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, 1999.
[ ] 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
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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.)
1351 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 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: $42,390,476.
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, 2000: $1,189,116.
As of December 31, 1999, the total number of shares of common stock,
.001 par value (the "Common Stock"), of the Registrant 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"),
was 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 dairy products to hotels, restaurants, cruise lines and other
businesses in the southern Florida region; Fresh, Inc. ("Fresh"), in Pompano
Beach, Florida, which processes, packages and sells 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.
(b) Businesses of Issuer
Food Distribution
A-One-A Produce distributes fresh fruits, vegetables and dairy
products to restaurants, country clubs, hotels, cruise lines 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's 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 34 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. Revenue in 1999 for
A-One-A Produce was approximately $37.2 million. A-One-A Produce employs
approximately 190 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 complex and take into effect a number of qualitative factors.
Pricing is set at a detailed item by item level for each type of
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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, Sodexho Marriott, Darden (Red Lobster and Olive
Garden) and Apollo Ship Chandlers. One customer, Apollo Ship Chandlers,
accounted for 13.7% of revenues in 1999. This customer is expected to account
for a lower percentage of revenues in 2000 as the Registrant is expected to have
a larger customer base.
Effective January 1998, the Registrant purchased all of the
outstanding stock of A-One-A Produce's former affiliate, Fresh, for $105,000 in
cash and 13,895 shares of Common Stock as well as forgiving accounts receivable
in the amount of $141,986. Fresh supplies cut produce principally through
A-One-A Produce and also to process food manufacturers directly.
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. Banner continues its concentration on the
prepared foods market which is believed to be one of the fastest growing sectors
of the food processing industry. It has, however, redirected its marketing focus
from fully packaged meals toward meal components, concentrating on prepared
latin ethnic products.
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 described herein.
Banner currently employs approximately 76 persons, 9 administrative
personnel and 67 processing, warehousing and similar personnel. There are no
union contracts and management of Banner believes that its labor relations are
satisfactory.
Banner has no predominant supplier of raw materials and all materials
are available from numerous sources.
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. 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 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,
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national, regional and local economic conditions, demographic trends, traffic
patterns, and 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.
Both of Banner's manufacturing plants are regulated and inspected by
the U.S. Department of Agriculture.
Employees
The Registrant and its subsidiaries employ approximately 350 people
which includes approximately 27 administrative, 60 transportation, 33 sales and
customer service representatives, 225 warehouse and processing personnel and
five 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 NW
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), 1,700 pallet locations and includes 30,000 square feet of
refrigerated warehouse space. The lease term is for ten years expiring June 30,
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 6,500
square feet at 1280 SW 29th Avenue, Pompano Beach, Florida, for its offices,
processing and warehouse. The lease is for a term of three years with an option
to extend for an additional three years at an average annual rental of $59,000.
In connection with the acquisition of Banner, the Registrant
acquired land and buildings in Miami, Florida, where Banner maintains processing
facilities and offices. The Registrant considers the building to be in good
condition.
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Banner leases a 22,000 square foot facility in Hialeah, Florida, for
use as an additional processing facility and warehouse. The lease term is for
five years expiring in July 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 Banner, 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 a defendant in an action brought by ALR
Corporation and Arne L. Rotne filed with the 11th Judicial Circuit in and for
Miami Dade County, Florida in December 1999, alleging breach of contract,
misappropriation of trade secrets, unfair competition and violation of Florida's
Deceptive and Unfair Trade Practices Act. The complaint seeks unspecified
damages. The Registrant is vigorously defending the matter and, when
appropriate, expects to assert counterclaims.
See also Note 10 to the Consolidated Financial Statements with
respect to a claim by a former employee for compensation.
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) 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.
(b) Market Information. Until the close of business September 29,
1998, the Registrant's Common Stock and common stock purchase warrants
(collectively the "Warrants") were listed on the NASDAQ SmallCap Market. Since
September 30, 1998, the Registrant's securities have been listed on the NASDAQ
Over the Counter 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 and Warrant 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, 1998 32 1/2 10 5/8
June 30, 1998 25 8 3/4
September 30, 1998 19 1/16 9 3/8
December 31, 1998 15 5/8 5
March 31, 1999 6 13/16 3 1/8
June 30, 1999 3 1/4 2 1/2
September 30, 1999 3 1/2 2 15/16
December 30, 1999 3 1/16 1 1/2
March 31, 2000 3 3/8 1 1/2
Warrants March 31, 1998 $1.75 $1.00
June 30, 1998 1.50 .19
September 30, 1998 .875 .25
December 31, 1998 .594 .06
March 31, 1999 .02 .02
June 30, 1999 .035 .02
September 30, 1999 .035 .03
December 31, 1999 .04 .02
March 31, 2000 .04 .01
Holders
As of May 5, 2000, there were 72 and 17 holders of record of the
Registrant's Common Stock and Warrants, respectively. The Registrant believes
that the number of beneficial owners of the shares of Common Stock and Warrants
are higher because a substantial number of shares
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of Common Stock and Warrants are held of record in street name by broker-dealers
for their customers.
Dividends
The Registrant has not paid any dividends on its Common Stock and
does not expect to pay a cash dividend in the foreseeable future, but intends to
devote all funds to the operation of its business. There are also restrictions
on the payment of dividends in the Registrant's bank loan statement.
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, 1999 Compared to Year Ended December 31, 1998
The Registrant's consolidated net loss for 1999 was approximately
$5,774,000 including one time write off's and non-recurring expenses. This loss
was substantially higher than its loss in 1998 of $2,719,000. Several factors
contributed to the losses in 1999. The Registrant incurred substantial non-cash
interest costs associated with the issuance of its subordinated debt. The
Registrant is currently negotiating with the holders to restructure this debt a
substantial portion of which may be converted to shares of Common Stock. In
addition, the Registrant wrote off goodwill from some of the businesses the
Company is no longer operating. An additional bad-debt reserve was established
to ensure the Company's level of accrual was sufficient to handle the exposure
from its receivables. The Company also incurred a loss from its Banner
processing operation (see Food Processing and Manufacturing below). The Company
has made some major changes in Banner during the first quarter of 2000 to
dramatically reduce operating cost structure. The Company's food distribution
segment had operating earnings before impairment change of $550,000 for 1999
compared to a net loss of $276,000 in 1998. A-One-A continued sales growth and
expense control has led to this strong profitability and management believes
this growth will continue into 2000, although there can be no assurance thereof.
