U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(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, 1998.
|_| 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 Food Group, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 65-0594270
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1325 N.W. 22nd Street, Pompano Beach, Florida 33069
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(Address of Principal Executive Office) (Zip Code)
(954) 917-7272
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
Redeemable Common Stock Purchase Warrants
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(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. $31,011,197.
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 stock, as of a specified date within the past 60 days.
The aggregate market value on March 31, 1999: $2,291,685.
As of December 31, 1998, the total number of shares of common stock
outstanding: 948,342.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
(a) Business Development
Terrace Food Group, Inc., a Delaware corporation (the "Registrant"), is
the successor to a company organized in 1989. The Registrant currently has three
wholly-owned operating subsidiaries: A-One-A Produce & Provisions, Inc.
("A-One-A Produce"), a Pompano Beach, Florida-based produce distributor that
sells and distributes fresh fruit and vegetables and "dry" grocery products to
hotels, restaurants, cruise lines and other businesses in the southern Florida
region; Fresh, Inc. ("Fresh"), in Pompano Beach, Florida, which processes and
packages fresh produce principally through A-One-A Produce; and Banner Beef &
Seafood Co., Inc. ("Banner"), a Miami, Florida-based custom value-added
processor of meat, seafood and poultry that manufactures and sells food service
products to retail and discount supermarkets, restaurants, airlines and other
industries. The Registrant acquired the business of Banner in July, 1998. The
Registrant finalized the sale of its "Hospitality" and "Frozen Dessert" segments
in the first half of 1998.
Reverse Split of Common Stock. Effective March 15, 1999, the shareholders
of the Registrant approved a one-for-ten reverse split of the Registrant's
outstanding Common Stock. This reverse split did not affect the number of shares
authorized or its par value. Therefore, unless otherwise stated explicitly, all
per share and share amounts for all periods presented have been adjusted to
reflect this reverse split.
Sale of Frozen Desserts Segment. 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.
Sale of Hospitality Segments. On March 13, 1998, A&E Management Corp. and
The Lasko Family Kosher Tours, Inc., then wholly-owned subsidiaries of the
Registrant, were sold to Dr. Samuel H. Lasko, formerly President of the
Registrant, effective as of January 1, 1998, for consideration aggregating
$575,000 in accordance with an independent fair value opinion. The sale was
ratified by the Registrant's shareholders at the 1998 Annual Meeting.
Additionally, on May 29, 1998, the Registrant sold the business assets and lease
of The Lasko Companies, Inc., which owned and operated The Terrace Oceanside
Restaurant with an unaffiliated third party, for an aggregate sales price of
$90,000 in cash.
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(b) Businesses of Issuer
Food Distribution
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 delivers
seven days per week and its customers typically 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 12 regional sales representatives to ensure
optimum service and communication. A-One-A Produce operates a fleet of 33
delivery trucks, all of which are refrigerated and equipped with two-way radios.
A-One-A Produce was founded in 1987 by Virgil D. Scarbrough and Scott
Davis. Messrs. Scarbrough and Davis are now senior executives of A-One-A Produce
under employment agreements expiring on June 30, 2002. See "Management -
Employment Agreements and Aggregate Options Holdings." Revenue in 1998 for
A-One-A Produce was approximately $27.6 million dollars.
A-One-A Produce employs approximately 154 people.
Mr. Davis is responsible for purchasing, pricing and overall operations.
Mr. Scarbrough generally is responsible for office and personnel administration.
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.
A-One-A Produce is a member of a produce buying co-operative, Pro*Act, and
is currently buying a substantial portion of its requirements through it.
Purchasing is also performed directly from farmers. Pricing to customers is set
on a weekly basis in accordance with market conditions. The Registrant's pricing
formulas are very complex and take into effect a number of qualitative factors.
Pricing is set at a detailed item by item level for each type of produce by
customer. A small number of larger accounts have pricing arrangements that
represent a margin above cost. Some of the Registrant's larger customers
currently include TGI Friday's, Darden (Red Lobster and Olive Garden) and Apollo
Ship Chandlers. No individual customer accounted for more than 10% of the
Registrant's distribution sales during 1998. However, Apollo Ship Chandlers
accounted for more than 10% during the second half of 1998 and is anticipated to
account for 10-15% of 1999 sales.
As of July, 1997, the Registrant acquired the assets and related
liabilities of A-One-A Produce for a purchase price of $3,130,000 in cash and
the issuance of a total of 50,000 shares of Common Stock. Effective January,
1998, the Registrant purchased all of the outstanding stock of A-One-A Produce's
affiliate, Fresh, for $105,000 and 13,895 shares of Common Stock. Fresh supplies
cut produce principally through A-One-A Produce and also to process food
manufacturers directly. In addition, in September, 1997, and in January, 1998,
the Registrant also acquired two smaller
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companies, "Bay Purveyors" and "Gourmet Distributors", which distribute dry
grocery items in the south Florida region. Their businesses are also conducted
as part of A-One-A Produce.
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.
Food Processing and Manufacturing. Banner has been in business since 1965
as a custom value-added processor of meat, seafood and poultry. It manufactures
food products customized to customer specifications for the retail and discount
store, airline, restaurant and other industries. In addition, Banner
manufactures a full line of products for the "Home Meal Replacement" market
which is believed to be one of the fastest growing sectors in the food
processing industry. The Registrant has spent extensive time and resources on
the creation and manufacturing of first class items to meet this demand. Since
Home Meal Replacement has recently taken a leading role in the market, as an
alternative to the traditional uncooked meat and seafood products, Banner's now
provides Home Meal Replacement products as a high quality meal solution. The
Registrant believes this emerging sector will continue to grow at a rapid pace
as the demand for convenient time saving meal opportunities expand even further.
On July 15, 1998, the Registrant acquired substantially all of the assets
and assumed substantially all the liabilities of Banner for an aggregate
purchase price of approximately $2,652,000. The acquisition was financed with a
portion of the funds received through a credit facility with a bank and the
issuance of Convertible Subordinated Notes. In connection with the acquisition
of Banner, the Registrant hired Mr. Manuel Jimenez as a vice president of
Banner. Mr. Jimenez was a shareholder of Banner Beef and Seafood Co., Inc. prior
to its acquisition by the Registrant and was its Chief Operating Officer.
Banner currently employs approximately 92 persons, 13 administrative
personnel and 79 processing, warehousing and similar personnel. There are no
union contracts and management of Banner believes that its labor relations are
good.
Advertising And Marketing
The Registrant currently markets its products and services through its
direct sales force, brokers and agents. The Registrant is evaluating 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 very competitive,
and the Registrant's subsidiaries face competition from other low-cost produce
providers. In addition, the food processing and manufacturing industry is also
very competitive. Some of the large volume processing and manufacturing
competitors have substantially greater capital resources, more
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sophisticated promotional practices and substantially larger and more developed
distribution networks than the Registrant's subsidiaries. However, the
Registrant strives to maintain high quality and exceptional service in the
market by making quality products and efficient service its priority. Food
related businesses are often affected by arbitrary changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the number and locations of competing businesses and employment
trends.
Government Regulation
The 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.
Employees
The Registrant and its subsidiaries employs approximately 283 people which
includes approximately 32 administrative, 47 transportation, 29 sales and
customer service representatives, 170 warehouse and processing personnel and 5
executive management. None of the Registrant's employees are represented by a
union nor have there been any work stoppages.
ITEM 2 - DESCRIPTION OF PROPERTY
A-One-A Produce leases approximately 55,000 square feet at 1351 N.W. 22nd
Street, Pompano Beach, Florida, for use as its principal offices and warehouse.
The building has 24 loading docks (approximately half of which are
refrigerated), 1700 pallet locations and includes 30,000 square feet of
refrigerated warehouse space. The lease term is for ten years expiring July 31,
2007, with three five year options to extend, 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 acquisition of A-One-A Produce.
Fresh leases from an unaffiliated third party approximately 8,000 square
feet at 2001 N.W. 15th Avenue, Pompano Beach, Florida, for its offices,
processing and warehouse. The lease is for a term of five years with an option
to extend for an additional five years at an average annual rental of $70,000.
Fresh may terminate the lease at its option on one year's notice.
In connection with the acquisition of Banner, the Registrant acquired the
land and building at 1111 N.W. 21st Terrace, Miami, Florida, where Banner
maintains processing facilities and offices.
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Banner leases 22,000 square feet at 6601 N.W. 37th Avenue, Hialeah,
Florida, for use as an additional processing facility and warehouse. The lease
term is for five years expiring in 2003, at a rental of approximately $128,000
per year. During the term of the lease, Banner has an option to purchase this
property for the lesser of $1,270,000 or its independently appraised value,
provided it is not in breach of the lease. The owners of this real estate are
the two former principal shareholders of the Banner business, prior to its sale
to the Registrant, each of whom has executed a non-competition agreement with
the Registrant.
The Registrant's executive offices are located in the A-One-A Produce
facility in Pompano Beach, Florida. Management believes that the above
facilities will be sufficient for its operations for the reasonably 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 did not
submit any matter to a vote of security holders, through solicitation of proxies
or otherwise.
