<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A-2
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required) for the fiscal year ended December 31, 1997.
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) for the transition period from _________________
to ___________________
Commission file number 0-27132
-----------------------------------------------------
Terrace Holdings, Inc.
------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 65-0594270
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1325 N.W. 22nd Street, Pompano Beach, Florida 33069
- --------------------------------------------- -------------------
(Address of Principal Executive Office) (Zip Code)
(954) 917-7272
----------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
<S> <C>
_____________________________________ _____________________________________
_____________________________________ _____________________________________
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
- --------------------------------------------------------------------------------
(Title of Class)
Redeemable Common Stock Purchase Warrants
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
-------------- ---------------
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year. $8,929,464.
Aggregate market value of the voting stock held by non-affiliates computed
by reference to the price of which the stock was sold, or the average bid and
asked prices of such, as of a specified date within the past 60 days. The
aggregate market value on June 29, 1998: $7,576,125.
As of December 31, 1997, the total number of shares of common stock
outstanding: 5,006,400.
This is page 1 of 26 sequentially numbered pages.
<PAGE>
PART I
------
Item 1 - Description of Business
- --------------------------------
(a) Business Development
- -------------------------
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. As of the date of this filing, the Registrant has
three wholly-owned operating subsidiaries, having sold two in the "hospitality"
group and two in the "food services and distribution" group in the first quarter
of 1998. 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 Registrant's kosher, casual dining restaurant.
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
Registrant 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
Registrant'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 Registrant
acquired the assets and related liabilities of A One A Wholesale's affiliate,
Fresh, Inc. Both corporations were unaffiliated with the Registrant. 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 Registrant'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 Registrant'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
Registrant, which manufactures and markets frozen desserts under the names
Deering Ice Cream and Howard Johnson, as well as co-packing for approximately 15
other unaffiliated companies. The Registrant also issued warrants to purchase
250,000 shares at $1.1875 to 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 Phillips, a
director of the Registrant, in recognition of his efforts successfully to
negotiate and consummate the acquisition. In December, 1997, however, the
Registrant consummated the sale of the assets and certain liabilities of its
wholly-
2
<PAGE>
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. Further, based on
post-closing accounting, the Company has released to the buyer the $200,000 of
the purchase price held in escrow and is in discussions with the buyer to
finalize the purchase price. The Registrant presently estimates it may have to
refund approximately $50,000 more of the purchase price. During the relatively
short period in which the Registrant owned and operated Deering Ice Cream, Inc.,
it became evident that the Registrant could not effect profitable operations
there without a substantial increase in the commitment of financial resources to
frozen dessert manufacturing, which resources have not been available to the
Registrant. Additionally, the Registrant's management determined that
concentrating on food distribution and processing would better serve its overall
goals over time. Accordingly, management determined to dispose of its frozen
dessert manufacturing operations as soon as practicable 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 Registrant will be
successful in accomplishing this.
In August, 1997, the Registrant guaranteed payment on a Loan and Security
Agreement between Foothill Capital Corporation of Mechanicsville, Virginia and
the Registrant'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 $3,200,000, 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 Registrant's guaranty
was adjusted accordingly.
Hospitality
Restaurant. From October, 1993 through May, 1995, the founders of the
Registrant 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
Registrant opened a new restaurant, "Terrace Oceanside Restaurant", in
Hallandale, Florida. The Registrant's initial plan was to establish a chain of
kosher restaurants, which were to be called Terrace restaurants, along the
Eastern seaboard and possibly later in the Midwestern United States. During
1996, however, management of the Registrant determined that the economic
feasibility of opening additional kosher Terrace restaurants would be more
difficult, both on an economic and management/employee basis, than earlier
anticipated and decided, instead, to seek possible acquisitions of going
concerns in the food - or food distribution - related industries.
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 "Subsequent Events."
Food and Beverage Management. The Registrant, until March 13, 1998,
through its wholly-owned subsidiary, A&E Management Corp., managed a non-kosher
restaurant and catering
3
<PAGE>
operation at The Club at Emerald Hills, an upscale country club in Hollywood,
Florida. See "Subsequent Events."
Holiday Vacations. In 1989, the Registrant began operating a kosher
Passover holiday vacation venue at the Bonaventure Resort & Spa, now known as
the Wyndham Resort & Spa, in Fort Lauderdale, Florida. Passover occurs each
spring and the Registrant takes over the entire Registry Resort & Spa for the
Passover holiday season. See "Subsequent Events."
In January, 1996, the Registrant 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 Registrant 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.
During the second half of 1997, the Board of Directors of the Registrant
determined that its initial strategy of attempting to expand by establishing
additional kosher dining facilities and Passover vacation venues geographically
dispersed would entail substantial costs both economically and in executive
personnel. Accordingly, the Board 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
the Board of his intention to acquire those segments. In connection with that
transaction, Dr. Lasko has submitted his resignation as President of the
Registrant effective immediately upon the affirmative vote of the Registrant's
stockholders at its upcoming Annual Meeting ratifying the transaction. In
accordance with the agreement, Dr. Lasko ceased drawing salary from the
Registrant effective as of January 1, 1998.
(b) Businesses of Issuer.
- --------------------------
Food Services and Distribution
A-One-A Produce & Provisions, Inc. Effective July 1, 1997, the
Registrant'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 Registrant
purchased all of the outstanding stock 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 the Registrant's Common Stock to three former shareholders of Fresh,
Inc. Both corporations were unaffiliated with the Registrant. 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 Registrant incorporated Terrace
Fresh, Inc. to operate the business of A-One-A Wholesale's affiliate, Fresh,
Inc. Revenue
4
<PAGE>
in 1996, prior to the Registrant'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
Registrant is the President and Chief Executive Officer of A-One-A Produce.