Operations
Food Distribution
The Registrant's distribution segment had operating earnings before
impairment charge of $550,000 for the year ended December 31, 1999 compared to
an operating loss of $276,000 for the comparable period in 1998. The strong
profit contribution during 1999 can be attributed to several factors. The
Registrant's marketing program concentrating on large volume chain restaurants,
institutions, hotel and healthcare accounts has had a strong impact on the
Registrant's sales volume and delivery costs. In addition, A-One-A Produces
cruise ship and export business lines of business have realized strong sales
growth with revenue in excess of $10 million during 1999. Current contract
opportunities with large volume new customers may enable A-One-A Produce to
continue its sales growth. A-One-A Produce's strong reputation for quality and
customer service has made it a major competitor in the South
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Florida marketplace. As further economies of scale are realized from new account
acquisitions and further cost control programs even greater profit levels may be
recognized in the future.
Food Processing and Manufacturing
The Registrant's manufacturing business, Banner incurred an
operating loss of approximately $3,130,000 for the year ended December 31, 1999
compared to a loss of $753,000 for the six-month period the Registrant owned
Banner in 1998. As a result of a change in the home meal replacement business of
the prepared foods industry from fully packaged meals to a meal component
approach, management has redirected its sales focus. Substantial write offs of
approximately $750,000 were recognized at year-end to account for the inventory
and marketing costs associated with the fully packaged meal program. Banner has
now focused its efforts toward the prepared latin ethnic foods market. In the
fiscal year 2000, Banner expects to take definitive steps, including but not
limited to payroll reduction, purchasing, scheduling, and manufacturing control,
to reduce the cost structure at Banner.
Liquidity and Capital Resources
At December 31, 1999, the Registrant had a cash deficit of
approximately $1,510,000, a working capital deficiency of $9,331,000, and
Stockholders' Deficiency of $3,872,000. The conditions may indicate that the
Company may be unable to continue as a going concern for a reasonable period of
time.
The Registrant is exploring a restructuring of most of its long term
indebtedness although there can be no assurance that such efforts will be
successful.
The Registrant has not complied with certain covenants of its bank
borrowing agreement. Although the lender has continued to provide funding under
terms of the agreement and temporarily increased the line of credit, it has not
formally waived its rights under the borrowing agreement. Negotiations are in
process to replace the current bank borrowing arrangement with one that will
provide for additional working capital with a higher line of credit to fund the
Company's continued growth. Several lenders have expressed interest in providing
financing to the Registrant.
The Registrant's Convertible Subordinated Notes (as defined herein)
matured on March 31, 2000. Based upon negotiations, the holders of the notes are
expected to agree to extend the term of the notes, convert their interest into
Common Shares or some combination thereof, although there can be no assurance
thereof.
Management believes the implementation of a new bank borrowing
arrangement, the restructuring of its Convertible Subordinated Notes and
improved operating performance will provide for the Registrant's improved
liquidity, although there can be no assurance thereof.
In December 1999, January 2000 and February 2000 two of the
Registrant's Executive Officers loaned the Registrant a total of $625,000. Each
has expressed a willingness to convert his loans into common stock of the
Registrant.
During April, May and July of 1999, the Registrant issued 20,772
shares of the Series C & D Redeemable Preferred Stock together with warrants to
purchase 360,000 shares of the Registrant's Common Stock to a private investment
group which included four of the Registrant's Directors. The proceeds of
approximately $1,800,000 were used for working capital purposes. The Series C &
D Redeemable Preferred Stock became mandatorily redeemable by the Registrant on
March 31, 2000 either in cash, or, at Registrant's election, by the issuance of
17% notes maturing March 31, 2003. The Series C & D Redeemable Preferred Stock
has not been redeemed as the Registrant is negotiating with the holders to
convert their interests therein to Common Stock of the Registrant. There can be
no assurance that such negotiations will be successful.
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On June 25, 1998, the Registrant issued to a private investor
$2,625,000 principal amount of 12%, which subsequently increased to 14%,
Convertible Subordinated Notes ("Convertible Subordinated 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 October 5, 1998, the Registrant, through its prospectus offered
to its warrant holders the opportunity to exercise their warrants and purchase
Common Stock at a temporarily reduced exercise price. On 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
Due to the seasonal nature of the food-distribution market in South
Florida, A-One-A Produce has historically been affected by the summer month's
business slowdown. With the continued sales growth in all business segments of
the Registrant, most noticeably the export and cruise ship divisions, the
seasonal slowdown in the local market will have a much smaller impact on the
Company's total sales in the traditional off season months. In addition as
Banner's sales levels increase, the nationwide shipment of latin ethnic products
will help reduce the seasonal impact of Registrant's consolidated revenue and
allow for a more predicable sales and profit trend.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this annual report may be forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Although the Registrant
believes that the assumptions underlying the forward- looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in the projections will prove to be accurate, and the Registrant does
not, nor should any investor, consider these projections to be representations
by the Registrant. Potential investors of the Registrant are cautioned that all
forward-looking statements involve risks and uncertainty. Such risks and
uncertainties include, but are not limited to, the risk factors set forth below.
1. Deficits ad Borrowing Defaults. The Registrant has increased
recurring operating losses and has significant working capital deficiency and
Stockholder's Deficit and is in default of its bank borrowing agreement. In
addition, the Registrant's Convertible Subordinated Notes matured on March 31,
2000 and have not been paid. These factors raise substantial doubt as to the
Registrant's ability to continue as a going concern and there can be no
assurance that the Registrant's efforts to restructure its indebtedness will be
successful.
2. Need for Additional Financing. The Registrant will be required to
obtain additional debt and/or equity financing to fund the costs of continuing
operations and there can be no assurance that it will be able to obtain such
financing.
3. Competition. The produce distribution and food processing businesses
are highly competitive and there are numerous well-established competitors
possessing substantially greater financial, marketing, personnel and other
resources than the Registrant. These competitors include national, regional and
local firms. There can be no assurance that consumers will regard the
Registrant's products and services as significantly distinguishable from
competitive products and services, or that substantially equivalent products
will not be introduced by the Registrant's competitors or that the Registrant
will be able to compete successfully.
4. Changes and Other Factors Affecting Business. The produce and
grocery distribution and food processing industries are often affected by
changes in consumer tastes, national, regional and local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing facilities. In addition, the labor intensiveness of these businesses,
as well as factors such as inflation, increased food, labor and employee benefit
costs and availability of experienced management and hourly employees may also
adversely affect the Registrant's operations.
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5. Current Seasonal Nature of Certain Operations. The Registrant's
current operations are located in south Florida and are seasonal in nature since
such operations rely, to a certain degree, on tourism in the winter months to
sustain them.
6. Government Regulation. Food businesses are subject to various
federal, state and local laws and regulations. The failure to obtain and retain
licenses or any other governmental approvals or to pass periodic governmental
inspections would have a material adverse effect on the Registrant. In addition,
food processing and other operating costs are affected by increases in the
minimum hourly wage, unemployment tax rates, sales taxes and similar matters
over which the Registrant has no control.
