SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

[X]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934
      For the fiscal year ended December 31, 1998

                          Commission File No. 811-08469

                               ACORN HOLDING CORP.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

            Delaware                                      59-2332857 
--------------------------------                   --------------------------
(State or other jurisdiction of                    (IRS Employer Identifi-
incorporation or organization)                            cation No.)

        1251 Avenue of the Americas, 45th Floor, New York, NY 10020-1104
        ----------------------------------------------------------------
               (Address of principal executive offices) (Zip code)

Issuer's telephone number, including area code        (212) 536-4089         
                                               -----------------------------

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:
                                            Common Stock, $.01 par value

Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 the past 90 days.
                             Yes   X                 No      
                                 -------               ------  
Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this Form, and no disclosure  will be contained,  to the
best  of  the  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 the fiscal year ended December 31, 1998 were $6,967,176.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  as of March 26,  1999  (valued  at the  average  of the bid price of
$.6875 and asked price of $.875 on such date) was $1,420,897.

The  number of shares of Common  Stock  outstanding  (including  shares  held by
affiliates of the issuer) as of March 26, 1998: 4,068,406.

Transitional Small Business Disclosure Format (check one):
                             Yes      ;    No   X  
                                ------       -------
                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

<PAGE>

ITEM 1.  Description of Business
-------  -----------------------

General
-------

         Acorn  Holding  Corp.  (the  "Company")  is a holding  company with one
wholly-owned  subsidiary,  Recticon  Enterprises,  Inc.  ("Recticon"),  which it
acquired in 1993 by issuing 800,000 shares of the Company's  common stock,  $.01
par value (the "Common  Stock") to the  stockholders of Recticon in exchange for
all of the outstanding shares of stock of Recticon. The principal purpose of the
Company is to derive  earnings from the operation of Recticon and possibly other
businesses rather than for the purpose of obtaining dividend and interest income
through the  efforts of others.  The Company  may  acquire  other  companies  or
operating  businesses  in the future.  While there can be no assurance  that any
such  acquisitions  will be made, the Company intends only to acquire the entire
or,  at the  least,  controlling  interests  in such  companies  and  have  such
companies operate as subsidiaries of the Company.

Significant Developments
------------------------

         In November,  1997 the Company announced its intention to repurchase up
to 1,500,000  shares of the  Company's  Common Stock  (approximately  27% of the
issued and  outstanding  shares),  depending  upon market  conditions  and other
factors.  On  January  22,  1998,  the  Company  repurchased,  for an  aggregate
consideration of $2,060,000, 1,300,000 shares of the Common Stock (approximately
22% of the outstanding  Common Stock) from Asset Value Fund Limited  Partnership
and  entered  into a  "standstill  agreement"  with  Asset  Value and one of its
principals.  In addition, the Company has also repurchased an additional 170,500
shares  of its  Common  Stock  since  November  1997  through  March  26,  1999,
representing  a total  repurchase by the Company of  approximately  26.5% of the
issued and outstanding  shares of Common Stock.  All of the  repurchased  shares
have been retired and have resumed the status of authorized but unissued  shares
of Common Stock.

Recticon's Present Business
---------------------------

         Recticon, located in Pottstown, Pennsylvania,  manufactures two, three,
four,  five and six-inch  monocrystalline  silicon  wafers,  which are made from
silicon crystals and are the basic substrate from which integrated  circuits and
other  semiconductor  devices  are  fabricated.  Recticon's  wafers  are used by
university research departments and microelectronic manufacturers,  and are best
suited for use in electronics  devices employed in avionics,  telecommunications
and computers.

         The business in which Recticon is engaged is highly competitive and the
Company believes that there are many competitors who produce,  sell,  design and
support similar products.  Many of these competitors have substantially  greater
marketing, financial, administrative and other resources than Recticon.

         In 1995,  Recticon  entered into long-term  agreements  with two of its
major customers, pursuant to which said customers have paid an aggregate of $2.3
Million in cash for the right to receive a specified number of silicon wafers at
a predetermined gross profit margin. In addition, in 1996, Recticon entered into
agreements  pursuant to which  Recticon  received  $2.4 Million in cash from two
customers  in order for  Recticon to purchase  additional  furnaces  and related
equipment (the "Units"). At the end of five years, the Units will be turned over
to Recticon at no cost. In exchange therefor,  Recticon has agreed to sell these

                                       2
<PAGE>

customers the wafers  produced by the Units at a mutually agreed to gross profit
margin to  Recticon.  Recticon  has  expanded  its  facilities  and, as a result
thereof,  has the  capacity to add an  additional  four or five Units.  Recticon
presently  has ten  functioning  Units.  These  new  Units  have not only  given
Recticon  added  capacity,  but have also  enabled it to enter into the five and
six-inch wafer market and, subject to purchasing additional  equipment,  give it
the capacity to enter into the eight-inch market. There can be no assurance that
Recticon  will  acquire  any  additional  Units or  successfully  enter into the
eight-inch wafer market.

         Recticon's  raw materials are acquired  from silicon  wholesalers.  For
1998, 13% of its raw materials  were acquired from one supplier,  while for 1997
it was 12%.  Although  Recticon has from time to time  experienced  shortages of
certain   supplies,   such  shortages  have  not  resulted  in  any  significant
disruptions in production. Recticon believes that there are adequate alternative
sources of supply to meet its requirements.

         For 1998 three  customers of Recticon  accounted for 53%, 15% and 5% of
its sales, respectively.  For 1997, three customers of the Company accounted for
39%,  18% and 11% of its  sales,  respectively.  The loss of any or all of these
customers,  could have an adverse,  possibly  severe,  effect on the business of
Recticon.

         Compliance   with  federal,   state  and  local  laws  and  regulations
regulating  the  discharge of materials  into the  environment  has not had, and
under  present  conditions,  Recticon  does not  anticipate  that  such laws and
regulations  will have a material  effect on the results of operations,  capital
expenditures or the competitive position of Recticon.

Employees
---------

         The Company  currently has three  executive  officers,  all of whom are
employees of the Company. Recticon presently employs 47 full-time people, all of
whom are located at its facility in Pottstown.