Produce is purchased on an international basis through approximately six
brokers. All purchases are made on an F.O.B. basis to A-One-A Produce's
warehouse. The Registrant has also recently joined a produce buying co-
operative, Pro*Act, and is currently buying a portion of its requirements
through it. Purchasing is also performed directly with farmers in the Florida
market depending upon seasonal availability. Pricing to customers is set on a
weekly basis in accordance with market conditions. The pricing scheme is very
complex and takes 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 market price as an approximation of cost. Some of the
Registrant's larger customers currently include Boston Market, TGI Friday's,
Darden (Red Lobster and Olive Garden), and Applebee's. No individual customer
accounts for more than 7% of the Registrant's produce sales.
Fresh, Inc. supplies cut produce to A-One-A Produce's customers 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 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
5
<PAGE>
negotiated in connection with the acquisition of A-One-A Wholesale and Fresh, to
become effective on the property's purchase by the affiliate of Messrs. Davis
and Scarbrough.
In September, 1997, the Registrant 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 $340,000. The business of Bay Purveyors is conducted as part of A-
One-A Produce.
In January, 1998, the Registrant 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
Deering Ice Cream, Inc. In December, 1997, the Registrant'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 Registrant and President of Deering, and Joseph Dane, Controller
of the Registrant and Chief Financial Officer of Deering, resigned their
respective positions with the Registrant.
Under the agreement with Fieldbrook, $200,000 of the purchase price was
placed in escrow for 60 days pending receipt by the parties of an independent
post-closing audit 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 Registrant released the full escrow amount
to Fieldbrook and is currently in discussion to finalize the purchase price
based on the post-closing audit. The Registrant presently estimates it may have
to refund approximately $50,000 more of the purchase price.
The Registrant 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
Registrant cannot estimate whether or if such royalties, if received, will be
material.
Subsequent Events
Sale of Hospitality Segments. In November, 1997, Samuel H. Lasko,
President, notified the Registrant of his intention to exercise his option to
purchase the hospitality subsidiaries of the Registrant at a purchase price
equal to the "fair value" of the subsidiaries. Dr. Lasko's exercise of his
option is subject to the Registrant securing an independent fairness opinion and
the affirmative vote of the majority of the Registrant's shareholders. The
Board of Directors retained an independent accounting, consulting and valuation
firm to render such an opinion and that opinion was acceptable to Dr. Lasko.
Accordingly, on March 12, 1998, the A&E Management, Inc., and The Lasko Family
Kosher Tours, Inc. subsidiaries of the Registrant 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 fairness
opinion received by the Registrant. The
6
<PAGE>
consideration consisted of Dr. Lasko giving up the approximately three years
remaining under his employment agreement with the Registrant (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, Dr. Lasko
agreed to manage the business of The Lasko Companies, Inc. (The Terrace
Oceanside Restaurant) for the Registrant, without fee, until the Registrant
consummates the sale thereof to an unaffiliated third party.
On March 23, 1998, an agreement was entered into under which the restaurant
business will be sold to an unaffiliated third party for an aggregate purchase
price of $90,000. Closing of the sale is scheduled for June 15, 1998. Pending
such closing, Dr. Samuel H. Lasko is managing the restaurant, without fee, on
behalf of the Registrant. If for any reason this sale is not completed, Dr.
Lasko will continue his management of the restaurant until the earlier of
approximately one year or a new buyer is found and purchases the Restaurant.
Advertising And Marketing
The Registrant currently markets its products and services through the use
of mailing lists and various trade publications. The Registrant 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
Registrant's products and services. Depending upon the outcome of any such
marketing evaluations, the Registrant may decide to make changes with respect to
the marketing of its products and services.
Competition
The wholesale fresh produce and grocery businesses are also very
competitive, and the Registrant's subsidiaries face competition from other low-
cost produce providers. However, A-One-A Produce and Fresh strive to maintain
high quality and exceptional service in the market by making quality products
and efficient service its priority.
It must be noted that 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 Registrant is subject to various federal, state and local laws
affecting its businesses. Each of the Registrant'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 Registrant'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.
7
<PAGE>
Employees
The Registrant employs approximately 105 people which includes
administrative, transportation and warehouse personnel, as well as executive
management.
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.
Item 2 - Description of Property
- --------------------------------
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 ten years with three five year
options to extend expiring June 30, 2007, at a rental of approximately $222,000
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 Registrant 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.
Until August 1, 1997, the Registrant leased approximately 2,000 square feet
at 2699 Stirling Road in Ft. Lauderdale, Florida, for use as its executive
offices and reservations center. The Registrant's executive offices are now
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.
Item 3 - Legal Proceedings
- --------------------------
The Registrant is not currently a party to any material legal proceeding.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the fourth quarter of the past fiscal year, the Registrant has not
submitted any matter to a vote of security holders, through solicitation of
proxies or otherwise.
8
<PAGE>
PART II
-------
Item 5 - Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
(a) Market Information. Since the Registrant's initial public offering in
early December, 1995, the Registrant's common stock and common stock purchase
warrants have been and currently are 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 month since the Registrant's initial public offering
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>
Bid Ask
------------ -----------
Type of Security Quarter Ended High Low High Low
- ---------------- ------------- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
Common Stock December 29, 1995/(1)/ 6 1/8 2 1/4 7 1/8 4 1/4
High/(2)/ Low/(2)/
--------- --------
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
December 31, 1997 2 11/16 1 1/8
Quarter Ended High Low High Low
------------- ---- ---- ---- ---
Warrants December 29, 1995/(1)/ 1 1/2 3/4 2 1 1/2
High/(2)/ Low/(2)/
--------- --------
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
</TABLE>
- ----------------------------
/(1)/ Includes only the period December 6, 1996 through December 29, 1996.