7. PACA Licenses. The Registrant's A-One-A Produce & Provisions, Inc.
subsidiary and its affiliate, Fresh, Inc., are subject to The Perishable
Agricultural Commodities Act ("PACA") which regulates "commission merchants,"
"brokers" and "dealers" engaged in the business of shipping or receiving
perishable agricultural commodities in interstate commerce. A-One-A Produce and
Terrace Fresh currently maintain PACA licenses to distribute fresh produce,
fruits and vegetables. The ability of the Registrant to continue successful
distribution and sales of its fresh produce, fruits and vegetables is dependent
upon its continued compliance with PACA. Loss of its PACA license would have a
materially adverse effect on the Registrant.
8. Dependence on Key Personnel. The Registrant's success depends to
a significant extent on the continued service of certain key management
personnel, the loss or interruption of services of which could have a material
adverse affect on the Registrant.
10. No Assurance of Continued Public Trading Market or Continued
Qualification for continued listing on the Over the counter Bulletin Board
("OTCBB") Inclusion. The Registrant's Common Stock and Warrants are listed on
the OTCBB. If a public trading market does not continue for the Registrant's
securities, purchasers of the Registrant's securities may have difficulty
selling their securities should they desire to do so. If the Registrant is
unable to satisfy the requirements for continued listing on OTCBB, trading, if
any, in the securities offered hereby would be conducted in the "pink sheets".
The Registrant is subject to the Securities and Exchange Commission's "Penny
Stock" regulations (as discussed below). As a result, an investor may find it
more difficult to dispose or to obtain accurate quotations as to the price of
the securities offered hereby. The above-described rules may materially
adversely affect the liquidity of the market for the Registrant's securities.
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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 engaged Deloitte and Touche LLP to serve as
independent accountants and auditors for the year ended December 31, 1999
succeeding Moore Stephens, P.C. The Registrant did not have any material
disagreements on accounting and financial disclosure with its accountants in
1999.
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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 59 Chairman of the Board of Directors,
President and Chief Executive Officer
Jonathan S. Lasko 29 Executive Vice-President, Secretary,
Chief Operating Officer and Director
Richard Power 51 Director
Fred A. Seigel 43 Director
Houssam T. Aboukhater 28 Director
Salvatore J. Bommarito 51 Director
William P. Rodrigues, Jr. 56 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 six 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 59, 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 Company. He is also a Managing Director of
Latona Associates, Inc. ("Latona Associates"); an investment-banking firm
involved in providing advisory services and capital. He served as a director of
a number of public and private companies and is currently a director of WPI
Group, Inc., SI Handling, Inc. and Beacon Capital Partners, L.P. 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 29, has been a director of the Registrant
since September, 1994, and its Chief Operating Officer since August, 1995. He
has also been the Company's Executive Vice-President since May, 1993. Mr. Lasko
is responsible for all day-to-day business conducted by the Company and oversees
the operations of the subsidiaries of the Registrant. Mr. Lasko
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was the Vice-President of A&E Management Corporation from October 27, 1993 and,
The Lasko Companies, Inc. from May 11, 1995. He is also President and Chief
Executive Officer of A-One-A Produce. Mr. Lasko attended Bernard Baruch College
in New York.
RICHARD POWER, age 51, has served as a director of the Company since
February, 1997. Currently Mr. Power is Executive Vice-President of Tyco
International Ltd., a New York Stock Exchange listed corporation. 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. He served as a consultant to Tyco in
Mergers and Acquisitions from 1995 to 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. for Boston College
FRED A. SEIGEL, age 43, has served as a Director since February 18,
1998. Mr. Seigel joined Latona Associates, a leading investment and advisory
firm, as a Managing Director in September 1999. In addition to his work at
Latona Associates, he currently serves as Executive Vice President of Operations
of ProcureNet, Inc. the pioneer and leading provider of Internet B2B solutions
and services. Prior to Latona Associates, Mr. Seigel founded and served for six
years as President and Director of Energy Capital Partners, a company that
provided financing for energy efficiency projects throughout the United States.
The company was sold to a Global 100 company in February, 1999. He also served
as a limited partner to two large-scale co-generation projects representing a
total investment of $350 million and as a project manager for Wheelabrator-Frye,
Inc. In addition, Mr. Siegel served as Director of the Executive Office of
Energy for the State of New Hampshire. Mr. Seigel received a Bachelor of Art
degree from New England College.
HOUSSAM T. ABOUKHATER, age 28, has served as a Director of the
Company since August 1998. Mr. Aboukhater 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
GenTek, 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.
SALVATORE J. BOMMARITO, age 51, has served as a Director of the
Company since May 1999. Mr. Bommarito is the founder of Twin Capital, Inc./New
Street Investments, L.P. a New York city-based investment banking firm,
organized in January 1994, which services include advising on mergers and
acquisitions and private placements and providing general corporate advice. From
June 1990 to January 1994, Mr. Bommarito served as a Managing Director at
Chemical Securities, Inc. in New York where he was founder and co-head of its
high yield bond underwriting business. From December 1984 to June 1990, Mr.
Bommarito served as a Managing Director at Bankers Trust Company in New York
where he was the Senior Banker in the Merchant Banking Group, which services
included advising on mergers and acquisitions, private placement and venture
capital. Mr. Bommarito holds an M.B.A. from Fordham University and an A.B. from
the University of Notre Dame.
14
<PAGE>
WILLIAM P. RODRIGUES, JR., age 56, was appointed Vice-President of
Finance and Chief Financial Officer on July 18, 1998. Previously, he had been
Controller of Mueller Company, a unit of Tyco International, Inc. since 1989.
From 1976 to 1987, he was Vice-President of 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with
the Securities and Exchange Commission ("SEC"). Such officers and directors and
10% stockholders are also required by SEC rules to furnish to the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons, the Company
believes that, during the fiscal year ended December 31, 1999, that there was
compliance with all Section 16(a) filing requirements applicable to its
officers, directors and 10% stockholders.
ITEM 10 - EXECUTiVE COMPENSATION
The following table sets forth all compensation paid or
distributions made during the fiscal years ended December 31, 1999, 1998 and
1997, by the Registrant or any of its subsidiaries to the Chief Executive
Officer of the Registrant and to each of its most highly compensated executive
officers, other than the Chief Executive Officer, whose compensation exceeded
$100,000.
<TABLE>
<CAPTION>
Annual Compensation
Year Ended Annual Other
Name & Principal Position December 31 Salary Compensation Options
- ------------------------- ----------- ------ ------------ -------
<S> <C> <C> <C> <C>
Samuel H. Lasko,
President and 1997 $150,000 $22,502(2)
Treasurer(1) 1998 $ -0- $ -0-
Jonathan S. Lasko,
Executive Vice 1997 $ 95,000 $21,727(2) 12,500(4)
President, Secretary and 1998 $125,000 $14,058 8,000(4)
Chief Operating Officer 1999 $125,000 $23,955(2) 5,000(4)
Steven Shulman 1997 $ -0- $ -0- 13,000(4)
Chief Executive Officer 1998 $ -0- $ -0- 15,000(4)
and President(3) 1999 $ -0- $ -0- 20,000(4)
William P. Rodrigues, Jr.
