason for such
termination, (ii) April 1, 1998, which is the date immediately subsequent
to the date on which the Optionor's Annual Report for fiscal 1997 on Form
10-KSB is required to be filed with the Securities and Exchange Commission,
(iii) the date on which Optionor's common stock is no longer listed for
quotation on the NASDAQ Stock Market, or (iv) any attempt by Optionor to
sell any of the Option Stock or any Subject Business to any party or entity
other than Optionee. At any time as the Option is exercisable hereunder,
the Optionee may exercise the Call, in whole but not in part, by giving
written notice (the "Exercise Notice") to the
2
<PAGE>
Optionor prior to 5:00 p.m., Florida time, on the last day of the Option
Period. The Exercise Notice shall specify whether the Call is being
exercised with respect to the Option Stock or the Subject Business. If the
call is exercised with respect to the Subject Business, the Optionor and
the Optionee will execute and deliver the Agreement to Sell and Purchase, a
copy of which is attached hereto as Attachment A. If the Call is exercised
with respect to the Option Stock, the Optionor and the Optionee will
execute an agreement selling the Option Stock and containing
representations and warranties customarily found in such an agreement and
similar in terms and conditions to Attachment A.
(b) If the Optionor attempts to sell or notifies the Optionee of the
Optionor's intent to sell all or any part of the Subject Business or the
Option Stock to a bona-fide third party, the Optionor shall specify in such
notice all of the terms and conditions of such sale, and then, and only in
such event, the following shall be applicable:
(i) The Optionee shall have a period of sixty days from the
receipt of such attempt or notice within which to notify the Optionor
that it elects to exercise the Option;
(ii) If the Optionee does not exercise the Option within such
sixty day period, the Optionor shall be free to sell the Subject
Business or the Option Stock to such bona-fide third party solely on
the terms and conditions specified in the notice. Any proposed sale
or other transfer by the Optionor of the Subject Business or the
Option Stock for any price less than that at, or on any terms and
conditions other than those by which, the Optionee could have
purchased the Subject Business or the Option Stock pursuant to the
provisions hereof shall be subject to the first right in the Optionee
to purchase the Subject Business or the Option Stock at such lesser
price, subject to such other terms and conditions, and Optionee shall
have a period of thirty days from the receipt of such notice within
which to notify the Optionor that the Optionee elects to purchase the
Subject Business or the Option Stock on such other terms and
conditions. To assure that the intent of these provisions will be
carried out, it is expressly agreed that the Optionor will provide in
any agreement or document, of any kind or nature, relating to the sale
or other transfer of the Subject Business or the Option
3
<PAGE>
Stock to any bona-fide third party that such offer, agreement or other
document is subject to the provisions hereof.
2. Representations and Warranties. The Optionor represents and warrants
that it owns and will own all of the Option Stock and the Subject Business
throughout the Option Period, free and clear of all encumbrances and will, in
the event the Call is exercised, deliver to the Optionee good and marketable
title to the Option Stock and the Subject Business, free and clear of all
encumbrances. The Optionor covenants and agrees that it will not, during the
Option Period, transfer any of the Option Stock or the Subject Business except
pursuant to this Agreement.
3. Company Revenues, Expenses and Income. If the Optionee exercises the
Option to purchase the Subject Business, at or prior to the closing of the
Agreement to Sell and Purchase (Attachment A hereto), Optionor shall cause the
books, records and financial statements of the Company for the fiscal year in
which the Option is exercised to reflect only the direct revenues, expenses,
income, charges and similar matters directly related to the operation of the
Subject Business and no corporate overhead in such fiscal year items shall be
allocable thereto except for the following:
(a) no more than 80% of the compensation paid to or accrued for the
Optionee shall be allocable to the Subject Business; and
(b) a percentage of the legal and accounting fees equal to the
percentage that the revenues of the Subject Business bear to the total
revenues of the Optionor in the aggregate, shall be allocable to the
Subject Business.
4. Closing. Payment for the Option Stock or the Subject Business
purchased (the "Closing") will be made, against delivery of the certificates
representing the Option Stock, or, the Subject Business, by appropriate
instruments of transfer, including but not limited to warranty bills of sale,
certificates evidencing all the shares of capital stock of the Company with
stock powers duly endorsed in blank, signature guaranteed, attached, or such
other appropriate instruments, on a date not later than sixty days following the
later of the giving of the Exercise Notice or the receipt of the Fairness
Opinion, as the Optionee shall specify in the Exercise Notice, at the offices of
Fishman & Merrick, P.C., 30 North LaSalle Street, Suite 3500, Chicago, Illinois
60602, or such other place as shall be mutually agreed between the parties.
4
<PAGE>
5. Public Announcements. Until such time as may be mutually agreed upon
by the parties to this Agreement, neither party hereto shall, without the
approval of the other party, make or cause to be made any press release or other
public announcement concerning the transactions contemplated by this Agreement
except and as to the extent required by law or regulation, including without
limitation applicable federal and state securities laws and regulations.
6. Expenses. Except as otherwise expressly set forth herein, the Optionor
shall pay or reimburse expenses of the Optionee incident to the performance and
enforcement of this Agreement (including all fees and expenses of respective
counsel, accountants and other consultants, advisors and representatives),
whether or not the transactions contemplated hereby are consummated.
7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, arrangements, covenants, promises, conditions, understandings,
inducements, representations and negotiations, expressed or implied, written or
oral, between them as to such subject matter.
8. Specific Performance; Other Rights and Remedies. The parties recognize
that certain of their rights under this Agreement are unique and, accordingly,
in addition to such other remedies as may be available to any of them at law or
in equity, the parties shall have the right to enforce their rights hereunder by
actions for injunctive relief and specific performance to the extent permitted
by law, without bond.
9. Waivers; Amendments. Any amendments to or modifications of this
Agreement or any waivers of requirements or breaches shall be made only with the
written consent of the party entitled to the benefit thereof. Any such waiver
shall not operate as a further or continuing waiver hereunder, nor shall any
failure to enforce or require strict performance operate as a waiver hereunder
except as is expressly set forth herein and no such waiver shall be effective
unless in writing.
10. Assignments; Successors and Assigns. This Agreement shall not be
assignable by any party without the prior written consent of the other;
provided, however, that notwithstanding the foregoing, the Optionee shall have
the right to designate an Affiliate or Affiliates to receive the Option Stock or
the Subject Business or to enter into the Agreement to Sell and Purchase or any
other agreement to purchase the Subject Business.
5
<PAGE>
This Agreement shall be binding and inure to the benefit of the parties
hereto and their respective heirs, successors and permitted assigns, including
without limitation successors by operation of law pursuant to any merger,
consolidation or sale of assets involving any of the parties.
11. Notices. All notices and other communications permitted or required
under this Agreement shall be given in writing and shall be (a) mailed by First
Class or Express Mail, postage prepaid, (b) sent by facsimile or other form of
rapid transmission, confirmed thereafter as in (a) above, or (c) personally
delivered to the receiving party. All such notices and communications shall be
mailed, sent or delivered as follows:
If to the Optionor, at:
Terrace Holdings, Inc.
2699 Stirling Road
Suite C-405
Fort Lauderdale, Florida 33312
Facsimile: (954) 894-0993
With a copy to:
Gerald L. Fishman, Esq.
Fishman & Merrick, P.C.
30 North LaSalle Street
Suite 3500
Chicago, Illinois 60602
Facsimile: (312) 726-2649
If to the Optionee, at:
Samuel H. Lasko and Jonathan S. Lasko
c/o 4201 North Hills Drive
Hollywood, Florida 33312
Facsimile: (954) 981-9121
or to such other persons as the party to receive such communication or notice
may have designated by written notice to the other party. Notice shall be
effective when given, except in the case of notice by mail, which shall become
effective two business days after mailing provided there is written proof of
such mailing.
12. Severability. The invalidity, illegality or unenforceability of any of
the provisions of this Agreement shall
6
<PAGE>
not invalidate the balance hereof, but this Agreement shall be reformed and
construed as if such invalid, illegal or unenforceable provision(s) were not
contained herein. The parties shall endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provision(s) with valid, legal and
enforceable provisions, the economic effect of which comes as close as possible
to that of the invalid, illegal or unenforceable provision(s).
13. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument binding upon the parties hereto.
14. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by and construed under the laws
of the State of Florida without giving effect to any choice or conflicts of laws
provisions.
15. Consent to Jurisdiction and Service. Each of the parties hereby
consents and submits to the jurisdiction of the courts of the State of Florida
and of any federal court located in said jurisdiction in connection with any
actions or proceedings brought against it by any other party to this Agreement
arising out of or relating to this Agreement and hereby agrees that any and all
claims in respect of any such act or proceeding may be heard and determined in
any such court.
The Optionor hereby irrevocably designates and appoints Samuel H. Lasko as
its authorized agent and to receive service of process in the State of Florida
when and as such legal actions or proceedings may be brought and such service of
process shall be deemed complete upon the date of delivery thereof to the
Optionor. It is understood that a copy of said process served on such agent as
soon as practicable will be forwarded to the Optionor, at its address set forth
herein, but its failure to receive such copy shall not affect in any way the
service of said process on said agent as the agent of the Optionor.
16. Inspection and Information. The Optionee may on or prior to the
Closing hereunder, through its representatives and counsel, make such
investigation of the business, properties and assets, and of the financial legal
condition of the Optionor as it may deem necessary or advisable, and the
Optionor agrees, at its expense, to cooperate therewith and make all persons and
documents relevant to such inquiry reasonably available.
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<PAGE>
17. Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning of
interpretation of hits Agreement.
18. Certain Terminology. Whenever used herein, the singular number shall
include the plural, the plural shall include the singular, and the use of any
gender shall include all genders, except where the context otherwise requires,
reference to "this section" or words of similar import shall be deemed to refer
to the entire section and not a particular subsection and references to
"hereunder," "herein," "hereof" or words of similar import shall be deemed to
refer to the entire Agreement and not the particular section or subsection.
19. Further Acts. The parties hereto each agree that at any time, and from
time to time, before and after the consummation of the transactions contemplated
by this Agreement, it/he will do all such things and execute and deliver all
such agreements, assignments, instruments, other documents and assurance, as any
other party or its/his counsel reasonably deems necessary or desirable in order
to carry out the terms and conditions of this Agreement and the transactions
contemplated hereby or to facilitate the enjoyment of any of the rights created
hereby or to be created hereunder.
20. No Presumption. This Agreement shall be construed without regard to
any presumption or other rule requiring construction against the party causing
this Agreement to be drafted.
21. Definitions. As used herein, unless context otherwise requires, the
following terms shall have the following respective meanings:
(a) "Acquisition Agreement" is defined in the preamble of this
Agreement.
(b) "Affiliate" of any person shall mean any person which directly or
indirectly owns or controls or is under common ownership or control with or
is controlled by such person.
(c) "Call" is defined in Section 1 of this Agreement.
(d) "Company" is defined in the Recitals to this Agreement.
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<PAGE>
(e) "Fairness Opinion" is defined in Section 1 of this Agreement.
(f) "Option" is defined in Section 1 of this Agreement.
(g) "Optionee" is defined in the Preamble to this Agreement.
(h) "Optionor" is defined in the Preamble to this Agreement.
(i) "Option Price" is defined in Section 1 of this Agreement.
(j) "Purchase Price" is defined in Section 1 of this Agreement.
(k) "Subject Acquisition" is defined in the Recitals to this
Agreement.
(l) "Subject Business" is defined in the Recitals to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
as of the date first above written, which date coincides with the closing of the
transactions consummated in accordance with the Acquisition Agreement.
TERRACE HOLDINGS, INC.
By: /S/ Samuel H. Lasko, Pres.
---------------------------
/S/ Samuel H. Lasko
-------------------------------
Samuel H. Lasko
/S/ Jonathan S. Lasko
-------------------------------
Jonathan S. Lasko
2245\96381\option.agr
9
<PAGE>
AGREEMENT
---------
THIS AGREEMENT ("Agreement") is made and entered into as of the 25th day of
June, 1998, by and between, Terrace Holdings, Inc., a Delaware corporation
(hereinafter referred to as the "Company"), and those investors listed on
Schedule A (hereafter referred to as "Purchasers").
RECITALS:
WHEREAS, the Company is in the food and produce processing and distribution
business and has negotiated an acquisition agreement with Banner Beef and
Seafood ("Banner") and requires interim financing to consummate such acquisition
and for working capital purposes;
WHEREAS, Purchasers desire to provide such interim financing by their
purchase, and the issuance by the Company of Convertible Subordinated Notes (in
the form attached hereto as Exhibit B) and warrants (in the form attached hereto
as Exhibit C) to purchase Common Stock of the Company.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "Market Price". As used in this Agreement, the term "Market Price"
shall mean, the closing price of the Company's Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
on any given date.
1.2 "Paid in Kind" ("PIK"). As used in this Agreement, "Paid in Kind"
shall mean, payment in the form of the issuance of the Company's 8% Cumulative
Preferred Stock.
1.3 "Change of Control" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in a transfer of control of
the Company or any of its subsidiaries to a person who is not an Original Owner
or (b) any merger or consolidation of or with the Company or any of its
subsidiaries or sale of all or substantially all of the property or assets of
the Company or any of its subsidiaries. For purposes of this definition,
"control of the Company or any of its subsidiaries" shall mean the power, direct
or indirect (x) to vote 50% or more of the securities having ordinary voting
power for the election of directors of the Company or any of its subsidiaries or
(y) to direct or cause the direction of the management and policies of the
Company or any of its subsidiaries.
1.4 "Change of Ownership" shall mean (a) 50% or more of the common stock
of the Company or any of its subsidiaries is no longer owned or controlled by
(including for the purposes of the calculation of percentage ownership, any
shares of common stock into which any capital stock of the Company or any of its
subsidiaries held by any of the Original Owners is convertible or for which any
such shares of the capital stock of the Company or any of its subsidiaries or of
any other person may be exchanged and any shares of common stock issuable to
such Original Owners upon
<PAGE>
exercise of any warrants, options or similar rights which may at the time of
calculation be held by such Original Owners) a person who is an Original Owner
or (b) any merger, consolidation or sale of substantially all of the property or
assets of the Company or any of its subsidiaries; provided, that the sale by the
Company of any shares of the capital stock of A-1-A Produce and Provisions,
Inc., Fresh Inc., and Banner Beef and Seafood, Inc. shall be deemed a sale of
substantially all of the Company's assets.
1.5 "Original Owners" shall mean Steven Shulman and Jonathan S. Lasko.
1.6 "Principal Subsidiaries" shall mean A-One-A Produce & Provisions,
Inc., Fresh, Inc., and Banner Beef and Seafood Co., Inc. (when acquired).
2. LOAN
2.1 Payment for and Issuance of Securities. Upon payment at Closing as
set forth herein, by the Purchasers to the Company, the Company shall issue to
Purchasers, its Convertible Subordinated Notes ("Notes") in the aggregate
principal amount of $2,625,000 ("Amount") in the amounts and names as set forth
on Schedule A hereto. Payment therefor shall be made by each Purchaser at
Closing in the amount of 95% of the purchased Amount by each Purchaser as set
forth on Schedule A hereto for an aggregate purchase price equal to $2,500,000.
The Company shall also issue warrants to purchase an aggregate of 400,000 shares
of Common Stock of the Company ("Warrants"). Schedule A lists the amounts and
numbers of each warrant to be sold and issued to each Purchaser.
2.2 Interest. The Notes will bear interest at 12% per annum, payable
quarterly in arrears. To the extent that more than 50% of the Amount of the
Notes is outstanding on the date that is four months after their issuance, the
interest rate on such outstanding Notes shall be increased to 14% per annum.
2.3 Conversion and Exercise. The Notes are convertible and the Warrants
will be exercisable into shares of Common Stock of the Company at the sole
option of the Purchasers at a per share conversion and exercise price of $1.25,
respectively, subject to adjustment as provided in Sections 2.4 and 2.11 below
(the "C/E Price"). Such option to convert or exercise may be elected by
Purchasers at any time subsequent to the expiration of the 60-day "Temporary
Reduced Warrant Exercise Period" currently planned for the Company's existing
public warrants in its pending registration statement on file with the
Securities and Exchange Commission ("SEC") on Form SB-2 (SEC File No. 333-45195)
(the "Registration Statement") and as defined in such Registration Statement (
"Temporary Reduced Warrant Exercise Period"). The C/E Price will be subject to
adjustment as set forth in Sections 2.4 and 2.11 hereof.
2.4 Reset Provisions.
(a) The C/E Price will be automatically reset to the lower of $1.25
or 80% of the average of the Market Prices for the 30 trading days of the
Company's Common Stock, immediately preceding the date which is 180 days from
the date of issuance of the Notes and Warrants hereunder.
2
<PAGE>
The C/E Price shall be reset to the lower of $1.25 or 80% of the average of the
Market Prices for the 30 trading days immediately preceding the date which is
one year from the date of issuance of the Notes and Warrants hereunder and
thereupon the Purchasers' option to convert the Notes and to exercise the
Warrants as provided in Section 2.3 hereof shall be extended an additional 30
days. The Conversion Price (as defined in Section 2.7 below) for any Preferred
(as defined in Section 2.7 hereof) issued to a holder of Notes hereunder will be
automatically reset to the lower of $1.25 or 80% of the average of the Market
Prices of the Company's Common Stock (i) for the 30 day trading days immediately
preceding the date which is 180 days from the date hereof and (ii) for the 30
trading days immediately preceding the date which is one year from the date
hereof. The exercise price for the Option referred to in Section 6.2(vi) hereof
(the "Option Exercise Price") and issued hereunder will be automatically reset
to the lower of $1.25 or 80% of the average of the Market Prices of the
Company's Common Stock (i) for the 30 trading days immediately preceding the
date which is 180 days from the date hereof and (ii) for the 30 trading days
immediately preceding the date which is one year from the date hereof.
(b) The C/E Price and the Conversion Price for the Preferred and the
Option Exercise Price shall also be reset in accordance with the foregoing
Section 2.4(a) upon the delisting of the Common Stock of the Company from
NASDAQ, except that the percentage of average Market Prices used in such reset
calculations shall be 60% instead of 80%.
2.5 Mandatory Prepayment. Principal and accrued and unpaid interest on
the Notes will be prepaid in whole or in part from the first net cash proceeds
received by the Company from the exercise of any warrants covered by, or the
issuance of any equity securities or notes or other debt security by the Company
under, its currently pending Registration Statement or otherwise.
2.6 Optional Redemption. Subsequent to the "Temporary Reduced Warrant
Exercise Period," principal and accrued and unpaid interest on the Notes may be
prepaid or converted any time without penalty, by the Company unless otherwise
previously prepaid or converted by the Company or converted by the holder
thereof.