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Until the close of business September 29, 1998,
the Registrant's Common Stock and common stock purchase warrants were listed on
the NASDAQ SmallCap Market. Since September 30, 1998, the Registrant's
securities have been traded on the NASDAQ Electronic Bulletin Board.
Set forth below is the range of high and low sales prices of the Common
Stock and Warrants for each quarter for the last two fiscal years as reported by
NASDAQ for those periods. Common Stock prices take into account the Registrant's
1-for-10 reverse split of its Common Stock. The prices represent quotations
between dealers. The quotations do not include retail markups, markdowns, or
commissions and may not represent actual transactions.
Type of Security Quarter Ended High Low
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Common Stock March 31, 1997 233/4 10
June 30, 1997 211/4 121/2
September 30, 1997 35 15
December 31, 1997 26 7/8 111/4
March 31, 1998 321/2 10 5/8
June 30, 1998 25 83/4
September 30, 1998 19 1/16 9 3/8
December 31, 1998 15 5/8 5
March 31, 19996 9/16 3 1/8
Warrants March 31, 1997 15/16 5/16
June 30, 1997 2 5/16 5/8
September 30, 1997 1 3/4
December 31, 1997 2 1/8 1
March 31, 1998 13/4 1
June 30, 1998 11/2 3/16
September 30, 1998 7/8 1/4
December 31, 1998 19/32 1/16
March 31, 1999 3/16 1/64
Holders
As of May 13, 1999, there were 71 and 17 holders of record of the
Registrant's Common Stock and Warrants, respectively. The Registrant believes
that it has a greater number of shareholders and Warrant holders because the
Registrant believes that a substantial amount of its Common Stock and Warrants
are held of record in street name by broker-dealers for their customers.
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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.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Terrace Food Group (Consolidated)
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Registrant's consolidated net loss for 1998 was approximately
$2,719,000 compared to a loss of approximately $4,352,000 for the same period in
1997. The major decrease was a result of discontinued operations costs that were
incurred by the Registrant in 1997. In addition to these reductions from the
prior year, the Registrant also reduced the loss from its operating subsidiaries
purchased in 1997. The Registrant realized a substantial increase in its
interest expense in 1998 with the placement of $2,625,000 in subordinated debt
in the beginning of the third Quarter of 1998 this interest amounted to
approximately $200,000 and was non-cash expense. In July of 1998 the Registrant
consummated its transaction to purchase Banner Beef and Seafood, a Miami based
manufacturer of value added meat and seafood products. The Registrant's
management identified this segment as one of the fastest growing food industry
and incorporated Banner as part of its strategic plan for growth. A substantial
portion of the Registrant's operating loss in 1998 resulted from the slow start
up and building of infrastructure in preparation for what management believes
will be strong growth in the coming year (See Food Processing and Manufacturing
below).
Continuing Operations
Food Distribution
In its first full year as a subsidiary of the Registrant, A-One-A lost
approximately $276,000 compared to a six-month loss of $208,000 for the
six-month period during which the Registrant owned A-One-A during 1997. The
substantial reduction in the loss can be attributed to several factors. The
investment that management made into infrastructure and technological
improvement began to be realized in the final quarter of 1998. Increased sales
volumes and operating cost controls allowed the distribution segment of the
Registrant to reach positive result levels by the end of fiscal 1998. While it
took longer than expected at A-One-A to reach profitable operating levels,
management believes that the results from it's A-One-A subsidiary have and
should continue to be positive as the sales volumes continue to increase and
more economics of scale are realized. As sales continue to increase the benefits
of the capital investments made during late 1997 and the beginning quarters of
1998 will be realized. A consistent level of profitability should be achieved
and the
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addition of the cruise ship and export divisions will contribute positive sales
increases and profit contribution.
Food Processing and Manufacturing
The Registrant purchased Banner in July of 1998, and accordingly there are
no comparative results for the prior year periods. The net loss from operations
for the six month period the Registrant owned Banner Beef was approximately
$753,000. This loss was due to several factors. The Registrant realized
excessive expenses with the building of management infrastructure to properly
handle the aggressive approach it has taken toward increasing sales at Banner.
Several key personnel were hired to put in place proper systems and procedures
on an on-going basis. In addition, management placed tremendous emphasis on the
Home Meal Replacement segment of the business that the previous owners of Banner
had committed to prior to the Registrant's purchase of Banner. The historic core
business at Banner was fragmented and inconsistent and management recognized the
need for a concise and direct selling approach to restore Banner to a profitable
state. By focusing the sales and marketing efforts on a product mix, management
believes sales volumes will increase and the Registrant will realize positive
results from the acquisition. As the Home Meal Replacement business is further
developed, this high growth sector of the food industry will play a major role
in management's strategic plan going forward. This business was only in its
beginning stages of development during 1998.
Liquidity and Capital Resources
At December 31, 1998, the Registrant had a cash deficit of approximately
$733,000 and a working capital deficit of approximately $3,105,000.
During the first quarter of 1999, management believes the food
distribution operations have been improved with the securing of substantial new
business, particularly with high volume institutional accounts. Management
believes this additional sales volume will contribute to increased profitability
and reduced seasonable variability. Management intends to continue it aggressive
marketing efforts in these areas as well as to cruise line and export customers.
Management further believes that a key element in its plan is to
substantially increase sales volume at Banner, where the Company has developed
the capability of producing high quality innovative products for the home meal
replacement ("HMR") market.
Several major customers have accepted the products on a limited basis with
good prospects for significantly expanded distribution. Presentations have been
made to a number of additional customers and initial responses have been
positive.
In April and May, 1999, the Registrant issued 19,618 shares of a newly
authorized Series C Preferred Stock together with Warrants to purchase 340,000
shares of the Registrant's Common Stock. The shares and warrants were purchased
by a private investor group which included three of the Registrant's Directors.
The Registrant received proceeds of approximately $1,700,000 in this transaction
which will be used for working capital.
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Management believes that the transactions described above and operating
improvements will be sufficient to provide for its continuing operations.
In addition, as of June 25, 1998, the Registrant issued to a private
investor $2,625,000 principal amount of 12% Convertible Subordinated Note
("Notes") and warrants to purchase 400,000 shares of Common Stock of the
Registrant. The proceeds from these Notes, combined with those from the senior
secured financing, were used to repay senior indebtedness, acquire Banner and
for working capital.
On July 15, 1998, the Registrant entered into a funding agreement with an
institutional lender providing the Registrant and its wholly-owned subsidiaries
an aggregate of up to $6,000,000 in senior secured financing.
On October 5, 1998, the Registrant, through its prospectus offered to its
warrantholders the opportunity to exercise their Warrants and purchase Common
Stock at a temporarily reduced exercise price. At December 31, 1998, 23,785
Warrants were exercised at the temporarily reduced exercise price.
In October and November, 1998, the Registrant issued 78,000 unregistered
shares of Common Stock together with Warrants and Options to purchase 40,500
shares of Common Stock to investors including private investors, directors,
officers and an employee of the Registrant. The shares were issued at prices
ranging from $9.30 to $10.00 per share. Proceeds of $760,000 were used for
working capital.
Seasonality
The continuing operations of the A-One-A Produce have been historically
seasonal due to the increased business in South Florida during the winter
months. With the purchase of Banner, the Registrant has taken steps in keeping
with its plan to reduce the seasonal impact to its business. Banner ships its
products nationwide and is not as vulnerable to seasonal swings in regional
business as is A-One-A. As well, the business at A-One-A continues to trend
toward multi-unit chain and contract business and it too should realize a less
severe impact from the business downturn in the summer months. These factors
should result in a much more predictable profit trend by quarter as the
Registrants' plan for growth continues to be carried through.
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 1998.
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PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS. PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
As of December 31, 1998, the Registrant's directors and executive officers
were:
Name Age Position Held
Steven Shulman 58 Chairman of the Board of Directors,
President and Chief Executive Officer
Jonathan S. Lasko 28 Executive Vice-President, Secretary, Chief
Operating Officer and Director
Richard Power 50 Director
Fred A. Seigel 42 Director
Houssam T. Aboukhater 27 Director
William P. Rodrigues, Jr. 55 Vice-President -- Finance, Treasurer and
Chief Financial Officer
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. Currently, there are
five 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.
STEVEN SHULMAN, age 58, has served as the Chairman of the Board of
Directors since February, 1997, and since February 18, 1998, he has also served
as the Chief Executive Officer of the Registrant. He is also 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.
JONATHAN S. LASKO, age 28, 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 was the vice-president of A&E Management Corp. from October 27,
1993, The Lasko Companies, Inc. from May 11, 1995 and
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Prime Concern Kosher Foods, Inc. from December, 1995 until such businesses were
sold in 1998. He is also President and Chief Executive Officer of A-One-A
Produce. Mr. Lasko attended 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.
RICHARD POWER, age 50, has served as a director of the Registrant since
February, 1997. He was Vice-President of Tyco Fire and Safety Services from May,
1997, to March, 1999, and the President of Carlisle Plastics, Inc. from January
to May, 1997, both divisions of Tyco International Ltd., a New York Stock
Exchange listed corporation. He served as a consultant to Tyco in Mergers and
Acquisitions from 1995 through 1996, Vice President and Chief Financial officer
of Abex Inc. a New York Stock Exchange listed corporation between 1994 and 1995,
and was the Managing Director of a private investment company from 1992 through
1994. Mr. Power holds a B.S. and an M.B.A. from Boston College.
FRED A. SEIGEL, age 42, has served as a Director since February 18, 1998.