Vice President Finance and
Chief Financial Officer 1999 $100,000 $ 6,096(5)
Milton Namiot, 1997 $175,000 $ 9,500(2) 12,500(6)
Chief Executive Officer(5)
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Resigned effective August 26, 1998.
(2) Represents amounts paid for lease of automobile, automobile insurance
and health insurance.
(3) 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.
(4) Represents options to purchase shares of Common Stock granted to
directors and executive officers under the Registrant's 1997 Stock
Option Plan.
(5) Represents amount paid for health insurance.
(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
Common Stock were made immediately exercisable. They have since expired,
unexercised.
15
<PAGE>
Option/SAR Grants in the Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees Exercise or
Name Granted(#) in Fiscal Year Base Price ($/Sh) Expiration Date
---- ---------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Steven Shulman 20,000 33.8% $ 3.19 May 18, 2009
Jonathan S. Lasko 5,000 8.5% $ 3.19 May 18, 2009
</TABLE>
Director Compensation
Directors are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors. In addition to the
foregoing, directors are also granted options annually through the Registrant's
1997 Stock Option Plan. At the Meeting held May 18, 1999, the Chairman of the
Board and President, Mr. Shulman, was granted 20,000 options, Mr. Richard Power
was granted 20,000 options, Mr. Jonathan Lasko was granted 5,000 options and
each of the other three directors was granted 3,000 options for 1999. The
Registrant anticipates that the Board of Directors will continue to meet at
least four times a year.
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 1999, 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".
16
<PAGE>
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Steven Shulman -0- -0- 14,667/33,333 $0/0
Jonathan S. Lasko -0- -0- 11,005/14,495 $0/0
William P. Rodrigues, Jr. -0- -0- 4,167/8,333 $0/0
</TABLE>
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 of the Board
of Directors (the "Compensation Committee") and increased Jonathan S. Lasko's
base compensation for 1998 and 1999 to $125,000. 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
June 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.
17
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTaIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information concerning the beneficial
ownership of Common Stock of the Registrant by each director, certain executive
officers, and by all directors and officers of the Registrant as a group as of
December 31, 1999. In addition, the table provides information concerning the
beneficial owners known to the Registrant to hold more than five percent of the
948,342 shares of outstanding Common Stock of the Registrant as of December 31,
1999.
Common Stock
Beneficial Percent of
Name of Beneficial Owner Ownership(1) Class(1)
- ------------------------ ------------ --------
Jonathan S. Lasko 104,167(2) 10.0%
Richard Power 94,250(3) 9.4%
Steven Shulman 130,284(4) 12.0%
Fred A. Seigel 20,458(5) 1.7%
Houssam T. Aboukhater 21,000(6) 1.8%
Salvatore Bommanito 40,000(9) 3.4%
William P. Rodrigues 6,666(7) *
Michael Feinberg 57,500(8) 6.0%
All Directors, Executive Officers and 5%
Holders as a Group (8 persons) 474,325 40.4%
- -----------------------------------
*Less than one percent.
(1) In each case the beneficial owner has sole voting and investment power
except that 38,000 shares held by Jonathan S. Lasko are held in joint
tenancy with his wife Ellen J. Lasko.
(2) Includes 2,500 shares held for the benefit of Jordana Lasko, a minor.
Includes 15,167 Options and 37,500 Warrants exercisable within 60 days
of this Report.
(3) Includes 6,333 Options and 43,167 Warrants exercisable within 60 days
of this Report.
(4) Includes 43,667 Warrants exercisable within 60 days of this Report.
(5) Includes 1,000 Options and 11,583 Warrants exercisable within 60 days
of this Report.
(6) Includes 1,000 Options exercisable within 60 days of this Report.
(7) Includes 4,166 Options exercisable within 60 days of this Report.
(8) Includes 7,500 warrants exercisable within 60 days of this Report.
(9) Includes 40,000 warrants exercisable within 60 days of this Report.
ITEM 12 - CERTAIN RELATIONSHiPS AND RELATED TRANSACTIONS
Samuel H. Lasko and Jonathan S. Lasko (collectively the "Laskos")
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.
On December 16, 1999 and February 9, 2000 Steven Shulman, President,
Chairman of the Board of Directors and Chief Executive Officer made two loans to
the Registrant of $300,000 each. The loans are evidenced by 8 1/2% Senior
Subordinated Notes, due December 10, 2000 and February 2001, respectively.
18
<PAGE>
On January 10, 2000, Jonathan Lasko, Executive Vice President and
Chief Operating Officer, loaned the Registrant $25,000. The loan is evidenced by
an 81/2% Senior Subordinated Note due January 10, 2001.
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 **
(21) Subsidiaries of the Registrant
The Registrant's three operating wholly owned subsidiaries are:
1. A One A Produce & Provisions, Inc.
1351 NW 22nd Street
Pompano Beach, Florida 33069
2. Fresh, Inc.
1351 NW 22nd Street
Pompano Beach, Florida 33069
3. Banner Beef & Seafood Co., Inc.
1111 NW 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, 1998, 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 May 3, 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, (ii) on
August 20, 1999 to report the dismissal of Moore Stephens P.C. as independent
accountants and (iii) on November 12, 1999 report the engagement of Deloitte and
Touche LLP as independent accountants and auditors for 1999.