2.7 Preferred Stock.
(a) The Company shall designate a series of preferred stock out of
its currently authorized but unissued shares of preferred stock sufficient in
number to convert the principal and accrued but unpaid interest of the Notes at
the initial C/E Price. Such series shall be the Company's Redeemable Convertible
8% Cumulative Preferred Stock ("Preferred"). Such Preferred shall be entitled to
a preference upon liquidation in an amount to be agreed upon by Purchaser and
the Company prior to such exchange. Such Preferred shall also be convertible
into Common Stock of the Company at the option of the holder thereof at the rate
of one share of Preferred for one share of common and the conversion price
therefor shall be entitled to adjustment identical to the adjustment provided
for the C/E Price as set forth in Section 2.11 hereof and as provided in Section
2.4 hereof (the "Conversion Price"). Dividends on the Preferred shall be in an
amount equal to 8% per annum and shall be cumulative irrespective of whether
declared or paid and are payable in cash or in "PIK" (as defined). Any dividend
paid in PIK shall result in an 8% reduction in the Conversion Price of the
Preferred.
3
<PAGE>
(b) The Company shall have the right, subject to applicable law, to
redeem the Preferred, in whole or in part, at a redemption price equal to the
Conversion Price for such Preferred plus any cumulated but unpaid dividends on
the Preferred. The Company shall designate the Preferred and file a Certificate
of Designation with terms and provisions consistent with those provided herein
and otherwise acceptable to the holders of the Notes within thirty days of the
date hereof.
(c) The Company shall have the right at any time and from time to
time after the expiration of the 60-day Temporary Reduced Warrant Exercise
Period, to convert the Amount of the Notes into shares of its Preferred at the
Conversion Price of the Preferred by notifying the holders of the Notes thereof
in writing. Accrued but unpaid interest on the Notes shall be paid in cash in
connection with any such conversion.
(d) The holder of any shares of Preferred shall have the right to
sell to the Company, and the Company agrees to repurchase any shares of
Preferred from such holder upon notice thereof at any time after the date which
is three years from the consummation of the Schroder financing arrangements with
the Company (as defined in Section 4.2(iv) hereof).
2.8 Change of Control. The holders shall have the right to convert any
outstanding principal and accrued but unpaid interest of the Notes and exercise
the Warrants for Common Stock of the Company at the C/E Price and the holders
shall have the right to convert the Preferred into shares of Common Stock of the
Company at the Conversion Price if there is a merger, sale, Change of Control,
Change of Ownership, material reconstitution of the Board of Directors of the
Company, as described in Section 7.3(g) hereof, significant change in
management, or sale of all or substantially all of the assets of the Company.
2.9 Terms. The Notes will mature one year from the date of issuance
thereof. The Warrants will expire four years from the date of issuance thereof.
2.10 Ranking. The Notes will rank senior to all existing and future
equity securities of the Company.
2.11 Anti-dilution Adjustments. If any of the Company's securities are
exercised or converted at a price less than the C/E Price or if the Company
issues or offers to sell its securities to a person or entity other than holders
hereunder at a price less than the then C/E Price or on more favorable terms and
conditions than those afforded to holders hereunder in connection with this
Agreement, the Company agrees to retroactively apply such lower price and adjust
the then C/E Price, the Conversion Price for the Preferred Stock and the Option
Exercise Price and the terms and conditions to securities of holders hereunder.
The terms of this paragraph shall not apply to issuances of Common Stock upon
exercise of rights, options and warrants outstanding as at the date of this
Agreement, to shares issued upon exercise of options granted under stockholder
approved option plans or upon exercise of options or other rights granted, and
to be granted in the future, as compensation to Company employees, directors or
bona fide consultants.
4
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3. DISCLOSURE; REGISTRATION
3.1 Disclosure. The Company will disclose the transaction in its SEC
filings and public documents but will only refer to Purchasers as "institutional
lenders," "private investors" or similar appellation. If required by the SEC to
disclose Purchasers' identity, the Company will use its best effort to limit
such disclosure to a confidential one to the SEC.
3.2 Registration Rights. Each holder of Notes, Warrants, Preferred or
Options issued pursuant hereto shall be entitled to the registration rights set
forth below with respect to any Registrable Shares. For purposes hereof,
Registrable Shares shall mean any shares of Common Stock of the Company
underlying such Notes, Warrants, Preferred or Options and issued to a holder
thereof in connection with exercise of the Warrants, exercise of the Options,
conversion of the Notes or conversion of any Preferred. The Company will use its
best efforts to file a registration statement and to register the Registrable
Shares as soon as is practicable. The Company may file such registration
statement on Form S-3 under the Securities Act of 1933, as amended (the "Act"),
if available. The Company will bear all costs and expenses associated with any
such registration. If such registration statement with respect to such
Registrable Shares has not been declared effective on or before January 1, 1999,
the Company will pay to each Purchaser a penalty of 3% of the outstanding
principal and accrued but unpaid interest of the Notes for each 60-day period
thereafter in which such registration statement is not declared effective.
3.3 Demand Registration. Each holder of Registrable Shares shall have a
one-time right to at any time request that the Company file a registration
statement with the Securities and Exchange Commission (the "SEC") on any form
which the Company is entitled to use. Such request shall be in writing, shall
specify the Registrable Shares of Common Stock intended to be sold or disposed
of by such Holder, shall state the intended method of disposition by such
holder, and the Company shall be obligated to effect such registration as
promptly as practicable, subject in any event to all applicable securities laws
and, of such registration related to an underwriting, all requirements of the
Company's investment banker.
3.4 Piggyback Registration. The Company agrees that, at any time or times
hereafter, until three years from the date hereof, as and when it intends to
register any of its securities under the Act whether for its own account and/or
on behalf of selling stockholders (except in connection with an offering solely
to its employees or an offering solely related to an acquisition on a Form S-4
or any subsequent similar form), the Company will notify each holder of such
intention and, upon request from any holder, will use its best efforts to cause
the Registrable Shares designated by such holder to be registered under the Act.
The number of Registrable Shares to be included in such offering may be reduced
if and to the extent that the underwriter of securities included in the
registration statement and offered by the Company shall be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the percentage of the reduction
of such shares shall be no greater than the percentage reduction of securities
of other selling stockholders, as such percentage reductions are determined in
the good faith judgment of the Company. The Company will use its best efforts to
keep each such registration statement current for such period of time as is not
otherwise burdensome to the Company.
5
<PAGE>
Any registration statement referred to in this Section 3.4 shall be
prepared and processed in accordance with the following terms and conditions:
(i) each holder will cooperate in furnishing promptly to the
Company in writing any information requested by the Company in connection
with the preparation, filing and processing of such registration statement.
(ii) To the extent requested by an underwriter of securities
included in the registration statement and offered by the Company, each
holder will defer the sale of its Registrable Shares for a period
commencing twenty (20) days prior and terminating sixty (60) days after the
effective date of the registration statement, provided that any principal
shareholders of the Company who also have shares included in the
registration statement will also defer their sales for a similar period.
(iii) The Company will furnish to each holder such number of
prospectuses or other documents incident to such registration as may from
time to time be reasonably requested, and cause its Registrable Shares to
be qualified under the blue-sky laws of those states reasonably requested
by the holders.
(iv) The Company will indemnify each holder (and any officer,
director or controlling person of each holder) and any underwriters acting
on behalf of each holder and any other holder against all claims, losses,
expenses, damages and liabilities (or actions in respect thereof) to which
they may become subject under the Act or otherwise, arising out of or based
upon any untrue or alleged untrue statement of any material facts contained
in any registration statement filed pursuant hereto, or any documents
relating thereto, including all amendments and supplements, or arising out
of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein contained not misleading, and will reimburse each holder
(or such other aforementioned parties) or such underwriters for any legal
and all other expenses reasonably incurred in accordance with investigating
or defending any such claim, loss, damage, liability or action; provided,
however, that the Company will not be liable where the untrue or alleged
untrue statement or omission or allege omission is based upon information
furnished in writing to the Company by any holder or any underwriter
obtained by any holer expressly for use therein, or as a result of any
holder's or any such underwriter's failure to furnish to the Company
information duly requested in writing by counsel for the Company
specifically for use therein. This indemnity agreement shall be in addition
to any other liability the Company may have. The indemnity agreement of the
Company contained in this paragraph shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Registrable Shares.
(v) Each holder will indemnify the Company (and any officer,
director or controlling person of the Company) and any underwriters acting
on behalf of the Company against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) to which they may become
subject under the Act or otherwise, arising out of or based upon any
6
<PAGE>
untrue or alleged untrue statement filed pursuant hereto, or any document
relating thereto, including all amendments, and supplements, or arising out
of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein contained not misleading, and, will reimburse the
Company (or such other aforementioned parties) or such underwriters for any
legal and other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or
action; provided, however, that each holder will be liable as aforesaid
only to the extent that such untrue or alleged untrue statement or omission
or alleged omission is based upon information furnished in writing to the
Company by such holder or any underwriter obtained by such holder expressly
for use therein, or as a result of its or such underwriter's failure to
furnish the Company with information duly requested in writing by counsel
for the Company specifically for use therein. This indemnity agreement
contained in this paragraph shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Registrable Shares.
(vi) Promptly after receipt by an indemnified party under this
Section 3.4 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party, promptly notice the indemnifying party of the
commencement thereof, but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 3.4. In case any such action is
brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate in, and, to the extent that it may wish jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this Section 3.4 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof,
other than reasonable costs of investigation or out-of-pocket expenses or
losses or cost incurred in collaborating in the defense.
(vii) The Company shall bear all costs and expenses incident to any
registration pursuant to this Section 3.4.
3.5 Investment Representations; No Market for Notes, Warrants or
Preferred. Purchasers acknowledge that the securities described herein are
being acquired for investment purposes only under this Agreement and are not
registered under the Act or any state securities law ("Blue Sky Law").
Purchasers represent and warrant that they each are "accredited investors" as
that term is defined under the Act and the regulations promulgated thereunder.
Purchasers acknowledge that there is no existing public or other market for the
Notes, Warrants or Preferred, nor is such a market likely to develop.
7
<PAGE>
4. DEFAULT.
4.1 If one or more of the following described Events of Default shall
occur and be continuing, that is to say:
(i) The Company shall default in the payment of principal of or
interest on this Note when due, or the Company or any of its subsidiaries
shall default in the payment of any other sums due the Company pursuant to
the terms of this Agreement, the Notes, the Warrants or any other
agreement, document or instrument delivered in connection herewith or
therewith; or
(ii) The Company or any of its Principal Subsidiaries shall default
in any payment of principal of or interest on any other obligation for
borrowed money beyond any period of grace provided with respect thereto, or
in the performance of any other agreement, term or condition contained in
any agreement or instrument under or by which any such obligation is
created, evidenced or secured if the effect of such default is to cause
such obligation to become due prior to its stated maturity; or
(iii) Any representation or warranty made by the Company or any of
its Principal Subsidiaries in this Agreement, the Notes, the Warrant or in
any other agreement, document or instrument delivered in connection
herewith or therewith shall prove to have been false or misleading in any
material respect as of the time made or furnished; or
(iv) The Company or any of its Principal Subsidiaries shall default
in the observance or performance of any other covenant, condition or
provision of this Agreement, the Notes, the Warrants, the Preferred or of
any other agreement, document or instrument delivered in connection
herewith or therewith; or
(v) The Company's earnings before interest, taxes, depreciation and
amortization for the year ending December 31, 1998, is less than $1,600,000
or for the year ending December 31, 1999, is less than $2,000,000;
then, and in any such event, (i) the holders of the Notes shall be entitled by
written, telephonic or telegraphic notice to the Company to declare the Notes
and interest accrued thereon and all other liabilities of the Company hereunder
to be forthwith due and payable and the same shall thereupon become due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived; (ii) the holders of the Notes shall be
entitled to an additional aggregate 250,000 Warrants to purchase the Company's
Common Stock; and (iii) the holders of the Notes shall be entitled to any and
all other remedies available hereunder or at law or in equity.
4.2 If one or more of the following described Events of Default shall
occur and be continuing, that is to say:
(i) A proceeding shall have been instituted in respect of the Company
or any of its Principal Subsidiaries:
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(1) seeking the entry of an order for relief against the Company
or any of its subsidiaries, or seeking a declaration that Company or
any of its Principal Subsidiaries is insolvent, or resulting in a
finding that Company or any of its Principal Subsidiaries is
insolvent, or seeking the dissolution, arrangement, adjustment,
composition or other similar relief with respect to Company or any of
its Principal Subsidiaries, its assets or its debts under any law now
or hereafter in effect relating to bankruptcy, insolvency, relief of
debtors, or protection of creditors, or
(2) seeking the appointment of a receiver, trustee, custodian,
liquidator, assignee, sequestrator or other similar official for the
Company or any of its Principal Subsidiaries or for all or any
substantial part of its property, and such proceeding results in the
entry, making or grant of any such order, finding or appointment, or
such proceeding shall remain undismissed or unstayed for a period of
thirty consecutive days, or, if such proceeding is brought under the
federal bankruptcy code, the Company or any of its Principal
Subsidiaries, as the case may be, fails to file a proper answer
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) thereto within ten (10) days of receipt
of notice of said proceeding; or
(ii) the Company or any of its Principal Subsidiaries shall
become insolvent, shall become generally unable to pay its debts as
they become due, shall voluntarily suspend transaction of its
business, shall make a general assignment for the benefit of
creditors, shall institute a proceeding described in the foregoing
paragraph 4.1.5 (i) (2) hereof or shall by any act indicate its
consent to or acquiescence in any proceeding or action described in
said paragraph 4.1.5 (i) 2 hereof (whether or not such proceeding is
actually instituted or diligently prosecuted), or shall dissolve,
wind-up or liquidate itself, or shall take any action in furtherance
of any of the foregoing; or
(iii) any Change of Ownership or Change of Control shall occur;
or
(iv) the failure of the Company to consummate its financing
arrangements with IBJ Schroder Business Credit Corporation
("Schroder") on the terms outlined in Schroder's commitment letter
dated May 29, 1998 to the Company within 36 days from the date hereof;
then, and in any such event, (i) principal and interest accrued but unpaid
with respect to the Notes and all other liabilities of the Company
hereunder shall thereupon become and be forthwith due and payable without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived; (ii) the holders of the Notes shall be entitled to an
additional aggregate 250,000 Warrants to purchase the Company's Common
Stock; and (iii) the holders of the Notes shall be entitled to any and all
other remedies available hereunder or at law or in equity.
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4.3 Upon the occurrence of an Event of Default as described in Section
4.1(i), (ii), (iii) or (iv) hereof, the Company shall have the right to cure
such breach within 30 days after notice shall have been given to the Company.
5. FEES AND EXPENSES.
5.1 Fees Payable Upon Default. If the Company shall default in the
payment of any amounts owing under the Notes, the Company shall pay all costs
incurred by a holder(s) of such Notes in any effort to collect the amounts due
under such Note including, without limitation, a reasonable sum for attorneys'
fees.
5.2 Other Fees. The Company shall pay to Purchasers at Closing, a
"Commitment Fee" equal to 3% of the Amount at the time of issuance. Purchasers
will be entitled to a "Breakup Fee" of 4% of the Amount if the Company completes
a comparable transaction within one year with another party. The Company will
pay all reasonable legal fees and expenses and out-of-pocket expenses of the
Purchasers related to this transaction whether or not this transaction is
consummated. The Company authorizes the Purchasers to deduct such fees and
expenses from the payment to be paid under Section 2.1 hereof.
6. CLOSING.
6.1 Closing and Closing Date. Subject to the provisions of this
Agreement, the consummation of the transactions contemplated by this Agreement
(the "Closing") shall be held at the offices of Terrace Holdings, Inc., 1351
N.W. 22nd Street, Pompano Beach, Florida, at 10:00 a.m. (local time), June 24,
1998, or at such later date, place or time as the parties shall otherwise
mutually agree upon (the date of the Closing being referred to herein as the
"Closing Date." All Closing transactions shall be deemed to take place
simultaneously, and no Closing transaction shall be deemed consummated until all
transactions to take place at the Closing have been consummated and all Closing
conditions enumerated in Section 6.2 have been met.
6.2 Conditions of Closing. Closing will be subject to the following
conditions, each of which may be waived by Purchasers, in their sole discretion:
(i) Purchasers shall have completed their due diligence
investigation and shall have received all necessary documentation,
sufficient information and access to such information on a timely basis to
Purchasers' sole satisfaction;
(ii) As a result of the consummation of this Agreement, no default
with the Company shall be existing, pending or occurring;
(iii) The Company shall secure a one year lockup on Common Stock held
by insiders by execution of a Lock Up Agreement in form and substance
acceptable to the Purchaser and their counsel on terms to be determined by
the parties;
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(iv) No material adverse change in the business, financial condition,
operations, assets, liabilities, management or prospects of the Company
from the date hereof exists or is pending at the time of Closing;
(v) Execution and delivery of a definitive agreement between the
Company and Banner for the acquisition of Banner by the Company; and
(vi) Purchasers will receive an option in form and substance
acceptable to Purchaser and their counsel to purchase an aggregate of
500,000 shares of the Company's Common Stock (the "Option Shares") at a
price determined on the basis of the average closing price for the
Company's Common Stock for the ten trading days immediately following the
expiration of the "Temporary Reduced Warrant Exercise Period (the "Tenth
Trading Day Date")." Said Option shall expire 90 days after the Tenth
Trading Day Date. If such "Temporary Reduced Warrant Exercise Period" does
not commence on or before August 31, 1998, such option price shall be
calculated using the first ten trading days in September, 1998 and the
Option shall expire on December 31, 1998.
6.3 Actions, Proceedings, Etc. All actions, proceedings, agreements,
instruments and documents required to carry out the transactions contemplated by
this Agreement shall have been completed in a manner reasonably satisfactory to
Purchasers and approved by its counsel, including but not limited to (i)
execution of the Notes (attached hereto as Exhibit B) and (ii) execution of the
Warrant Certificates (attached hereto as Exhibit C).
7. REPRESENTATIONS AND WARRANTIES; COVENANTS; NEGATIVE COVENANTS.
7.1 Representations and Warranties. The Company represents and warrants
that:
(a) Corporate Existence and Qualification. The Company (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and (ii) is duly qualified and in good standing in
every state in which it is doing business or in which the failure to be so
qualified would or could have a material adverse effect on its business or
properties. The Company's subsidiaries are corporations duly organized, validly
existing and in good standing under the laws of the relevant jurisdiction of
incorporation.
(b) Corporate Authority. The Company has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Agreement, the Notes, the Warrant and any and all other agreements, documents or
instruments executed in connection herewith or therewith (the "Transaction
Documents") and all such action has been duly authorized by all necessary
corporate proceedings on its part.
(c) No Conflict. Neither the execution and delivery of the Transaction
Documents, the consummation of the transactions therein contemplated, nor
compliance with the terms and provisions thereof will conflict with or result in
a breach of any term, condition or provision of the Articles of Incorporation or
By-laws of the Company or any of its subsidiaries or
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of any law, regulation, order, writ, injunction or decree of any court or
governmental instrumentality or agency or of any agreement or instrument to
which any of them is a party or by which any of them is bound or to which any of
them is subject or constitute a default thereunder or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the property of the Company or any of its subsidiaries.