Mr. Seigel was the founder, President and Director of Energy Capital Partners, a
privately-held, Boston-based company organized in September, 1993, providing
financing for energy efficiency projects throughout the United States. The
company was sold to ABB Structured Finance (Americas) in February, 1999. Mr.
Siegel continues to serve as its President. From January, 1988 to October, 1994,
he served as a limited partner in two large-scale energy co-generation projects
in New York state, representing a total investment of $350,000,000. From March,
1984 to November, 1986, Mr. Seigel was a project manager for Wheelabrator-Frye,
Inc., in that company's Resource Recovery Division. From January, 1981 to
January, 1993, he was the Director of the Executive Office for Energy for the
State of New Hampshire. Mr. Seigel holds a B.A. from New England College,
Henniker, New Hampshire.
HOUSSAM T. ABOUKHATER, age 27, was elected a Director of the Registrant on
August 26, 1998. He is Vice President of Prestolite Wire, a privately-held,
Southfield, Michigan-based company, which is a leading producer of
telecommunications wire. From 1993 to 1996, Mr. Aboukhater served as Vice
President of Balcrank Products, an automotive components division of the General
Chemical Group, a New York Stock Exchange listed corporation. Mr. Aboukhater
also currently serves as Director of Market Analysis for Latona Associates, an
investment banking firm involved in advisory services and principal investments.
Mr. Aboukhater holds a B.A. in business administration from the University of
San Diego, San Diego, California.
WILLIAM P. RODRIGUES, JR., age 55, was appointed Vice-President -- Finance
and Chief Financial Officer on July 18, 1998. Previously, he had been Controller
of Mueller Co., a unit of Tyco International, Inc. since 1989. From 1976 to
1987, he was Vice-President -- Finance and Controller of Clearfield Cheese
Company, a subsidiary of H.P. Hood Inc., a Boston-based dairy products company.
Mr. Rodrigues holds an A.B. degree from Boston College.
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Director Compensation
Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. Non-employee directors are paid
$750 for each directors' meeting attended. In addition to the foregoing,
directors are also granted options annually through the Registrant's 1997 Stock
Option Plan. At the Annual Directors Meeting held August 26, 1998, the Chairman
of the Board and President, Mr. Shulman, was granted 5,000 options and each of
the other four directors was granted 3,000 options for 1998. 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, 1998, 1997 and 1996, 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.
Annual Compensation
-------------------
Year Ended Annual Other
Name & Principal Position December 31 Salary Compensation Options
- ------------------------- ----------- ------ ------------ -------
Samuel H. Lasko, 1996 $125,000 $ 9,517(2)(3)
President and 1997 $150,000 $ 22,502(2)
Treasurer(1) 1998 $ -0- $ -0-
Jonathan S. Lasko, 1996 $ 70,000 $ 7,255(2)
Executive Vice 1997 $ 95,000 $ 21,727(2)
President, Secretary and 1998 $125,000 $ 14,058 8,000(5)
Chief Operating Officer
Steven Shulman 1997 $ -0- $ -0- 13,000(5)
Chief Executive Officer 1998 $ -0- $ -0- 15,000(5)
and President(4)
Milton Namiot, 1997 $175,000 $ 9,500(2) 12,500(6)
Chief Executive Officer(6)
- ----------------------------
(1) Resigned effective August 26, 1998.
(2) Represents amounts paid for lease of automobile, automobile insurance and
health insurance.
(3) Does not include repayments of loans from A&E Management Corp., The Lasko
Companies, Inc. and the Registrant.
(4) Steven Shulman became Chief Executive Officer of the Registrant in
February, 1998, subsequent to the resignation of former CEO Milton Namiot.
Mr. Shulman became President of the Registrant in August, 1998, subsequent
to the resignation of Samuel H. Lasko.
(5) Represents options granted to directors and executive officers under the
Registrant's 1997 Stock Option Plan.
(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 his
three year employment contract, 50% of the options theretofore granted Mr.
Namiot, or options to purchase 12,500 shares of the Registrant's common
stock, were made immediately exercisable. They have since expired,
unexercised.
13
<PAGE>
Option/SAR Grants in the Last Fiscal Year
Individual Grants
-----------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Name Granted(#) in Fiscal Year Price ($/Sh) Expiration Date
---- ---------- -------------- ------------ ---------------
Steven Shulman 15,000 26.3% $11.25 Aug-Nov, 2008
Jonathan S. Lasko 8,000 11.4% $11.41 Aug-Nov, 2008
Dr. Samuel H. Lasko -0- -0- -0- -0-
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
The following table sets forth options exercised by the Registrant's chief
executive officer and the Registrant's two other most highly compensated
executive officers during fiscal 1998, and the number and value of all
unexercised options at year end. The value of "in-the-money" options refers to
options having an exercise price which is less than the market price of the
Registrant's stock at fiscal year-end. On that date, none of the Registrant's
executive officers held exercisable options which were "in-the-money".
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Steven Shulman -0- -0- 6,333/21,667 $0/0
Jonathan S. Lasko -0- -0- 41,667/16,333 $0/0
William P. Rodrigues, Jr. -0- -0- 0/12,500 $0/0
Employment Agreements and Aggregate Options Holdings
The Registrant has a five-year employment agreement, ending August 31,
2000, with Jonathan S. Lasko. Under his employment agreement, Mr. Lasko is to
receive an annual base salary of $115,000 for the fourth year and $125,000 for
the fifth year of his employment. 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 sale
by Registrant of its Deering Ice Cream subsidiary, by amendments dated February
17, 1997, to his
14
<PAGE>
employment agreement, Jonathan Lasko voluntarily surrendered his one-time
performance based option to purchase up to an aggregate of 75,000 shares of
common stock, and in lieu thereof, the Registrant issued to him, warrants to
purchase 37,500 shares of its common stock at an exercise price of $11.875 per
share. The employment agreement also entitles Mr. Lasko to the use of an
automobile and to employee benefit plans, such as group life, health,
hospitalization and life insurance. Under the employment agreement, 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.
In August, 1998, Dr. Samuel H. Lasko resigned as an officer and director
of the Registrant. As was done by Jonathan Lasko, Dr. Lasko also surrendered his
one-time performance based option to purchase up to an aggregate of 75,000
shares of common stock in connection with the sale by the Registrant and, in
lieu thereof, received warrants to purchase 37,500 shares of common stock at an
exercise price of $11.875 per share.
In connection with the A-One-A Produce transaction, the Registrant entered
into five-year employment agreements, effective July 1, 1997, and ending July
30, 2002, with both Virgil D. Scarbrough and Scott Davis. Under these employment
agreements, Messrs. Scarbrough and Davis serve as senior executives of the
Registrant's wholly-owned subsidiaries A-One-A Produce and Fresh, and each
receive a annual base salary of $120,000, an annual discretionary bonus, a
performance incentive bonus of 20% of annual salary, which percentage will be
increased incrementally if the pre-tax income of A-One-A Produce and Fresh
exceed specified levels, and all other benefits available to other Registrant
executives.
The 1997 Stock Option Plan and Participants
The Registrant amended its 1997 Stock Option Plan (the "Plan") enabling it
to grant options for shares of its Common Stock. While the Plan still authorizes
the grant of options to purchase up to an aggregate of 1,750,000 shares of the
Registrant's Common Stock, options are granted and reported on a post-split
basis. Options may be granted 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 Plan is set forth as an exhibit to this Registration
Statement, and the following description is qualified in its entirety by
reference thereto.
15
<PAGE>
The Plan is administered by the Compensation Committee, which is 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, 1998, 114,300 options have been granted, including
82,000 to current officers and directors.
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
16
<PAGE>
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 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.
As of December 31, 1998, the following officers, directors, significant
employees and other employees have received the number of options as is
designated opposite their respective names:
Name Number of Options (1)
---- -----------------
Steven Shulman 28,000(2)(9)
Jonathan S. Lasko 20,500(3)
Richard Power 15,000(4)(9)
William P. Rodrigues, Jr. 12,500(5)
Samuel H. Lasko(6) 12,500
Houssam T. Aboukhater 3,000(7)
Fred A. Seigel 3,000(7)
Bruce S. Phillips(6) 2,000(9)
Other Employees 17,800(8)
---------
TOTAL 114,300(10)
=========
- ----------
(1) Unless otherwise stated, these options become exercisable one third per
year over three years from the date granted.
(2) Includes 5,000 options at an exercise price of $13.75 per share and 10,000
at $10.00 per share granted in 1998.
(3) Includes 3,000 options at an exercise price of $13.75 per share and 5,000
at $10.00 per share granted in 1998.
(4) Includes 3,000 options at an exercise price of $13.75 per share and 10,000
at $10.00 per share granted in 1998.
(5) Includes 10,000 options at an exercise price of $15.625 per share and 2,500
at $10.00 per share granted in 1998.
(6) Former Director.
17
<PAGE>
(7) Includes 3,000 options at an exercise price of $13.75 per share granted in
1998.