19
<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 11, 1999
- --------------------------------------------------------------------------------
POWER OF ATTORNEY
Terrace Food Group, Inc. and each of the undersigned do hereby appoint
Messrs. Steven Shulman and Jonathan Lasko, its or his true and lawful attorney
to execute on behalf of the Registrant and the undersigned any and all
amendments to the Annual Report on Form 10-KSB and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Steven Shulman Chairman of the Board, Chief May 11, 2000
- --------------------- Executive Officer, President
Steven Shulman and Director
/s/ Jonathan S. Lasko Executive Vice-President, Chief May 11, 2000
- ---------------------- Operating Officer, Secretary
Jonathan S. Lasko and Director
Director
- ----------------------
Richard D. Power
/s/ Fred A. Seigel Director May 11, 2000
- -----------------------
Fred A. Seigel
/s/ Houssam T. Aboukhater Director May 11, 2000
- -------------------------
Houssam T. Aboukhater
20
<PAGE>
Director
- --------------------------
Salvatore J. Bommarito
/s/ William P. Rodrigues, Jr. Vice President-Finance, May 11, 2000
- ------------------------------- Treasurer and Chief Financial
William P. Rodrigues, Jr. Officer
21
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORTS F 2-3
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998:
Consolidated Balance Sheet F 4
Consolidated Statements of Operations F 5
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) F 6
Consolidated Statements of Cash Flows F 7
Notes to Consolidated Financial Statements F 9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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 subsidiaries (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for 1999 have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's recurring losses from
operations, negative cash flows from operations and stockholders' capital
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
May 5, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Terrace Food Group, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Terrace Food Group, Inc. and
its subsidiaries for the year 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Terrace Food Group, Inc. and its subsidiaries for the year
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
F-3
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Accounts receivable (less allowance for
<S> <C>
doubtful accounts of $303,944) $ 5,334,715
Inventories 1,878,081
Current portion of note receivable - stockholder 53,000
Other current assets 239,272
------------
Total current assets 7,505,068
Property and equipment, net 4,631,962
Note receivable - stockholder, net of current portion 53,000
Cost in excess of net assets of businesses acquired -
net of accumulated amortization of $469,465 3,366,679
Deferred Financing Costs, net of accumulated amortization of $361,818 249,322
------------
TOTAL $ 15,806,031
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Cash overdraft $ 1,510,380
Accounts payable 4,707,832
Accrued expenses 1,802,931
Line of credit 4,056,528
Term loan 1,380,330
Current portion of long-term debt 271,788
Convertible subordinated notes 3,105,987
------------
Total current liabilities 16,835,776
Note payable - related party 300,000
Long term debt, net of current portion 477,496
Other non-current liabilities 136,666
------------
Total liabilities 17,749,938
COMMITMENTS AND CONTINGENCIES (Note 10)
SERIES C and D REDEEMABLE PREFERRED STOCK,
$.001 par value, 21,308 shares authorized, 20,772 shares issued and outstanding 1,927,989
------------
STOCKHOLDERS' DEFICIENCY:
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 10,513,923
Accumulated deficit (14,386,767)
------------
Total stockholders' deficiency (3,871,896)
------------
TOTAL $ 15,806,031
============
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Net sales $ 42,390,476 $ 31,011,197
Cost of sales 33,287,117 23,624,475
------------ ------------
Gross profit 9,103,359 7,386,722
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 12,239,202 9,065,269
Provision for doubtful accounts 403,142 241,855
Impairment charge 606,708 --
------------ ------------
Total operating expenses 13,249,052 9,307,124
------------ ------------
Loss from operations (4,145,693) (1,920,402)
------------ ------------
OTHER (EXPENSE) INCOME:
Interest expense (1,638,056) (670,128)
Interest income 9,894 10,549
------------ ------------
Total other expense (1,628,162) (659,579)
------------ ------------
Loss from continuing operations (5,773,855) (2,579,981)
DISCONTINUED OPERATIONS:
Loss on disposal of discontinued businesses
(net of income taxes of $0) -- (139,483)
------------ ------------
Net loss $ (5,773,855) $ (2,719,464)
============ ============
BASIC AND DILUTED LOSS PER
SHARE OF COMMON STOCK:
Loss from continuing operations $ (6.52) $ (3.84)
Loss on disposal of discontinued businesses -- (0.20)
------------ ------------
Basic and diluted net loss per share of common stock $ (6.52) $ (4.04)
============ ============
Basic and diluted weighted average shares of common
stock outstanding 948,342 672,620
============ ============
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Convertible Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------ ------ ------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 78,000 78 759,922 760,000
Net costs from exercise
of common stock purchase
warrants 26,951 26 (23,571) (23,545)
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
Issuance of common stock purchase
warrants related to the
Series C & D Redeemable
Preferred Stock 277,200 277,200
Amortization of Series C and D
Redeemable Preferred Stock discount (405,289) (405,289)
Net loss (5,773,855) (5,773,855)
--- ---- ------- ----- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1999 - $ - 948,342 $ 948 $10,513,923 $(14,386,767) $(3,871,896)
== ==== ======= ===== =========== ============ ===========
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Loss from continuing operations $(5,773,855) $(2,579,981)
----------- -----------
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 2,025,291 769,466
Provision for doubtful accounts 403,142 241,855
Impairment charge 606,708 --
Gain on sale of equipment (91,614) --
Changes in Assets and Liabilities:
(Increase) decrease in:
Restricted cash -- 137,701
Accounts receivable (1,729,704) (1,924,768)
Inventories (250,205) (573,885)
Note receivable - stockholder 53,000 (159,000)
Other current assets (72,842) 47,779
Deferred financing costs (47,536) (35,033)
Increase (decrease) in:
Accounts payable and cash overdrafts 1,725,316 2,563,373
Accrued expenses 748,065 392,590
Other noncurrent liabilities (47,500) 184,166
----------- -----------
Total adjustments 3,322,121 1,644,244
----------- -----------
Net cash used in continuing operations (2,451,734) (935,737)
----------- -----------
Discountinued Operations:
Loss from discontinued businesses -- (139,483)
----------- -----------
Net cash used in discontinued operations -- (139,483)
----------- -----------
Net cash used in operations (2,451,734) (1,075,220)
----------- -----------
INVESTING ACTIVITIES - CONTINUING OPERATIONS:
Purchase of property and equipment (749,033) (2,382,604)
Purchase of businesses - net of cash acquired (3,389,668)
Proceeds from sale of equipment 637,919 --
----------- -----------
Net cash used in investing activities - continuing operations (111,114) (5,772,272)
----------- -----------
</TABLE>
(Continued)
F-7
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------
1999 1998
FINANCING ACTIVITIES - CONTINUING OPERATIONS:
<S> <C>
Proceeds from issuance of convertible subordinated notes
with warrants and options -- 2,500,000
Proceeds from sale of Series C & D Preferred Stock with warrants 1,799,900 --
Borrowing of long-term debt 380,000 3,001,684
Repayment of long-term debt (1,127,771) (368,049)
Borrowing under line of credit 1,210,719 2,845,810
Repayment of line of credit -- (1,354,085)
Borrowings from related party 300,000 --
Net proceeds from issuance of common stock
and exercise of common stock purchase warrants -- 736,455
Incurrence of deferred financing costs -- (514,323)
----------- -----------
Net cash provided by financing activities - continuing operations 2,562,848 6,847,492
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR -- --
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the years for:
Interest $ 615,311 $ 345,097
=========== ===========
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 its
common stock valued at $236,132 to satisfy liabilities relating to the
purchase of A-One-A and Deering.
The Company's convertible subordinated notes were issued in 1998 at a discount
of $406,000 that is being amortized over the term of the notes (see Note 7).
In 1998, the Company's outstanding convertible preferred stock automatically
converted to common stock (see Note 12).
(Concluded)
See notes to the consolidated financial statements.
F-8
<PAGE>
TERRACE FOOD GROUP, INC. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS, MANAGEMENT'S PLANS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Operations - Terrace Food Group, Inc. (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
A-One-A Produce and Provisions, Inc. ("A-One-A") and Fresh, Inc.
("Fresh") subsidiaries. A-One-A distributes fresh and precut produce,
and dairy products to foodservice, to cruise lines and to export
customers throughout South Florida. Fresh processes precut produce which
is marketed primarily by A-One-A.