(d) Valid Agreement. The Transaction Documents have been duly and
validly executed and delivered by the Company and the Preferred Shares and any
Option Shares, will be duly and validly executed on their date of delivery, and
each constitutes, or will constitute, a valid and legally binding agreement of
the Company enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency, fraudulent conveyance or other laws of general
application relating to or affecting the enforcement of creditors, rights; and
no authorization, approval, exemption or consent by any governmental or public
body or authority is required in connection with the execution, delivery and
carrying out of the terms of the Transaction Documents.
(e) Franchises, Etc. The Company and its subsidiaries has obtained all
necessary franchises, certificates, licenses and permits required to engage in
its business or operations, and is not in default under any term or condition
contained in any such franchise, certificate, license or permit.
(f) Conformity to Applicable Laws. The Company and each of its
subsidiaries is in compliance and conformity with all laws, ordinances, rules,
regulations and all other legal requirements (including such of the same as
pertain to consumer protection, equal opportunity, health, occupational safety,
pension, employment, environmental and securities matters) the violation of
which would have an adverse effect on their business, properties or condition
(financial or otherwise). Neither the Company nor any of its subsidiaries has
received and has no basis to expect any order or notice of any violation or
claim of violation of any such law, ordinance, rule or regulation.
(g) Taxes. The Company and each of its subsidiaries has filed all
federal, state and local tax returns required to be filed and has paid or made
adequate provision for the payment of all federal, state and local taxes,
charges and assessments.
(h) Insolvency. The issuance of the Notes by the Company under this
Agreement does not and will not render the Company insolvent; the Company is not
contemplating making any filing of a petition under any state or federal
bankruptcy or insolvency law or the liquidation of all or a major portion of its
property, and the Company has no knowledge of any person contemplating the
filing of any such petition against them or either or them.
(i) Financial Information. The Company has furnished to Purchasers
copies of its 10-KSB filed with the SEC for the year ended December 31, 1997
(the "10-KSB") and its 10-QSB filed with the SEC for the quarter ended March 31,
1998 (the "10-QSB"). The financial statements contained in the 10-KSB and 10-QSB
fairly represent the financial condition of the Company and have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"). Since the
date of the 10-QSB, there has been no change in the assets, liabilities or
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financial condition of the Company from that reflected in the 10-QSB except for
changes in the ordinary course of business which in the aggregate have not been
materially adverse.
(j) Judgments/Actions. Except as disclosed to the Purchasers in
writing, there are no actions, suits, or proceedings pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries or any of their properties at law, or in equity, or by or before
any governmental authority, governmental department, commission, board, bureau,
agency, or instrumentality, or any arbitrator, which, if determined adversely,
could cause a material adverse effect, or which question the validity of any
Transaction Documents.
(k) Absence of Defaults Under Other Agreements. Neither the Company
nor any subsidiary of the Company is not in default (i) in the performance,
observance, or fulfillment of any of the obligations, covenants, or conditions
contained in any agreement or agreement or instrument to which it is a party,
(ii) under any requirement of law, or (iii) as a result of a demand of any
governmental authority, which default or violation might cause a material
adverse effect on their business, properties or condition (financial or
otherwise).
7.2 Affirmative Covenants. The Company covenants that until payment
in full of the Notes and unless otherwise consented to in writing by the holders
of the Notes, it will, and it will cause each of its subsidiaries to:
(a) Financial Information. Furnish to the holders of the Notes as soon
as practicable, and in any event within one hundred twenty (120) days after the
end of each fiscal year of the Company, a consolidated balance sheet for the
Company and its subsidiaries as of the end of such fiscal year and the related
statements of income, changes in financial position and retained earnings for
such fiscal year, setting forth in each case in comparative form figures for the
preceding fiscal year, all in reasonable detail and certified by independent
public accountants of recognized standing selected by the Company. Furnish to
the holders of the Notes as soon as practicable, and in any event within forty-
five (45) days after the end of each fiscal quarter of the Company, a
consolidated unaudited balance sheet and the related statements of income for
the Company and its subsidiaries, as of the end of such fiscal quarter.
(b) Event of Default. Furnish to the holders of the Notes forthwith
upon any officer's obtaining knowledge that an Event of Default as described in
Section hereof, or any condition, event, act or omission which with the giving
of notice or the lapse of time or both would constitute such an Event of
Default, has occurred and is continuing, a certificate of its President
specifying the nature thereof, the period of existence thereof and the action it
has taken or proposes to take with respect thereto.
(c) Litigation, etc. Furnish to the holders of the Notes forthwith
upon any officer's obtaining actual knowledge thereof, a certificate of its
President describing any pending or threatened litigation, governmental
proceeding, governmental investigation, notice of lien or labor or other dispute
which could reasonably be expected to materially adversely affect the business,
properties or condition (financial or otherwise) of the Company.
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(d) Compliance with Governmental Requirements. Comply, in all material
respects with all laws, ordinances, rules, regulations, decrees, orders, writs,
injunctions or other governmental requirements applicable to it or its business
the noncompliance with which might, individually or in the aggregate, involve
any substantial risk of any material adverse effect on the business, properties
or condition (financial or otherwise) of the Company or of any material
impairment of the Company's ability to perform its obligations under the
Transaction Documents; provided, however, that nothing in this Section shall
require the Company to comply with any such requirement so long as the validity
thereof or its applicability shall be contested in good faith by appropriate
proceedings diligently conducted.
(e) Corporate Existence, etc. Maintain the corporate existence of the
Company and each subsidiary and the qualification of the Company and each
subsidiary to do business and good standing in each jurisdiction in which such
qualification is necessary for the proper conduct of its business; maintain, in
full force and effect all licenses, permits and other authorizations necessary
for the ownership and operation by the Company and each subsidiary of its
properties and business; and maintain and keep, all the property of the Company
and each subsidiary in good repair, working order and condition and make or
cause to be made all necessary or appropriate repairs, renewals, replacements
and substitutions, so that the efficiency of all such property shall at all
times be properly preserved and maintained; provided, however, that nothing
contained in this Section shall require the Company to maintain or retain assets
which the Company deems inadequate, unproductive, surplus or otherwise not in
its best interests.
(f) Taxes. Pay or cause to be paid all taxes, fees, assessments and
governmental charges or levies upon any of the property or assets of the Company
or its subsidiaries or upon the Company or its subsidiaries or their income or
profits before the same shall become delinquent, and all lawful claims of
whatsoever nature which, if unpaid, might become a lien or charge upon any such
property, assets, income or profits; provided, however, that the Company and its
subsidiaries shall not be required to pay and discharge any such tax, fee,
assessment, charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings diligently conducted (unless
and until foreclosure, distraint, sale or other similar process shall have been
commenced).
(g) Books and Records. Maintain proper books of record and account in
accordance with generally accepted accounting practices.
(h) Insurance. Continue to maintain insurance in form, amount, and
substance acceptable to the holders of the Notes including, without limitation,
worker's compensation and general liability insurance written by companies
acceptable to the holders of the Notes upon all facets of its business, of such
character and amounts as are customarily maintained by companies engaged in like
business; (ii) furnish to the holders of the Notes, upon request, a statement of
the insurance coverage; and (iii) obtain other or additional insurance promptly,
upon reasonable request of the holders of the Notes, to the extent that such
insurance may be available.
(i) Further Assurances. (i) Promptly correct, or cause to be promptly
corrected, any defect, error, or omission which may be discovered in the
contents of the Transaction
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Documents or in the execution or acknowledgment thereof; and (ii) execute,
acknowledge, deliver, and record or file, or cause to be executed, acknowledged,
delivered, and recorded or filed, such further instruments, and do such further
acts as may be necessary, desirable, or proper to carry out more effectively the
purposes of the Transaction Documents.
7.3 Negative Covenants. The Company covenants that until payment,
conversion or redemption in full of the Note(s), it will not, and will cause its
subsidiaries to not, without the prior written consent of the holders of the
Notes:
(a) Liens. Create, incur, issue, assume or suffer to exist any
mortgage, pledge, lien or other encumbrance on or security interest in any of
its ("Liens"), whether now owned or hereafter acquired, except:
(i) Liens for taxes or other governmental charges which are not
due or remain payable without penalty or-which are being contested in
good faith and by appropriate proceedings diligently conducted;
(ii) deposits or pledges to secure workmen's compensation,
unemployment insurance, old age benefits or other social security
obligations or in connection with or to secure the performance of
bids, tenders, trade contracts or leases or to secure statutory
obligations or surety or appeal bonds or other pledges or deposits of
like nature and all in the ordinary course of business;
(iii) mechanics', carriers', workmen's, repairmen's or other
like Liens arising in the ordinary course of business in respect of
obligations not yet due or which are being contested in good faith and
by appropriate proceedings diligently conducted; and
(iv) Liens in favor of IBJ Schroder Business Credit Corporation
in connection with the financing on the terms outlined in the
commitment letter dated May 29, 1998, with respect thereto (the "IBJ
Commitment").
(b) Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (as defined below), except:
(i) Indebtedness under this Agreement and the Note(s);
(ii) Indebtedness with respect to the IBJ Commitment; and
(iii) Current accounts payable arising out of transactions
(other than borrowings) in the ordinary course of business.
For purposes hereof, "Indebtedness" of any corporation shall mean all
obligations for borrowed money or for the deferred purchase price of property
which in accordance with generally accepted accounting principles would be
included in determining total liabilities as shown on the liability side
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of a balance sheet as of the date Indebtedness is to be determined and shall
include any obligation of such corporation created or arising under any lease of
fixed assets under which such corporation is a lessee and which, in accordance
with Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board, would be required to be capitalized on a balance
sheet of such corporation.
(c) Contingent Liabilities. Assume, guarantee, endorse or otherwise
become or remain directly or indirectly liable in connection with the
obligations of any other person, firm or corporation, except for the endorsement
of negotiable or other instruments for deposit or collection or similar
transactions in the ordinary course of its business.
(d) Loans and Advances. Make or have outstanding any loans or advances
or extend credit to any person, firm or corporation, except:
(i) loans or advances in the ordinary course of business to
employees and suppliers; and
(ii) trade credit extended under usual and customary terms in the
ordinary course of business.
(e) Merger and Disposition of Assets. Sell, lease, abandon or
otherwise dispose of all or any substantial portion of the Company's or any of
its subsidiaries, properties or assets, or consolidate or merge with any other
person, firm or corporation, or purchase or otherwise acquire all or any
substantial portion of the property or assets of any other person, firm or
corporation, or permit any other person, firm or corporation to consolidate or
merge with it.
(f) Dividends. Declare, make, pay, become or remain liable to make or
pay, any dividend or other distribution of any nature (whether in cash,
property, securities or otherwise) on account of or in respect of any shares of
Common Stock of the Company or on account of the purchase, redemption,
retirement or acquisition of any shares of Common Stock of the Company.
(g) Change of Ownership. Permit or suffer any Change of Control,
Change of Ownership or change in the identity, authority, or responsibilities of
any person having senior management and policy authority with respect to the
Company and/or any direct or indirect change (including any change in beneficial
ownership) in the ownership of the issued and outstanding Common Stock as of the
date of this Agreement.
(h) No Change in Accounting Practices. Materially change accounting
practices, methods, or standards or the reporting format for any information
furnished to the holders of the Notes under the terms and provisions of the
Transaction Documents, which accounting practices shall conform with GAAP
throughout the terms of the Transaction Documents.
(i) No Transactions With Affiliates. Enter into any transaction with
an affiliate, including, without limitation, the purchase, sale, or exchange of
property of the Company or any of its subsidiaries or the rendering of any
service, unless the transaction is in the ordinary course of and
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pursuant to the reasonable requirements of Company's business and upon fair and
reasonable terms no less favorable to Company or any of its subsidiaries than
would be obtained in a comparable arm's length transaction with a person to an
affiliate.
(j) No Adverse Transactions. Enter into any transaction which
materially and adversely affects or may materially and adversely affect the
Company's ability to pay the notes or permit or agree to any material extension,
compromise, or settlement or make any material change or modification of any
kind or nature with respect to any account, including any of the terms relating
thereto, other than discounts and allowances in the ordinary course of business.
8. MISCELLANEOUS
8.1 Termination of the Agreement. This Agreement may be terminated
and the transaction contemplated hereby may be abandoned at any time, but not
later than the Closing Date:
(a) by mutual consent of the parties; or
(b) by Purchasers or the Company if, through no material fault of
the party so electing to terminate, the Closing shall not have
occurred on or prior to June 30, 1998.
In the event of the termination of this Agreement by any party as above
provided, without material fault of any party, no party shall have any liability
hereunder, including any liability for damages. In the event that a condition
precedent to a party's obligation is not met, nothing contained herein shall be
deemed to require any party to terminate this Agreement rather than to waive
such condition precedent and proceed with the Closing.
8.2 Waivers. No action taken pursuant to this Agreement, including
any investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any provision or
agreement contained herein or in any other documents. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach. Any party hereto may, at or
before the Closing, waive any conditions to its obligations hereunder which are
not fulfilled.
8.3 Binding Effect; Benefits. This Agreement shall inure to the benefit
of the parties hereto and shall be binding upon the parties hereto and their
respective successors and assigns. Except as otherwise set forth herein, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement.
8.4 Assignment. Without limitation, and without the consent, prior,
written or otherwise, of the Company, this Agreement and all of the rights and
obligations hereunder may be assigned by the Purchasers to any entity owned or
controlled by, or affiliated with any of them. The Company shall consent in
writing to any such assignment.
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8.5 Notices. All notices, requests, demands and other communications
which are required to be or may be given under this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
upon receipt when transmitted by facsimile or telex or after dispatch by
certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company, to:
Terrace Holdings, Inc.
1351 N.W. 22nd Street
Pompano Beach, Florida 33069
Facsimile: 954-917-7552
With a copy to:
Gerald L. Fishman, Esq.
Fishman, Merrick, Miller, Genelly,
Springer, Klimek & Anderson, P.C.
125 South Wacker Street, Suite 2800
Chicago, Illinois 60606
Facsimile: 312-726-2649
If to Purchasers, in care of:
Maria DiMeo Calvelli, Esq.
Werbel & Carnelutti
711 Fifth Avenue
New York, New York 10022-3194
Facsimile: 212-832-3353
8.6 Entire Agreement. This Agreement (including the Schedule and
Exhibits hereto) constitute the entire agreement and supersede all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof and supersede all prior agreements,
representations, warranties, statements, promises and understandings, whether
written or oral, with respect to the subject matter hereof. No party hereto
shall be bound by or charged with any written or oral arguments,
representations, warranties, statements, promises or understandings no
specifically set forth in this Agreement or in any Exhibit hereto, or in
certificates and instruments to be delivered pursuant hereto on or before the
Closing.
8.7 Headings; Certain Terms. The section and other headings contained
in this Agreement are for reference purposes only and shall not be deemed to be
a part of this Agreement or to affect the meaning or interpretation of this
Agreement. As used in this Agreement, the term "including" means "including, but
not limited to" unless otherwise specified; the word "or" means "and/or," and
the word "person" means and refers to any individual, corporation, trust,
partnership,
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joint venture, government or governmental authority, or any other entity; and
the plural and singular forms are used interchangeably.
8.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed, shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
8.9 Governing Law. This Agreement and all other Transaction Documents
shall be construed in accordance with the laws of the State of New York, without
giving effect to the choice of law principles or rules thereof. The parties
hereto hereby agree that any action relating hereto may be maintained in a court
of competent subject matter jurisdiction located in the State of New York, and
hereby consent to the jurisdiction of any such court for all purposes connected
herewith.
8.10 Severability. If any term or provision of this Agreement shall to
any extent be invalid or unenforceable, the remainder of this Agreement shall
not be affected thereby, and each term and provision of the agreement shall be
valid and enforced to the fullest extent permitted by law.
8.11 Amendments. This Agreement may not be modified or changed except
by an instrument or instruments in writing signed by the party or parties
against whom enforcement of any such modification or amendment is sought.
8.12 Disclosures. Any disclosure by either party hereto pursuant to
any specific provision of this Agreement shall be deemed a disclosure for all
other purposes of this Agreement.
8.13 Survival of Representations. All representations, warranties,
covenants and agreements contained herein or made in writing in connection
herewith shall survive the execution and delivery of this Agreement and the
other Transaction Documents and the issuance of the Notes.
8.14 Section References. All references contained in this Agreement
to any section number are references to sections of this Agreement unless
otherwise specifically stated.
8.15 Brokers and Finders. Each party represents and warrants there
are no brokers, finders or similar persons to whom compensation will be due or
owing as a result of consummation of the transactions contemplated by this
Agreement and each party hereby agrees to indemnify and hold the other party
harmless against any such claims.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement, or
have caused this Agreement to be signed in their respective names by an officer
thereunder duly authorized, as of the date first above written.
TERRACE HOLDINGS, INC.
By: ____________________________________________
Jonathan S. Lasko, Executive Vice- President
PURCHASER:
By: ____________________________________________
20
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
PURCHASER
Name, Address, Social Security Principal Amount Number of Number of Purchase
Number or FEIN Number of Notes Warrants Options Price
- ------------------------------ ---------------- --------- --------- --------
<S> <C> <C> <C> <C>
Network Funds III, Ltd. $2,625,000 400,000 500,000 $2,500,000
</TABLE>
21
<PAGE>
CONVERTIBLE SUBORDINATED NOTE
-----------------------------
$2,625,000 June 25, 1998
FOR VALUE RECEIVED, the undersigned, Terrace Holdings, Inc. (hereinafter
referred to as the "Company"), hereby promises to pay to the order of Network
Funds III, Ltd. or any successor holder of this Note (hereafter referred to as
"Purchaser"), at Purchaser's principal place of business, or such other place or
places as Purchaser may designate in writing, the principal sum of Two Million
Six Hundred Twenty Five Thousand Dollars ($2,625,000).
This Note is one of a series of Notes aggregating $2,625,000 principal
amount issued pursuant to that certain Agreement dated the date hereof by and
between the Company and the purchasers as identified in Schedule A thereto (the
"Agreement"). This Note is entitled to all rights and benefits as provided in
the Agreement including, but not limited to, rights and benefits with respect to
conversion, anti-dilution and reset provisions as provided therein.
1. Payment. The principal amount and unpaid interest accruing under this
Note shall be payable one year from the date of this Note.