ITEM 2.  Description of Property
-------  -----------------------

         The Company  maintains its principal  executive office in New York, New
York at no charge to the Company, and an office in New Canaan, Connecticut, at a
cost of $300 per month.

         Recticon  currently  leases  approximately  30,000  square  feet  in  a
facility in Pottstown, Pennsylvania, pursuant to a lease agreement which expires
on February  28,  2009.  Recticon  has a right of first  refusal to purchase the
property in the event of a sale by the lessor.  Recticon  considers the facility
to be generally  well-maintained,  adequate for its current needs and capable of
supporting a reasonably higher level of demand for its products.

ITEM 3.  Legal Proceedings
-------  -----------------

         The  Company is not  currently  engaged in any pending  material  legal
proceedings nor is it aware of any threatened claims against it.

                                       3
<PAGE>


ITEM 4.  Submission of Matters to a Vote of Security Holders

         The Annual Meeting of  Stockholders of the Company was held on December
18, 1998 (the  "Meeting").  The following  matters were voted on and approved by
the  holders of a majority of the  outstanding  shares of the  Company's  Common
Stock in accordance with Delaware General Corporation Law:

         (a) The first proposal  presented to the  stockholders was the election
of five persons as directors of the Company to hold office until the next Annual
Meeting of Stockholders and until their  respective  successors are duly elected
and qualified.  The following  persons were elected as directors of the Company,
and each person received that number of votes set opposite that person's name:

                                          VOTES
                                   FOR            WITHHELD
                                 -------------------------  
       Paula Berliner            3,503,733         42,875
       Edward N. Epstein         3,503,733         42,875
       Ronald J. Manganiello     3,503,733         42,875
       Stephen A. Ollendorff     3,500,183         46,425
       Bert Sager                3,500,183         46,425

         (b) The second proposal presented to the stockholders was to ratify the
firm of Grant Thornton LLP as the independent  public accountants of the Company
for the 1998 fiscal year.  There were  3,507,583  shares of Common Stock cast in
favor of such  proposal,  38,125  shares  of Common  Stock  voted  against  such
proposal, and 900 shares abstained.


                                     PART II

ITEM 5.  Market for the Registrant's Common Equity
         and Related Stockholder Matters                         
         -----------------------------------------
          
         The Company's  Common Stock was accepted for listing in October 1988 on
NASDAQ under the symbol "AVCC".  The following table sets forth, for the periods
indicated,  the range of high and low  closing  bid  quotations  as  reported by
NASDAQ.  Such quotations reflect  inter-dealer  prices,  without retail mark-up,
mark-down or commission and do not necessarily  represent  actual  transactions.
There presently is a limited public market for the Common Stock.

         Quarter Ending             Low          High
         --------------             ---          ----

            1998
            ----

         March 31                   $1.25        $1.50
         June 30                    $1.25        $1.72
         September 30               $ .81        $1.56
         December 31                $ .75        $1.22

                                       4
<PAGE>

         Quarter Ending             Low          High
         --------------             ---          ----

            1997
            ----

         March 31                   $1.56        $2.00
         June 30                    $1.38        $2.19
         September 30               $1.56        $2.06
         December 31                $1.38        $1.84


         As of March 26, 1999, there were approximately 420 holders of record of
the Company's Common Stock with 4,068,406 shares of Common Stock outstanding. In
addition,  the Company believes that there are more than 1,500 beneficial owners
of Common Stock whose shares are held in "street" name as of such date. On March
26, 1999,  the closing bid and asked  quotations of the Common Stock were $.6875
and $.875, respectively.

         The  Company has never paid and does not  currently  intend to pay cash
dividends.  In  addition,  the Company has never made,  nor adopted any policies
with respect to, in-kind distributions, and has no present intention of adopting
any such policies or of making any such distributions.

ITEM 6.  Management's Discussion and Analysis
         or Plan of Operations                       
         ------------------------------------

         On  November  4,  1997,  pursuant  to the  approval  of  the  Company's
stockholders,  the Company  withdrew  its  election  with the  Commission  to be
treated as a Business  Development  Company under the 1940 Act. Since that time,
the  Company  has been  operating  as a holding  company  with one  wholly-owned
subsidiary, Recticon. The Company believes that it has sufficient short-term and
long-term  liquidity either from cash on hand, credit  arrangements or cash flow
from  operations.  The  business  in which  the  Company  is  engaged  is highly
competitive and cyclical in nature.  For the fiscal year ended December 31, 1998
("Fiscal 1998"), the Company's net sales declined  approximately $1 Million from
the fiscal year ended  December 31, 1997 and income from  continuing  operations
declined approximately $500,000 during the corresponding period.

         The Company's  sales and  profitability  have been  adversely  effected
during the first  quarter of the fiscal year ending  December 31, 1999  ("Fiscal
1999") and the  Company is  anticipating  a loss for the first  quarter of 1999.
Although the Company hopes to achieve profitability during the second quarter of
Fiscal  1999,  no  assurance  can be  given  that the  Company  will  return  to
profitability during Fiscal 1999.

         The Company has carefully reviewed the state of the Company's Year 2000
preparedness with the appropriate  operating personnel of the Company.  Based on
that  investigation,  the Company has determined  that Year 2000 issues will not
have a material  affect on the  Company's  business,  results of  operations  or
financial condition.

         The Company  believes that it has  identified  and modified or replaced
all computer systems which were not previously Year 2000 compliant. The costs of

                                       5
<PAGE>

modifying  and  replacing  the software  systems have been nominal and have been
expensed as incurred.

         The  Company  has  contacted  its  principal  customers,  and  based on
discussions  with  such  customers,  the  Company  does  not  believe  that  its
operations will be materially  affected by problems with the computer systems of
third parties with whom it deals.

     From  time to time in both  written  reports  and  oral  statements  by the
Company's senior  management,  we may express our expectations  regarding future
performance by the Company.  These  "forward-looking  statements" are inherently
uncertain,  and investors  must recognize that events could turn out to be other
than what senior  management  expected.  

ITEM 7. Financial  Statements.  
------  ---------------------

         See Index to Financial Statements after Signature Page.