/(2)/ In February, 1996, NASDAQ changed its reporting system to no longer
including Bid and Ask amounts; therefore, the prices shown for these
dates only reflect the High and Low actual sales price.
9
<PAGE>
Holders
As of January 7, 1997, there were 40 and 39 holders of record of the
Registrant's Common Stock and Public Warrants, respectively. The Registrant
believes that it has a greater number of shareholders and Public Warrant holders
because the Registrant 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 Registrant 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.
10
<PAGE>
Item 6 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations:
- ----------------------
Terrace Holdings, Inc. (Consolidated)
- -------------------------------------
Year ended December 31, 1997, compared to year ended December 31, 1996.
- -----------------------------------------------------------------------
The Registrant'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 Registrant's operating subsidiaries. In
November, 1997, Management and the Board restructured the focus and objective of
the Registrant going forward. A major part of this restructuring included the
concentration on the processing and distribution of produce and other food
related items. The Registrant's plan called for the sale of its ice cream and
hospitality units. 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 underperformance of the ice cream unit due to increased cost
associated with production as well as increased selling, general, and
administrative costs.
In addition, the Registrant incurred losses from its A-One-A Produce and
Provisions, Inc. subsidiary in the six-months it owned the Registrant in 1997.
These losses were due primarily to costs associated with its moving into its new
facility and increased labor costs. See Below.
Continuing Operations:
- ----------------------
A-One-A Produce & Provisions, Inc., the Registrant's subsidiary 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 the company was not part of the Registrant's organization. For the
other 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
the increased cost in selling, general, and administrative expenses due to the
Registrant's plan to develop the business in a very aggressive manner. In
addition, the Registrant 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 Registrant has taken steps to increase efficiency,
both with technology as well as internal control in order to overcome initial
inefficiencies and realize greater profitability from its distribution sector.
The Registrant also purchased two small distribution companies in late 1997 to
expand and consolidate with A-One-A's current operation. Management believes
that as it continues to attempt to increase value, both through increased
produce sales as well as varying its product lines, the Registrant will realize
greater profitability.
11
<PAGE>
Discontinued Operations:
- ------------------------
Passover Holiday Segments:
- --------------------------
For the Passover season in 1997, the Registrant operated three venues, the
Registry Resort & Spa in Fort Lauderdale, Florida, the Fontainebleau Hotel in
Miami Beach, Florida, and the Rye Town Hilton in Westchester, New York. Revenue
for this segment was approximately $3,475,000, compared to $3,750,000 in 1996.
The decrease in revenue was a result of the Registrant's decision not to renew
1997 operations at the Tamiment Hotel in Pennsylvania. As a result of non-
operation at this facility, the Registrant expensed the remainder of the
amortized value directly associated with that hotel. The Registrant originally
acquired the contracts to operate vacation venues at the Fontainebleau, Rye Town
Hilton and Tamiment Resort in 1996 for $675,000. The full amount was recorded as
intangible assets. Management decided that the growth and income trend of this
segment was not in the ultimate plans of the Registrant, and accordingly decided
to exit this segment of the Registrant's business. Subsequent to the year ended
December 31, 1997, the Registrant sold these operations retroactive to the
beginning of the year 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 Registrant decided in November, 1997, to dispose of its food service
units. As of the end of fiscal 1997, the Registrant's reported loss for its
A & E Management, Inc. and The Lasko Companies, Inc. subsidiaries was
approximately $98,000 compared to a loss of approximately $189,000 in 1996. The
increase was due primarily to costs associated with the disposal of these
entities. Management's decision to dispose of these entities was primarily based
on the Registrant's inabilities to effectively grow these specific entities. As
mentioned above, while the Registrant has already sold, subject to shareholder
ratification, the A & E Management Corp. subsidiary to Samuel H. Lasko, it
expects to sell the Terrace Oceanside Restaurant, which is the operation of The
Lasko Companies, Inc. subsidiary in the second quarter of 1998. Presently, the
Registrant has entered into a Management Agreement with Samuel H. Lasko, under
which Mr. Lasko will continue to manage the restaurant until such a sale of the
operations is consummated.
Deering Ice Cream, Inc.
- -----------------------
In February, 1997, the Registrant 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 it did not fit into the
Registrant's long term plan of goals and objectives, additionally, the revenues
in the ice cream subsidiary took a downturn. As a result, profitability was not
obtained. In order to overcome these two issues, the Registrant would have had
to infuse substantial funding to compete with some of the larger competition,
and such additional funding, whether in the form of equity capital or debt
financing, did not appear to be reasonably available. Thus, Management felt
concentrating on its distribution and processing entities was a better direction
to take.
12
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Registrant had cash of approximately $(372,000)
and working capital of approximately $(1,050,000). The Registrant, A-One-A
Produce & Provisions, Inc. and Terrace Fresh, Inc. have relied principally on
internally generated funds to fund their working capital needs.
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 Registrant has received a letter of intent from a bank to provide financing
to the Registrant. 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 Registrant 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. Several warrantholders have indicated they
intend to exercise their warrants, once the registration statement is declared
effective. In addition, if so requested by the Registrant, a private investor
has indicated his intent to purchase equity capital in the Registrant if
sufficient proceeds are not realized by the Registrant from such warrant
exercises.