(8) Includes 1,000 options at an exercise price of $16.90 per share, 10,000 at
$23.10 per share and 500 at $10.00 per share granted in 1998.
(9) All of Mr. Phillips' options, 2,000 of Mr. Power's options, as well as
3,000 of Mr. Shulman's options, granted in February, 1997, at a price of
$11.85, became exercisable at the time they were granted.
(10) Does not include options granted to Milton Namiot, a former director and
former Chief Executive Officer, and Joseph Dane, former Corporate
Controller of the Registrant. In February, 1997, Messrs. Namiot and Dane
were granted 25,000 and 2,500 options, respectively. Although they were no
longer affiliated with the Registrant subsequent to the sale of the
Registrant's Deering Ice Cream business, the Compensation Committee
determined to make immediately exercisable 12,500 of Mr. Namiot's options
and all of Mr. Dane's options for a total of 120 days beyond the date of
the cessation of their employment by the Registrant. All of such options
have expired unexercised.
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
December 31, 1998. In addition, the table provides information concerning the
beneficial owners known to the Registrant to hold more than five percent of the
outstanding Common Stock of the Registrant as of December 31, 1998.
Common Stock
Beneficial Percent of
Name of Beneficial Owner Ownership(1) Class(1)
- ------------------------ ------------ --------
Jonathan S. Lasko 49,000(2) 5.2%
Richard Power 42,250 *
Steven Shulman 71,950 7.6%
Fred A. Siegel 7,875 *
Houssam T. Aboukhater 20,000 *
William P. Rodrigues 2,500 *
A-One-A Wholesale Produce, Inc. 50,000(3) 5.3%
Michael Feinberg 50,000 5.3%
All Directors, Executive Officers and 5%
Holders as a Group 293,575(4) 30.1%
- --------------------------------------
*Less than five percent.
(1) In each case the beneficial owner has sole voting and investment power
except that 380,000 shares held by Jonathan S. Lasko are held in joint
tenancy with his wife Ellen J. Lasko.
(2) Includes 25,000 shares held for the benefit of Jordana Lasko, a minor.
(3) These shares were issued in connection with the Company's acquisition of
the business and assets of the named company which is owned equally by
Virgil Scarbrough and Scott Davis. Messrs. Scarbrough
18
<PAGE>
and Davis are Officers of A-One-A Produce & Provisions, Inc., one of the
Company's wholly-owned subsidiaries.
(4) Does not include stock options granted in the amounts as follows: Jonathan
S. Lasko - 20,500; Steven Shulman - 28,000; Richard Power - 15,000; Fred A.
Seigel - 3,000; Houssam T. Aboukhater - 3,000; and William P. Rodrigues,
Jr. - 12,500. Also does not include warrants to purchase Common Stock at a
price of $1.1875 in the following amounts: Jonathan S. Lasko - 37,500;
Steven Shulman - 3,667; Richard Power - 3,167; and Fred A. Seigel - 1,583.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of DownEast, the Registrant issued to
each of Samuel H. Lasko and Jonathan S. Lasko (collectively the "Laskos")
warrants to purchase 37,500 shares of the Registrant's common stock at $11.875
per share. Messrs. Laskos surrendered their respective performance options to
purchase up to 75,000 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
"fair value" and "fairness" opinions from an independent valuation firm. The
sale was ratified by the shareholders at the 1998 Annual Meeting on August 26,
1998.
A-One-A Produce 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 expiring July 31, 2007, with two five year
options to extend 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.
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 **
--------------------------
19
<PAGE>
(21) Subsidiaries of the Registrant
-----------------------------------
The Registrant's three operating wholly-owned subsidiaries are:
1. A One A Produce & Provisions, Inc.
1325 N.W. 22nd Street
Pompano Beach, Florida 33069
2. Fresh, Inc.
1325 N.W. 22nd Street
Pompano Beach, Florida 33069
3. Banner Beef & Seafood Co., Inc.
1111 N.W. 21st Terrace
Miami, Florida 33127
- --------------------
* 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 statements #33-96892-A and #333-45195; to
Registrant's Form 10-KSB and amendments thereto for the year ended December
31, 1997, Commission file number 0-27132; and to Registrant's Reports on
Form 8-K filed with the Commission on July 30, 1998.
b) Reports on Form 8-K
The Registrant filed Current Reports on Form 8-K (i) on January 16, 1998,
to report the consummation of the sale of its Deering Ice Cream subsidiary to a
unaffiliated third party; (ii) on April 21, 1998, to report financial
information related to the Registrant's acquisition of A-One-A; (iii) on April
21, 1998, to report financial information related to the Registrant's sale of
the business of its Deering subsidiary; (iv) on July 8, 1998, to report a press
release announcing the agreement to purchase Banner Beef and Seafood Co., Inc.;
(v) on July 30, 1998, to report the consummation of the Banner acquisition, file
exhibits related to that transaction, and report financial information related
to the Banner acquisition; and (vi) on April 26, 1999, to report a press release
announcing the completion of its $1.6 million preferred equity financing and
issuance of its Series C Preferred Stock to those unaffiliated investors.
20
<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 FOOD GROUP, INC.
- --------------------------------------------------------------------------------
Registrant
By: /s/ Steven Shulman, President
- --------------------------------------------------------------------------------
Steven Shulman, President
Date: May 14, 1999
- --------------------------------------------------------------------------------
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.
Signature Title Date
- --------- ----- ----
/s/ Steven Shulman Chairman of the Board, Chief May 14, 1999
- ------------------------- Executive Officer, President
Steven Shulman and Director
/s/ Jonathan S. Lasko Executive Vice-President, Chief May 14, 1999
- ------------------------- Operating Officer, Secretary
Jonathan S. Lasko and Director
/s/ Richard D. Power Director May 14, 1999
- -------------------------
Richard D. Power
/s/ Fred A. Seigel Director May 14, 1999
- -------------------------
Fred A. Seigel
/s/ Houssam T. Aboukhater Director May 14, 1999
- --------------------------
Houssam T. Aboukhater
/s/ William P. Rodrigues, Jr. Vice President-Finance, Treasurer May 14, 1999
- ----------------------------- and Chief Financial Officer
William P. Rodrigues, Jr.
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Terrace Food Group, Inc.
We have audited the accompanying consolidated balance sheet of
Terrace Food Group, Inc. and its subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1998. 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 Food Group, Inc. and its subsidiaries as of December 31,
1998, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
---------------------
Certified Public Accountants.
New York, New York
April 2, 1999, except for
Note 18 for which the date is
April 13, 1999
F-1
<PAGE>
TERRACE FOOD GROUP, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
- ------------------------------------------------------------------------------
Assets
Current Assets:
Accounts Receivable (Less Allowance for Doubtful Accounts
of $161,292) $ 4,008,153
Inventories 1,627,876
Current Portion of Note Receivable - Stockholder 53,000
Other Current Assets 166,431
-----------
Total Current Assets 5,855,460
Property and Equipment - Net 5,189,378
Note Receivable -Stockholder 106,000
Cost in Excess of Net Assets of Businesses Acquired -
Net of Accumulated Amortization of $312,650 4,199,477
Other Assets, Net 469,854
-----------
Total Assets $15,820,169
===========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
TERRACE FOOD GROUP, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Cash Overdraft $ 773,011
Accounts Payable 3,719,884
Accrued Expenses 1,054,866
Current Portion of Long-Term Debt 566,754
Line of Credit 2,845,809
-----------
Total Current Liabilities 8,960,324
Long-Term Debt 2,310,631
Convertible Subordinated Notes 2,335,000
Other Non-Current Liabilities 184,166
-----------
Total Liabilities 13,790,121
-----------
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock, $.001 Par Value, 10,000,000
Shares Authorized, None Issued or Outstanding. --
Common Stock - $.001 Par Value, 25,000,000 Shares Authorized,
948,342 Issued and Outstanding 948
Additional Paid-in Capital 10,642,012
Accumulated Deficit (8,612,912)
-----------
Total Stockholders' Equity 2,030,048
-----------
Total Liabilities and Stockholders' Equity $15,820,169
===========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TERRACE HOLDINGS, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
1 9 9 8 1 9 9 7
------- -------
Net Sales $31,011,197 $ 8,929,464
Cost of Sales 23,624,475 6,853,507
----------- -----------
Gross Profit 7,386,722 2,075,957
----------- -----------
Operating Expenses:
Selling, General and Administrative Expenses 9,065,269 3,370,480
Provision for Doubtful Accounts 241,855 60,000
----------- -----------
Total Operating Expenses 9,307,124 3,430,480
----------- -----------
Loss from Operations (1,920,402) (1,354,523)
----------- -----------
Other (Expense) Income:
Interest Expense (670,128) (79,594)
Interest Income 10,549 22,601