2. Interest. This Note shall initially bear interest at of 12% per annum.
Interest shall be payable quarterly in arrears. All payments by the Company
hereunder shall be applied first to accrued interest, then to principal
currently due in accordance with the terms hereof, the balance (if any) to
prepayment of principal. Interest will be calculated on the basis of the actual
number of days elapsed over a year of three hundred sixty (360) days. Should any
payment become due and payable on any day other than a Business Day (as such
term is hereafter defined), the date of such payment shall be extended to the
next succeeding Business Day, and, in the case of a payment of principal or past
due interest or any installment of either thereof, interest shall accrue and be
payable thereon for the period of such extension at the applicable rate or rates
specified herein. "Business Day" shall mean each day (other than Saturday or
Sunday) when banks are open for the conducting of customary commercial banking
activities in the State of New York. Interest is payable in cash. To the extent
that more than 50% of the series of Notes of which this Note is a part are
outstanding four months after the date hereof, the interest rate with respect to
such Notes shall be increased 14% per annum.
3. Fees and Expenses on Default. If the Company shall default in the
payment of any amounts owing under this Note or if an Event of Default shall
occur as described in the Agreement, the Company shall pay all costs incurred by
Purchaser to collect the amounts due under this Note, including, without
limitation, a reasonable sum for attorneys' fees.
4. Manner of Payment. The Company shall make payment of principal or
interest on this Note to the Purchaser by depositing a check or the certificate
evidencing the securities issued in payment thereof, payable to the Purchaser,
in the United States mails and addressed to the Purchaser at his principal
business address.
5. Prepayment. The Company shall be entitled to prepay all or any portion
of the principal and unpaid interest of this Note at any time or from time to
time, without penalty; provided,
<PAGE>
however, that any such prepayment on this Note shall first be credited against
any accrued and unpaid interest on this Note.
6. Conversion. This Note is issued under the provisions of the Agreement.
Subject to the provisions of the Agreement (including NASDAQ requirements) and
this Note, the Purchaser has the right, at Purchaser's sole option, at any time
subsequent to the expiration of the 60-day "Temporary Reduced Warrant Exercise
Period" currently planned for the Company's existing publicly-traded warrants in
its pending registration statement on file with the Securities and Exchange
Commission ("SEC"), on Form SB-2 (SEC File No. 333-45195), and as defined in
such registration statement and before the principal amount is paid in full, to
convert the principal of this Note, or any portion thereof, into fully paid and
non-assessable shares of Common Stock of the Company at the Conversion Price of
$1.25 per share as adjusted as provided hereunder and in the Agreement (the
"Conversion Price").
7. Anti-dilution Adjustment. If at any time before the full payment of
this Note, any of the Company's securities are exercised or converted at a price
less than the Conversion Price or the Company issues or offers to sell its
securities to a person or entity other than holders hereof at a price less than
the then Conversion Price or on more favorable terms and conditions than those
afforded to the holders hereof in connection with this Note or the Agreement,
the Company agrees to retroactively apply such lower price and adjust the then
Conversion Price and the terms and conditions of securities of the holders
hereof. The terms of this paragraph shall not apply to issuances of Common Stock
of the Company upon exercise of rights, options and warrants outstanding as at
the date of this Note, to shares issued upon exercise of options granted under
stockholder approved option plans or upon exercise of options or other rights
granted, and to be granted in the future, as compensation to Company employees,
directors or bona fide consultants.
8. Reset Provisions. The Conversion Price will be automatically reset to
the lower of $1.25 or 80% of the Market Price of the Company's Common Stock, on
the date which is 180 days from the date of issuance of this Note hereunder. To
the extent that principal or interest is due and owing with respect to this Note
on the date of maturity hereof, the Conversion Price shall be reset to the lower
of $1.25 or 80% of the Market Price on such date and thereupon the Purchasers'
option to convert this Note shall be extended an additional 30 days. In
addition, this Note shall also be entitled to the benefits of any other reset
provisions provided in the Agreement.
9. Preferred Stock.
(a) The Company shall designate a series of preferred stock out of
its currently authorized but unissued shares of preferred stock sufficient in
number to convert the principal and accrued but unpaid interest of this Note at
the Conversion Price. Such series shall be the Company's Redeemable Convertible
8% Cumulative Preferred Stock ("Preferred"). Such Preferred shall be entitled to
a preference upon liquidation, shall be convertible into Common Stock of the
Company at the option of the holder thereof at the rate of one share of
Preferred for one share of Common Stock and the Conversion Price therefor shall
be entitled to adjustment as provided for herein and in the Agreement (the
"Conversion Price"). Dividends on the Preferred shall be in an amount equal
2
<PAGE>
to 8% per annum and shall be cumulative irrespective of whether declared or paid
and are payable in cash or in "PIK" as defined in the Agreement. Any dividend
paid in PIK shall result in an 8% reduction in the Conversion Price of the
Preferred.
(b) The Company shall have the right, subject to applicable law, to
redeem the Preferred, in whole or in part, at a redemption price equal to the
Conversion Price for such Preferred plus any cumulated but unpaid dividends on
the Preferred. The Company shall designate the Preferred and file a Certificate
of Designation with terms and provisions consistent with those provided herein
and otherwise acceptable to the holders of the Notes within thirty days of the
date hereof.
(c) The Company shall have the right at any time and from time to
time after the expiration of the 60-day Temporary Reduced Warrant Exercise
Period, to convert the principal amount of the Notes into shares of its
Preferred at the Conversion Price of the Preferred by notifying the holder of
this Note thereof in writing. Accrued but unpaid interest on this Note shall be
paid in cash in connection with any such conversion.
(d) The holders of any shares of Preferred shall have the right to
sell to the Company, and the Company agrees to repurchase any shares of
Preferred from such holders upon notice thereof at any time after the date which
is three years from the consummation of the Schroder financing arrangements with
the Company (as defined in the Agreement).
10. Event of Default. If one or more of the Events of Default described in
the Agreement shall occur and be continuing, the holder hereof shall be entitled
to all rights and benefits of the Agreement with respect to any such Event of
Default.
11. Waivers. No delay or omission of Purchaser to exercise any right or
power under, or with respect to, this Note shall impair any such right or power
or shall be construed to be a waiver of any default or acquiescence thereof. No
waiver of any default shall be construed, taken or held to be a waiver of any
other default of a similar nature or otherwise. Presentment, protest and notice
of dishonor are hereby expressly waived.
12. Amendments and Modifications. This Note may not be amended or
modified, nor shall any revision hereof be effective, except by an instrument in
writing expressing such intention executed by Purchaser and the Company.
13. Choice of Law. This Note shall be governed and controlled as to
validity, enforcement, interpretation, construction, effect and in all other
respects, including, but not limited to, the legality of the interest charged
hereunder, by the statutes, laws and decisions of the State of New York, without
giving effect to the choice of law principles or rules thereof. The parties
hereto hereby agree that any action relating hereto may be maintained in a court
of competent subject matter jurisdiction located in the State of New York, and
consent to the jurisdiction of any such court for all purposes connected
herewith.
3
<PAGE>
14. Binding Effect. This Note may be transferred by Purchaser at any time
and from time to time without the consent of the Company. This Note shall be
binding upon the Company and shall inure to the benefit of Purchaser and
Purchasers' successors and assigns.
15. Severability. Any provision of this Note which is unenforceable or
contrary to applicable law, and the inclusion of which would affect the
validity, legality or enforcement of this Note, shall be of no effect, and, in
such case, all the remaining terms and provisions of this Note shall be fully
effective, as though no such invalid provision had ever been included in this
Note.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the day and year first above written.
TERRACE HOLDINGS, INC.
By: ___________________________
Title: ___________________________
Attest:
___________________________
Secretary
4
<PAGE>
CONVERSION NOTICE
To Be Executed by the Registered Holder
in Order to Convert Note
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to convert
$_____________ amount of principal and accrued and unpaid interest of the above
Note into fully paid, non-assessable shares of Common Stock as above set forth,
and requests that certificates for such shares of Common Stock shall be issued
in the name of
__________________________________________________
(please insert taxpayer identification
or other identifying number)
and to be delivered to
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
____________________________________ ____________________________
Registered Holder Date
SIGNATURE GUARANTEED
5
<PAGE>
NOTICE OF CONVERSION TO PREFERRED STOCK
________________________________________________
Registered Holder
You are hereby notified that in accordance with the "Preferred Stock"
provisions above set forth, Terrace Holdings, Inc. (the "Company") hereby
converts the above Note into ________________ shares of its Redeemable
Convertible 8% Cumulative Preferred Stock ("Preferred") as hereinabove (and in
that certain Agreement dated as of June 25, 1998 between and among the Company
and the original holder hereof and others) described. Certificate(s) evidencing
such shares of Preferred will be issued upon tender of the original of the above
Note to the Company at its principal offices. Notwithstanding lack of tender to
the Company of the original of the above Note as aforesaid, as of
__________________________________
(Date)
such Note shall be deemed null and void and of no further force or effect except
to receive certificate(s) evidencing said shares of Preferred and cash in
payment of accrued but unpaid interest with respect to such Note and in
accordance with the terms contained in the above Note and the aforementioned
Agreement.
Terrace Holdings, Inc.
By:________________________________________
Date of this Notice:_______________________
6
<PAGE>
WARRANT CERTIFICATE
-------------------
The securities represented by this Certificate were issued on June
25, 1998, without registration under the Securities Act of 1933, as
amended, or any applicable state securities law. No transfer, sale or
other disposition of these securities or any interest therein may be
made except under an effective registration statement under said Act
covering such securities unless the Corporation has received an
opinion of counsel satisfactory to it that such transfer or resale
does not require registration under said Act.
VOID AFTER JUNE 30, 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF
400,000 SHARES OF COMMON STOCK
OF
TERRACE HOLDINGS, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
Network Funds III, Ltd.
- -------------------------------------------------------------------------------
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate, one fully paid and
nonassessable share of Common Stock, $.001 par value ("Common Stock"), of
TERRACE HOLDINGS, INC., a Delaware corporation (the "Company"), at any time
between the Closing Date(as herein defined) and the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Warrant
Certificate attached hereto duly executed, at the corporate offices of the
Company accompanied by payment of $1.25 per share or such amount as adjusted
herein (the "Purchase Price") in lawful money of the United States of America in
cash or by official bank or certified check made payable to TERRACE HOLDINGS,
INC.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the applicable terms and
conditions set forth in the Agreement dated June 25, 1998, (the "Agreement") by
and between the Company and the purchasers therein set forth on Schedule A
thereto. The holder of this Warrant Certificate and each Warrant represented
hereby shall be entitled to all rights and benefits of the Agreement.
This Warrant Certificate and each Warrant represented hereby are subject to
anti-dilution adjustment to the extent the Company issues Common Stock or
securities convertible into, or exercisable for the purchase of, Common Stock at
a price per share of Common Stock less than the Purchase Price, in which event
the Purchase Price under this Warrant shall be adjusted to such lower price per
share.
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates
identical hereto for the balance of such Warrants.
The term "Closing" shall have the same meaning as stated in the Agreement.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on June 30,
2002, or such earlier date as the Warrants shall be redeemed. If such date shall
in the State of New York be a holiday or a day on which the banks are authorized
to close, the then Expiration Date shall mean 5:00 p.m. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
the banks are authorized to close.
This Warrant Certificate and the Warrants represented hereby shall be
entitled to the reset provisions, antidilution provisions, registration rights
and all other rights as provided in the Agreement.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Company, for a new Warrant
Certificate or Warrant Certificates identical hereto representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by the Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Agreement.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company) for all purposes and shall not be affected by any notice to the
contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the choice of
law principles or rules thereof. The parties hereto hereby agree that any action
relating hereto may be maintained in a court of competent subject matter
jurisdiction located in the State of New York, and consent to the jurisdiction
of any such court for all purposes connected herewith.
2
<PAGE>
The Warrants evidenced hereby are not registered under the federal or any
state securities laws and are issued and sold by the Company in reliance in part
upon the investment and other representations from the issues in compliance with
Regulation D promulgated under the Securities Act of 1933, as amended, or other
applicable federal or state exemptive provisions.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
TERRACE HOLDINGS, INC.
By: ___________________________________
Its
Date: as of June 25, 1998
----------------------------------------------
3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
______ Warrants represented by the above Warrant Certificate, and to purchase
the securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
__________________________________________________
(please insert taxpayer identification
or other identifying number)
and to be delivered to
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
__________________________________________________
__________________________________________________
__________________________________________________
(Address)
__________________________________
(Date)
__________________________________
(Taxpayer Identification Number)
__________________________________________
Registered Holder
SIGNATURE GUARANTEED
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
_________________________________
Registered Holder
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
__________________________________________________
(please insert taxpayer identification or
other identifying number)
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints ___________________________ Attorney to transfer this
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
__________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OR THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
___________________________________________
Registered Holder
<PAGE>
ASSET ACQUISITION AGREEMENT
BY AND BETWEEN
TERRACE HOLDINGS, INC.
A DELAWARE CORPORATION,
AND
BANNER BEEF AND SEAFOOD CO., INC.,
A FLORIDA CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. DEFINITIONS...........................................................
1.1 Affiliate.......................................................
1.2 Ancillary Documents.............................................
1.3 Assets..........................................................
1.4 Code............................................................
1.5 Liabilities.....................................................
1.6 Home Meal Replacement Project...................................
2. SALE OF ASSETS........................................................
2.1 Purchase and Sale of Assets.....................................
2.2 Delivery of Possession and Instruments..........................
of Transfer
3. CONSIDERATION.........................................................
3.1 Cash Consideration...............................................
3.2 Time and Mode of Cash Payment....................................
3.3 Employment and Non-Competition Agreements........................
3.4 Allocation of Consideration for Tax Purposes.....................
4. CLOSING...............................................................
4.1 Closing and Closing Date.........................................
5. REPRESENTATIONS AND WARRANTIES OF BANNER..............................
5.1 Organization, Good Standing, Power, Etc..........................
5.2 Articles of Incorporation and By-Laws............................
5.3 Subsidiaries, Divisions and Affiliates...........................
5.4 Equity Investments...............................................
5.5 Authorization of Agreement.......................................
5.6 Effect of Agreement..............................................
5.7 Restrictions; Burdensome Agreements..............................
5.8 Governmental and Other Consents..................................
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.9 Financial Statements............................................
5.10 Absence of Certain Changes or Events............................
5.11 Title to Assets; Absence of Liens
and Encumbrances................................................
5.12 Equipment.......................................................
5.13 Insurance.......................................................
5.14 Agreements, Arrangements, Etc...................................
5.15 Patents, Trademarks, Copyrights, Etc............................
5.16 Permits, Licenses, Etc..........................................
5.17 Compliance with Applicable Laws.................................
5.18 Litigation......................................................
5.19 No Interest in Competitors......................................
5.20 Customers, Suppliers, Distributors and Agents...................
5.21 Books and Records...............................................
5.22 Employee Benefit Plans..........................................
5.23 Powers of Attorney..............................................
5.24 Labor Disputes, Unfair Labor Practices..........................
5.25 Past Due Obligations............................................
5.26 Environmental Compliance........................................
5.27 Tax and Other Returns and Reports...............................
5.28 Recent Dividends and Other Distributions........................
5.29 Inventory.......................................................
5.30 Purchase and Sale Obligations...................................
5.31 Other Information...............................................
5.32 Knowledge of Banner and its Shareholders........................
5.33 Scope of Representations and Warranties.........................
6. REPRESENTATIONS AND WARRANTIES OF THI.................................
6.1 Organization....................................................
6.2 Authorization of Agreement......................................
6.3 Effect of Agreement.............................................
6.4 Restrictions; Burdensome Agreements.............................
6.5 Governmental and Other Consents.................................
6.6 Litigation......................................................
6.7 Compliance with Applicable Law..................................
6.8 Tax and Other Returns and Reports...............................
6.9 Other Information...............................................
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.10 Form 10-KSB..................................................
6.11 Absence of Certain Changes or Events.........................
7. PRE-CLOSING COVENANTS OF BANNER....................................
7.1 Conduct of Business Until Closing Date.......................
7.2 Approvals, Consents and Further Assurances...................
7.3 Access to Properties, Records, Suppliers,
Agents, Etc..................................................
7.4 Advice of Changes............................................
7.5 Conduct......................................................
7.6 Employee Benefit Plans.......................................
7.7 Satisfaction of Conditions by Banner.........................
7.8 Non-Disclosure of Negotiations and...........................
Non-Usage of Documents of THI
7.9 Lease and Purchase Option
of Hialeah Real Estate.......................................
8. PRE-CLOSING COVENANTS OF THI.......................................
8.1 Satisfaction of Conditions by THI............................
8.2 Confidentiality..............................................
9. POST-CLOSING COVENANTS.............................................
9.1 Further Assurances...........................................
9.2 Confidentiality..............................................
9.3 Cooperation..................................................
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THI
10.1 Accuracy of Representations and Warranties...................
10.2 Performance of Agreements....................................
10.3 Litigation, Etc..............................................
10.4 Approvals and Consents.......................................
10.5 Officer's Certificate........................................
10.6 Active Status Certificate....................................
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.7 No Material Adverse Change...................................
10.8 Actions, Proceedings, Etc. ..................................
10.9 Opinion of Counsel to Banner.................................
10.10 Licenses, Permits, Consents, Etc. ...........................
10.11 Documentation of Rights. ....................................
10.12 Employment and Non-Competition Agreements....................
10.13 Officers' Financial Certificate..............................
10.14 THI Financing Commitment.....................................
10.15 Deposit; Liquidated Damages..................................
10.16 Lease/Option on Real Property................................
10.17 Completion of Due Diligence..................................
11. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BANNER...................
11.1 Accuracy of Representations and Warranties...................
11.2 Performance of Agreements....................................
11.3 Secretary's Certificate......................................
11.4 Actions, Proceedings, Etc. ..................................
11.5 No Injunction................................................
11.6 Opinion of Counsel to Buyer..................................
11.7 Completion of Schedules and Exhibits.........................
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATIONS........