Management believes that actions presently being taken to revise the
Registrant's operating and financial requirements provide the opportunity for
the Registrant to continue as a going concern. However, the success of
management's plans is not assured.
Seasonality:
- ------------
The continuing operations of the Registrant are seasonal due to the increased
business in South Florida during the winter months. However, the Registrant'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.
Item 7 - Financial Statements
- -----------------------------
The financial statements to this Form 10-KSB are attached commencing on
Page F-1.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
The Registrant did not have any changes in, or any material disagreements
on accounting and financial disclosure with, its accountants in fiscal 1997.
13
<PAGE>
PART III
--------
Item 9 - Directors, Executive Officers. Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act
- -------------------------------------------------
As of December 31, 1997, the Registrant's directors and executive officers
were:
<TABLE>
<CAPTION>
Name Age Position Held
<S> <C> <C>
Dr. Samuel H. Lasko/(1)/ 52 President, Treasurer and Director
Jonathan S. Lasko 26 Executive Vice-President, Secretary, Chief
Operating Officer and Director
Bruce S. Phillips 54 Director
Steven Shulman 56 Chairman of the Board of Directors and Chief
Executive Officer
Richard Power 48 Director
Bernard Rubin, M.D. 49 Director
Fred A. Seigel/(2)/ 42 Director
</TABLE>
______________________________
/(1)/ In connection with the sale of the "hospitality" businesses, in
March, 1998, Dr. Lasko has resigned as an officer of the Registrant
effective on the ratification of the sale by the Registrant's shareholders
(later this year). Dr. Lasko has also advised that he will not stand for
re-election as a director at that time.
/(2)/ Elected a director on February 18, 1998, to fill the vacancy caused by the
resignation of Milton Namiot. See Item 10, "Executive Compensation," Note
6.
Directors are elected on an annual basis. All directors of the Registrant
hold office until the next annual meeting of the shareholders or until their
successors are elected and qualified. At present, the Registrant'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 as of February 17,
1997, there have been seven directors. The Registrant'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 Registrant 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
14
<PAGE>
Registrant and one of its directors, and the brother-in-law of Bruce S.
Phillips, a director of the Registrant.
JONATHAN S. LASKO, age 26, has been a director of the Registrant since
September, 1994, and its Chief Operating Officer and Secretary since August,
1995. He has also been the Registrant'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
Registrant, Mr. Lasko was a part-time employee of the Registrant and managed its
food and beverage operations for its Passover holiday vacation. Mr. Lasko is
the son of Dr. Samuel H. Lasko, the President and Treasurer of the Registrant
and one of its directors, and the nephew of Bruce S. Phillips, a director of the
Registrant.
BRUCE S. PHILLIPS, age 54, has been a director of the Registrant 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
Registrant and its President and Treasurer, and the uncle of Jonathan S. Lasko,
a director of the Registrant and its Executive Vice-President, Secretary and
Chief Operating Officer.
STEVEN SHULMAN, age 56, 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 Registrant.
RICHARD POWER, age 48, has been the President of Carlisle Plastics, Inc., a
division of Tyco International Ltd., a New York Stock Exchange listed
corporation, since January, 1997. He served as a consultant to Tyco 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 Registrant.
BERNARD RUBIN, M.D., age 49, was a director of the Registrant from August,
1995, to February 17, 1997, when he voluntarily resigned. He was re-elected a
director at the Registrant'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
15
<PAGE>
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.
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, 1983, 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.
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. The
Registrant anticipates that the Board of Directors will continue to meet at
least four times a year.
Item 10 - 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
Registrant or any of its subsidiaries to the Chief Executive Officer of the
Registrant 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/(2)/ 750,000/(5)/
President and 1996 $125,000 $ 9,517/(3)(4)/
Treasurer 1997 $150,000 $ 22,502/(3)/
Jonathan S. Lasko, 1995 $ 24,592 $ 169,081/(2)/ 750,000/(5)/
Executive Vice 1996 $ 70,000 $ 7,255/(3)/
President, Secretary and 1997 $ 95,000 $ 21,727/(3)/
Chief Operating Officer
Milton Namiot, 1997 $175,000 $ 9,500/(3)/ 125,000/(6)/
Chief Executive Officer/(6)/
</TABLE>
16
<PAGE>
____________________________________________________
/(1)/ Paid by A&E Management Corp. ("A&E").
/(2)/ Represents combined "S" corporation distributions in the nature of
dividends through December 5, 1995, when the Registrant first offered and
sold its securities to the public.
/(3)/ Represents amounts paid for lease of automobile, automobile insurance,
cell phone and health insurance.
/(4)/ Does not include repayments of loans from A&E, The Lasko Companies, Inc.
and the Registrant.
/(5)/ 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 Registrant issued to each of Samuel H. Lasko and
Jonathan D. Lasko warrants to purchase 375,000 shares of the Registrant's
common stock at $1.1875 per share exercisable immediately and expiring
August 31, 2000.
/(6)/ In connection with the sale of the Registrant's Deering Ice Cream, Inc.
business, Mr. Namiot resigned as an officer. He was an officer and
director of the Registrant from February 17, 1997 until the closing of the
Deering transaction. In connection with his resignation, the termination
of this three year employment contract and his release of the Registrant
from the terms thereof, Mr. Namiot was vested with 50% of the options
theretofore granted him, or options to purchase 125,000 shares of the
Registrant's common stock.