----------- -----------
Total Other (Expense) (659,579) (56,993)
----------- -----------
Loss From Continuing Operations (2,579,981) (1,411,516)
Discontinued Operations:
Loss from Operations of Discontinued Businesses
(Net of Income Taxes of $-0-) -- (813,795)
Loss on Disposal of Businesses, including
Provision of $20,000 for Operating Loss during the
Phase Out Period in 1997 (Net of Income Taxes of
$-0- in both years) (139,483) (2,126,742)
--------- -----------
Net Loss $(2,719,464) $(4,352,053)
=========== ===========
Basic and Diluted Loss Per Share of Common Stock:
Loss from Continuing Operations $ (3.84) $ (3.17)
Loss from Operations of Discontinued
Businesses (Net of Income Tax of $-0- in both years) -- (1.83)
Loss on Disposal of Discontinued Businesses (.20) (4.77)
----------- -----------
Basic and Diluted Net Loss Per Share of
Common Stock $ (4.04) $ (9.77)
=========== ===========
Basic and Diluted Weighted Average Shares of
Common Stock Outstanding 672,620 445,403
=========== ===========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TERRACE HOLDINGS, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
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 - December 31, 1996 -- $ -- 331,250 $ 331 $ 3,948,930 $(1,541,395) $ 2,407,866
Asset Acquisition -
Deering -- -- 91,890 92 763,907 -- 763,999
Finders Fee -- -- 7,500 8 88,305 -- 88,313
Asset Acquisition -
A-One-A -- -- 50,000 50 999,950 -- 1,000,000
Private Placement 1,523,825 1,524 -- -- 2,671,776 -- 2,673,300
Net Proceeds from the
Issuance of Common Stock -- -- 20,000 20 219,980 -- 220,000
Stock Based Compensation -- -- -- -- 387,000 -- 387,000
Net Loss -- -- -- -- -- (4,352,053) (4,352,053)
--------- ------- ------- --------- ----------- ---------- -----------
Balance - December 31,
1997 1,523,825 1,524 500,640 501 9,079,848 (5,893,448) 3,188,425
Asset Acquisition -
Fresh, Inc. -- -- 13,895 14 269,986 -- 270,000
Conversion of
Preferred to Common (1,523,825) (1,524) 304,765 305 1,219 -- --
Net Proceeds from
Issuance of Common
Stock and Exercise
of Common Stock
Purchase Warrants -- -- 104,951 104 736,351 -- 736,455
Asset Acquisition -
Banner -- -- 3,000 3 37,497 -- 37,500
Deering Acquisition
Liability Conversion -- -- 10,091 10 126,122 -- 126,132
A-One-A Acquisition
Liability Conversion -- -- 11,000 11 109,989 -- 110,000
Warrants and Options
Issued with Convertible
Subordinated Notes -- -- -- -- 281,000 -- 281,000
Net Loss -- -- -- -- -- (2,719,464) (2,719,464)
---------- ------- ------- --------- ----------- ----------- -----------
Balance - December 31,
1998 -- -- 948,342 $ 948 $10,642,012 $(8,612,912) $ 2,030,048
========== ======= ======= ========= =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TERRACE HOLDINGS, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
<S> <C> <C>
Net Loss from Continuing Operations $(2,579,981)$(1,411,516)
Adjustments to Reconcile Net Loss to Net Cash (Used for)
Provided by Operating Activities:
Depreciation and Amortization 769,466 157,613
Provision for Doubtful Accounts 241,855 60,000
Stock Based Compensation -- 180,000
Changes in Assets and Liabilities:
(Increase) Decrease in:
Restricted Cash 137,701 (137,701)
Accounts Receivable (1,924,768) (541,699)
Inventory (573,885) (102,069)
Notes Receivable (159,000) --
Other Current Assets 47,779 17,638
Other Assets (35,033) (1,728)
Increase (Decrease) in:
Accounts Payable and Cash Overdrafts 2,563,373 554,530
Accrued Expenses and Other Current Liabilities 392,590 338,955
Other Liabilities 184,166 --
---------- -----------
Total Adjustments 1,644,244 525,539
---------- -----------
Net Cash - Continuing Operations (935,737) (885,977)
---------- -----------
Discontinued Operations:
Loss From Discontinued Businesses (139,483) (2,940,537)
Adjustments to Reconcile Loss to Net Cash:
Depreciation and Amortization -- 180,115
Loss on Disposal of Businesses (Including Provision
of $20,000 for Operating Loss During Phase Out Period) -- 1,974,742
Changes in Net Assets, Liabilities -- (1,787,219)
---------- -----------
Net Cash - Discontinued Operations (139,483) (2,572,899)
---------- -----------
Net Cash - Operations - Forward (1,075,220) (3,458,876)
---------- -----------
Investing Activities - Continuing Operations:
Purchase of Property and Equipment (2,382,604) (201,744)
Purchase of Businesses - Net of Cash Acquired (3,389,668) (3,616,993)
---------- -----------
Net Cash - Investing Activities - Continuing Operations $(5,272,272)$(3,818,737)
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TERRACE HOLDINGS, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
1 9 9 8 1 9 9 7
------- -------
Investing Activities - Discontinued Operations:
Purchase and Disposal of DownEast Frozen Desserts, LLC -
<S> <C> <C>
Net of Cash Acquired $ -- $ 288,900
Acquisition of Assets -- (40,933)
---------- -----------
Net Cash - Investing Activities - Discontinued Operations -- 247,967
---------- -----------
Financing Activities - Continuing Operations:
Proceeds from Issuance of Convertible Subordinated Notes
with Warrants and Option 2,500,000 --
Borrowing of Long-Term Debt 3,001,684 100,000
Repayment of Long-Term Debt (368,049) (64,467)
Borrowing Under Line of Credit 2,845,810 1,354,085
Repayment of Line of Credit (1,354,085) --
Net Proceeds from Issuance of Common Stock
and Exercise of Common Stock Purchase Warrants 736,455 220,000
Incurrence of Deferred Financing Costs (514,323) --
Proceeds from Issuance of Convertible Preferred Stock -- 2,673,300
---------- -----------
Net Cash - Financing Activities - Continuing Operations 6,847,492 4,282,918
---------- -----------
Financing Activities - Discontinued Operations:
Proceeds of Demand Notes Payable -- 1,175,821
---------- -----------
Net (Decrease) in Cash and Cash Equivalents -- (1,570,907)
Cash and Cash Equivalents - Beginning of Years -- 1,570,907
---------- -----------
Cash and Cash Equivalents - End of Years $ -- $ --
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 345,097 $ 51,093
Income Taxes $ -- $ --
</TABLE>
Supplemental Disclosures of Non-Cash Financing Activities:
During the first quarter of 1998, the Company issued 13,895 shares of its
common stock valued at $270,000 in connection with the acquisition of Fresh,
Inc. and in the third quarter issued 3,000 shares of its common stock in
connection with the acquisition of Banner Beef and Seafood, Inc. valued at
$37,500.
During the third quarter of 1998, the Company issued 21,091 Shares of Common
Stock valued at $236,132 to satisfy liabilities relating to the purchase of
A-One-A and Deering.
During the first quarter of 1997, the Company issued 99,390 shares of common
stock valued at approximately $853,000 in connection with the acquisition of
DownEast Frozen Desserts, LLC. and during the third quarter, issued 50,000
shares of its common stock valued at $1,000,000 in connection with the
acquisition of A-One-A Wholesale Produce, Inc.
The Company's Convertible Subordinated Notes were issued at a discount of
$406,000 that is being amortized over the term of the Notes (See Note 7).
The Company's outstanding convertible preferred stock automatically converted
to common (See Note 12).
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(1) Nature of Operations and Summary of Significant Accounting Policies
Name Change - In August 1998 the Company's shareholders approved the change of
the Company's name from Terrace Holdings, Inc. to Terrace Food Group, Inc.
("Terrace" or the "Company").
Operations - The Company operates in two segments of the food industry, Food
Distribution and Food Processing and Manufacturing.
The Food Distribution segment includes the operations of the Company's AoneA
Produce and Provisions, Inc. ("AoneA") and Fresh, Inc. ("Fresh") subsidiaries.
AoneA distributes fresh and precut produce, dairy products and dry grocery
products to foodservice, cruiseline and export customers throughout South
Florida. Fresh processes precut produce which is marketed primarily by AoneA
(See Note 2).
The Food Processing and Manufacturing segment includes the operations of the
Company's Banner Beef & Seafood Co., Inc. ("Banner") subsidiary acquired in July
1998 (See Note 2). Banner is a custom value added processor of meat, seafood and
poultry products marketed nationally to retail and foodservice customers.
During 1997, the Company decided to dispose of its frozen dessert and
hospitality businesses. The divestitures were completed during 1998 (See Note
3).
Reverse Split of Common Stock - Effective March 15, 1999, the shareholders of
the Company approved a one for ten reverse split of the Company's common stock
without any other changes in authorization, par value or otherwise. All per
share and share amounts for all periods presented have been adjusted to reflect
this reverse split.
Consolidation Policy - The consolidated financial statements include the
accounts of Terrace and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. The subsidiaries' fiscal years end on the
Saturday closest to December 31. The 1997 consolidated financial statements also
include, in discontinued operations, the accounts of A&E Management Corp., The
Lasko Family Kosher Tours, Inc., The Lasko Companies and Deering Ice Cream, Inc.
all of which have been sold. (See Note 3).
Inventories - Inventories are recorded at the lower of cost or market. Cost is
determined on the first-in, first-out ("FIFO") basis.