12.1 Survival.....................................................
12.2 Indemnification by Banner....................................
12.3 Indemnification by THI.......................................
12.4 Right to Defend..............................................
12.5 Subrogation..................................................
13. MISCELLANEOUS.......................................................
13.1 Expenses.....................................................
13.2 Termination of Agreement.....................................
13.3 Waivers......................................................
13.4 Binding Effect; Benefits.....................................
13.5 Assignment...................................................
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
13.6 Notices......................................................
13.7 Entire Agreement.............................................
13.8 Headings; Certain Terms......................................
13.9 Counterparts.................................................
13.10 Governing Law................................................
13.11 Severability.................................................
13.12 Amendments...................................................
13.13 Disclosures..................................................
13.14 Section References...........................................
13.15 Brokers and Finders..........................................
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE AND EXHIBIT INDEX
--------------------------
<S> <C>
1. Exhibit 1.3(b) Inventory
2. Exhibit 1.3(c) Equipment
3. Exhibit 1.3(d) Rights (Patents, Trademarks, Copyrights, etc.)
4. Exhibit 1.3(g) Accounts Receivable
5. Exhibit 1.3(h) Real Property (owned or leased)
6. Exhibit 1.3(j) Excluded Assets
7. Exhibit 2.1 Excluded Liabilities
8. Exhibit 3.3(a) Manuel Jimenez Employment Agreement
9. Exhibit 3.3(b) Feliciano Foyo Non-Competition Agreement
10. Exhibit 3.3(c) Joseph Teijeiro Non-Competition Agreement
11. Exhibit 3.6 Allocation of Consideration
12. Exhibit 4.1 Form of Closing Memorandum
13. Exhibit 5.1 Good Standing Certificates - Banner
14. Exhibit 5.2 Articles of Incorporation and By-laws of Banner
15. Exhibit 5.3 Subsidiaries, Divisions and Affiliates of Banner
16. Exhibit 5.4 Equity Investments
17. Exhibit 5.8 Governmental and Other Consents of Banner
18. Exhibit 5.9 Financial Statements of Banner
19. Exhibit 5.10 Material Adverse Changes
20. Exhibit 5.11 Liens and Encumbrances of Banner
21. Exhibit 5.13 Insurance Policies
22. Exhibit 5.14.1 Liabilities
23. Exhibit 5.15 Patents, Trademarks, Copyrights
24. Exhibit 5.16 Permits, Licenses, Etc.
25. Exhibit 5.18 Material Litigation of Banner
26. Exhibit 5.19 5% Interest Ownership Table
27. Exhibit 5.20 Customers, Suppliers, Distributors and Agents
28. Exhibit 5.22 Employee Benefit Plans
29. Exhibit 5.23 Powers of Attorney
30. Exhibit 5.24 Material Labor Disputes
31. Exhibit 5.25 Past Due Obligations
32. Exhibit 5.26 Environmental Compliance
33. Exhibit 5.29 Inventory
34. Exhibit 6.5 Governmental and Other Consents of THI
35. Exhibit 6.6 Material Litigation of THI
36. Exhibit 6.10 Form 10-KSB
37. Exhibit 10.9 Opinion of Counsel to Banner
38. Exhibit 10.13 Officer's Financial Certificate
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
39. Exhibit 10.16 Lease/Option to Purchase Land and Building
40. Exhibit 11.3 Secretary's Certificate
41. Exhibit 11.6 Opinion of Counsel to THI
</TABLE>
vii
<PAGE>
ASSET ACQUISITION AGREEMENT
---------------------------
THIS AGREEMENT ("Agreement") is made and entered into as of the 25th day of
June, 1998, by and between Terrace Holdings, Inc., a Delaware corporation, or
its assignee under Section 13.5 of this Agreement ("THI") and Banner Beef and
Seafood Co., Inc., a Florida corporation ("Banner").
RECITALS:
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WHEREAS, Banner is in the business of importing, producing, marketing and
distributing beef, seafood and other food products (the "Business") and owns the
Assets (as hereinafter defined) utilized in the Business; and
WHEREAS, THI desires to purchase from Banner, and Banner desires to sell to
THI, the Assets subject to the Liabilities (as hereinafter defined), and THI
desires to assume from Banner, and Banner desires to assign to THI, the
Liabilities on the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements of the parties hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" As used in this Agreement, the term "Affiliate" shall
mean, as applied to any person, any other person directly or indirectly
controlling, controlled by, or under common control with, that person. For
purposes of this definition, "control" (including with correlative meanings, the
terms "controlling", "controlled by", and "under common control with") as
applied to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of that
person or entity, whether through the ownership of voting securities, by
contract, or otherwise.
1.2 "Ancillary Documents" shall have the meaning set forth in Section 9.1
hereof.
1.3 "Assets" shall mean the assets of Banner (as of the Closing) as
follows:
(a) the Business as a going concern, the goodwill pertaining thereto
and all of Banner's right, title and interest in and to the names "Banner
Beef and Seafood",
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"Banner Classics", and all other names and phrases used by Banner, as well
as all logos relating thereto;
(b) all items of inventory owned by Banner including, without
limitation, all raw materials, work-in-progress and finished products of
Banner (all of which are collectively referred to hereinafter as
"Inventory"), including those items of Inventory set forth in Exhibit
1.3(b);
(c) all vehicles except cars belonging to Messrs. Foyo and Teijeiro,
machinery, equipment (including equipment which has previously been fully
depreciated by Banner and all equipment loaned to customers), furniture,
fixtures and non-inventory supplies of Banner (including containers,
packaging and shipping material, tools and spare parts and other similar
tangible personal property owned by Banner, which are listed on Exhibit
1.3(c), all of which are collectively referred to hereinafter as the
"Equipment");
(d) all of Banner's right, title and interest in and to the United
States and foreign rights of Banner currently owned or used by Banner (and
the rights proposed to be used) which are set forth on Exhibit 1.3(d), in
the conduct of the Business, with respect to copyrights, licenses,
trademarks, trademark rights, service mark rights, and trade secrets, shop
rights, know-how, technical information, techniques, discoveries, designs,
proprietary rights and non-public information and registrations, reissues
and extensions thereof and applications and licenses therefor, including
the items listed on Exhibit 1.3(d) (all of such rights being collectively
referred to hereinafter as the "Rights");
(e) all books and records of Banner including all in-house mailing
lists, other customer and supplier lists, trade correspondence, production
and purchase records, promotional literature, data storage tapes and
computer disks, computer software, order forms, accounts payable records
(including invoices, correspondence and all related documents), accounts
receivable ledger through the Closing Date, all documents relating to
uncollected invoices, and all shipping records through the Closing Date;
(f) all contracts, agreements and orders for goods;
(g) all trade receivables of Banner (the "Accounts Receivable") and
all advance payments, prepaid items, rights to offset and credits of all
kinds of Banner, including those items listed in Exhibit 1.3(g);
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(h) all real property owned or leased or under contract for purchase
by Banner together with all fixtures attached thereto, including those
items listed in Exhibit 1.3(h) (the "Real Property");
(i) all real property and all tangible personal property owned by
Banner which is not specifically included in, or specifically excluded by,
the foregoing subsections (a) through (h); and
(j) all other assets of Banner, except as specifically excluded on
Exhibit 1.3(j) (the "Excluded Assets").
1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended,
and/or superseded.
1.5 "Liabilities" shall mean all agreements, indentures, mortgages, plans,
policies, arrangements, leases, contracts and other instruments, including all
amendments thereto (or where they are verbal, written summaries of the materials
terms thereof), fixed or contingent, and all trade payables and liabilities
related to the Assets or the Business consistent with the terms of this
Agreement, and all other indebtedness, liabilities and obligations of Banner
which remain outstanding at Closing, but excluding any loans to Banner by any of
Banner's shareholders and those liabilities specifically listed on Exhibit 2.1
(collectively, the "Excluded Liabilities").
1.6 "Home Meal Replacement Project" shall mean any orders received from or
on behalf of and processed for delivery to Wal-Mart Stores, Inc.
2. SALE OF ASSETS
2.1 Purchase and Sale of Assets. In exchange for the consideration
specified herein, and upon and subject to the terms and conditions of this
Agreement, THI agrees to purchase and acquire from Banner, and Banner agrees to
sell, assign, transfer, convey and deliver to THI at the Closing, all rights,
title and interest in and to the Assets, THI agrees to assume from Banner, and
Banner agrees to assign to THI, the Liabilities other than those Excluded
Liabilities specifically relating to certain loans from Banner's shareholders to
Banner, which are more particularly described on Exhibit 2.1.
2.2 Delivery of Possession and Instruments of Transfer. At the Closing,
Banner shall deliver to THI warranty bills of sale, warranty deeds, executed
leases and such other instruments of transfer reasonably requested by and
satisfactory to THI and its counsel for the consummation of the transactions
contemplated under this Agreement and as are
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necessary to vest in THI all of Banner's rights, title and interest in and to
the Assets, subject to the Liabilities.
3. CONSIDERATION
3.1 Cash Consideration. The aggregate cash consideration to be paid by THI
in full consideration for its purchase of the Assets and the other rights
provided herein shall be One Million Eight Hundred Thousand Dollars (
$1,800,000), payable in accordance with the provisions of Section 3.2 and
Section 10.15.
3.2 Time and Mode of Cash Payment. The cash consideration set forth in
Section 3.1, less any amount previously paid under Section 10.15, shall be
payable at the Closing by wire transfer of immediately available funds.
3.3 Employment and Non-Competition Agreements. As an additional inducement
to THI to enter into this Agreement, the following shall be applicable:
(a) Manuel Jimenez shall, at the Closing, deliver to THI an executed
Employment Agreement in the form attached hereto as Exhibit 3.3(a).
(b) Feliciano Foyo shall, at the Closing, deliver an executed Non-
Competition Agreement in the form attached hereto as Exhibit 3.3(b).
(c) Joseph Teijeiro shall, at the Closing, deliver to THI an executed
Non-Competition Agreement in the form attached hereto as Exhibit 3.3(c).
3.4 Allocation of Consideration for Tax Purposes. The parties agree to
allocate the consideration paid pursuant to this Agreement in the manner and in
accordance with the values specified in Exhibit 3.6 for tax purposes. None of
the parties shall, at any time hereafter, in any tax or information return filed
with any state or federal agency or in any audit, other tax proceeding or
otherwise, take a position which is contrary to such allocation.
4. CLOSING
4.1 Closing and Closing Date. Subject to the provisions of this Agreement,
the consummation of the transactions contemplated by this Agreement (the
"Closing") shall be held at the offices of Terrace Holdings, Inc., 1351 N.W.
22nd Street, Pompano Beach, Florida, at 10:00 a.m. (local time), June 30, 1998
unless extended as provided in Section 10.15 below (the date of the Closing
being referred to herein as the "Closing Date"), but shall be deemed effective
as of June 30, 1998, or such later month end as immediately precedes
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any Closing Date subsequent to June 30, 1998 (the "Effective Date"). All Closing
transactions shall be deemed to take place simultaneously, and no Closing
transaction shall be deemed consummated until all transactions to take place at
the Closing have been consummated. The actions and documents necessary for the
consummation of transactions contemplated by this Agreement shall be set forth
in the Closing Memorandum attached hereto as Exhibit 4.1.
5. REPRESENTATIONS AND WARRANTIES OF BANNER
Banner hereby represents and warrants to THI as follows, each of which
representation and warranty shall be true as of the Closing Date:
5.1 Organization, Good Standing, Power, Etc. Banner is a corporation duly
organized, validly existing and its status is active under the laws of the State
of Florida. Banner is authorized or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction (set forth in Exhibit
5.1) in which the character and location of its Assets or the nature of the
Business makes such qualification necessary. Banner has all requisite corporate
power and authority to (i) execute, deliver and perform its obligations under
this Agreement and to consummate the transactions contemplated hereby and (ii)
to own or lease and operate its properties and assets, and carry on the Business
as it is presently being conducted.
5.2 Articles of Incorporation and By-Laws. Included in Exhibit 5.2 hereto
are correct and complete copies of the Articles of Incorporation of Banner, as
amended to date, and the By-Laws of Banner, as amended to date.
5.3 Subsidiaries, Divisions and Affiliates. Except as set forth on Exhibit
5.3, there are no subsidiaries or divisions of Banner. Except as set forth on
Exhibit 5.3, the Business has been conducted solely by Banner and not through
any Affiliate, joint venture or other entity, person or under any other name.
5.4 Equity Investments. Except as set forth in Exhibit 5.4, Banner does
not own or have any rights to any equity interest, directly or indirectly, in
any corporation, partnership, joint venture, firm or other entity.
5.5 Authorization of Agreement. The execution, delivery and performance of
this Agreement has been, and the Ancillary Documents will be, duly and validly
executed and delivered by Banner. This Agreement constitutes a valid and binding
obligation of Banner enforceable in accordance with its terms, except that such
enforcement may be limited by
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bankruptcy, insolvency or other similar laws affecting the enforcement of
creditor's rights generally.
5.6 Effect of Agreement. Except as set forth on Exhibit 5.14.1 to this
Agreement, the execution, delivery and performance of this Agreement by Banner,
and the consummation by Banner of the transactions contemplated hereby, will
not, with or without the giving of notice and the lapse of time, or both, (a)
violate any provision of law, statute, rule, regulation or executive order to
which Banner is subject which would materially adversely effect the Business;
(b) violate any judgment, order, writ or decree of any court applicable to
Banner which would materially adversely effect the Business; or (c) result in
the breach of or conflict with any term, covenant, condition or provision of,
result in the modification or termination of, constitute a default under, or
result in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the Assets pursuant to, any corporate charter, by-law,
commitment, contract or other agreement or instrument, including any of the
Liabilities, to which Banner or any of its shareholders is a party or by which
any of the Assets is or may be bound or affected or from which Banner derives
benefit, which breach, conflict, modification, termination, default or
encumbrance described in this clause (c) would be material to the Business or
any of the Assets.
5.7 Restrictions; Burdensome Agreements. Banner is not a party to any
contract, commitment or agreement, nor is Banner or the Assets subject to, or
bound or affected by any order, judgment, decree, law, statute, ordinance, rule,
regulation or other restriction of any kind or character, which would,
individually or in the aggregate, materially adversely affect the Business or
any of the Assets.
5.8 Governmental and Other Consents. Except as set forth on Exhibit 5.8,
no consent, authorization or approval of, or exemption by, any governmental or
public body or authority is required in connection with the execution, delivery
and performance by Banner of this Agreement or of any of the instruments or
agreements herein referred to, or the taking of any action herein contemplated.
5.9 Financial Statements. Banner has delivered to THI, and included in
Exhibit 5.9 hereto are, correct and complete copies of balance sheets of Banner
as of May 31, 1998, May 31, 1997, and May 31, 1996, the related statements of
income for the five months ended May 31, 1998, 1997 and 1996 (the "1998
Financial Statements"), and audited balance sheets for the years ended December
31, 1996, 1995, 1994 and 1993 and unaudited balance sheet for the year ended
December 31, 1997 and the related statements of income for the years then ended
(collectively, with the 1998 Financial Statements, the "Financial Statements").
The Financial Statements other than the balance sheet for the year ended
December 31, 1997 and the 1998 Financial Statements have been audited by Price
Waterhouse, Certified Public
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Accountants. The Financial Statements have been prepared in accordance with
generally accepted accounting principles and practices consistently applied and
fairly present the financial position of Banner at their respective dates and
the results of operations for the respective periods covered thereby.
5.10 Absence of Certain Changes or Events. Except as set forth on Exhibit
5.10, since January 1, 1998, Banner has not: (a) suffered any adverse change in,
or the occurrence of any events which, individually or in the aggregate, has or
have had, or might reasonably be expected to have, a material adverse effect on,
Banner's financial condition, results of operations or Business or the value of
the Assets; (b) incurred damage to or destruction of any material Asset or
material portion of the Assets, whether or not covered by insurance; (c)
incurred any material obligation or liability (fixed or contingent) except (i)
current trade or business obligations incurred in the ordinary course of
business, none of which were entered into for inadequate consideration, (ii)
obligations or liabilities including the Liabilities to the extent required
thereby, and (iii) obligations and liabilities under this Agreement; (d) made or
entered into contracts or commitments to make any capital expenditures in excess
of Ten Thousand Dollars ($10,000.00); (e) mortgaged, pledged or subjected to
lien or any other encumbrance any of the Assets (except for purchase money liens
used in the acquisition of the Assets, as set forth on Exhibit 5.11); (f) sold,
transferred or leased any material Asset or material portion of the Assets, or
canceled or compromised any debt or material claims, except in each case, in the
ordinary course of business; (g) sold, assigned, transferred or granted any
rights under or with respect to any licenses, agreements, patents, inventions,
trademarks, trade names, copyrights or formulae or with respect to know-how or
any other intangible asset including, but not limited to, the Rights; (h)
amended or terminated any of the contracts, agreements, leases or arrangements
which otherwise would have been set forth on Exhibit 5.14.1 hereto; (i) waived
or released any other rights of material value; or (j) entered into any
transactions not in the ordinary course of business which would, individually or
in the aggregate, materially adversely affect the Assets or the Business.
5.11 Title to Assets; Absence of Liens and Encumbrances. Except as set
forth on Exhibit 5.11, (a) Banner has good title to, and owns outright, the
Assets, subject to the Liabilities, including but not limited to the real estate
located at 1111 N.W. 21st Terrace, Miami, Florida, which Assets include
substantially all of Banner's assets reflected in the Financial Statements
(except (i) as sold, used or otherwise disposed of in the ordinary course of
business, and (ii) as disclosed in the Financial Statements), free and clear of
all mortgages, claims, liens, charges, encumbrances, security interests,
restrictions on use or transfer or other defects as to title; and (b)
immediately following the Closing, subject to the Liabilities, THI will have
good title to all Assets, free and clear of all mortgages, claims, liens,
charges, encumbrances, security interests, restrictions on use or transfer, or
other defects of any
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nature. The leases and other agreements or instruments under which Banner holds,
leases or is entitled to the use of any real or personal property included in
the Assets (a correct and complete list of such leases and other agreements or
instruments being set forth on Exhibit 5.14.1) are in full force and effect and
all rentals, royalties or other payments accruing thereunder prior to the date
hereof have been duly paid. Banner enjoys peaceable and undisturbed possession
under all such leases, and, except as set forth in Exhibit 5.11 the change in
ownership of the Assets will not adversely affect such leases, other agreements
and instruments.
5.12 Equipment. Set forth on Exhibit 1.3(c) is a correct and complete list
as of February 28, 1998 of all of the Equipment (as defined in Section 1.3(c)),
indicating for each piece of Equipment whether it is owned or leased and setting
forth where it is located. None of the Equipment has been disposed of since
December 31, 1997. Except as noted on Exhibit 1.3(c), all of the Equipment
generally has been suitable to Banner for the uses for which it was designed or
has been employed by Banner.
5.13 Insurance. Except as set forth on Exhibit 5.13, there are no
outstanding or unsatisfied written requirements made by any of Banner's current
insurance companies with respect to current policies covering any of the Assets,
or by any governmental authority requiring, with respect to any of the Assets,
that any repairs or other work be done on or with respect to, or requiring any
equipment or facilities be installed on or in connection with, any of the
Assets. Banner carries, and (with respect to any period for which a claim
against Banner may still arise) has always carried product liability insurance,
worker's compensation insurance in reasonable amounts, and other insurance which
is reasonably necessary to the conduct of Banner's business. On Exhibit 5.13 is
set forth a correct and complete list of (a) all currently effective insurance
policies and bonds covering the Assets or the Business, and their respective
annual premiums (as of the last renewal or purchase of new insurance), and (b)
for the three-year period ending on the date hereof, (i) all accidents,
casualties or damage occurring on or to the Assets or relating to the business
or products of Banner which in the aggregate are in excess or Ten Thousand
Dollars ($10,000.00), and (ii) claims for product liability, damages,
contribution or indemnification and settlements (including pending settlement
negotiations) relating thereto which in the aggregate are in excess of Ten
Thousand Dollars ($10,000.00). Except as set forth on Exhibit 5.13, as of the
date hereof there are no disputes with underwriters of any such policies or
bonds, and all premiums due and payable have been paid. There are no pending or,
to the knowledge of Banner, threatened terminations or premiums increases with
respect to any of such policies or bonds and, to the knowledge of Banner, there
is no condition or circumstance applicable to the Business which may result in
such termination or increase. Banner and the Assets are in compliance with all
material conditions contained in such policies or bonds, except for non-
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compliance which, individually or in the aggregate, would not have a material
adverse affect on the Business or the Assets.