ITEM 8.  Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure       
         ---------------------------------------------

         Reference is made to the Company's  Current  Report on Form 8-K,  dated
November 10, 1997,  filed with the Commission on November 10, 1997, with respect
to the change of its accountants.

                                    PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons       
------  ------------------------------------------------------------   

         The following is a list (along with certain  biographical  information)
of the  executive  officers and  directors of the Company.  All directors of the
Company  are serving a current  term of office  which  continues  until the next
annual meeting of  stockholders,  and all officers are serving a current term of
office which continues until the next annual meeting of directors:

                                   Year of
                                  Election
                                     as
 Name and Age                     Director       Position
 ------------                     --------       --------
(As of 3/1/99)

Bert Sager(1)                     1983           Director
  (73)

Stephen A. Ollendorff             1983           Chairman of the Board,
  (60)                                           Chief Executive Officer,
                                                 Secretary and Director

Edward N. Epstein*                1995           President and Chief
  (58)                                           Operating Officer; Director

Larry V. Unterbrink               (2)            Treasurer
  (64)



                                       6
<PAGE>

                                   Year of
                                  Election
                                     as
 Name and Age                     Director        Position
 ------------                     --------        --------
(As of 3/1/99)

Robert P. Freeman                  -             President and Chief
  (64)                                           Executive Officer
                                                 of Recticon

Paula Berliner                    1990            Director
  (55)  (1)

Ronald J. Manganiello*            1997            Director
  (49)    (1)(3)

--------------
*Designees of Edward N. Epstein.  See "Certain Relationships and
 Related Transactions."

(1)  Member of the Audit Committee.
(2)  Mr. Unterbrink was a member of the Board from
     1985 until February 1995.
(3)  Mr.  Manganiello was a member of the Board from November 1995 until January
     1997, and was elected to the Board in December 1997.
--------------

         BERT SAGER was  Co-Chairman  of the Board of the Company from  November
1995 to December  1998 and was Chairman from June 1989 to November  1995.  Prior
thereto,  he was President  since the Company's  inception  until June 1989. Mr.
Sager  has been a  private  investor  for more  than  five  years and has been a
practicing attorney since 1949. He is a director of Artesyn  Technologies,  Inc.
("Artesyn"), a publicly-traded manufacturer of standardized electronic products,
of Boca Raton, Florida.

         STEPHEN A. OLLENDORFF has been Chief  Executive  Officer of the Company
since  September 1992,  Chairman of the Board since November 1995,  President of
the  Company  from  June 1989  until  November  1995,  and  Secretary  since the
Company's  inception.  He served as Vice President from the Company's  inception
until his election as President.  Mr.  Ollendorff was of counsel to the law firm
of Hertzog,  Calamari & Gleason from  December  1990 until  January  1999. He is
currently  of  counsel  to the law  firm of  Kirkpatrick  &  Lockhart  LLP.  Mr.
Ollendorff  also serves as a director of Artesyn and  Pharmaceutical  Resources,
Inc., a  publicly-traded  manufacturer of generic drugs,  of Spring Valley,  New
York.

         EDWARD N. EPSTEIN was elected  President and Chief Operating Officer of
the Company in November  1995.  For more than the past five years,  has been the
principal  of Edward N.  Epstein & Assoc.,  a consulting  firm  specializing  in
corporate  structure  and  management.  He has also been,  since January 1996, a
principal in the merchant banking firm of New Canaan Capital LLC, and since July
1996,  a  principal  of  Sylhan  LLC,  an   integrated   contract   manufacturer
specializing in the precision machining of refractory metal parts.


                                       7
<PAGE>

         LARRY V. UNTERBRINK, Treasurer of the Company since February 1990, is a
private investor  residing in Florida.  Since November 1986, Mr.  Unterbrink has
been  a  principal  of  Groupe  Financier,  a  publishing  and  consulting  firm
specializing in international finance. Mr. Unterbrink had been, from May 1982 to
December  1994,  President  and  Treasurer  of  Seahorse  Ltd.,  a  leasing  and
publishing company.

         PAULA BERLINER was a Vice President of the Company from June 1992 until
December  1998,  and, since May 1990,  has been a private  investor  residing in
Florida.  She is presently a director of Republic  Security  Financial  Corp., a
holding company for Republic Security Bank.

         RONALD J. MANGANIELLO has been a principal in the merchant banking firm
of New Canaan  Capital LLC,  since January  1996.  Since July 1996 he has been a
principal of Sylhan LLC. From 1986 to January 1996, Mr. Manganiello was Chairman
and  Chief   Executive   Officer  of  Hanger   Orthopedic   Group,   Inc.,  a
publicly-traded  provider of patient care services and products for orthotic and
prosthetic rehabilitation; director of Hanger Orthopedic Group, Inc.

         There are no family  relationships  between any  executive  officers or
directors of the Company.

Section 16(a) Compliance
------------------------

         The Company is aware of the following late filing of a report  required
by Section  16(a) of the Exchange  Act:  Edward N. Epstein  failed to file, on a
timely  basis,  a Statement of Changes in  Beneficial  Ownership on Form 4. This
filing was subsequently completed on the appropriate form.

ITEM 10.  Executive Compensation
--------  ----------------------

Summary Compensation Table
--------------------------

         The following  table sets forth  information for the fiscal years ended
December  31, 1998,  December  31, 1997 and  December  31,  1996,  respectively,
respecting compensation earned by the Chief Executive Officer of the Company and
the  executive  officers  (whose salary and bonus earned in Fiscal 1998 exceeded
$100,000)  of  the  Company  serving  at the  end of  Fiscal  1998  (the  "Named
Executives").


                                                                    Long-Term
                                  Annual Compensation(1)           Compensation
                                  ----------------------           ------------
                                                                   Securities 
  Name and                                                         Underlying
  Principal Position          Year      Salary($)       Bonus($)   Options(#)(2)
  ------------------          ----      ---------       --------   -------------

  Stephen A. Ollendorff     1998(3)     $246,597           -0-        --
    Chairman and Chief      1997(3)     $254,615(4)        -0-       50,000
    Executive Officer       1996(3)     $264,042           -0         --


  Edward N. Epstein           1998      $212,787           -0-        --
    President and Chief       1997      $182,090(4)        -0-        --
    Operating Officer         1996      $150,000           -0-        --



                                       8
<PAGE>


                                                                    Long-Term
                                  Annual Compensation(1)           Compensation
                                  ----------------------           ------------
                                                                   Securities 
  Name and                                                         Underlying
  Principal Position          Year      Salary($)       Bonus($)   Options(#)(2)
  ------------------          ----      ---------       --------   -------------

  Robert P. Freeman           1998      $197,830        $ 50,000      --
    President and Chief       1997      $215,920        $ 95,673    50,000
    Executive Officer -       1996      $242,480        $150,000      --
    Recticon Enterprises,
    Inc.