17
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
The following table sets forth options exercised by the Registrant's chief
executive officer and the Registrant's two other most highly compensated
executive officers during fiscal 1996, and the number and value of all
unexercised options at year end. The value of "in-the-money" options refers to
options having an exercise price which is less than the market price of the
Registrant's stock at fiscal year-end. On that date, none of the Registrant's
executive officers held exercisable options which were "in-the-money".
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired On Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- --------------------- ------------------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
Milton Namiot/(1)/ --- --- --- ---
Samuel H. Lasko --- --- 0/750,000/(2)/ $0/0
Jonathan S. Lasko --- --- 0/750,000/(2)/ $0/0
</TABLE>
__________________________________________________
/(1)/ Mr. Namiot was not an officer of the Registrant in 1996. He was elected
an officer on February 17, 1997, following the DownEast transaction, and
resigned in December, 1997 following the sale of the Deering business.
/(2)/ Represents options(based on performance by the Registrant) contained in
the Lasko's employment agreements. In connection with the DownEast
acquisition, effective February 17, 1997, each of Messrs. Samuel and
Jonathan Lasko voluntarily surrendered their respective right to these
options and, in lieu thereof, the Registrant issued to each of Samuel H.
Lasko and Jonathan D. Lasko warrants to purchase 375,000 shares of the
Registrant's common stock at $1.1875 per share exercisable immediately and
expiring August 31, 2000.
Employment Agreements and Aggregate Options Holdings
The Registrant 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 Registrant the balance of his employment agreement in partial
consideration of his purchase of the Registrant's "hospitality" segments. See
"Subsequent Events."
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 Registrant
issued to each of Samuel Lasko and
18
<PAGE>
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 Registrant
114,322 of such warrants in partial consideration of his purchase of the
Registrant'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 Registrant 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 Registrant 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
Registrant. As a result of the sale of the Deering business, Mr. Namiot
resigned from his positions as an officer and director of the Registrant.
In connection with the A-One-A transaction, the Registrant 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 Registrant's wholly-
owned subsidiaries A-One-A Produce & Provision, 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 Registrant'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.
The 1997 Stock Option Plan and Participants
The Registrant 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 Registrant's Common Stock, to (i) officers and other full-time
salaried employees of the Registrant and its subsidiaries with managerial,
professional or supervisory responsibilities, and (ii) consultants and advisors
who render bona fide services to the Registrant and its subsidiaries, in each
case, where the Compensation Committee determines that such officer, employee,
consultant or advisor has the capacity to make a substantial contribution to the
success of the Registrant. The number of individuals who currently would be
eligible to receive options pursuant to the Plan is approximately seven. As
used herein with respect to the Plan, references to the Registrant include
subsidiaries of the Registrant.
The purposes of the Plan are to enable the Registrant 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 Registrant by providing them with an equity participation in the Registrant.
The full text of the
19
<PAGE>
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 Registrant'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 Registrant'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
Registrant 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 December 31, 1997, 738,000 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 Registrant, or with Common Stock of the Registrant
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 Registrant, or within
six 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
within the sixth month after the decedent's death. Options expire immediately
in the event an optionee is
20
<PAGE>
terminated with or without cause or resigns; provided, however, in the event the
Registrant terminates the employment of an optionee who at the time of such
termination was an officer of the Registrant and had been continuously employed
by the Registrant 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 Phillips 20,000/(2)/
Richard Power 20,000/(2)/
Milton Namiot/(3)/ 125,000
Joseph Dane/(3)/ 25,000
Hersh Taubenfeld 20,000
Keith Stuart 20,000
Amy Lasko 15,000
Vivien Cypkin 5,000
Other Employees/(4)/ 108,000
-------
TOTAL 738,000
</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. Phillip's and Mr. Power's options, as well as 30,000 of Mr.
Shulman's options, became exercisable at the time they were granted.
(3) In connection with the Registrant's sale of its Deering subsidiary's
business, Messrs. Namiot and Dane are no longer affiliated with the
Registrant. The Registrant's Compensation Committee determined that the
number of options listed became exercisable after consummation of such sale
on such date the options would have been exercisable had Messrs. Namiot and
Dane stayed affiliated with the Registrant. See footnote 8 to "Executive
Compensation" table.
(4) Includes options granted to 17 individual employees of the Registrant's
subsidiaries at an exercise price of $2.31 per share, such options become
exercisable one third per year over three years from the date granted.
21
<PAGE>
Item 11 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table provides information concerning the beneficial
ownership of common stock of the Registrant by each director, certain executive
officers, and by all directors and officers of the Registrant as a group as of
March 1, 1998. In addition, the table provides information concerning the
beneficial owners known to the Registrant to hold more than 5 percent of the
outstanding common stock of the Registrant as of March 1, 1998.
<TABLE>
<CAPTION>
Common Preferred
Stock Stock
Beneficial Percent Beneficial Percent
Name of Beneficial Owner Ownership/(1)/ of Class/(1)(2)/ Ownership of Class
- ------------------------ -------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Dr. Samuel H. Lasko 383,750/(3)/ 7.7% -0- -0-
Jonathan S. Lasko 380,000 7.6% 25,000/(4)/ *
Richard Power 204,154 * 50,000 *
Steven Shulman 346,154 6.9% 50,000 *
Bernard Rubin, M.D. -0- -0- 15,000 *
Fred A. Seigel 64,577 * -0- -0-
Bruce S. Phillips -0- -0- -0- -0-
Milton Namiot/(5)/
All Directors and
Executive Officers
as a Group (6 persons) 1,378,635/(6)/ 27.5% 140,000 9.2%
</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 September 30, 1997.