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 of, 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:
Buildings 30 Years
Machinery and Equipment 5 - 7 Years
Transportation Equipment 7 -10 Years
Office Equipment, Furniture and Fixtures 5 -10 Years
Leasehold Improvements 5 -10 Years
Cash and Cash Equivalents - The Company considers highly liquid investments,
with a maturity of three months or less, when acquired to be cash equivalents.
The Company did not have any cash equivalents at December 31, 1998.
F-8
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(1) Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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.
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 or a
significant change in the environment in which the business assets operate. The
Company considers assets to be impaired when the expected future non-discounted
cash flows of the business is 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, 1998,
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 - The Company extends credit to its customers,
resulting 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 does not require
collateral on its financial instruments.
Other Concentrations - A-One-A is a member of a cooperative of independent
distributors through which it obtains advantageous pricing on purchases.
Although A-One-A purchased 26% of consolidated purchases through this
cooperative, management believes there is no business vulnerability regarding
this concentration of purchases, as the products are readily available from
other sources.
Advertising - Advertising costs, which were not material in 1998 or 1997, are
expensed as incurred.
Earnings Per Share - Effective December 31, 1997 the company adopted SFAS No.
128 "Earnings Per Share," which established standards for computing and
presenting both Basic and Diluted Earnings Per Share ("EPS").
(2) Business Acquisitions
On January 2, 1998, the Company purchased certain 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 $453,764 primarily for inventory which resulted in
costs in excess of fair value of net assets acquired of $400,000. The
acquisition has been accounted for as a purchase. The operations of Gourmet have
been included in the Company's results of operations from the date of
acquisition. Management has deemed the operations of this acquisition immaterial
for pro forma purposes.
In February 1998, effective January 1, 1998, the Company purchased all of the
outstanding stock of Fresh, a related entity because of common shareholders. The
operations of Fresh have been included in the Company's results of operations
from the date of acquisition. Results of operations for 1997 include sales to
and purchases from Fresh of $203,327 and $357,425 respectively. In consideration
for the purchase, the Company paid $105,000 in cash, issued 13,895 shares of
common stock valued at $270,000 and forgave net accounts receivable of $141,986.
The acquisition, accounted for as a purchase, resulted in cost in excess of fair
value of net assets acquired of $373,004.
F-9
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(2) Business Acquisitions (Continued)
On July 15, 1998, the Company acquired the assets and substantially all the
liabilities of Banner through an acquisition accounted for as a purchase. The
operations of Banner Beef and Seafood Co., Inc. have been included in the
Company's results of operations from that date. The cost of the purchase
included a base cash price of $1,800,000, the payoff of existing debt of
$670,536, and other costs of $181,212. The cost of the acquisition was primarily
allocated to property, plant and equipment.
In connection with the Banner acquisition, the Company entered into a five year
employment agreement with the Banner operations vice president at an annual base
salary of $200,000 and entered into a five-year lease for a plant located in
Hialeah, Florida, which Banner uses as a processing facility. During the term of
the lease, the Company has an option to purchase this property for the lesser of
$1,270,000 or its independently appraised value.
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:
Current Assets:
Accounts Receivable $ 448,535
Inventories 773,533
Other 23,893
----------
Total 1,245,961
Property, Plant and Equipment 2,289,286
Cost in Excess of Net Assets Acquired 773,004
----------
Total 4,308,251
----------
Current Liabilities:
Accounts Payable and Accrued Expenses 679,452
Other 6,301
----------
Total 685,753
----------
Aggregate Consideration $3,622,498
==========
Effective 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 50,000 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.
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.
F-10
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(2) Business Acquisitions (Continued)
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 the right of first refusal to purchase the land and
building at a fair market value.
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 the October 1, 1997 effective
purchase date.
In consideration for the acquisition, the Company paid the shareholders of Bay
Purveyors $340,000. The acquisition has been accounted for as a purchase.
The cost in excess of net assets of businesses acquired is to be amortized over
20 years using the straight-line method. Amortization amounted to $224,502 and
$88,148 in the years ended December 31, 1998 and 1997 respectively.
The following pro forma information presents the results of the combined
operations of Terrace, A-One-A, Fresh and Banner treating the acquired
businesses as if they were subsidiaries of Terrace for each year. This pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been completed as of January 1, 1997 or results which may occur
in the future.
Pro forma unaudited information:
Twelve months ended
December 31,
1 9 9 8 1 9 9 7
------- -------
Total Revenues $ 33,832,500 $23,559,721
Loss from Continuing Operations $ (3,016,591) $(1,986,438)
Basic and Diluted Loss from Continuing
Operations Per Share of Common Stock $ (4.48) $ (4.32)
(3) Discontinued Operations and Divestitures
Frozen Dessert Business - In February 1997, the Company acquired certain assets
and related liabilities of DownEast Frozen Desserts, LLC ("DownEast"), which
manufactured and marketed frozen desserts under the name Deering Ice Cream, Inc.
("Deering").
The Company sold this business in December 1997, at loss of approximately
$1,385,000. 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.
F-11
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(3) Discontinued Operations and Divestitures (Continued)
Hospitality Business - In November 1997, the Company adopted a formal plan to
sell the Hospitality Business to Samuel H. Lasko then President, Treasurer and a
Director of the Company and to an unrelated party. The disposal was completed in
1998.
The 1997 estimated loss on the disposal of the Hospitality Group of
approximately $742,000, included a provision of $20,000 for expected losses
during the phase- out period. The Company received $90,000 from the unrelated
party. Dr. Lasko relinquished his employment contract and gave the Company an 8%
promissory note in the principal amount of $159,000. The note is due in equal
annual principal installments on April 30, 1999, 2000, and 2001.
Operating results, including net sales of approximately $4,853,000 of the
Hospitality Group are included in discontinued operations, in the statements of
operations for the year ended December 31, 1997.
During 1998 the Company incurred costs of $39,483 in excess of the amounts
provided in 1997 for expected losses during the phase out periods.
(4) Inventories
Inventories at December 31, 1998 consisted of:
Raw Materials $ 729,205
Semi-Processed Goods 65,625
Finished Goods 833,046
------------
Total $ 1,627,876
----- ============
(5) Property and Equipment
The following is a summary of property and equipment:
Land $ 197,951
Buildings 1,322,475
Machinery and Equipment 2,475,179
Transportation Equipment 964,943
Office Equipment, Furniture and Fixtures 374,248
Leasehold Improvements 97,836
Construction in Progress 161,499
------------
Total - At Cost 5,594,131
Less: Accumulated Depreciation (404,753)
------------
Property and Equipment - Net $ 5,189,378
---------------------------- ============
Included in the total cost above are assets acquired under capital leases in the
gross amount of $1,048,799. Amortization expense totaling $117,109 is included
in depreciation expense. Accumulated amortization at December 31, 1998 is
$168,971. Depreciation expense related to property and equipment amounted to
$335,217 and $69,465 for the years ended December 31, 1998 and 1997,
respectively.
F-12
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(6) Line of Credit and Term Loan
In July 1998, the Company and its subsidiaries entered into a financing
agreement with a bank under which the bank provided a line of credit, subject to
available collateral, to a maximum of $4,000,000 and a term loan of $2,000,000.
The loans are collateralized by virtually all assets of the Company. All cash
received by the Company must be remitted to the bank as long as there is an
outstanding balance under the line of credit, which will expire on July 15,
2001. The line of credit accrues interest at .5% over the bank's prime lending
rate. The interest rate at December 31, 1998 was 8.25%. The weighted average
interest rate on short-term borrowings as of December 31, 1998 was 8.25%. The
term loan is payable in thirty-six monthly installments of $23,810 plus annual
interest of 1% above the bank's prime rate through July 2001, with the remaining
balance then due. The interest rate at December 31, 1998 was 8.75% and the
outstanding balance on the loan was $1,880,950 (See Note 8). Costs related to
the financing are being amortized over its term. Amortization expense recorded
in 1998 was $93,747.
The loan agreement requires the Company to maintain certain financial ratios. In
addition, the loan agreement restricts additional borrowings, dividends and
acquisitions as defined. The Company was in default of certain covenants at
December 31, 1998. The bank has agreed to waive its right to consider the loans
in default.
(7) Convertible Subordinated Notes
On June 25, 1998, the Company issued to a private investor $2,625,000 principal
amount 12% convertible subordinated notes ("Notes"), and warrants to purchase
40,000 shares of common stock of the Company. The original terms of Notes
included conversion, at the option of the private investor, into Common Stock of
the Company at a rate of the lower of $10.00 per share, or a rate based on the
market price of the Company's common stock during the 30 trading day period
preceding the end of the 60-day period ended December 4, 1998, during which the
Company temporarily reduced the exercise price of its $40.00 warrants to $10.00.
The exercise price of the warrants is the same as the conversion rate of the
Notes. At any time, the Notes not then converted or repaid, could be converted
at the option of the Company, into redeemable convertible 8% cumulative
preferred stock ("Preferred Stock") of the Company. The Notes, warrants and
Preferred Stock issued to the private investor are subject to anti-dilution
adjustments, registration rights, interest and dividend adjustments and payment
by the Company of certain fees and expenses in connection with the transaction.
The Company also granted the private investor an option to purchase 50,000
shares of the Company's common stock. That option expired, unexercised, December
31, 1998.