5.14 Agreements, Arrangements, Etc.
5.14.1 Except as set forth on Exhibit 5.14.1, Banner is not a party to,
nor are Banner or any of the Assets bound by any:
(a) lease agreement (whether as lessor or lessee) of the Assets;
(b) license agreement, assignment or contract (whether as licensor or
licensee, assignor or assignee) relating to trademarks, trade names,
patents, or copyrights (or applications therefor), unpatented designs or
processes, formulae, know-how or technical assistance, or other proprietary
rights;
(c) employment or other contract or agreement with an employee or
independent contractor which (i) may not be terminated without liability to
Banner upon notice to the employee or independent contractor of not more
than 30 days, or (ii) provides payments (contingent or otherwise) of more
than $10,000 per year (including all salary, bonuses and commissions);
(d) agreement, contract or order with any buying agent, supplier or
other individual or entity who assists, provides or is otherwise involved
in the acquisition, supplying or providing Assets or other goods to Banner;
(e) non-competition, secrecy or confidentiality agreements;
(f) agreement or other arrangement for the sale of goods or services
by Banner to any third party (including the government or any other
governmental authority) other than sales made in the ordinary course of
business;
(g) agreement with any labor union;
(h) policy of insurance (including bonds) in force with respect to
Banner or any of its operations, properties, assets or executive officers;
(i) agreement, contract or order with any distributor, dealer, sales
agent or representative, other than contracts or orders for the purchase,
sale or license of goods made in the usual and ordinary course of business
at an aggregate price per contract
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or more than $1,000 and a term of more than six months under any such
contract or order;
(j) agreement, contract or order with any manufacturer, supplier or
customer (including those agreements which allow discounts or allowances or
extended payment terms);
(k) agreement with any food processor, food distributor or brokerage
company, management company or any other individual or entity who assists,
places, brokers or otherwise is involved with the marketing or distribution
of Banner's products to its customers;
(l) joint venture or partnership agreement with any other person;
(m) agreement guaranteeing, indemnifying or otherwise becoming liable
for the obligations or liabilities of another;
(n) agreement with any banks or other persons, other than its
employees, for the borrowing or lending of money or payment or repayment of
draws on letters of credit or currency swap or exchange agreements, other
than purchase money security interests which may, under the terms of
invoices from its suppliers, be granted to suppliers with respect to goods
so purchased and a revolving line of credit for One Million Dollars
($1,000,000) with First Union National Bank of Florida which line of credit
balance is approximately Five Hundred Thousand Dollars ($500,000) [the
"First Union Line of Credit"] at the execution of this Agreement;
(o) agreement with any bank, finance company or similar organization
which acquires from Banner receivables or contracts for sales on credit;
(p) agreement granting any person a lien, security interest or
mortgage on any of the Assets, including, without limitation, any factoring
or agreement for the assignment of receivables or inventory;
(q) agreement for the incurrence of any capital expenditure in excess
of Ten Thousand Dollars ($10,000);
(r) advertising, publication or printing agreement;
(s) agreement which restricts Banner from doing business anywhere in
the world;
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(t) agreement giving any party the right to renegotiate or require a
reduction in prices or the repayment of any amount previously paid; or
(u) other agreement or contract, not included in or expressly
excluded from the terms of the foregoing clauses (a) through (t),
materially affecting the Assets or Business, including trade and other
payables and liabilities related to the Assets incurred in the ordinary
course of business, except contracts or purchase orders for the purchase or
sale of goods or services made in the usual and ordinary course of
business.
Correct and complete copies of all documented Liabilities as shown on Exhibits
5.14.1 and 5.9 have been separately delivered to THI prior to the date hereof.
Documented Liabilities are those liabilities for which there is written proof,
including but not limited to, contracts, agreements, invoices or purchase
orders.
5.14.2 To the best of Banner's knowledge, each of the Liabilities is
valid, in full force and effect and enforceable and bona fide in accordance with
its terms.
5.14.3 Except as set forth on Exhibit 5.14.1, Banner has fulfilled, or has
taken all action reasonably necessary to enable it to fulfill when due, all of
its obligations under the Liabilities, except where the failure to do so would
not, individually or in the aggregate, have a material adverse affect on the
Business or the Assets. Furthermore, there has not occurred any default by
Banner or any event which, with the lapse of time or the election of any person
other than Banner, will become a default, nor has there occurred, to the
knowledge of Banner, any default by others or any event which, with the lapse of
time or the election of Banner, will become a default under any of the
Liabilities, except for such defaults, if any, which (a) have not resulted and
will not result in any material loss to or liability of Banner or any of its
successors or assigns or (b) have been set forth on Exhibit 5.14.1. Banner is
not in arrears in any material respect with respect to the performance of
satisfaction of the terms or conditions to be performed or satisfied by it under
any of the Liabilities and no waiver or variance has been granted by any of the
parties hereto.
5.14.4 The accounts receivable of Banner at February 28, 1998, and as
reflected on its balance sheet of that date, are true and complete except for
Ten Thousand Dollars ($10,000) thereof, which may be deemed to be a reasonable
reserve for unpaid debts. If on or about December 31, 1998, any of such
accounts, to the extent of them remaining unpaid, are not paid in full on demand
when due, except as otherwise then agreed by THI, Banner forthwith upon notice
from THI to that effect, will pay the full amount thereof to THI against
delivery to Banner of an assignment of the defaulted account or accounts less
the Ten Thousand Dollars ($10,000) as aforesaid, which is deemed to be the full
reserve against
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unpaid accounts receivable of Banner. Payments of accounts receivable will be
applied on a first-in first-out basis whereby the oldest customer invoices shall
be the first to receive credit for payment.
5.14.5 Except as set forth on Exhibit 5.14.1, to the best of Banner's
knowledge, each of the Liabilities does not require the consent of the other
parties thereto and, with respect to any of the Liabilities which do require the
consent of the other parties thereto, Banner has obtained such consent and has
provided or will provide THI with copies thereof.
5.15 Patents, Trademarks, Copyrights, Etc. Exhibit 1.3(d) sets forth (i)
the registered and beneficial owner and the expiration date, to the extent
applicable, for each of the Rights set forth on such Exhibit and (ii) the
product, service, or products or services of Banner which make use of, or are
sold, licensed or made under, each such Right. All of the Rights are included in
the Assets and constitute all Rights necessary for the conduct of the Business,
as such business is currently being conducted. Except as set forth on Exhibit
5.15, Banner has not sold, assigned, transferred, licensed, sub-licensed or
conveyed the Rights, or any of them, or any interest in the Rights, or any of
them, to any person, and has the entire right, title and interest (free and
clear of all security interests, liens and encumbrances of every nature) in and
to the Rights necessary to the conduct of the Business as currently being
conducted; neither has the validity of such items been, nor is the validity of
such items, nor the use thereof by Banner, the subject of any pending or, to the
knowledge of Banner, threatened opposition, interference, cancellation,
nullification, conflict, concurrent use, litigation or other proceeding, to the
knowledge of Banner. The conduct of the Business as currently operated, and the
use of the Assets does not conflict with, or infringe, legally enforceable
rights of third parties. Except as set forth on Exhibit 5.15, the Rights owned
by or licensed to Banner have not been used, and no use is now being made, by
any entity except Banner and other entities duly licensed to use the same.
Except as set forth on Exhibit 5.15, there is no infringement of any proprietary
right owned or licensed by Banner.
5.16 Permits, Licenses, Etc. Exhibit 5.16 sets forth the permits,
licenses, registrations, memberships, orders or approvals of governmental or
administrative authorities or required to permit Banner to carry on its Business
as currently conducted other than permits, licenses, registrations, trade
memberships, orders or approvals, the failure to obtain which would not,
individually or in the aggregate, have a material adverse affect on the Assets
or on Banner's business.
5.17 Compliance with Applicable Laws. The conduct of Banner's Business
does not violate or infringe, and there is no basis for any claims of violation
or infringement of, any law, statute, ordinance, regulation or executive order
(including, without limitation, the Federal Food, Drugs and Cosmetics Act, as
amended, the Occupational Safety and Health
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Act, the National Environmental Policy Act, any federal agriculture law, or the
Foreign Corrupt Practices Act and the respective regulations thereunder and
similar applicable state laws and regulations, including but not limited to
agriculture laws and regulations) currently in effect, except in each case for
violations or infringements which do not and will not, individually or in the
aggregate, have a material adverse affect on the Assets or Banner's Business.
Banner is not in default under any governmental or administrative registration,
membership or license issued to it, under any governmental or administrative
order or demand directed to it, or with respect to any order, writ, injunction
or decree of any court which, in any case, materially adversely affects the
financial condition, results of operations or Business or the value of the
Assets.
5.18 Litigation. Except as set forth on Exhibit 5.18, there is no claim,
action, suit, proceeding, arbitration, reparation, investigation or hearing or
notice of hearing, pending or, to the knowledge of Banner, threatened, before
any court or governmental, administrative or other competent authority or
private arbitration tribunal against or relating to or affecting (directly or
indirectly, including by way of indemnification) the Business or any of the
Assets, or the transactions contemplated by this Agreement; nor are any facts
known to Banner, which it believes could reasonably give rise to any such claim,
action, suit, proceeding, arbitration, investigation or hearing, which may have
any adverse affect, individually or in the aggregate in excess of Ten Thousand
Dollars ($10,000) upon the Business, the value of the Assets or the transactions
contemplated by this Agreement. Banner has not waived any statute of limitations
or other affirmative defense with respect to any of its obligations. There is no
continuing order, injunction or decree of any court, arbitrator or governmental,
administrative or other competent authority to which Banner is a party, or to
which Banner is subject. Neither Banner nor any of its shareholders or current
officer, director, partner or employee of Banner or any Affiliate of Banner has
been permanently or temporarily enjoined or barred by order, judgment or decree
of any court or other tribunal or any agency or other body from engaging in or
continuing any conduct or practice in connection with the Business. Banner's
worker's compensation experience rating for the five-year period ending on the
Closing Date is set forth in Exhibit 5.18.
5.19 No Interest in Competitors. Set forth on Exhibit 5.19 is a list
describing the extent to which Banner, any of the shareholders or any officer or
director of Banner or any Affiliate of any of the foregoing, directly or
indirectly, owns more than a five percent (5%) interest in or controls or is an
employee, officer, director, or partner of or participant in (but only to the
extent such a participation exceeds one percent), or consultant to any
corporation, partnership, company, limited partnership, joint venture,
association or other entity which is a competitor, supplier or customer of
Banner or has any type of business or professional relationship with Banner.
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5.20 Customers, Suppliers, Distributors and Agents. Except as set
forth on Exhibit 5.20, Banner has no knowledge that any customer, client,
distributor, supplier or any other person or entity with material business
dealings with Banner, will or may cease to continue such relationship with
Banner, or will or may substantially reduce the extent of such relationship, at
any time prior to or after the Closing Date. Except as set forth on Exhibit
5.20, Banner has no knowledge of (1) any other existing or contemplated
modification or change in the business relationship of Banner, or (2) any
existing condition or state of facts or circumstances which has affected
adversely, should reasonably be expected to adversely affect (in a material
manner), the Business with its customers, clients, suppliers or other persons or
entities with material business dealings with Banner or which has prevented or
will prevent such business from being carried on by Banner under its new
ownership after the Closing in essentially the same manner as it is currently
carried on.
5.21 Books and Records. The books of account and other financial and
corporate records of Banner are in all material respects complete, correct and
up to date, with all necessary signatures required in connection with the
consummation of the transactions contemplated hereunder, and are in all material
respects accurately reflected in the Financial Statements.
5.22 Employee Benefit Plans. Except as described in Exhibit 5.22, Banner
does not have any hospitalization, health insurance, pension, retirement, profit
sharing, stock option or similar plans. Exhibit 5.22 sets forth a correct and
complete list of each and every employee benefit plan, including each pension,
profit sharing, stock bonus, bonus, deferred compensation, severance, stock
option or purchase plan, or other retirement plan or arrangement, covering
employees of Banner (the "Employee Benefit Plans"). For each such employee
pension plan, multi-employer plan or welfare plan as those terms are defined in
Section 3 of the Employee Retirement Income Security Act of 1974 ("ERISA") and
for each Employee Benefit Plan with respect to which Banner is a "party in
interest" as defined in Section 3 of ERISA, or a "disqualified person" as
defined in Section 4975 of the Code, Banner has delivered to THI complete and
accurate copies of (i) all Employee Benefit Plans and all amendments thereto;
(ii) the trust instrument or insurance contract, if any, forming a part of the
plans, and all amendments thereto; (iii) the most recent and preceding year's
Internal Revenue Service Form 5500 and all schedules thereto; (iv) the most
recent Internal Revenue Service determination letter, or if no letter has been
issued, any pending application to the Internal Revenue Service for a
determination letter regarding qualified status; (v) any bond required by
Section 412 of ERISA; and (vi) the summary plan description. Banner has complied
with all of the material regulations governing each of the Employee Benefit
Plans maintained for the benefit of Banner's employees, including, without
limitation, rules and regulations promulgated pursuant to ERISA and the Code, by
the Department of Treasury, Department of Labor, and the Pension Benefit Plans
Guaranty Corporation, and each of the
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Employee Benefit Plans now operated has since its inception been operated in
accordance with its provisions and is in compliance with such regulations. To
Banner's knowledge, neither Banner nor any Employee Benefit Plans maintained by
Banner or any fiduciaries thereof have engaged in any prohibited transaction, as
that term is defined in Section 406 of ERISA or Section 4975 of the Code, nor
have any of them committed any breach of fiduciary responsibility with respect
to any of the Employee Benefit Plans, and Banner does not have any knowledge
that any other person has not complied with these regulations.
5.23 Powers of Attorney. Except as set forth on Exhibit 5.23, no person
has any power of attorney to act on behalf of Banner in connection with any of
Banner's properties or business affairs other than such powers to so act as
normally pertain to the officers of Banner.
5.24 Labor Disputes, Unfair Labor Practices. Except as set forth on
Exhibit 5.24, Banner is not engaged in any labor practice which would have a
material adverse affect on the Assets or the Business. There is no pending or
affirmatively threatened (i) unfair labor practice complaint, charge, labor
dispute, strike, slowdown, walkout or work stoppage before the National Labor
Relations Board or any other authority or (ii) grievance or arbitration
proceeding arising out of or under a collective bargaining agreement involving
employees of Banner. There have been no strikes, labor disputes, slow-downs,
walkouts, or work stoppages involving employees of Banner during the last five
(5) years. No union representation question exists with respect to the employees
of Banner and no union organizing activities are taking place. Banner has not
received notice from any of its employees of such employee's intent to terminate
his or her employment or bring any action against Banner for any reason related
to the transactions contemplated by this Agreement or for any other reason.
5.25 Past Due Obligations. Except as set forth on Exhibit 5.25, no past
due obligations of Banner over $500 have given rise or shall give rise within 6
months after the Closing Date (except as such will be performed by Banner prior
to the Closing so as to relieve THI of all liability therefor) to any additional
liability to THI on account of their being past due.
5.26 Environmental Compliance. Except as set forth in Exhibit 5.26, (i)
Banner has not generated, used, transported, treated, stored, released or
disposed of, nor has suffered or permitted anyone else to generate, use,
transport, treat, store, release or dispose of any Hazardous Substance in
violation of any laws or governmental regulation; (ii) there has not been any
generation, use, transportation, treatment, storage, release or disposal of any
Hazardous Substance in connection with the conduct of the Business or the use of
any property, facility or Assets of Banner or to the knowledge of Banner any
nearby or adjacent
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properties or facilities, which has created or might reasonably be expected to
create any liability under any laws or governmental regulation or which would
require reporting to or notification of any governmental entity; (iii) no
asbestos or polychlorinated biphenyl or underground storage tank is contained in
or located at any facility of Banner; and (iv) any Hazardous Substance handled
or dealt with in any way in connection with the Business has been and his being
handled or dealt with in all respects in compliance with applicable local, state
and federal laws. For purposes of this Section, "Hazardous Substance" means (but
shall not be limited to) substances that are defined or listed in, or otherwise
classified pursuant to, any applicable Laws as "hazardous substances",
"hazardous materials', "hazardous wastes" or "toxic substances", or any other
formulation intended to define, list or classify substances by reason of
deleterious properties such as ignitability, corrosivity, toxicity or "EP
toxicity", and petroleum and drilling fluids, produced waters and other wastes
associated with the exploration, development, or production or crude oil,
natural gas or geothermal energy.
5.27 Tax and Other Returns and Reports. Banner has timely filed or will
file all federal, state and local tax returns and information returns ("Tax
Returns") required to be filed by it and has paid all taxes due for all periods
ending on or before December 31, 1996. Adequate provision has been made in the
books and records of Banner and in the Financial Statements referred to in
Section 5.10 above for all taxes whether or not due and payable and whether or
not disputed.
5.28 Recent Dividends and Other Distributions. There has been no dividend
or other distribution of assets or securities by Banner, whether consisting or
money, property or any other thing of value, declared, issued or paid to or for
the benefit of Banner's shareholders subsequent to the date of the most recent
financial statements described in Section 5.9 except those distributions made to
the shareholders for the purpose of paying 1997 and 1998 taxes due on
shareholder income from the Business, in accord with past practice.
5.29 Inventory. Except as set forth in Exhibit 5.29, all of the Inventory
is of a usable quality in the ordinary course of business.
5.30 Purchase and Sale Obligations. All purchase, sales and orders and
all other commitments for purchases, sales and orders made by or on behalf of
Banner have been made in the usual and ordinary course of its business in
accordance with normal practices. On the Closing Date, Banner shall deliver to
THI a schedule of all such uncompleted purchase and sale orders and other
commitments with respect to any of Banner's obligations as of a date not earlier
than ten (10) days prior to the Closing.
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5.31 Other Information. None of the information which has been or may
be furnished by Banner or any of its representatives to THI or any of its
representatives in connection with the transactions contemplated hereby, which
is contained in this Agreement (including the Exhibits hereto) or any Ancillary
Document or any certificate or instrument delivered or to be delivered by or on
behalf of Banner in connection with the transactions contemplated hereby, does
or will contain any untrue statement of a material fact or omit a material fact
necessary to make the information contained herein or therein not misleading.
5.32 Knowledge of Banner and its Shareholders. As to each representation
and warranty made by Banner under this Article 5, any fact or information known
to any shareholder of Banner or notice received by any shareholder of Banner,
but specifically excluding any employee of Banner, shall be imputed to Banner as
if such fact or information were known to Banner or such notice received by
Banner, keeping in mind that this Agreement is an asset purchase, not a purchase
of Banner.