(3) Includes 3,750 shares held for the benefit of Dr. Lasko's minor child.
(4) Held for the benefit of Jordana Lasko, a minor.
(5) In December, 1997, following the sale of the Deering subsidiary's business,
Mr. Namiot resigned as an officer and director of the Registrant.
(6) Does not include stock options granted. See "1997 Stock Option Plan and
Participants." Also does not include Warrants to purchse Common Stock at a
price of $1.1875 in the following amounts: Samuel H. Lasko - 375,000;
Jonthan S. Lasko - 375,000; Steven Shulman - 36,666.7; Richard Power -
31,666.7; Fred A. Siegel - 15,833.3; Bernard Rubin, M.D. - 20,000; and Bruce
S. Phillips -70,000.
22
<PAGE>
Item 12 - Certain Relationships and Related Transactions
- --------------------------------------------------------
Effective July 1, 1995, A&E Management Corp. ("A&E") and Prime Concern
Kosher Foods, Inc. ("Prime Concern") entered into an agreement whereby A&E
provided certain management services to Prime Concern and acted as the primary
operator of the Deli Maven, Prime Concern's retail kosher delicatessen in Boca
Raton, Florida, for a period of six months for a non-refundable fee of $50,000
payable on the earlier of the closing of the Registrant's public offering or
March 31, 1996. As noted, the Registrant's public offering was closed on
December 11, 1995.
Samuel 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 Registrant's offering. Pursuant
to agreements, the remaining principal of $185,549, together with all accrued
interest, was payable out of the Registrant'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 Registrant issued to each
of Samuel H. Lasko and Jonathan D. Lasko (collectively the "Laskos") warrants to
purchase 375,000 shares of the Registrant's common stock at $1.1875 per share.
Messrs. Laskos surrendered their respective performance options to purchase up
to 750,000 shares of the Registrant'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
Registrant's wholly owned subsidiaries, The Lasko Family Kosher Tours, Inc., The
Lasko Companies, Inc. and A&E Management, Inc. 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, Inc. for consideration equal to $575,000 in accordance with
a "fairness opinion" received by the Registrant 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 ten years with three five year
options to extend expiring June 30, 2007 at an annual rental of approximately
$222,000. 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 Registrant 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 Registrant 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.
23
<PAGE>
Item 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
(3)(i) Articles of Incorporation *
--------------------------------
(3)(ii) By-laws *
---------------
(3)(iii) Instruments defining the rights of holders *
---------------------------------------------------
(10) Material Contracts **
-----------------------
The following Material Contracts are filed herewith:
10.1 Employment Agreement, dated July 1, 1997, between Terrace
Holdings, Inc. and Scott Davis
10.2 Employment Agreement, dated July 1, 1997, between Terrace
Holdings, Inc. and Virgil Scarbrough
10.3 Employment Agreement, dated July 17, 1997, between Terrace
Holdings, Inc. and Kenneth Cohen
10.4 Investment Banking Agreement, dated July 1, 1997 between Terrace
Holdings, Inc. and Biltmore Securities, Inc.
10.5 Asset Acquisition Agreement, dated July 6, 1997 between Terrace
Holdings, Inc. and A One A Wholesale Produce, Inc.
10.6 Stock Purchase Agreement, dated February 2, 1998, between Terrace
Holdings, Inc. and Virgil Scarbrough and Scott Davis
10.7 Sale of Assets Agreement, dated September 1, 1997, between Terrace
Holdings, Inc. and Dry Dock
10.8 Guaranty dated August 7, 1997, by Terrace Holdings, Inc. in favor of
Foothill Capital Corporation
10.9 Agreement to Sell and Purchase, dated as of March 2, 1998, between the
Registrant and Samuel H. Lasko, relating to The Lasko Family Kosher
Tours, Inc. and A&E Management, Inc.
10.10 Management Agreement dated as of March 2, 1998, relating to the
Terrace Oceanside Restaurant
10.11 Terrace Holdings, Inc. 1997 Stock Option Plan
10.12 Asset Purchase Agreement, dated December 31, 1997, between D.M.S. Food
Distributors, Inc. (Gourmet Distributors) and the Registrant
10.13 Form of Contract for Sale of Business between The Lasko Family
Companies, Inc. and Steven Newman, relating to the Terrace Oceanside
Restaurant
10.14 Agreement dated as of June 25, 1998, between Terrace Holdings, Inc.
and Network Funds III, Ltd.
10.15 Asset Acquisition Agreement dated as of June 25, 1998, between Terrace
Holdings, Inc. and Banner Beef & Seafood Co., Inc.
24
<PAGE>
(21) Subsidiaries of the Registrant
-----------------------------------
The Registrant's three operating wholly-owned subsidiaries are:
1. The Lasko Companies, Inc.
2699 Stirling Road
Suite C - 405
Ft. Lauderdale, Florida 33312
2. A One A Produce & Provisions, Inc.
1325 N.W. 22nd Street
Pompano Beach, Florida 33069
3. Terrace Fresh, Inc.
1325 N.W. 22nd Street
Pompano Beach, Florida 33069
(23.1) Consent of Moore Stephens, P.C.
_______________
* Incorporated by this reference to the Registrant's registration statement
#33-96892-A.
** All material contracts presently in full force and effect and heretofore
filed with the Commission are hereby incorporated by this reference to
Registrant's registration statement #33-96892-A, and to Registrant's Form
10-KSB for the year ended December 31, 1995, Commission file number 0-27132.
b) Reports on Form 8-K
The Registrant filed Current Reports on Form 8-K on January 16, 1998 for the
purpose of reporting the consummation of the sale of its Deering Ice Cream
subsidiary to a unaffiliated third party.