(1)   No officer  received  perquisites  which,  are in the aggregate,  greater 
      than or equal to the lesser of $50,000 or 10% of annual salary and bonus.

(2)   Represents options awarded under the 1991 Stock Option Plan.

(3)   Mr.  Ollendorff  has  voluntarily  assumed  responsibility  for  rent  and
      secretarial  expenses relating to the New York office. Mr. Ollendorff does
      not receive any fringe benefits from the Company.

(4)   As a result of an agreement  between Messrs.  Epstein and Ollendorff,  Mr.
      Ollendorff   voluntarily  reduced  his  annual  compensation  by  $24,280,
      effective   July  1997,  in  order  to  increase  Mr.   Epstein's   annual
      compensation for 1997 by $24,280. See "Employment Arrangements" below.


        The Company does not have any annuity, retirement,  pension, deferred or
incentive  compensation plan or arrangement  under which any executive  officers
are entitled to benefits, nor does the Company have any long-term incentive plan
pursuant to which  performance  units or other forms of  compensation  are paid.
Executives  who qualify are permitted to participate in the Company's 1991 Stock
Option Plan.

Stock Option Grants In Last Fiscal Year
---------------------------------------

        During the fiscal  year ended  December  31,  1998,  there were no stock
option grants or stock  appreciation  rights granted to the Named  Executives or
any other stock appreciation rights.

        On March 2, 1998 the Stock Option and Compensation  Committee authorized
the further  amendment to certain of the  Company's  outstanding  stock  options
(which had previously  been amended on November 22, 1994).  In exchange for each
optionee agreeing to an increase in the exercise price in the event of a "change
of  control"  from  $.5625 to $1.25  (equal to the  "fair  market  value" of the
Company's  Common  Stock  on  March 2,  1998),  the  Company  would  expand  the
definition of "change of control" to include the merger,  sale or liquidation of
the business as set forth in (iv) below. The amended and expanded  definition of
"change of control"  would occur in the following  circumstances:  (i) the first
purchase  of shares of equity  securities  of the  Company  pursuant to a tender
offer or exchange  offer (other than an offer by the Company) for 25% or more of
the equity  securities of the Company,  which offer has not been approved by the
Board  of  the  Company,  (ii) a  single  purchaser  or a  group  of  associated
purchasers  acquiring,  without  the  approval  or  consent  of the Board of the
Company,  securities  of the Company  representing  25% or more of the  combined

                                       9
<PAGE>

voting power of the Company's  then  outstanding  securities in one or a related
series of  transactions,  (iii) in respect of an  election of  directors  by the
Company's stockholders,  the election of any or all of the management's slate of
directors being contested or opposed, whether through a solicitation of proxies,
or otherwise,  or (iv) on the day the  stockholders of the Company approve (A) a
definitive agreement for the merger or other business combination of the Company
with or into  another  corporation  pursuant  to which the  stockholders  of the
Company  do not own,  immediately  after the  transaction,  more than 50% of the
voting  power  of  the  corporation  that  survives  and  is  a  publicly  owned
corporation  and not a subsidiary  of another  corporation,  or (B) a definitive
agreement for the sale,  exchange,  or other disposition of all or substantially
all of  the  assets  of the  Company,  or (C)  any  plan  or  proposal  for  the
liquidation or dissolution of the Company. As of March 26, 1999, no such "change
of control" has occurred.

        On November 7, 1996,  the Board of Directors  authorized  the Company to
loan moneys to officers and employees of the Company in order to encourage  them
to exercise their stock options. The term of such loans would be for the shorter
of ten years or 60 days  after  termination  of  employment  of the  officer  or
employee,  interest would accrue and be payable monthly on the principal, at the
prevailing  rate  applicable  to 90-day  treasury  bills at the time the loan is
made,  and the loan  would be  collateralized  at all  times,  which  collateral
(subject to applicable law) may include shares of the Company. The loans must be
collateralized  so that the fair market  value of the  collateral  would have to
equal or exceed the principal outstanding amount of the loan at all times. As of
March 26,  1999,  no such loans to officers or  employees  have been made by the
Company.

Year-End Option Values Table
----------------------------

        The  following  table  sets  forth  information  at  December  31,  1998
respecting exercisable and non-exercisable options held by the Named Executives.
During Fiscal 1998, the Named Executives did not exercise any stock options. The
table also includes the value of  "in-the-money"  stock options which represents
the spread  between the exercise  prices of the existing  stock  options and the
year-end price of the Common Stock.


                   Number of Unexercised       Value of Unexercised In-
                        Options Held             the-Money Options
                  at December 31, 1998(1)      Held at December 31, 1998(1)
                  -----------------------      ----------------------------
                                   Not                          Not
Name             Exercisable    Exercisable     Exercisable  Exercisable
----             -----------    -----------     -----------  -----------

Stephen A.
  Ollendorff      300,000(2)       -0-             $-0-         $-0-

Edward N.
  Epstein         120,000(2)       -0-             $-0-         $-0-

Robert P.
  Freeman         100,000          -0-             $-0-         $-0-

----------------

                                       10
<PAGE>

(1)   Based upon the closing sales price of the Common Stock on December 31,
      1998 ($.75).
(2)   On October 31, 1998,  Messrs.  Ollendorff and Epstein each surrendered 
      30,000 stock options previously granted in order to enable the Company to 
      grant options to employees of Recticon.

Compensation of Directors
-------------------------

            Effective  December 1998 directors who are not executive officers of
the Company are  compensated for their services by payment of an annual retainer
of  $12,000,  $1,000 per day for each Board  meeting  attended in person by such
director and $750 per day for each committee  meeting attended in person by such
director.