5.33 Scope of Responsibilities and Warranties. All of the representations
and warranties of Banner apply to the sale of its assets and not to the sale of
the corporation itself and should be interpreted in this context.
6. REPRESENTATIONS AND WARRANTIES OF THI
-------------------------------------
THI hereby represents and warrants to Banner as follows, each of which
representation and warranty shall be true as of the Closing Date:
6.1 Organization. THI is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. THI has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby.
6.2 Authorization of Agreement. The execution, delivery and performance
of this Agreement by THI, and the consummation of the transactions contemplated
hereby have been duly and effectively authorized by THI's Board of Directors.
This Agreement has been; and the Ancillary Documents will be, duly and validly
authorized, executed and delivered on behalf of THI. This Agreement constitutes
a valid and binding obligation of THI, enforceable in accordance with its terms,
except that such enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors, rights generally.
6.3 Effect of Agreement. The execution, delivery and performance of this
Agreement by THI and consummation by THI of the transactions contemplated hereby
will
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not, with or without the giving or notice and the lapse of time, or both, (a)
violate any provision of law, statute, rule, regulation or executive order to
which the THI is subject; (b) violate any judgment, order, writ or decree of any
court applicable to THI; or (c) result in the breach of or conflict with any
term, covenant, condition or provision of the Certificate of Incorporation of
THI or any commitment, contract or other agreement on instrument to which THI is
a party.
6.4 Restrictions; Burdensome Agreements. THI is not a party to any
contract, commitment or agreement, nor is THI subject to, or bound or affected
by any order, judgment, decree, law, statute, ordinance, rule, regulation or
other restriction of any kind or character, which would, individually or in the
aggregate, materially adversely affect THI's business.
6.5 Governmental and Other Consents. Except as set forth on Exhibit 6.5,
no consent, authorization or approval of, or exemption by, any governmental or
public body or authority is required in connection with the execution, delivery
and performance by THI of this Agreement or of any of the instruments or
agreements herein referred to, or the taking of any action herein contemplated.
6.6 Litigation. Except as set forth on Exhibit 6.6, there is no claim,
action, suit, proceeding, arbitration, reparation, investigation or hearing or
notice of hearing, pending or, to the knowledge of THI, threatened, before any
court or governmental, administrative or other competent authority or private
arbitration tribunal against or relating to or affecting (directly or
indirectly, including by way of indemnification) its business or the
transactions contemplated by this Agreement; nor are any facts known to THI,
which it believes could reasonably give rise to any such claim, action, suit,
proceeding, arbitration, investigation or hearing, which may have any adverse
affect, individually or in the aggregate in excess of Ten Thousand Dollars
($10,000) upon the business of THI or the transactions contemplated by this
Agreement. THI has not waived any statute of limitations or other affirmative
defense with respect to any of its obligations. There is no continuing order,
injunction or decree of any court, arbitrator or governmental, administrative or
other competent authority to which THI is a party, or to which THI is subject.
Neither THI nor any of its shareholders or current officer, director, partner or
employee of THI or any Affiliate of THI has been permanently or temporarily
enjoined or barred by order, judgment or decree of any court or other tribunal
or any agency or other body from engaging in or continuing any conduct or
practice in connection with its business.
6.7 Compliance with Applicable Laws. The conduct of THI's business does
not violate or infringe, and there is no basis for any claims of violation or
infringement of, any law, statute, ordinance, regulation or executive order
(including, without limitation, the
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Federal Food, Drugs and Cosmetics Act, as amended, the Occupational Safety and
Health Act, the National Environmental Policy Act, any federal agriculture law,
or the Foreign Corrupt Practices Act and the respective regulations thereunder
and similar applicable state laws and regulations, including but not limited to
agriculture laws and regulations) currently in effect, except in each case for
violations or infringements which do not and will not, individually or in the
aggregate, have a material adverse affect on THI's business. THI is not in
default under any governmental or administrative registration, membership or
license issued to it, under any governmental or administrative order or demand
directed to it, or with respect to any order, writ, injunction or decree of any
court which, in any case, materially adversely affects the financial condition,
results of operations of THI.
6.8 Tax and Other Returns and Reports. THI has timely filed or will file
all federal, state and local tax returns and information returns required to be
filed by it and has paid all taxes due for all periods ending on or before
December 31, 1996. Adequate provision has been made in the books and records of
THI for all taxes whether or not due and payable and whether or not disputed.
6.9 Other Information. None of the information which has been or may be
furnished by THI or any of its representatives to Banner or any of its
representatives in connection with the transactions contemplated hereby, which
is contained in this Agreement (including the Exhibits hereto) or any Ancillary
Document or any certificate or instrument delivered or to be delivered by or on
behalf of THI in connection with the transactions contemplated hereby, does or
will contain any untrue statement of a material fact or omit a material fact
necessary to make the information contained herein or therein not misleading.
6.10 Form 10-KSB. THI has delivered to Banner, and included in Exhibit
6.10 hereto are, correct and complete copies of Form 10-KSB as filed with the
Securities and Exchange Commission for the years 1995, 1996 and 1997, as amended
(the "10-Ks"). The 10-Ks have been prepared in accordance with generally
accepted accounting principles and practices consistently applied and fairly
present the financial position of THI at their respective dates and the results
of operations for the respective periods covered thereby.
6.11 Absence of Certain Changes or Events. Except as set forth on Exhibit
6.11, since January 1, 1998, THI has not: (a) suffered any adverse change in, or
the occurrence of any events which, individually or in the aggregate, has or
have had, or might reasonably be expected to have, a material adverse effect on,
THI's financial condition; (b) incurred damage to or destruction of any material
asset or material portion of its assets, whether or not covered by insurance;
(c) incurred any material obligation or liability (fixed or contingent) except
(i) current trade or business obligations incurred in the ordinary course of
business, none of which were entered into for inadequate consideration, and (ii)
obligations and liabilities
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under this Agreement; (d) made or entered into contracts or commitments to make
any capital expenditures in excess of Ten Thousand Dollars ($10,000.00); (e)
mortgaged, pledged or subjected to lien or any other encumbrance any of its
assets, except for those liens and encumbrances required for financing of the
transactions contemplated by this Agreement; (f) sold, transferred or leased any
material asset or material portion of its assets, or canceled or compromised any
debt or material claims, except in each case, in the ordinary course of
business; (g) sold, assigned, transferred or granted any rights under or with
respect to any licenses, agreements, patents, inventions, trademarks, trade
names, copyrights or formulae or with respect to know-how or any other
intangible asset; (h) waived or released any other rights of material value; or
(i) entered into any transactions not in the ordinary course of business which
would, individually or in the aggregate, materially adversely affect THI's
business.
7. PRE-CLOSING COVENANTS OF BANNER
-------------------------------
Banner hereby covenants and agrees with THI that Banner shall do, or cause
to be done, the following, between the date of this Agreement and the Closing
Date or date of termination of this Agreement, as the case may be:
7.1 Conduct of Business Until Closing Date. Except as permitted or
required hereby or as THI may otherwise consent in writing, Banner shall:
7.1.1 operate the Business only in the usual, regular and ordinary
manner, and use its best efforts to (a) preserve the present business
organization of Banner intact, (b) keep available the services of the
present employees of Banner, and (c) preserve the current business
relationships of Banner with customers, clients, suppliers, distributors
and others having business dealings with it;
7.1.2 bear the risk of loss or damage to the Assets on and prior to
the Closing where such risk of loss is not the legal obligation of another,
and maintain all properties necessary for the conduct of the Business,
whether owned or leased;
7.1.3 maintain the books, records and accounts of Banner in the
usual, regular and ordinary manner, on the basis consistent with prior
periods;
7.1.4 duly comply with all laws, rules and regulations applicable to
Banner and to the conduct of its Business, the failure of which to comply
would have a material adverse affect on the Business;
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7.1.5 perform all of the obligations of Banner without default,
unless such default is of no significance to Banner and could have no
adverse impact on Banner, its Assets or Business;
7.1.6 neither (a) amend Banner's Articles of Incorporation or By-
Laws; (b) merge with or into, consolidate, amalgamate or otherwise combine
with, any other entity; nor (c) change the character of the Business;
7.1.7 neither (a) encumber, mortgage, or voluntarily subject to lien
any of the existing Assets; (b) transfer, sell, lease, license or otherwise
dispose of any of, or any part of, the Assets (other than in the ordinary
course of business); (c) convey, transfer or acquire any material Asset or
property to, for or on behalf of Banner other than in the ordinary course
of business except for assets to be used for Home Meal Replacement Project;
(d) enter into any arrangement, agreement or undertaking, with respect to
any of the employees relating to the payment of bonus, severance, profit-
sharing or special compensation or any increase in the compensation payable
or to become payable to any such employee; nor (e) incur any material fixed
or contingent obligation or enter into any agreement, commitment, contract
or other transaction or arrangement relating to the Business or the Assets
except in connection with Home Meal Replacement Project;
7.1.8 not make any distributions or dividends of Assets or
securities, nor any changes to the capital structure of Banner, except as
permitted in Section 5.28; and
7.1.9 neither modify, change or terminate any of its material
obligations other than in the ordinary course of business, nor grant any
power of attorney with respect to the Business or the Assets to any party
except THI.
7.1.10 use its best efforts to assist THI in securing the appropriate
governmental licenses necessary for THI to operate the Business from and
after Closing.
7.2 Approvals, Consents and Further Assurances. Banner shall use its best
efforts to obtain in writing as promptly as possible all approvals, consents and
waivers required in order to effectuate the transactions contemplated hereby,
and shall deliver to THI copies, reasonably satisfactory in form and substance
to counsel to THI, of such approvals and consents. Banner shall also use its
best efforts to assure that the other conditions set forth in Article 10 hereof
are satisfied by the Closing Date.
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7.3 Access to Properties, Records, Suppliers, Agents, Etc. Banner shall
give to THI and to THI's counsel, financiers, accountants and other
representatives reasonable access to and copies of such of Banner's properties,
personnel, books, tax returns, contracts, commitments and records as relate to
the Assets, suppliers, agents, distributors, etc. or other aspects of the
Business; and shall furnish to THI and such representatives all such additional
instruments, contracts, documents or other written obligations (certified by
officers of Banner, if so requested) and financial and other information
concerning the Business, Assets, suppliers, agents, etc. as THI or its
representatives may from time to time reasonably request.
7.4 Advice of Changes. If Banner becomes aware of any fact or facts which,
if known at the date hereof, would have been required to be set forth or
disclosed in or pursuant to this Agreement or which, individually or in the
aggregate, could materially adversely affect the Business or Assets of Banner,
it shall promptly advise THI in writing thereof.
7.5 Conduct. Except as permitted or required hereby or as THI may
otherwise consent in writing, neither Banner nor any of its shareholders shall
enter into any transaction or take any action which would result in any of the
representations and warranties of Banner contained in this Agreement or in any
Ancillary Document not being true and correct as of the time immediately after
such transaction has been entered into or such event has occurred and on the
Closing Date.
7.6 Employee Benefit Plans. Except for payment of Banner's current
obligations under its employee benefit plan, Banner shall not incur any
additional obligations or liabilities, including (i) all liabilities for all
claims incurred, whether or not reported, on or before the Closing Date under
all "employee welfare benefit plans," within the meaning of Section 3(l) of
ERISA, (ii) all liabilities or obligations for vacations or sick leave or
retiree, medical or life benefits to employees or former employees of Banner,
and (iii) all liabilities of Banner for all benefits accrued under any "employee
pension benefit plan," within the meaning of Section 3(2) of ERISA under each
Employee Benefit Plan.
7.7 Satisfaction of Conditions by Banner. Banner hereby covenants and
agrees with THI that, between the date of this Agreement and the Closing Date or
date of termination of this Agreement, as the case may be, it shall use its best
efforts to assure that the conditions set forth in Article 10 hereof are
satisfied by the Closing Date.
7.8 Non-Disclosure of Negotiations and Non-Usage of Documents of THI.
Banner hereby covenants and agrees with THI that it shall not use, show,
display, describe or otherwise disclose, directly or indirectly, in any manner,
this Agreement, any Exhibits hereto or any other document created by THI's
counsel, in whole or in part, which was the subject of negotiations between THI
and Banner, or any of the terms or other aspects of the
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negotiations between THI and Banner, in the event that the Closing shall not
occur for any reason. Banner further agrees that it will return and cause all of
its advisors, representatives and other parties, over which it has control, to
return to THI all documents or other written materials regarding this
transaction that were obtained from THI or its counsel during the course of the
negotiations (including all drafts of all documents) except matters in any way
related to Home Meal Replacement Project.
7.9 Lease and Purchase Option of Hialeah Real Estate. At the Closing, THI
and the shareholders of Banner shall have executed a lease substantially in the
form of Exhibit 10.17, of the real estate facilities located at 6601 N.W. 37th
Avenue, Hialeah, Florida, and owned in fee simple by said shareholders (the
"Lease"). The Lease shall provide for a term of five (5) years at an annual
rental of One Hundred Twenty Thousand Dollars ($120,000), payable in sixty (60)
consecutive, equal monthly installments in the amount of Ten Thousand Dollars
($10,000) each, on a net-net-net basis. For the term of such lease, THI shall be
granted the option to purchase such real estate and improvements in fee simple
without any clouds to title thereof at a purchase price equal to the lower of
the independently appraised value thereof or One Million Two Hundred Seventy
Thousand Dollars ($1,270,000), subject to all normal prorations and
apportionments of costs, taxes, etc. between purchaser and seller as generally
done in such transactions in such geographic area. The appraisal shall be
performed by an MAI appraiser, approved by the current shareholders of Banner.
THI shall pay the cost of such appraisal.
8. PRE-CLOSING COVENANTS OF THI
8.1 Satisfaction of Conditions by THI. THI hereby covenants and agrees
with Banner that, between the date of this Agreement and the Closing Date or
date of termination of this Agreement, as the case may be, THI shall use its
best efforts to assure that the conditions set forth in Article 11 hereof are
satisfied by the Closing Date.
8.2 Confidentiality. Prior to the Closing, THI shall keep confidential any
and all information furnished to it by Banner in the course of negotiations,
except (i) to the extent any such information must be disclosed to any lenders
interested in the transaction, (ii) to the extent such information must be
disclosed to comply with the applicable securities laws, rules and regulations,
and (iii) for information that is available to THI from sources other than
Banner without violating the law. If for any reason the Closing shall not occur,
THI, to the extent such information has not then already been publicly
disclosed, shall continue to keep such information confidential, to the extent
that it is protectable by law, and shall not use it and shall immediately return
and cause all of its advisors, representatives and other parties over which it
has control to return to Banner all documents or other written materials
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regarding Banner and any copies thereof obtained from Banner or made by it
through Banner during the course of the negotiations.
9. POST-CLOSING COVENANTS
9.1. Further Assurances. After the Closing hereunder, Banner shall take all
necessary actions to formally change its name and to deliver to THI any
necessary documents to enable THI to fully utilize such names as part of the
Rights. Banner and its shareholders shall use their best efforts to acquire or
provide THI with the transition of any governmental licenses necessary for THI
to operate the Business. Banner, at the request of THI, also shall execute,
acknowledge and deliver to THI, without further consideration, all such further
assignments, conveyances, endorsements, deeds, powers of attorney, consents and
other documents (together with the instruments referred to in Section 1.3,
referred to herein collectively as the "Ancillary Documents") and take such
other action as THI may reasonably request (a) to transfer to and fully vest in
THI, and protect THI's right, title and interest in and to all of Banner's
right, title and interest in and to the Assets, and (b) otherwise to consummate
the transactions contemplated by this Agreement.
9.1.1 THI will provide to the shareholders of Banner reasonable
access to any records of Banner's business which is in THI's possession and
which will assist Banner and its shareholders in responding to or complying
with any tax audit or other governmental inquiry or which may be necessary
in connection with any litigation by or against Banner and its shareholders
and relating thereto.
9.1.2 THI will use its best efforts to maintain licenses in good
standing under the applicable laws and regulations administered by the
United States Department of Agriculture, the Florida Department of
Agriculture or other similar federal, state or other governmental agency
having regulatory jurisdiction over Banner, its business or the Assets.
9.1.3 After the Closing, during the term of the Employment Agreement
of Manuel Jimenez, THI shall not acquire or establish a business which
competes with the Business, unless such business is made a part of the
Business.
9.1.4 THI will use its best efforts to assist Messrs. Foyo and
Teijeiro in obtaining releases of their respective guaranties relating to
the First Union Line of Credit.
9.2 Confidentiality. (a) Banner shall use its best efforts to keep
confidential any and all information concerning THI and its principals and
Affiliates, except for information that may be available from sources generally
available to the public. If for any reason the
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Closing shall not occur, Banner will continue to use its best efforts to keep
the information concerning THI and its principals and Affiliates confidential
and will not use it for any purpose and will return to THI all documents or
other written materials and any copies thereof obtained or made by it during the
course of the negotiations concerning THI and its principals and Affiliates.
(b) THI shall use its best efforts to keep confidential any and all
information concerning Banner and its principals and Affiliates, except for
information that may be available from sources generally available to the
public. If for any reason the Closing shall not occur, THI will continue to use
its best efforts to keep the information concerning Banner and its principals
and Affiliates confidential and will not use it for any purpose and will return
to Banner all documents or other written materials and any copies thereof
obtained or made by it during the course of the negotiations concerning Benner
and its principals and Affiliates.
9.3 Cooperation. Banner shall cooperate with THI in arranging or
participating in meetings between THI and employees, suppliers, customers,
agents, distributors and others who have or have had a business relationship
with Banner, at times that are non-injurious in a material way to the operations
of Banner.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THI
The obligations of THI pursuant to this Agreement are subject to the
satisfaction at the Closing of each of the following conditions, any or all of
which conditions may be waived by THI in its sole discretion:
10.1 Accuracy of Representations and Warranties. All representations and
warranties made by Banner (contained in this Agreement, any Exhibit or Schedule
hereto, or any certificate or instrument delivered to THI or its representatives
by Banner or its representatives) shall be true on and as of the Closing Date
with the same force and effect as though made on and as of the Closing Date
(i.e., with respect to representations that a state of facts exists on or as of
the date hereof, it is a condition that such state of facts exists on or as of
the Closing Date; and with respect to a representation that a state of facts has
or has not changed between a date prior to the date hereof and the date hereof,
it is a condition that such state of facts has or has not changed between such
prior date and the Closing Date), except as affected by transactions
contemplated hereby.
10.2 Performance of Agreements. Banner shall have performed and complied
with all covenants, obligations and agreements, including but not limited to
those set forth in
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Section 3.4 of this Agreement, to be performed or complied with by them on or
before the Closing Date pursuant to this Agreement.