25
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
Registrant
By: /s/ Samuel H. Lasko, President
-----------------------------------------------------------------------------
Samuel H. Lasko, President
Date: July 8, 1998
---------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Samuel H. Lasko President and Director July 8, 1998
- --------------------------
Samuel H. Lasko
/s/ Jonathan S. Lasko Executive Vice-President, July 8, 1998
- -------------------------- Secretary, Chief Operating
Jonathan S. Lasko Officer, Principal Financial
Officer and Director
/s/ Bruce S. Phillips Director July 8, 1998
- --------------------------
Bruce S. Phillips
/s/ Richard Power Director July 8, 1998
- --------------------------
Richard Power
/s/ Steven Shulman Director, Principal Executive July 8, 1998
- -------------------------- Officer
Steven Shulman
/s/ Fred A. Siegel Director July 8, 1998
- --------------------------
Fred A. Siegel
/s/ Bernard Rubin, M.D. Director July 8, 1998
- --------------------------
Bernard Rubin, M.D.
/s/ Mario Jacobs Principal Accounting Officer July 8, 1998
- --------------------------
Mario Jacobs
</TABLE>
26
<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 SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
<S> <C>
Current Assets:
Accounts Receivable (Less Allowance for Doubtful Accounts
of $60,000) $1,869,198
Inventories 280,458
Due from Related Party 122,752
Restricted Cash 137,701
Due on Sale of Discontinued Operations 90,000
Other Current Assets 107,823
----------
Total Current Assets 2,607,932
Property and Equipment - Net 665,282
Cost in Excess of Net Assets of Businesses Acquired -
Net of Accumulated Amortization of $88,148 3,639,882
Other Assets 14,246
----------
Total Assets $6,927,342
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C>
Current Liabilities:
Cash Overdraft $ 372,451
Accounts Payable 892,742
Accrued Expenses 805,890
Current Portion of Long-Term Debt 162,370
Line of Credit 1,354,084
Provision for Phase-Out Costs 20,000
Other Current Liabilities 50,000
-----------
Total Current Liabilities 3,657,537
-----------
Long-Term Debt 81,380
-----------
Total Liabilities 3,738,917
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Convertible Preferred Stock, $.001 Par Value, 10,000,000
Shares Authorized, 1,523,825 Shares Issued and Outstanding 1,524
Common Stock - $.001 Par Value, 25,000,000 Shares Authorized,
5,006,400 Issued and Outstanding 5,006
Additional Paid-in Capital 9,075,343
Accumulated Deficit (5,893,448)
-----------
Total Stockholders' Equity 3,188,425
-----------
Total Liabilities and Stockholders' Equity $ 6,927,342
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
----------- -----------
<S> <C> <C>
Net Sales $ 8,929,464 $ --
Cost of Sales 6,853,507 --
----------- -----------
Gross Profit 2,075,957 --
----------- -----------
Operating Expenses:
Selling, General and Administrative Expenses 3,370,480 348,439
Loss on Disposal -- 129,826
Provision for Doubtful Accounts 60,000 --
----------- -----------
Total Operating Expenses 3,430,480 478,265
----------- -----------
(Loss) from Operations (1,354,523) (478,265)
----------- -----------
Other (Expense) Income:
Interest Expense (79,594) --
Interest Income 22,601 19,338
----------- -----------
Total Other (Expense) (56,993) 19,338
----------- -----------
(Loss) From Continuing Operations (1,411,516) (458,927)
Discontinued Operations:
(Loss) from Operations of Discontinued Business
Segments (Net of Income Taxes of $-0-) (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 (Loss) $(4,352,053) $(1,156,027)
=========== ===========
(Loss) Per Share of Common Stock:
(Loss) from Continuing Operations $ (.32) $ (.14)
(Loss) from Operations of Discontinued
Business Segments (Net of Income Tax of $-0-) (.18) (.21)
(Loss) on Disposal of Discontinued Business Segments (.48) --
----------- -----------
Basic and Diluted Net (Loss) Per Share of Common Stock $ (.98) $ (.35)
=========== ===========
Weighted Average Shares of Common Stock Outstanding 4,454,034 3,312,500
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible Additional Total
----------- ---------- -----
Preferred Stock Common Stock 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
========= ====== ========= ====== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
----------- ---------
<S> <C> <C>
Operating Activities:
Net (Loss) from Continuing Operations $(1,411,516) $(458,927)
----------- ---------
Adjustments to Reconcile Net (Loss) to Net Cash
(Used for) Provided by Operating Activities:
Depreciation and Amortization 157,613 --
Stock Based Compensation 180,000 --
Provision for Doubtful Accounts 60,000 --
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (541,699) --
Inventory (102,069) --
Other Current Assets 17,638 --
Other Assets (1,728) --
Increase (Decrease) in:
Accounts Payable 182,082 --
Accrued Expenses 338,955 --
----------- ---------
Total Adjustments 290,792 --
----------- ---------
Net Cash - Continuing Operations - Forward (1,120,724) (458,927)
----------- ---------
Discontinued Operations:
(Loss) From Discontinued Business Segments (2,940,537) (697,100)
Adjustments to Reconcile (Loss) to Net Cash:
Depreciation and Amortization 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 (1,787,219) (165,304)
----------- ---------
Net Cash - Discontinued Operations - Forward (2,572,899) (522,318)
----------- ---------
Investing Activities - Continuing Operations:
Acquisition of Assets (201,744) (179,308)
Purchase of Business - Net of Cash Acquired (3,616,993) --
----------- ---------
Net Cash - Investing Activities - Continuing Operations - Forward (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 (40,933) --
----------- ---------
Net Cash - Investing Activities - Discontinued Operations -
Forward $ 247,967 $(675,000)
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TERRACE HOLDINGS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
----------- -----------
<S> <C> <C>
Net Cash - Continuing Activities - Forwarded $(1,120,724) $ (458,927)
----------- -----------
Net Cash - Discontinued Operations - Forwarded (2,572,899) (522,318)
----------- -----------
Net Cash - Investing Activities - Continuing Operations -
Forwarded (3,818,737) (179,308)
----------- -----------
Net Cash - Investing Activities - Discontinued Operations -
Forwarded 247,967 (675,000)
----------- -----------
Financing Activities - Continuing Operations:
Proceeds from Notes Payable 100,000 --
Payment of Notes Payable (64,467) (10,000)
Payments of Demand Notes Payable - Stockholders and Related Parties -- (185,549)
Proceeds from Line of Credit 1,354,085 --
Restricted Cash (137,701) --
Bank Overdrafts 372,448 --
Proceeds from Issuance of Convertible Preferred Stock 2,673,300 --
Proceeds from Issuance of Common Stock 220,000 --
----------- -----------
Net Cash - Financing Activities - Continuing Operations 4,517,665 (195,549)
----------- -----------
Financing Activities - Discontinued Operations:
Proceeds of Demand Notes Payable 1,175,821 --
----------- -----------
Net (Decrease) in Cash and Cash Equivalents (1,570,907) (2,031,102)
Cash and Cash Equivalents - Beginning of Years 1,570,907 3,602,009
----------- -----------
Cash and Cash Equivalents - End of Years $ -- $ 1,570,907
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 51,093 $ 9,020
Income Taxes $ -- $ --
</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.
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
(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:
Transportation Equipment 7 - 10 Years
Equipment, Furniture and Fixtures 5 - 7 Years
Leasehold Improvements 5 - 10 Years
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-8
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #2
- --------------------------------------------------------------------------------