The Food Processing and Manufacturing segment includes the operations of
the Company's Banner Beef & Seafood Co., Inc. ("Banner") subsidiary (See
Note 2). Banner is a custom value added processor of meat, seafood and
poultry products marketed nationally to retail and foodservice
customers.
Going Concern - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred recurring operating losses.
At December 31, 1999 there is a working capital deficiency and a
stockholder's deficiency; the Company is in default of its bank
borrowing agreement. These conditions may indicate that the Company may
be unable to continue as a going concern for a reasonable period of
time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Management of the Company is taking several actions in its attempts to
alleviate this situation.
Management Plans - Negotiations are in process to replace the current
bank borrowing arrangement with a new arrangement with a different
financial institution that would provide for additional working capital
which would enable the Company to fund its operations and obligations
for at least fiscal 2000. Several lenders expressed interest in
providing financing to the Company. The Company is in the process of
negotiating terms with the prospective lenders.
The Company's Convertible Subordinated Notes matured on March 31, 2000;
however, the Company is in negotiations with the holders to extend the
maturity. As part of the negotiations, the holders of the notes are
being asked to convert all or part of the notes into common stock.
Management has taken actions to improve operations at Banner. Cost
reduction programs have reduced salaries and overhead. The product line
has been streamlined and marketing efforts have been targeted at proven
and growing market segments. Banner's ethnic product line revenues for
the first quarter of fiscal 2000 have exceeded the revenues for the
entire fiscal 1999 year and, as such, management expects that revenues
for the full fiscal 2000 will be significantly in excess of fiscal 1999
as a result of the product line continuing to receive market acceptance.
F-9
<PAGE>
Food Distribution revenues for the first quarter of fiscal 2000 exceeds
similar revenues of fiscal 1999 by approximately 18% and the Company is
in the process of negotiating for new food service contracts with cruise
lines. Accordingly, management expects the Food Distribution business to
grow substantially during fiscal 2000.
Management believes the implementation of a new bank borrowing
arrangement, the restructuring of its Convertible Subordinated Notes and
improved operating performance would provide for the Company's
continuing operations through fiscal 2000.
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, which does not have a
significant impact on the consolidated financial statements.
Inventories - Inventories are recorded at the lower of cost or market.
Cost is determined on the first-in, first-out ("FIFO") basis.
Deferred Financing Costs - The Company amortizes, using a method which
approximates the interest method, deferred financing costs incurred in
connection with its financing agreements over the related period.
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for normal repairs and maintenance are charged to expense
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,
if applicable.
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, 1999.
Cost in Excess of Net Assets of Businesses Acquired - The cost in excess
of net assets of businesses acquired ("Goodwill") 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.
F-10
<PAGE>
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.
During 1999, the Company recorded an impairment charge of approximately
$607,000 related to goodwill associated with prior acquisitions and is
recorded as Impairment Charge in the accompanying consolidated
statements of operations. As of December 31, 1999, management expects
the carrying value of its long-lived assets to be fully recoverable.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the bases for income
tax purposes, and operating loss and tax credit carryforwards.
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.
Concentrations of Risk - 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 27% 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.
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. Among other provisions, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments 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. In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 for all fiscal quarters of all fiscal years beginning after June 15,
2000. Management has not determined what effect, if any, the adoption of
SFAS No. 133 will have on the consolidated financial statements.
Loss Per Share - Basic EPS excludes dilution and is computed by dividing
earnings (loss) available to common stockholders by the weighted-average
number of common stock shares outstanding for the period. Diluted EPS
assumes conversion of options and warrants and the issuance of common
stock for all other potentially dilutive shares, unless the effect of
issuance would have an anti-dilutive effect.
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 goodwill 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. During 1999, the Company determined that the remaining net
carrying value of the goodwill associated with this acquisition was
F-11
<PAGE>
impaired and not recoverable and, accordingly, charged such to
operations as an impairment charge in the consolidated 1999 statement of
operations.
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. 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 goodwill of $373,004.
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 have been included in the Company's
results of operations from the date of acquisition. 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.
There was no goodwill recorded in connection with this acquisition.
A summary of the allocation of the aggregate consideration paid for the
aforementioned acquisitions, based on 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
Goodwill 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
===========
F-12
<PAGE>
The following pro forma information presents the results of the Company
for the year ended December 31, 1998 as if the above acquisitions had
occurred at the beginning of the period presented:
For the Year
Ended
December 31, 1998
Total revenues $ 33,832,500
============
Loss from continuing operations $ (3,016,591)
=============
Basic and diluted loss from continuing
operations per share of common stock $ (4.48)
============
The pro forma consolidated results of operations are based on historical
financial information of the Company and include adjustments to give
effect to the following: additional amortization of goodwill and other
intangibles arising from the transactions; increased interest on
borrowing to finance the acquisitions; and certain other adjustments.
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which would have actually resulted had the acquisitions
occurred on the date indicated, or of future results of operations of
the consolidated entities.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
During 1998 the Company incurred costs of $139,483 in excess of the
amounts provided in 1997 for expected losses during the phase out
periods for two businesses it divested in 1997.
4. INVENTORIES
Inventories at December 31, 1999 consisted of:
Raw Materials $ 551,436
Semi-Processed Goods 43,102
Finished Goods 1,283,543
----------
Total $1,878,081
==========
F-13
<PAGE>
5. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1999:
Land $ 197,951
Buildings 1,322,475
Machinery and equipment 3,067,713
Transportation equipment 32,174
Office equipment, furniture and fixtures 620,184
Leasehold improvements 360,311
----------
Total at cost 5,600,808
Less: accumulated depreciation (968,846)
-----------
Property and equipment, net $ 4,631,962
===========
Included in the total cost above are assets acquired under capital
leases in the gross amount of $1,452,688. Depreciation expense for these
assets acquired under capital leases was $204,945 and $117,109 for the
years ended December 31, 1999 and 1998, respectively. Accumulated
depreciation for these assets acquired under capital lease at December
31, 1999 was $212,561.
Total depreciation expense related to property and equipment amounted to
$760,145 and $335,217 for the years ended December 31, 1999 and 1998,
respectively.
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, as defined in the agreement, to a maximum of
$4,000,000 and a term loan of $2,000,000. The loans are collateralized by
virtually all of the 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 on
the line of credit at December 31, 1999 was 9%. 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 15, 2001, with the remaining balance then due.
The interest rate for the term loan at December 31, 1999 was 9.5%. Costs related
to the financing, included in deferred financing costs in the consolidated
balance sheet, are being amortized over its term. Amortization expense recorded
for the years ended December 31, 1999 and 1998 was $134,292 and $93,747,
respectively.
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, 1999 and, accordingly, the term loan is included in current
liabilities in the consolidated balance sheet. The bank has continued to provide
funds under the agreement and the line has been temporarily increased.