10.3 Litigation, Etc.
10.3.1 Except as set forth on Exhibit 5.18, no claim, action, suit,
proceeding, arbitration, investigation or hearing or note of hearing shall
be pending or threatened against or affecting THI, Banner or any of the
Assets, which (a) might result either in an action or enjoin or prevent the
consummation of the transactions contemplated by this Agreement; (b) in the
reasonable judgment of THI would materially adversely affect the Business
or the ability of THI to consummate the transactions contemplated by this
Agreement or to own the Assets or to operate the Business.
10.3.2 Banner shall not be in violation of any law, statute,
ordinance, rule, regulation or executive order, the enforcement of which
would, individually or in the aggregate, materially adversely affect the
Assets or the Business; or which would individually or in the aggregate,
materially adversely affect the ability of THI to consummate the
transactions contemplated by this Agreement or to operate the Business.
10.3.3 No law, regulation or decree shall have been proposed,
adopted or promulgated, or have become effective, the enforcement of which
would materially adversely affect the ability of THI to consummate the
transactions contemplated by this Agreement or to operate any such
business.
10.4 Approvals and Consents. Banner shall have obtained, and THI shall
have received copies of, all of the approvals and consents referred to in
Section 7.2, each of which approvals and consents shall be in full force and
effect and reasonably satisfactory in form and substance to THI and its counsel.
10.5 Officer's Certificate. THI shall have received an accurate
certificate, dated the Closing Date, of the President of Banner dated as of the
Closing Date, stating, among other things, that he is not aware of any material
omissions or facts that would materially alter any of the Financial Statements,
nor is he aware of any facts or factors that are reasonably likely to occur, or
if known to other parties, that could have a material adverse effect on the
financial condition, business, operations, Assets, liabilities, management or
prospects of Banner.
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10.6 Active Status Certificate. THI shall have received (a) a certificate
of the Secretary of State of Florida, dated within 30 days before the Closing
Date, certifying that the status of Banner is active.
10.7 No Material Adverse Change. THI shall confirm in good faith and its
reasonable discretion that there have been no material adverse changes in the
financial condition, business, operations, assets, liabilities, management or
prospects of Banner, and that the unaudited net tangible working capital of
Banner as of May 31, 1998 is no less than its audited net tangible working
capital as of December 31, 1997. "Net tangible working capital" shall have the
meaning ascribed to such term under generally accepted accounting principles as
applied to Banner's industry.
10.8 Actions, Proceedings, Etc. All actions, proceedings, instruments and
documents required to carry out the transactions contemplated by this Agreement
shall have been completed in a manner reasonably satisfactory to THI, such
approval not to be unreasonably withheld.
10.9 Opinion of Counsel to Banner. THI shall have received an opinion of
Kelley Drye & Warren LLP, counsel to Banner, addressed to THI, dated the Closing
Date, to the effect set forth in, and substantially in the form, of Exhibit
10.9.
10.10 Licenses, Permits, Consents, Etc. THI shall have received evidence,
in form and substance reasonably satisfactory to counsel for THI, that such
licenses, permits, consents, approvals, authorizations or orders of governmental
authorities as are necessary to the consummation of the transactions
contemplated by this Agreement and the continued operation of the Business have
been obtained.
10.11 Documentation of Rights. Banner shall have delivered to THI true and
complete copies of all of the documentation held by Banner relating to each of
the Rights.
10.12 Employment and Non-Competition Agreements. THI shall have entered
into Employment and Non-Competition Agreements with Manuel Jimenez, Feliciano
Foyo and Joseph Teijeiro in the forms attached hereto as Exhibits 3.4(a), 3.4(b)
and 3.4(c), respectively.
10.13 Officers' Financial Certificate. THI shall have received an accurate
certificate as set forth in Exhibit 10.13 from the President and Secretary of
Banner, dated as of the Closing Date, satisfactory in form and substance to THI
and its counsel, certifying that the 1996 Financial Statements are true and
correct, and fairly present the financial position of Banner during that interim
period.
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10.14 THI Financing Commitment. One day prior to signing this Agreement,
THI shall have secured binding commitments, satisfactory to it for not less than
One Million Eight Hundred Thousand Dollars ($1,800,000) principal amount of
equity, loans or other financing, the proceeds of which will fund at Closing
some or all the cash consideration to Banner provided in Section 3.1. Upon
receipt prior to Closing of such binding commitments, THI shall so notify
Banner.
10.15 Deposit; Liquidated Damages. Upon the earlier of, signing this
Agreement or THI's funding the Home Meal Replacement Project , THI shall have
delivered a deposit of One Hundred Eighty Thousand Dollars ($180,000)[the
"Initial Deposit"] to Banner's attorney, as listed in Section 13.6 ("Banner's
Attorney"), representing an irrevocable, non-refundable deposit under this
Agreement. If the transaction contemplated by this Agreement does not Close by
June 30, 1998, the Initial Deposit shall be paid to Banner; provided however,
THI shall be entitled to extend the Closing until July 15, 1998, upon the
payment and receipt by June 30, 1998, of an additional irrevocable, non-
refundable deposit of One Hundred Thousand Dollars ($100,000)[the "Second
Deposit", the Initial Deposit and the Second Deposit are collectively referred
to as the "Deposit"] to Banner's Attorney. If the Closing takes place the
Deposit shall be applied to the Purchase Price due under Section 3.1. If the
Closing does not take place by close of business on July 15, 1998,(or July 31,
1998, in the event that the deadline is extended as permitted below) the entire
Deposit shall be paid to Banner and the parties shall have no further
obligations hereunder except for the return of information. The only exception
to the deadline set forth above is where THI fails to Close by reason of a delay
in the bank financing. In that case, THI may furnish a letter of assurance from
the bank stating that financing is forthcoming and the delay is due solely to
bank procedures. If THI provides such letter to Banner, the deadline for Closing
will be extended from July 15, 1998, to a date by which the bank estimates
financing will be completed; however, such date shall be no later than July 31,
1998.
10.16 Lease/Option on Real Property. THI shall have received a duly
executed "triple net" Lease and Option to Purchase the building and real estate
located at 6601 N.W. 37th Avenue, Hialeah, Florida, in the form attached hereto
as Exhibit 10.16.
10.17 Completion of Due Diligence. To THI's sole satisfaction, THI shall
have received sufficient information and access to such information on a timely
basis regarding Banner. As of the date of this Agreement, certain Exhibits or
Schedules required of Banner to be attached hereto have not yet been prepared or
assembled. Receipt and approval by THI and its counsel in THI's sole discretion
at or prior to Closing of all Exhibits and Schedules hereto is a further
condition to the obligations of THI hereunder and the Closing hereof.
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Provided, however, Banner shall be entitled to receive the Deposit if Closing
does not take place as provided in Section 10.15 above.
11. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BANNER
The obligations of Banner under this Agreement are subject to the
satisfaction at the Closing of each of the following conditions, any or all of
which conditions may be waived by Banner in its sole discretion.
11.1 Accuracy of Representations and Warranties. All representations and
warranties by THI in this Agreement shall be true as of the Closing Date with
the same force and effect as though made on and as of the Closing Date.
11.2 Performance of Agreements. THI shall have performed and complied in
all material respects with all covenants, obligations and agreements to be
performed or complied with by it on or before the Closing Date pursuant to this
Agreement.
11.3 Secretary's Certificate. Banner shall have received a certificate
from THI, substantially in the form of Exhibit 11.3, dated the Closing Date.
11.4 Actions, Proceedings, Etc. All actions, proceedings, instruments and
documents required to carry out the transactions contemplated by this Agreement
shall have been completed in a manner reasonably satisfactory to Banner and
approved by its counsel, including but not limited to securing the appropriate
approval(s) and/or license(s) under the applicable laws and regulations
administered by the United States Department of Agriculture, the Florida
Department of Agriculture, or other similar federal, state or other governmental
agency having regulatory jurisdiction over Banner, the Business or the Assets;
and such counsel to Banner shall have been furnished with such other instruments
and documents as they shall have reasonably requested.
11.5 No Injunction. No third party injunction, stay or restraining order
shall be in effect prohibiting the consummation of the transactions contemplated
hereby.
11.6 Opinion of Counsel to Buyer. Banner shall have received an opinion of
Fishman, Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C., counsel to
THI, addressed to Banner, dated as of the Closing Date, to the effect set forth
in, and substantially in the form, of Exhibit 11.6.
11.7 Completion of Schedules and Exhibits. As of the date of this
Agreement, certain Exhibits or Schedules required of THI to be attached hereto
have not yet been prepared or assembled. Receipt and approval by Banner and its
counsel, in Banner's sole
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discretion, at or prior to Closing, of all such Exhibits and Schedules hereto is
a further condition to the obligations of Banner hereunder and the Closing
hereof. Provided, however, Banner shall be entitled to receive the Deposit if
Closing does not take place as provided in Section 10.15 above.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
12.1 Survival. The representations and warranties set forth in this
Agreement, in any Exhibit or Schedule hereto and in any certificate or
instrument delivered in connection herewith shall survive for a period of one
(1) year after the Closing Date and shall thereupon terminate and expire and
shall be of no force or effect thereafter, except (i) with respect to any
material claim, written notice of which shall have been delivered to THI or
Banner, as the case may be, such claim shall survive the termination of such
period and shall survive for as long as such claim is unsettled, and (ii) with
respect to any litigation which shall have been commenced to resolve such claim
on or prior to such date. For purposes hereof, a material claim shall mean a
claim or claims aggregating $25,000 or more, individually or in the aggregate.
12.2 Indemnification by Banner. Subject to the limitations set forth in the
last sentence of Section 12.1, Banner hereby covenants and agrees with THI that,
regardless of any investigation made at any time by or on behalf of THI or any
information THI may have and, regardless of the Closing hereunder, Banner shall
indemnify THI and Banner and its respective directors, officers, employees,
representatives and Affiliates of THI, and each of their successors and assigns
(individually, a "THI Indemnified Party"), and hold them harmless from, against
and in respect of any and all costs, losses, claims, liabilities, fines,
penalties, damages and expenses (including interest which may be imposed in
connection therewith, court costs and reasonable fees and disbursements of
counsel) incurred by any of them resulting from any misrepresentation, breach of
warranty or nonfulfillment of any agreement, covenant or obligation by Banner
made in this Agreement (including without limitation any Exhibit hereto and any
certificate or instrument delivered in connection herewith) any taxes of any
kind whatsoever, or expenses, interest or penalties relating thereto, including
those that arise out of or result from the transactions contemplated by this
Agreement, other than taxes relating to the conduct of the Business after the
Closing Date.
If, by reason of the claim of any third party relating to any of the
matters subject to indemnification under this Section 12.2, a lien, attachment,
garnishment or execution is placed upon any of the property or assets of any THI
Indemnified Party, Banner shall promptly furnish an indemnity bond reasonably
satisfactory to THI to obtain the prompt
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release of such lien, attachment, garnishment or execution. THI shall be
entitled to reduce any amounts it owes to Banner in the amount owed to it by
Banner under this Section 12.2.
12.3 Indemnification by THI. Subject to the limitations set forth in the
last sentence of Section 12.1, THI hereby covenants and agrees with Banner that
THI shall indemnify Banner and its respective directors, officers, employees,
representatives and Affiliates of Banner and each of their successors and
assigns (individually, a "Banner Indemnified Party") and hold them harmless
from, against and in respect of any and all costs, losses, claims, liabilities,
fines, penalties, damages and expenses (including interest which may be imposed
in connection therewith and court costs and reasonable fees and disbursements of
counsel) incurred by any of them resulting from (i) the conduct of the
operations of Banner subsequent to the Closing, and (ii) any misrepresentation,
breach of warranty or the nonfulfillment of any agreement, covenant or
obligation by THI made in this Agreement (including without limitation any
Exhibit hereto and any certificate or instrument delivered in connection
herewith).
If, by reason of the claim of any third party relating to any of the
matters subject to indemnification under this Section 12.3, a lien, attachment,
garnishment or execution is placed upon any of the property or assets of any
Banner Indemnified Party, THI shall promptly furnish an indemnity bond
reasonably satisfactory to Banner to obtain the prompt release of such lien,
attachment, garnishment or execution. Banner shall be entitled to reduce any
amounts it owes to THI in the amount owed to it by THI under this Section 12.3.
12.4 Right to Defend. If the facts giving rise to any such
indemnification shall involve any actual claim or demand by any third party
against a THI Indemnified Party or Banner Indemnified Party (referred to
hereinafter as an "Indemnified Party"), the indemnifying parties shall be
entitled to notice of and entitled (without prejudice to the right of any
Indemnified Party to participate at its own expense through counsel of its own
choosing) to defend or prosecute such claim at their expense and through counsel
of their own choosing if they give written notice of their intention to do so no
later than the time by which the interest of the Indemnified Party would be
materially prejudiced as a result of its failure to have received such notice;
provided, however, that if the defendants in any action shall include both the
indemnifying parties and an Indemnified Party, and the Indemnified Party shall
have reasonably concluded that counsel selected by the indemnifying parties has
a conflict of interest because of the availability of different or additional
defenses to the Indemnified Party, the Indemnified Party shall cooperate fully
in the defense of such claim and shall make available to the indemnifying
parties pertinent information under its control relating thereto. THI shall
notify Banner within five (5) business days of its becoming aware of any matters
or claims for which it might seek indemnification hereunder and provide
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Banner with copies of complaints, citations, notices and responses made in
connection therewith. Failure to provide such notice shall be a waiver of rights
to indemnification.
12.5 Subrogation. If the Indemnified Party receives payment or other
indemnification from the indemnifying party hereunder, the indemnifying party
shall be subrogated to the extent of such payment or indemnification to all
rights in respect of the subject matter of such claim to which the Indemnified
Party may be entitled, to institute appropriate action for the recovery thereof,
and the Indemnified Party agrees reasonably to assist and cooperate with the
indemnifying party at no expense to the Indemnified Party in enforcing such
rights.
13. MISCELLANEOUS
13.1 Expenses. Except as and to the extent otherwise provided in this
Agreement, whether or not the transactions contemplated by this Agreement are
consummated, Banner and THI shall each pay their own respective expenses and the
fees and expenses of their respective counsel and other experts.
13.2 Termination of Agreement. This Agreement may be terminated and the
transaction contemplated hereby may be abandoned at any time, but not later than
the Closing Date:
(a) by mutual consent of the parties; or
(b) by Banner or THI if, through no material fault of such party so
electing to terminate, the Closing shall not have occurred on or prior to
July 15, 1998, subject to the provisions of Section 10.15 above.
In the event of the termination of this Agreement by any party as above
provided, without material fault of any party, no party shall have any liability
hereunder, including any liability for damages. In the event that a condition
precedent to a party's obligation is not met, nothing contained herein shall be
deemed to require any party to terminate this Agreement rather than to waive
such condition precedent and proceed with the Closing.
13.3 Waivers. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, covenant or agreement contained herein or in any other documents. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any
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subsequent breach. Any party hereto may, at or before the Closing, waive any
conditions to its obligations hereunder which are not fulfilled.
13.4 Binding Effect; Benefits. This Agreement shall inure to the benefit
of the parties hereto and shall be binding upon the parties hereto and their
respective successors and assigns. Except as otherwise set forth herein, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement.
13.5 Assignment. Without limitation, and without the consent, prior,
written or otherwise, of Banner, this Agreement and all of the rights and
obligations hereunder may be assigned by THI to any entity owned or controlled
by, or affiliated with it. Banner shall consent in writing to any such
assignment. Upon such assignment, THI shall not be released from any obligation,
of any kind or nature, under this Agreement and shall remain fully liable for
the obligations of any such assignment under this Agreement.
13.6 Notices. All notices, requests, demands and other communications
which are required to be or may be given under this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
upon receipt when transmitted by facsimile or telex or after dispatch by
certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to THI, to:
Terrace Holdings, Inc.
1351 N.W. 22nd Street
Pompano Beach, Florida 33069
Facsimile: 954-917-7270
With a copy to:
Gerald L. Fishman, Esq.
Fishman, Merrick, Miller, Genelly,
Springer, Klimek & Anderson, P.C.
125 South Wacker Drive
Suite 2800
Chicago, Illinois 60606
Facsimile: 312-726-2649
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If to Banner, to:
Banner Beef and Seafood Co., Inc.
1111 N.W. 21st Terrace
Miami, Florida 33127
Facsimile:
With a copy to:
Ignacio G. Sanchez, Esq.
Kelley Drye & Warren, LLP
2400 Miami Center
201 South Biscayne Blvd.
Miami, Florida 33131
Facsimile:
13.7 Entire Agreement. This Agreement (including the Exhibits hereto) and
the Ancillary Documents constitute the entire agreement and supersede all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof and supersede all prior agreements,
representations, warranties, statements, promises and understandings, whether
written or oral, with respect to the subject matter hereof. No party hereto
shall be bound by or charged with any written or oral arguments,
representations, warranties, statements, promises or understandings no
specifically set forth in this Agreement or in any Exhibit hereto or any
Ancillary Documents, or in certificates and instruments to be delivered pursuant
hereto on or before the Closing.
13.8 Headings; Certain Terms. The section and other headings contained in
this Agreement are for reference purposes only and shall not be deemed to be a
part of this Agreement or to affect the meaning or interpretation of this
Agreement. As used in this Agreement, the term "including" means "including, but
not limited to" unless otherwise specified; the word "or" means "and/or," and
the word "person" means and refers to any individual, corporation, trust,
partnership, joint venture, government or governmental authority, or any other
entity; and the plural and singular forms are used interchangeably.
13.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed, shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
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13.10 Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida, without giving effect to the choice of law
principles or rules thereof.
13.11 Severability. If any term or provision of this Agreement shall to
any extent be invalid or unenforceable, the remainder of this Agreement shall
not be affected thereby, and each term and provision of the agreement shall be
valid and enforced to the fullest extent permitted by law.
13.12 Amendments. This Agreement may not be modified or changed except by
an instrument or instruments in writing signed by the party or parties against
whom enforcement of any such modification or amendment is sought.
13.13 Disclosures. Any disclosure by either party hereto pursuant to any
specific provision of this Agreement shall be deemed a disclosure for all other
purposes of this Agreement.
13.14 Section References. All references contained in this Agreement to
any section number are references to sections of this Agreement unless otherwise
specifically stated.
13.15 Brokers and Finders. Each party represents and warrants there are
no brokers, finders or similar persons to whom compensation will be due or owing
as a result of consummation of the transactions contemplated by this Agreement
and each party hereby agrees to indemnify and hold the other party harmless
against any such claims. Banner acknowledges that it is obligated to pay a five
percent (5%) commission to KEV BRI, Inc., which shall share said commission on a
50/50 basis with Sky Foods, Inc. Banner knows of no other broker or salesperson.
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IN WITNESS WHEREOF, the parties hereto have signed this Agreement, or have
caused this Agreement to be signed in their respective names by an officer
thereunder duly authorized, as of the date first above written.
TERRACE HOLDINGS, INC.
By:______________________________________
___________________________, President
BANNER BEEF AND SEAFOOD, CO., INC.
By:______________________________________
___________________________, President
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