Employment Arrangements
-----------------------

            The Company has entered into an employment agreement,  for a minimum
three-year  period,  which  has been  renewed  by its  terms,  with  Stephen  A.
Ollendorff,  pursuant to which Mr.  Ollendorff  receives annual  compensation of
$250,000,  subject to annual  cost-of-living  adjustments,  from the Company. On
January 17, 1996, Mr. Ollendorff's  employment agreement was amended in order to
clarify certain terms and conditions, including the geographic location in which
services are to be provided,  events of  termination  and his  obligations  with
respect to confidential information, non-solicitation of employees and covenants
not to compete.  Mr.  Ollendorff  agrees to devote such time to the business and
affairs of the Company as he believes is  necessary  for the  operations  of the
Company. In addition,  Mr. Ollendorff has voluntarily assumed responsibility for
rent and  secretarial  expenses  relating to the Company's New York office.  Mr.
Ollendorff receives no fringe benefits from the Company.

            Effective  January  1,  1997,  Mr.  Ollendorff  receives a salary of
$120,000  per year as  Chairman  of the  Board  of  Recticon  Enterprises,  Inc.
("Recticon"),  which  amount is paid by the  Company  from the  amounts  paid by
Recticon to the Company each month. In addition,  Recticon rents office space in
Mr.  Ollendorff's  New Jersey  office and pays rent  directly to Mr.  Ollendorff
directly for such space in the amount of $500 per month. Any amounts received by
Mr.  Ollendorff from Recticon as rent and/or salary are deducted from his salary
from the  Company to the  extent and as long as he  receives  such  monies  from
Recticon.

            The Company  entered  into an  employment  agreement  with Edward N.
Epstein,  effective  January 1, 1996,  for a three  year  period,  for an annual
compensation of $150,000,  subject to  cost-of-living  adjustments.  Mr. Epstein
agrees to devote  such time to the  business  and  affairs of the  Company as he
believes is necessary for the operations of the Company.

         As a result of an agreement between Messrs. Epstein and Ollendorff, Mr.
Ollendorff  voluntarily  reduced his annual  compensation by $24,280,  effective
July 1997, in order to increase Mr.  Epstein's  annual  compensation for 1997 by
$24,280.  Mr.  Ollendorff  has agreed not to accept any  increased  compensation
(other than  cost-of-living  increases) until Mr. Epstein's annual  compensation
shall be equal to Mr. Ollendorff's.

            Robert  P.  Freeman,   President  and  Chief  Executive  Officer  of
Recticon, entered into a letter agreement with Recticon as of February 15, 1995,

                                       11
<PAGE>

which provides that if, within one (1) year of a "change of control" (as defined
in the  agreement) of Recticon,  his  employment is terminated  without cause by
Recticon, or he resigns because of (i) assignment,  without his written consent,
of any duties  inconsistent  with his  position,  duties,  responsibilities  and
status with  Recticon,  or change in his  reported  responsibilities,  titles of
offices or any plan, act, scheme or design to  constructively  terminate him, or
(ii)  reduction  by  Recticon of his annual base  salary,  he shall  receive the
following benefits: (i) annual base salary through the date of termination; (ii)
in lieu of any further salary payments,  severance pay on the tenth business day
following the date of termination, a lump sum equal to two times his annual base
salary; and (iii) if Mr. Freeman terminates his employment with Recticon between
the first and second year of a change of control for any reason  other than "for
cause",  Recticon  will pay him the  amount  he would  have  been paid if he had
remained employed through the end of the second year of a change of control, but
in no event less than an amount equal to six months of base salary. In addition,
Recticon  will maintain all medical,  health and accident  plans for a period of
the  earlier  of (i) 24 months or (ii) the date of which he is covered by reason
of his being employed by a new employer.

ITEM 11.  Security Ownership of Certain Beneficial Owners and
          Management                                         
          ---------------------------------------------------

Security Ownership of Certain Beneficial Owners
-----------------------------------------------

            The following table sets forth, as of the close of business on March
15,  1999,  information  as to those  stockholders  (other  than  members of the
Company's  management),  which is known by the Company to beneficially  own more
than 5% of its outstanding Common Stock.

                                     No. of Shares
Name and Address                     Beneficially                  Percentage
of Beneficial Owner                   Owned(1)                      of Class 
-------------------                   --------                      -------- 

Estate of Herbert Berman(2)           283,000                        6.97%
 405 Lexington Avenue
 New York, NY 10174

Allen Landers, M.D.
1385 York Avenue
New York, NY 10021                    253,800                        6.24%

--------------- 
(1)  Beneficial  ownership,  as reported in the above table, has been determined
     in  accordance  with  Rule  13d-3  under  the 1934  Act.  Unless  otherwise
     indicated,   beneficial  ownership  includes  both  sole  voting  and  sole
     dispositive power.

(2)  Excludes  51,000 shares of Common Stock owned by the adult  children of the
     late Herbert Berman.

Ownership by Management
-----------------------

             The  following  table  sets  forth,  as  of  March  15,  1999,  the
beneficial  ownership  of the Common  Stock of the Company of (i) each  director
(including  the Named  Executives)  of the Company,  and (ii) all  directors and

                                       12
<PAGE>

executive  officers of the Company as a group (based upon information  furnished
by such persons).  Under the rules of the Commission, a person is deemed to be a
beneficial  owner of a security  if he has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the disposition of
such  security.  Accordingly,  more  than  one  person  may  be  deemed  to be a
beneficial  owner  of the  same  securities.  A person  is also  deemed  to be a
beneficial owner of any securities of which that person has the right to acquire
beneficial ownership within 60 days.