The Company is negotiating with several other banks to replace this arrangement.
F-14
<PAGE>
7. CONVERTIBLE SUBORDINATED NOTES
In 1998, the Company issued to a private investor $2,625,000 principal
amount of Convertible Subordinated Notes ("Notes"), warrants to purchase
40,000 shares of common stock and options to purchase 50,000 shares of
common stock of the Company. The options expired December 31, 1998. The
exercise price of the warrants and the conversion rate of the Notes are
at $6 a share. The Notes can be converted at the option of the Company
into Redeemable Convertible 8% Cumulative Preferred Stock ("Preferred
Stock") of the Company. The Notes, warrants and any Preferred Stock
issued to the private investor are subject to anti-dilution adjustments,
registration rights, interest and dividend adjustments and payment by
the Company of certain fees and expenses in connection with the
transaction. The Company received proceeds of $2,500,000, with $281,000
attributed to the warrants and options and $2,219,000 to the Notes. The
discount on the Notes in the amount of $406,000 is being amortized over
the term of the Notes.
The Notes agreement required the Company to attain a specified earnings
level for 1998, which was not attained. Accordingly, the Company has
issued to the private investor additional warrants to purchase 25,000
shares of common stock of the Company that are exercisable at $6.00 per
share and the interest rate of the notes was increased to 14%.
On April 13, 1999, the Company and the private investor agreed to amend
the terms of the Notes. The maturity date was extended to March 31,
2000, and the Notes are able to be converted to either common stock or
Preferred Stock at a rate of $6 per share and the exercise price of the
warrants was set at $6.00 per share through the maturity date. Any
default which may have occurred under the agreement was waived or deemed
cured. The Company has issued the private investor an additional
$631,090 in Notes as payment for accrued and unpaid interest on the
Notes though April 13, 1999 and other considerations. The Company also
issued the private investor 25,000 additional warrants to purchase the
Company's common stock at $9.00 per share. Of this amount $350,000
represented additional discount to the Notes and is being amortized over
the extended term of the Notes.
Total discount amortization related to the notes was $491,000 and
$116,000 for the years ended December 31, 1999 and 1998, respectively.
As of March 31, 2000, the Company has not paid the principal or any
accrued interest on the Notes and the holders have not converted the
Notes. Accordingly, the convertible subordinated debt is included in
current liabilities in the consolidated balance sheet. The Company is
negotiating with the holders of the Notes to extend their maturity to
convert them to common stock or a combination thereof.
F-15
<PAGE>
8. LONG-TERM DEBT AND CAPITAL LEASE
At December 31, 1999, long-term debt consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable in thirty-six monthly total installments of $5,647
including interest at 9.3% per annum, through October 2001,
collateralized by certain manufacturing equipment. $ 109,044
Capital lease obligation payable in thirty-six monthly total
installments of $12,170 including interest at 10.69% per
annum through July 2002, collateralized by certain
manufacturing equipment. 328,384
Capital lease obligation payable in forty-two monthly
installments of $7,223 including interest at 11.12%
per annum through February 2003, collateralized by
certain packaging equipment 229,565
Various notes payable in thirty-six total monthly
installments of $1,377-$2,142 including interest
at 14.6%-16.1% per annum collateralized by certain
computer equipment and software 82,291
---------
Total 749,284
Less: current portion (271,788)
---------
Total $ 477,496
=========
</TABLE>
Long-term debt at December 31, 1999 matures as follows:
2000 $271,788
2001 274,279
2002 185,806
2003 17,411
--------
Total $749,284
========
9. INCOME TAXES
Deferred income 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 income 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
bases and accounting carrying values of property and equipment and
intangible assets. Deferred income tax assets are established for all
deductible temporary differences and operating loss carryforwards. The
operating loss carryforwards at December 31, 1999, (assuming all
operating loss carryforwards will be available) amount to approximately
$14,000,000. Such loss carryforwards will expire at the rate of
$5,100,000 in 2014, $3,350,000 in 2013, $4,000,000 in 2012, $1,200,000
in 2011 and $350,000 in 2010. At December 31, 1999, based on the amount
of the operating loss carryforwards, the Company would have a deferred
tax asset of approximately $4,750,000. However, because of the
uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize these carryforwards, a
valuation allowance of $4,750,000 has been established representing an
increase of $1,750,000 from December 31, 1998. Accordingly, no deferred
income tax asset is reflected in these consolidated financial
statements.
F-16
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
Operating Leases - Future minimum rental payments under noncancellable
operating leases, including equipment leases, with terms in excess of
one year are as follows:
Year ending
December 31, Amount
2000 $1,028,181
2001 1,059,849
2002 975,440
2003 795,532
2004 703,883
Thereafter 1,440,741
----------
Total $6,003,626
==========
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 Hialeah, Florida at an annual
rate of approximately $128,000. The lease term is for five years through
June 2003. 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. There is no renewal option for this lease.
Rent expense related to the leases for the years ended December 31, 1999
and 1998 was $689,894 and $462,005, respectively.
Employment Agreements - 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. Additionally, A-One-A
produce has employment agreements with two of its executives through
June 30, 2002, for base salaries of $120,000 each 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 a party to litigation arising from the
normal course of business. The Company is a defendant in an action
brought by a former marketing agent alleging breach of contract,
misappropriation of trade assets, unfair competition and violation of
Florida's Deceptive and Unfair Trade Practices Act. The complaint seeks
unspecified damages. The Company is vigorously defending the matter and,
when appropriate, expects to assert counterclaims. Additionally, the
Company is currently in dispute with a former employee relating to a
compensation matter. In management's opinion, the litigation and dispute
will not materially affect the Company's financial position, results of
operations or cash flows.
11. SERIES C & D REDEEMABLE PREFERRED STOCK
In the second and third quarters of 1999, the Company issued 20,772
shares of newly authorized Series C & D Redeemable Preferred Stock
together with warrants to purchase 360,000 shares of the Company's
F-17
<PAGE>
common stock. The Series C & D Redeemable Preferred Stock and warrants
were purchased by a private investor group that included four of the
Company's Directors. The Company received proceeds of approximately
$1,800,000 in these transactions was used for operating purposes.
The Series C & D Preferred Stock was issued at a discount, calculated to
yield an effective annual dividend of approximately 15%. The Series C &
D Redeemable Preferred Stock is redeemable, in cash, at the option of
the Company through March 30, 2000, when it becomes mandatorily
redeemable either, at the option of the Company, in cash or through
conversion into 17% Senior Notes which would mature on March 31, 2003.
As of March 31, 2000, the Series C & D Redeemable Preferred Stock had
not been redeemed by the Company as discussions were being held with the
holders to convert such stock to common stock of the Company. The stock
purchase warrants, valued at $277,200, expire four years from their date
of issue, provide for the purchase of Company's common stock at $9.00
per share during the first year, $7.50 per share during the second year
and $6.00 per share thereafter. The discount of $554,400 from the
redemption value of $2,077,200 is being amortized by changes to
Additional Paid-in Capital - ($405,289) for 1999 through March 31, 2000.