The Company received proceeds of $2,500,000 on the $2,625,000 Notes resulting in
a discount of $125,000 and an additional discount of $281,000 attributed to the
warrants and option. The Note discount of $406,000 is being amortized over the
term of the Notes. Amortization expense recorded in 1998 related to the note was
$116,000.
The terms of the Note required the Company to attain a specified earnings level
for 1998, which was not attained. Accordingly, the Company is obligated to issue
the private investor additional warrants to purchase 25,000 shares of common
stock of the Company which are exercisable at $6.00 per share. Additionally, the
original terms of Notes have been amended (See Note 18).
F-13
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(8) Long-Term Debt
At December 31, 1998, long-term debt consisted of the following:
Bank term loan payable in thirty-six monthly installments
of $23,810 plus interest at 1% above the bank's prime rate
through July 2001, with the balance then due (See Note 6). $1,880,950
Note payable in thirty-six monthly total installments of $9,382,
including interest at 8.77% per annum, through October 2001,
collateralized by certain manufacturing equipment. 281,552
Capital lease obligation payable in forty-eight monthly total
installments of $6,215 including interest at 11.14%
per annum through March 2003, collateralized by certain
manufacturing equipment. 239,822
Notes payable in thirty-six to sixty total monthly
installments of $1,377-$2,142 including interest at
14.6%-16.1% per annum through February 2003,
collateralized by certain computer equipment and software. 109,288
Notes payable in thirty-six to sixty total monthly installments of
$1,150-$6,583 including interest at 7.68%-9.8% per annum
through July 2003, collateralized by certain transportation
equipment. 365,773
-----------
Total 2,877,385
Less: Current Portion (566,754)
-----------
Total $ 2,310,631
===========
Long-term debt at December 31, 1998 matures as follows:
1999 $ 566,754
2000 537,168
2001 1,555,047
2002 167,540
2003 50,876
-----------
Total $ 2,877,385
===========
F-14
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(9) 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 carry forwards. The operating loss
carry forwards at December 31, 1998, (assuming all operating loss carry forwards
will be available) amount to approximately $8,900,000. Such loss carry forwards
will expire at the rate of $3,350,000 in 2013, $4,000,000 in 2012, $1,200,000 in
2011 and $350,000 in 2010. At December 31, 1998, based on the amount of
operating loss carry forwards, the Company would have had a deferred tax asset
of approximately $3,000,000. However, because of the uncertainty that the
Company will generate income in the future sufficient to fully or partially
utilize these carry forwards, a valuation allowance of $3,000,000 has been
established representing an increase of $1,100,000 from December 31, 1997.
Accordingly, no deferred tax asset is reflected in these financial statements.
(10) Loss Per Share
Loss per share of common stock is based on weighted average number of common
shares outstanding for each period presented. There were no potential common
shares included as they were all considered to be anti-dilutive. Securities that
could potentially dilute earnings per share in the future include common stock
purchase warrants and options to purchase common stock representing
approximately 777,000 Common Shares. The Company has 948,342 shares of common
stock issued and outstanding at December 31, 1998.
(11) Commitments and Contingencies
Operating Leases - Future minimum rental payments under operating leases,
including equipment leases, with terms in excess of one year are as follows:
Year ending December 31, Amount
1999 $ 579,470
2000 575,070
2001 572,592
2002 538,236
2003 333,775
Thereafter 775,912
----------
Total $3,375,055
==========
A-One-A's main operating facility is leased from an affiliate of two of
A-One-A's officers at an annual rate of approximately $222,000 through June
2007. The lease provides the Company with three five year renewal options.
The Company also leases a plant located in Hileah, Florida at an annual rate of
approximately $128,000. The lease term is for five years through June 2003.
There is no renewal option for this lease.
Rent expense related to the leases for the years ended December 31, 1998 and
1997 was $462,005 and $142,630, respectively.
F-15
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(11) Commitments and Contingencies (Continued)
Employment Agreements - In addition to the A-One-A and Banner employment
agreements (See Note 2), the Company has an employment agreement with its
Executive Vice President and Chief Operating Officer, through August 31, 2000,
for a base salary of $125,000 per year.
Standby Letter of Credit - The Company has available a standby letter of credit
in the amount of $25,000, which is being maintained as security for payments
related to purchases of inventory. The letter of credit is collateralized
through the Company's bank line of credit.
Litigation - The Company is party to litigation arising from the normal course
of business. In management's opinion, this litigation will not materially affect
the Company's financial position, results of operations or cash flows.
(12) Description of Securities
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.
In September 1998, the Company issued 10,091 unregistered shares to repay
$126,132 of outstanding loans related to its 1997 acquisition of the Deering Ice
Cream business.
In October and November 1998, the Company sold 78,000 unregistered shares at
prices ranging from $9.30 to $10.00, with proceeds of $760,000. Unrelated
investors purchased 50,000 shares and directors, officers and employees
purchased 28,000 shares.
Warrant holders exercised warrants to purchase 26,951 shares of the Company's
common stock for $306,704.
In November 1998, the Company issued 11,000 unregistered shares to satisfy
$110,000 of indebtedness to the former owners of A-One-A related to its
acquisition in 1997.
In November 1997, the Company sold 20,000 shares of unregistered common stock to
an unrelated party for $11.00 per share. The issuance of these shares resulted
in a charge to operations of $180,000.
Convertible Preferred Stock - During 1997 the Company issued 1,523,825 Preferred
Units each consisting of one share of Convertible Preferred Stock and two
warrants, each to purchase one-tenth of a share of Company common stock at $40
per share for aggregate consideration of $2,637,300, net of offering costs. In
connection with the offering, the Company issued the soliciting agent and its
assignees, warrants to purchase 75,000 shares of Company common stock at a price
of $40 per share, exercisable through December 4, 2000. There were no dividends
declared or paid on the Convertible Preferred Stock during 1997 or 1998. On July
31, 1998, all of the outstanding shares of the Convertible Preferred Stock
automatically converted on the basis of one-fifth of a common share for each
convertible preferred share into shares of common stock of the Company.
F-16
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(12) Description of Securities (Continued)
Options and Warrants - The Company has the following options and warrants to
purchase of shares common stock outstanding at December 31, 1998:
Options - In connection with the initial public offering of Common Shares, the
underwriter purchased an option from the Company to purchase up to 125,000 units
each consisting of one-tenth of a share of common stock and a warrant to
purchase one-tenth of a share of common stock and 1,650 shares of common stock.
The option is exercisable through December 4, 2000 at $45.00 for each unit and
each share of common stock.
Warrants Number of Shares Exercise Price
- -------- ---------------- --------------
Issued in connection with initial public
offering of Common Shares in 1995 and
the sale of Convertible Preferred Stock Units
in 1997; exercisable through December 4, 2000 445,610 $ 40.00
Issued in connection with Deering purchase and to one
current and one former executive of the company in
1997; exercisable through August 31, 2000 130,833 11.875
Issued in connection with Convertible Subordinated
Notes in 1998; exercisable through June 30, 2002
(See Note 6). 40,000 6.00
Issued in connection with sales of Common
Shares in 1998; exercisable through
November 30, 2003 12,500 10.00
Issued prior to initial public offering in 1995;
exercisable through December 4, 2000. 20,000 100.00
(13) Stock Option Plan
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, as amended, authorizes the grant of options to purchase up to
an aggregate of 1,750,000 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.
F-17
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(13) Stock Option Plan (Continued)
Pursuant to the Plan, the Board of Directors have made the following grants:
Shares Exercise Price Expiration
------ -------------- ----------
1997
63,000 $11.875 February, 2007
10,800 23.10 June-September, 2007
1998
1,000 16.90 January, 2008
1,000 23.10 March, 2008
10,000 15.60 July, 2008
17,000 13.75 August 2008
28,000 10.00 November, 2008
The options generally vest over a three-year period, one-third per year.
A summary of the options is as follows:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at December 31, 1996
Granted 73,800 $13.50
Exercised -- --
Expired/Canceled -- --
-------
Outstanding at December 31, 1997 73,800 $13.50
Granted 57,000 $12.45
Exercised -- --
Expired/Canceled (16,500) 12.53
-------
Outstanding at December 31, 1998 114,300 $13.11
=======
Exercisable at December 31, 1998 23,767 $13.40
=======
Certain options and warrants included in the prior year table have been
reflected in Note 12.
If compensation cost of $492,000 and $890,000, for options issued under the Plan
in 1998 and 1997, respectively, 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 increased on a pro forma basis as
indicated below:
Years ended
December 31,
1 9 9 8 1 9 9 7
------- -------
Net Loss:
As Reported $(2,719,464) $(4,352,053)
Pro Forma $(3,211,464) $(5,242,053)
Basic and Diluted Net Loss Per Share of Common Stock:
As Reported $ (4.04) $ (9.80)
Pro Forma $ (4.77) $ (11.80)
F-18
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(13) Stock Option Plan (Continued)
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
assumption used for the grants awarded in 1998 and 1997, respectively:
Years ended
December 31,
1 9 9 8 1 9 9 7
------- -------
Dividend Yields 0% 0%
Expected Volatility 92% 76%
Risk-Free Interest Rate 4.7% 6.0%
Expected Lives 3.8 Years 4.0 Years
The weighted-average fair value of options granted was $8.63 and $7.60 for the
years ended December 31, 1998 and 1997, respectively.