                               No. of Shares
Name and Address               Beneficially                  Percentage
of Beneficial Owner             Owned(1)                      of Class 
-------------------            -------------                  -------- 

Bert Sager                         428,125                    10.12%
                                    (3)(4)

Stephen A. Ollendorff            1,462,200                    32.58%
                                 (4)(5)(6)

Edward N. Epstein                  936,000                    22.35%
                                 (4)(5)(7)

Paula Berliner                     168,300                     4.07%
                                       (4)

Robert P. Freeman                  140,000                     3.36%
                                       (4)

Ronald J. Manganiello              184,946                     4.55%
                                       (8)
All executive officers
 and directors as                2,552,858                    52.01%
 a group (7 persons)             (3)(4)(5)
                                 (6)(7)(8)
--------------------
*     Less than 1%
(1)   Unless otherwise indicated, the address of all the Company's directors and
      executive  officers is c/o the Company's  principal  executive  offices at
      1251 Avenue of the Americas, 45th Floor, New York, NY 10020-1104.

(2)   A person is deemed to be the beneficial  owner of voting  securities  that
      can be acquired by such person within 60 days from March 15, 1999 upon the
      exercise of options,  warrants or convertible securities.  Each beneficial
      owner's  percentage  ownership is determined by assuming that  convertible
      securities,  options or  warrants  that are held by such  person  (but not
      those held by any other person) and which are  exercisable  within 60 days
      of the  Record  Date have been  exercised.  Unless  otherwise  noted,  the
      Company  believes that all persons named in the table have sole voting and
      investment  power with respect to all shares of Common Stock  beneficially
      owned by them.

                                       13
<PAGE>

(3)   Does not include 200 shares of Common Stock owned by Mr.  Sager's  spouse,
      as sole trustee of a trust formed by Mrs. Sager's mother,  as to which Mr.
      Sager disclaims beneficial ownership

(4)   Includes  the  following  shares  that may be  acquired  upon  exercise of
      options  within 60 days from March 15,  1999:  Mr.  Sager -  160,000;  Mr.
      Ollendorff - 300,000;  Mr. Epstein - 120,000;  Ms. Berliner - 70,000;  Mr.
      Freeman - 100,000;  and all directors  and executive  officers as group (7
      persons) 840,000.

(5)   Stephen A. Ollendorff,  Chairman of the Board, Chief Executive Officer and
      Secretary of the Company, has entered into an Irrevocable Proxy and Voting
      Agreement  with Respect to Election of Directors  dated  December 19, 1995
      with Edward N. Epstein,  President of the Company, with respect to 936,000
      shares of Common Stock  beneficially  owned by Mr.  Epstein.  See "Certain
      Relationship  and Related  Transactions."  Accordingly,  Mr.  Ollendorff's
      beneficial  ownership includes such shares. Other than as set forth above,
      Mr. Ollendorff disclaims beneficial ownership of such shares.

(6)   Includes 1,000 shares owned by Mr. Ollendorff's spouse.

(7)   Includes 10,000 shares owned by Mr.Epstein as trustee for his minor child.

(8)   Includes 32,946 shares owned by Mr. Manganiello's spouse and 2,000 owned
      by Mr. Manganiello as trustee for his children.

ITEM 12.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         Mr. Ollendorff,  Chief Executive Officer of the Company, was of counsel
to Hertzog,  Calamari & Gleason, general counsel to the Company, through January
31, 1999.  Effective February 1, 1999, the Company no longer retains counsel who
are affiliated with Mr.Ollendorff.

         Mr.  Ollendorff  has  entered  into an  Irrevocable  Proxy  and  Voting
Agreement With Respect to Election of Directors  (the  "Proxy"),  with Edward N.
Epstein,  with respect to the shares of Common Stock  beneficially  owned by Mr.
Epstein  (the  "Stock"),  commencing  on December  19, 1995 and  terminating  on
December 31 of such year in which  either party shall have given the other party
at least twelve (12) months' written notice thereof prior to December 31 of such
year;  provided,  that,  notwithstanding the foregoing the Proxy shall remain in
full force and effect until at least  December  31,  1998.  If any shares of the
Stock covered by the Proxy are sold to any other party,  the Proxy as it relates
to such shares of Stock shall terminate  immediately upon such sale. Pursuant to
the Proxy, Mr. Ollendorff  undertakes to vote the Stock, as well as use his best
efforts  (including  voting shares of stock of the Company owned by him) for the
election of the greater of (i) two (2)  directors  or (ii) a number of directors
equal to 22%  (rounded  up to the next  highest  number) of the entire  Board of
Directors,  acceptable to Mr.  Epstein.  Mr. Epstein had designated  himself and
Ronald J. Manganiello to Mr.  Ollendorff with respect to the election of members
of the Board as acceptable to him.

                                       14
<PAGE>

ITEM 13.  Exhibits and Reports on Form 8-K
--------  --------------------------------

         (a)    Exhibits:

         3.1  Certificate  of  Incorporation  as  filed  and  recorded  with the
Secretary  of State of  Delaware,  as amended -  incorporated  by  reference  to
Exhibit  3.1 to the  Company's  Annual  Report on Form 10-KSB for the year ended
December 31, 1997.

         3.2 By-laws,  as amended,  effective November 7, 1996 - incorporated by
reference to Exhibit 3 to the Company's  Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996.

         10.1 Employment  Agreement  dated August 31, 1993,  between the Company
and Stephen A.  Ollendorff  -  incorporated  by reference to Exhibit 10.2 to the
Company's  Registration  Statement  on Form N-2 (No.  33-69610)  filed  with the
Commission on September 19, 1993.

         10.2 Agreement  dated October 31, 1991 between the Company and Larry V.
Unterbrink - incorporated  by reference to Exhibit 10.3 to the Company's  Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.

         10.3 1991 Stock Option Plan, as amended - incorporated  by reference to
Exhibit 10.7 to the Company's  Registration Statement on Form N-2 (No. 33-69610)
filed with the Commission on September 29, 1993.

         10.4 Purchase and Settlement  Agreement,  dated as of April 8, 1994, by
and among  ServiceMax,  ServiceMax Tire and Auto Centers of Michigan,  Inc., the
Company, Stephen A. Ollendorff,  Orland Wolford, Bert Sager, Donald R. Nance, C.
James Sabo,  Richard A. Sabo and Robert L. Sabo -  incorporated  by reference to
Exhibit  10.7 to the  Company's  Annual  Report on Form 10-K for the fiscal year
ended December 31, 1993.

         10.5 Amendment No. 1 to Employment  Agreement,  dated as of January 17,
1996,  by and between the Company and Stephen A.  Ollendorff -  incorporated  by
reference to Exhibit 10.7 to the Company's  Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995.