(1) Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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-9
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #3
- --------------------------------------------------------------------------------
(1) Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Earnings Per Share (Continued) - 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 upper level manager.
F-10
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #4
- --------------------------------------------------------------------------------
(2) Business Acquisitions (Continued)
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>
<CAPTION>
Current Assets:
<S> <C>
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 $4,847,324
---------------------------- ==========
</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,
------------
1 9 9 7 1 9 9 6
------- -------
<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>
F-11
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #5
- --------------------------------------------------------------------------------
(3) Discontinued Operations
(A) Frozen Dessert 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.
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 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>
<CAPTION>
<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 $20,000 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).
F-12
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #6
- --------------------------------------------------------------------------------
(3) Discontinued Operations (Continued)
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.
Assets and liabilities of the Hospitality Group to be disposed of consisted of
the following at December 31 1997:
<TABLE>
<CAPTION>
<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. Several warrantholders have indicated they
intend to exercise their warrants, once the registration statement is declared
effective. 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-13
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #7
- --------------------------------------------------------------------------------
(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>
<CAPTION>
<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-14
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #8
- --------------------------------------------------------------------------------
(9) Long-Term Debt
At December 31, 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
<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
----- ========
Long-term debt at December 31, 1997, matures as follows:
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%.
F-15
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #9
- --------------------------------------------------------------------------------
(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 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).
F-16
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #10
- --------------------------------------------------------------------------------
(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 Amount
- ----------- ------
December 31,
- ------------
<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>
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 $2,637,300 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.
F-17
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #11
- --------------------------------------------------------------------------------
(13) Description of Securities (Continued)
(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.
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.
F-18
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #12
- --------------------------------------------------------------------------------
(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 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-19
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #13
- --------------------------------------------------------------------------------
(14) Stock Option Plan and Warrants (Continued)
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>
1 9 9 7 1 9 9 6
----------- -----------
<S> <C> <C>
Year ended December 31:
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,
------------
1 9 9 7 1 9 9 6
------- -------
<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
-------- -------- --------
Range of Remaining Average Average
-------- --------- ------- -------
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.
F-20
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996, Sheet #15
- --------------------------------------------------------------------------------
(15) New Authoritative Accounting Pronouncements (Continued)
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
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.
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) 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.
. . . . . . . . . . . .
F-21
<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
<PAGE>
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:
8
<PAGE>
(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.
9
<PAGE>
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;
10
<PAGE>
(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
11
<PAGE>
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
12
<PAGE>
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.
13
<PAGE>
(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
14
<PAGE>
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
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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,
18
<PAGE>
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:
---------
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",
1
<PAGE>
"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);
2
<PAGE>
(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
3
<PAGE>
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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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-
8
<PAGE>
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
9
<PAGE>
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;
10
<PAGE>
(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
11
<PAGE>
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
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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
15
<PAGE>
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.
16
<PAGE>
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
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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;
20
<PAGE>
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.
21
<PAGE>
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
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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
25
<PAGE>
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.
26
<PAGE>
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.
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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
33
<PAGE>
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.
34
<PAGE>
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.
35
<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:______________________________________
___________________________, President
BANNER BEEF AND SEAFOOD, CO., INC.
By:______________________________________
___________________________, President
36
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Form 10-KSB/A-2 (File No. 0-27132) of
our report dated March 13, 1998, on our audits of the financial statements of
Terrace Holdings, Inc.
By: /s/ Moore Stephens, P.C.
------------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants
New York, New York
July 6, 1998