The following table summarizes information about stock options and warrants at
December 31, 1997:
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Range of Remaining Average Average
-------- --------- ------- -------
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$10.00 - 11.85 75,500 8.8 Years $ 11.16 20,550 $11.85
$13.75 - 16.90 28,000 9.6 Years $ 14.52 -- --
$23.10 10,800 8.6 Years $ 23.10 3,267 $23.10
------- ------
114,300 9.0 Years $ 13.11 23,767 $13.40
======= ======
(14) Going Concern Considerations
The Company has incurred recurring operating losses from operations and had a
working capital deficiency of approximately $3,105,000 at December 31, 1998,
which would ordinarily raise substantial doubt about the Company's ability to
continue as a going concern. Management's actions and plans to deal with the
possible adverse effects of these factors have alleviated such doubt.
A group of private investors has committed to invest additional equity capital
into the Company (See Note 18). Additionally, during the first quarter of 1999,
management believes the food distribution operations have been improved with the
securing of substantial new business, particularly with high volume
institutional accounts. Management believes this additional sales volume will
contribute to increased profitability and reduced seasonable variability.
Management intends to continue it aggressive marketing efforts in these areas as
well as to cruise line and export customers.
Management further believes that a key element in its plan is to substantially
increase sales volume at Banner, where the Company has developed the capability
of producing high quality innovative products for the home meal replacement
("HMR") market.
Several major customers have accepted the products on a limited basis with good
prospects for significantly expanded distribution. Presentations have been made
to a number of additional customers and initial responses have been positive.
Management believes the proceeds from the equity investment, combined with its
plans for operating growth and efficiencies will allow for the Company's
continuing operations.
F-19
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(15) Segment Data
The following information is presented as a result of the Company adopting SFAS
No. 131, "Disclosures about Segments of on Enterprise and Related Information."
At December 31, 1998, the Company's two business units have distinct management
teams and infrastructures that offer different products which are evaluated
separately in assessing performance and allocating resources. These business
units have been reported as two reportable segments, Food Distribution and Food
Processing and Manufacturing. Each segment has a distinct customer base and
requires different strategic and marketing efforts. Food Distribution includes
the operations of the Company's A-One-A and Fresh subsidiaries and Food
Processing and Manufacturing is represented by Banner.
Terrace evaluates performance based on operating profit before interest and
taxes. Accordingly, interest has not been allocated to the operating segments.
Year ended December 31, 1998
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
Sales $27,981,862 $3,029,335 $31,011,197
Depreciation and Amortization 478,383 81,039 559,422
Operating Loss (276,394) (753,454) (1,029,848)
Segment Assets 9,837,572 5,358,607 15,196,179
Expenditures For Segment Property
and Equipment 872,161 1,697,865 2,570,026
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total Segments $(1,029,848)
Interest Expense (670,128)
Amortization of Deferred Financing Costs (61,550)
Interest Income 10,549
Corporate Expenses (829,004)
-----------
Total $(2,579,981)
===========
Assets:
Total Segments $15,196,179
Note Receivable 159,000
Other Assets 426,368
Other Current Assets 38,622
-----------
Total $15,820,169
===========
F-20
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(15) Segment Data (Continued)
Year ended December 31, 1997
Food
Distribution Total
------------ -----
Sales $8,929,462 $8,929,462
Depreciation and Amortization 157,613 157,613
Operating Loss (207,722) (207,772)
Segment Assets 6,689,284 6,689,284
Expenditures for Segment Property and Equipment 201,774 201,774
Reconciliation of segment amounts to consolidated amounts:
Loss from Continuing Operations:
Segment $ (207,772)
Interest Expense (79,594)
Interest Income 22,601
Corporate Expenses (1,146,751)
-----------
Total $(1,411,516)
===========
Assets:
Segment $ 6,689,284
Due on Sale 90,000
Other Assets 500
Restricted Cash 137,701
Other Current Assets 9,857
-----------
Total $ 6,927,342
===========
(16) 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, bank line of credit and letter 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.
F-21
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(17) New Authoritative Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and how it is
designated, for example, gains or losses related to changes in the fair value of
a derivative not designated as a hedging instrument is recognized in earnings in
the period of the change, while certain types of hedges may be initially
reported as a component of other comprehensive income (outside earnings) until
the consummation of the underlying transaction.
On March 31, 1999, the FASB released a proposal for public comment that would
resolve certain practice issues raised when accounting for stock options. Since
the issuance of APB Opinion 25, "Accounting for Stock Issued to Employees,"
questions have surfaced about its application and differing practices have
developed. The FASB's broad reconsideration of the stock compensation issue
culminated in the issuance of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. SFAS No. 123 permits the continued application of APB
Opinion 25 for employees. However, questions remain about the proper application
of APB Opinion 25 in a number of circumstances. The FASB's proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.
The proposed Interpretation includes the following conclusions:
o Once an option is repriced, that option must be accounted for as a variable
plan from the time it is repriced to the time it is exercised. Consequently,
the final measurement of compensation expense would occur at the date of
exercise.
o Employees would be defined as they are under common law for purposes of
applying APB Opinion 25.
o APB Opinion 25 does not apply to outside directors because, by definition, an
outside director cannot be an employee. Accordingly, the cost of issuing stock
options to outside board members will have to be determined on a fair value
basis in accordance with SFAS No. 123, and recorded as an expense in the
period of the grant (the service period could be prospective, however).
o Since APB Opinion 25 was issued in 1972, the terms of many "section 423" tax
plans have changed from those in existence at the time. Many of those plans
now provide that employees can purchase an employer's stock at the lesser of
85 percent of the stock price at the date of grant or 85 percent of the price
at the date of exercise. This provision is refereed to as a "look-back"
option. The FASB decided that plans with a look-back option do not," in and of
themselves, create a compensatory plan.
o A subsidiary may account for parent company stock issued to its employees
under APB Opinion 25 in their separately issued financial statements, provided
the subsidiary is part of the parent's Consolidation financial statements.
The FASB's proposed Interpretation would be effective upon issuance, which is
expected in September 1999, but generally would cover plan grants and
modifications that occur after December 25, 1998.
F-22
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
(18) Subsequent Event
On April 13, 1999, the Company issued 19,618 shares of a newly authorized Class
C Preferred Stock together with Warrants to purchase 340,000 shares of the
Company's Common Stock. The shares and warrants were purchased by a private
investor group which included three of the Company's Directors.
The Company received proceeds of approximately $1,700,000 in this transaction
which will be used for operating purposes.
The Preferred Stock provides for a cumulative annual coupon dividend of 13% and
the issue was priced to yield an effective annual dividend of 15%. The Preferred
Stock is redeemable, in cash, at the option of the Company through March 30,
2000, when it becomes mandatorily redeemable either in cash or through
conversion into 17% Notes which would mature on March 31, 2003. The stock
purchase warrants, which expire four years from their date of issue, provide for
the purchase of Company's Common Stock at a price of $9.00 per share.
Also on April 13, 1999, the Company and the private investor agreed to amend the
terms of the Convertible Subordinated Notes (See Note 7). The maturity date of
the Notes was extended to March 31, 2000, the Conversion Price of the Notes to
either Common or Preferred Shares and the Exercise Price of the Warrants was set
at $6.00 per share through that date. Any default which may have occurred under
the agreement was waived or deemed cured. The Company will issue additional
$621,000 in Notes as payment for accrued and unpaid interest on the Notes
through April 13, 1999 and other consideration to the private investor. The
Company will also issue the private investor additional 25,000 Warrants to
purchase the Company's Common Stock at an exercise price of $9.00 per share.
(19) Subsequent Event (Unaudited) Subsequent to the Date of the Report of
Independent Auditors
On April 30, 1999, the Company reached a final settlement relating to certain
claims and disputes arising from the sale of Deering in December 1997. The terms
of the settlement provide for the Company to make a cash payment and relinquish
its right to receive royalties from the buyer. Costs relating to the settlement
of $100,000 have been included in discontinued operations in the consolidated
statement of operations for the year ended December 31, 1998.
. . . . . . . .
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to said statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,169,445
<ALLOWANCES> 161,292
<INVENTORY> 1,627,876
<CURRENT-ASSETS> 5,855,460
<PP&E> 5,594,131
<DEPRECIATION> 404,753
<TOTAL-ASSETS> 15,820,169
<CURRENT-LIABILITIES> 8,960,324
<BONDS> 0
0
0
<COMMON> 948
<OTHER-SE> 2,029,100
<TOTAL-LIABILITY-AND-EQUITY> 15,820,169
<SALES> 31,011,197
<TOTAL-REVENUES> 31,011,197
<CGS> 23,624,475
<TOTAL-COSTS> 9,054,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 241,855
<INTEREST-EXPENSE> 670,128
<INCOME-PRETAX> (2,579,981)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,579,981)
<DISCONTINUED> (139,483)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,719,464)
<EPS-PRIMARY> (4.04)
<EPS-DILUTED> (4.04)
</TABLE>