         10.6 Employment Agreement, dated as of January 17, 1996, by and between
the Company and Edward N. Epstein - incorporated by reference to Exhibit 10.8 to
the Company's  Annual  Report on Form 10-KSB for the fiscal year ended  December
31, 1995.

         10.7 Amendment No. 1 to Employment  Agreement,  dated as of January 17,
1996,  by and  between the Company and Larry V.  Unterbrink  -  incorporated  by
reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995.

                                       15
<PAGE>

         10.8 Asset Purchase Agreement,  dated May 30, 1997, by and among Morgan
Tire & Auto, Inc., the Company and Automotive Industries, Inc. - incorporated by
reference to Exhibit 2.1 to the Company's  Current Report on Form 8-K dated June
9, 1997.

         10.9 Assumption Agreement, dated May 30, 1997, by and among Morgan Tire
& Auto,  Inc., the Company and  Automotive  Industries,  Inc. - incorporated  by
reference to Exhibit 2.2 to the Company's  Current Report on Form 8-K dated June
9, 1997.

         10.10 Letter Agreement,  dated as of February 15, 1995,  between Robert
P. Freeman and  Recticon -  incorporated  by  reference to Exhibit  10-13 to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.

         21    List of subsidiaries of the Company.

         27    Financial Data Schedule.

         (b) Reports on Form 8-K:

         There  were no  reports  on Form 8-K filed by the  Company  during  the
quarter ended December 31, 1998.

                                       16

<PAGE>

                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  Registrant  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                               ACORN HOLDING CORP.
                               (Registrant)

Dated:  March 29, 1999         By:Stephen A. Ollendorff
                                  --------------------------------------
                                  Stephen A. Ollendorff, Chairman
                                  of the Board and Chief Executive
                                  Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been  signed  by the  following  persons  on  behalf  of the  Registrant  in the
capacities and on the dates indicated.

Signature                                   Title                 Date


Stephen A. Ollendorff              Chairman of the Board          March 29, 1999
------------------------           Chief Executive Officer
Stephen A. Ollendorff              (Principal Executive
                                   Officer), Secretary
                                   and Director

Edward N. Epstein                  President and Chief            March 29, 1999
------------------------           Operating Officer;
Edward N. Epstein                  Director


Larry V. Unterbrink                Treasurer (Principal           March 29, 1999
------------------------           Financial and Accounting
Larry V. Unterbrink                Officer)


Paula Berliner                     Director                       March 29, 1999
------------------------
Paula Berliner



Ronald J. Manganiello              Director                       March 29, 1999
------------------------
Ronald J. Manganiello



Bert Sager                         Director                       March 29, 1999
------------------------
Bert Sager



                                       17
<PAGE>
                      FINANCIAL STATEMENTS AND REPORT OF
                   INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                     ACORN HOLDING CORP. AND SUBSIDIARIES

                          December 31, 1998 and 1997


                                      F-1
<PAGE>












                                C O N T E N T S


                                                                        Page


ACORN HOLDING CORP. AND SUBSIDIARIES

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                       F-3

FINANCIAL STATEMENTS

         CONSOLIDATED BALANCE SHEETS                                     F-4

         CONSOLIDATED STATEMENTS OF INCOME                               F-5

         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY       F-6

         CONSOLIDATED STATEMENTS OF CASH FLOWS                           F-7

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      F-8


AUTOMOTIVE INDUSTRIES, INC.

REPORT OF INDEPENDENT ACCOUNTANTS                                        F-18

FINANCIAL STATEMENTS

         BALANCE SHEET                                                   F-19

         STATEMENT OF OPERATIONS                                         F-20

         STATEMENT OF SHAREHOLDER'S EQUITY                               F-21

         STATEMENT OF CASH FLOWS                                         F-22

         NOTES TO FINANCIAL STATEMENTS                                   F-23



                                      F-2


<PAGE>


               Report of Independent Certified Public Accountants


Board of Directors
Acorn Holding Corp.


         We have audited the accompanying  consolidated  balance sheets of Acorn
Holding Corp. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows  for  the  years  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 audits. We did not audit the
financial  statements of Automotive  Industries,  Inc., as of and for the period
ended May 31, 1997, at which date the net assets of that company were sold.  The
net  operations of that company for the period ended May 31, 1997,  and the gain
on the sale of that  company's  net  assets  at that  date are  included  in the
consolidated  statements of income as "Discontinued  Operations."  This caption,
except for the elimination of intercompany transactions and related tax effects,
was audited by other  auditors,  whose report  thereon has been furnished to us,
and our  opinion,  insofar  as it  relates  to  those  amounts  included  in the
statement  of income of  Automotive  Industries,  Inc.,  is based  solely on the
report of the other auditors.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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  audits,  and the report of the other  auditors,  provide a
reasonable basis for our opinion.

         In our opinion,  based on our audits and the report of other  auditors,
the  financial  statements  referred to above  present  fairly,  in all material
respects,  the  consolidated  financial  position  of Acorn  Holding  Corp.  and
Subsidiaries as of December 31, 1998 and 1997, and the  consolidated  results of
their operations and their  consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.


Grant Thornton LLP


Philadelphia, Pennsylvania
March 3, 1999, except for Note R as to which
    the date is March 8, 1999

                                      F-3
<PAGE>
                      Acorn Holding Corp. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