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.
In October 1998, warrant holders exercised warrants to purchase 26,951
shares of the Company's common stock for $306,704. Transaction costs in
the amount of $330,249 were incurred in the registration of the shares
related to the exercise of the warrants, which resulted in net costs
associated with this transaction in the amount of $23,545.
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.
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 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-18
<PAGE>
Options and Warrants - The Company has outstanding options and warrants
to purchase shares of its common stock at December 31, 1999, which are
described in the following paragraphs.
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.
See Note 13 for more information regarding a stock option plan of the
Company.
Warrants -
Number of Exercise
Shares 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. 121,833 11.875
Issued in connection with Convertible
Subordinated Notes in 1998; exercisable
through June 30, 2002 65,000 6.00
25,000 9.00
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
Issued in connection with Series C & D Preferred
Stock in 1999, exercisable through April 30,
2003 360,000 *
*Through April 20, 2000 at $9.00
April 21, 2000 - April 20, 2001 at $7.50
April 21, 2001 - April 20, 2003 at $ 6.00
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 350,000 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-19
<PAGE>
Pursuant to the Plan, the Board of Directors has made the following
grants:
Exercise
Shares Price Expiration
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
1999 59,000 3.19 May 17, 2009
The options generally vest over a three-year period, one-third per year.
A summary of the option under the Plan for 1999 and 1998 is as follows:
Weighted Average
Shares Exercise Price
------ --------------
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
Granted 59,000 3.19
Exercised - -
Expired/Canceled (19,350) 12.64
--------
OUTSTANDING AT DECEMBER 31, 1999 153,950 9.37
========
EXERCISABLE AT DECEMBER 31, 1999 44,916 13.51
========
If compensation cost of $156,000 and $492,000, for options issued under
the Plan in 1999 and 1998, respectively, had been determined based on
the fair value at the grant dates for awards under Plan, 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,
1999 1998
--------------- ----------------
NET LOSS:
As Reported $ (5,773,855) $ (2,719,464)
Pro forma $ (5,929,855) $ (3,211,464)
BASIC AND DILUTED NET LOSS PER
SHARE OF COMMON STOCK:
As Reported $ (6.52) $ (4.04)
Pro forma $ (6.68) $ (4.77)
F-20
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants awarded in 1999 and
1998, respectively:
Years ended
December 31,
1999 1998
---- ----
Divident yields 0 % 0 %
Expected Volatility 116 % 92 %
Risk-free interest rate 5.2 % 4.7 %
Expected lives 4 years 3.8 years
The weighted-average fair value of options granted was $2.65 and $8.63
for the years ended December 31, 1999 and 1998, respectively.
The following table summarizes information about stock options and
warrants at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------------------
Weighted Weighted Weighted
Range of Remaining Average Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$3.19 59,000 9.40 3.19 - $ 0.00
$10.00-11.85 57,500 8.00 10.95 29,674 11.27
$13.75-16.90 28,000 8.60 14.52 9,333 14.52
$23.10 9,450 7.50 23.10 5,969 23.10
------- ---- ----- ------ -----
153,950 8.61 $9.37 44,976 $13.51
======= ==== ===== ====== =====
</TABLE>
14. SEGMENT DATA
At December 31, 1999 and 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.
F-21
<PAGE>
The Company evaluates performance based on operating profit before
interest and taxes. Accordingly, interest has not been allocated to the
operating segments.
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
--------------- ----------------- ------------
<S> <C> <C> <C>
Sales $ 37,441,017 $ 4,949,459 $ 42,390,476
Depreciation and amortization 529,541 456,690 986,231
Operating income (loss) before impairment charge 550,313 (3,129,690) (2,579,377)
Impairment charge 606,708 - 606,708
Operating income (loss) (56,395) (3,129,690) (3,186,085)
Segment assets 10,343,870 5,087,180 15,431,050
Expenditures for segment property
and equipment 409,106 339,427 749,033
RECONCILIATION OF SEGMENT AMOUNTS
TO CONSOLIDATED AMOUNTS:
Loss from continuing operations:
Total segments $ (3,186,085)
Interest expense (1,638,056)
Amortization of deferred financing costs (202,791)
Interest income 9,894
Corporate expenses (756,817)
-------------
TOTAL $ (5,773,855)
=============
ASSETS:
Total segments $ 15,431,050
Note receivable 106,000
Other assets 249,322
Other current assets 19,659
-------------
TOTAL $ 15,806,831
=============
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
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
============
</TABLE>
Major Customer - Revenues from one customer of the Company's food
distribution segment represents approximately 13.7% of the Company's
consolidated revenues.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
In assessing the fair value of 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, related party balances, trade
payables, 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, term loan, convertible subordinated notes and line of
credit approximated its fair value based on quoted market prices for
similar issues.
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.
F-23
<PAGE>
16. LOSS PER SHARE
The following is a reconciliation of the numerators and denominators
used in computing basic and diluted net loss per share.
1999 1998
Net loss $ (5,773,855) $ (2,719,464)
Amortization of preferred stock discount (405,289) -
------------ -------------
Net loss (numerator), basic and diluted $ (6,179,144) $ (2,719,464)
============ =============
Shares (denominator):
Weighted average common shares outstanding,
basic and diluted 948,342 672,620
============ ============
Net loss per share, basic and diluted $ (6.52) $ (4.04)
============ ============
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future,
but were excluded in the computation of diluted net loss per share in
the periods presented, as their effect would have been antidilutive.
Such outstanding securities consist of the following:
1999 1998
Outstanding options 153,950 114,300
Warrants 1,049,943 648,943
--------- -------
Total 1,203,893 763,243
========= =======
* * * * * *
F-24
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,638,659
<ALLOWANCES> 303,944
<INVENTORY> 1,878,081
<CURRENT-ASSETS> 7,505,068
<PP&E> 5,600,808
<DEPRECIATION> 968,846
<TOTAL-ASSETS> 15,806,031
<CURRENT-LIABILITIES> 16,835,776
<BONDS> 0
1,927,989
0
<COMMON> 948
<OTHER-SE> (3,872,844)
<TOTAL-LIABILITY-AND-EQUITY> 15,806,031
<SALES> 42,390,476
<TOTAL-REVENUES> 42,390,476
<CGS> 33,287,117
<TOTAL-COSTS> 12,239,202
<OTHER-EXPENSES> 606,708
<LOSS-PROVISION> 403,142
<INTEREST-EXPENSE> 1,638,056
<INCOME-PRETAX> (5,773,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,773,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,573,855)
<EPS-BASIC> (6.52)
<EPS-DILUTED> (6.52)
</TABLE>