                ASSETS                                  1998             1997 
                                                  --------------  --------------
CURRENT ASSETS
    Cash and cash equivalents                      $  1,126,838    $  2,882,526
    Restricted cash                                      11,798          41,439
    Investment securities                               668,439         986,706
    Accounts receivable - trade                          84,817         429,893
    Current portion of note receivable from
      sale of subsidiary                                110,235         121,696
    Current portion of note receivable
      - employee                                         40,000          40,000
    Inventories                                       2,055,827       2,506,763
    Prepaid expenses                                     22,337          13,843
    Deferred income tax asset                            70,881         179,000
                                                   ------------    ------------
                Total current assets                  4,191,172       7,201,866
                                                   ------------    ------------
MACHINERY AND EQUIPMENT, net of accumulated
    depreciation of $2,255,282 and
    $1,998,010 in 1998 and 1997, respectively         1,978,743       1,706,823
                                                   ------------    ------------
OTHER ASSETS
    Deposits and other                                     --            82,563
    Note receivable from sale of subsidiary,
     less current portion                               110,236         243,393
    Note receivable, less current portion
     - employee                                          80,000         120,000
    Other investments                                     9,108           9,981
    Goodwill, net of amortization of $555,947
     and $470,417 in 1998 and 1997, respectively        299,357         384,887
    Deferred income tax asset                         1,322,583       1,306,000
                                                   ------------    ------------
                                                      1,821,284       2,146,824
                                                   ------------    ------------
                                                   $  7,991,199    $ 11,055,513
                                                   ============    ============
            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Current maturities of long-term debt           $    121,062    $    121,062
    Accounts payable                                     20,157         303,474
    Accrued expenses
       Salaries and bonuses                              86,688         142,672
       Other                                             40,333          70,847
    Machine purchase deposit liability                   11,798          41,439
    Deferred income                                     300,000         466,680
                                                   ------------    ------------
                Total current liabilities               580,038       1,146,174
                                                   ------------    ------------
LONG-TERM DEBT, less current maturities                 121,061         242,122
                                                   ------------    ------------
DEFERRED INCOME                                         525,000         783,306
                                                   ------------    ------------
COMMITMENTS                                                --              --
STOCKHOLDERS' EQUITY
    Common stock                                         40,684          55,389
    Additional paid-in capital                       11,823,449      14,090,156
    Accumulated deficit                              (5,083,839)     (5,247,684)
    Less common stock in treasury, at
     cost - 9,000 shares                                   --           (13,950)
    Accumulated other comprehensive income
     (loss)                                             (15,194)           --   
                                                   ------------    ------------
                Total stockholders' equity            6,765,100       8,883,911
                                                   ------------    ------------
                                                   $  7,991,199    $ 11,055,513
                                                   ============    ============

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

                        CONSOLIDATED STATEMENTS OF INCOME

                             Year ended December 31,



                                                         1998             1997
                                                     ------------   ------------

Net sales                                            $ 6,967,176    $ 7,907,820
                                                     -----------    -----------

Costs and expenses
    Cost of sales                                      5,098,572      5,209,795
    Selling, general and administrative                1,662,802      1,977,433
                                                     -----------    -----------
                                                       6,761,374      7,187,228

                Operating profit                         205,802        720,592
                                                     -----------    -----------

Other income (expense)
    Gain on sale of fixed assets                          18,000           --
    (Loss) gain on investment                             (4,696)       102,000
    Interest income, net                                  42,232         83,616
                                                     -----------    -----------
                                                          55,536        185,616
                                                     -----------    -----------

                Income from continuing
                  operations before income taxes         261,338        906,208

Income taxes                                              97,493        142,749
                                                     -----------    -----------

                Income from continuing operations        163,845        763,459
                                                     -----------    -----------

Discontinued operations
    Loss from operations of Automotive
     Industries, Inc. (net of income tax
     benefit of $239,589)                                   --         (379,395)
    Gain on sale of assets and
     liabilities of Automotive Industries, Inc. 
      (net of income taxes of $700,138)                     --        1,095,087
                                                     -----------    -----------
                                                            --          715,692
                                                     -----------    -----------

                NET INCOME                           $   163,845    $ 1,479,151
                                                     ===========    ===========

Earnings per share
    Income from continuing operations                $       .04    $      0.14
    Income from discontinued operations                     --             0.13
                                                     -----------    -----------

                Net income                           $       .04    $      0.27
                                                     ===========    ===========

Weighted average shares outstanding                    4,179,542      5,538,164
                                                     ===========    ===========

The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

                                                                     Retained      Accumulated
                                                      Additional     earnings        other
                                          Common        paid-in    (accumulated    comprehensive     Treasury
                                           stock        capital      (deficit)       income           stock           Total
                                      ------------   -------------  -------------  ------------   -------------  ------------

<S>                                   <C>            <C>            <C>            <C>            <C>            <C>         
Balance at January 1, 1997            $     55,389   $ 14,090,156   $  1,999,143   $       --     $       --     $ 16,144,688

Cumulative adjustment at January 1,
  1997, due to deregistration as a            --             --       (8,725,978)          --             --       (8,725,978)
  business development company
Treasury shares purchased                     --             --             --             --          (13,950)       (13,950)
Net income                                    --             --        1,479,151           --             --        1,479,151
                                      ------------   -------------  -------------  ------------   -------------  -------------

Balance at December 31, 1997                55,389     14,090,156     (5,247,684)          --          (13,950)     8,883,911

Comprehensive income
  Net income                                  --             --          163,845           --             --          163,845
  Other comprehensive income, net of
   reclassification adjustments and
   taxes                                      --             --             --         (15,194)          --           (15,194)
                                                                                                                 -------------
  Total comprehensive income                                                                                          148,651
                                                                                                                 -------------
Treasury shares purchased                     --             --             --             --       (2,267,462)    (2,267,462)
Retirement of treasury stock               (14,705)    (2,266,707)          --             --        2,281,412           --   
                                      ------------   -------------  -------------  ------------   -------------  -------------
Balance at December 31, 1998          $     40,684   $ 11,823,449   $ (5,083,839)  $   (15,194)   $      --      $  6,765,100
                                      ============   =============  =============  ============   =============  =============

</TABLE>

     The accompanying notes are an integral part of this statement.

                                      F-6
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,



                                                       1998           1997      
                                                   ------------  ------------
Cash flows from operating activities
    Net income                                     $   163,845   $ 1,479,151
    Adjustments to reconcile net income
          to net cash provided by
          operating activities
      Depreciation and amortization                    343,210       525,524
      Deferred income taxes                             91,536       584,000
      Gain on sale of assets                              --      (1,795,225)
      Imputed interest                                    --          53,321
      (Gain) loss on sale of assets                    (18,000)        3,645
      Deferred credit                                     --         (53,321)
      Decrease in assets
         Accounts receivable                           345,076       312,817
         Inventories                                   450,936       256,719
         Prepaid expenses and other assets              74,069       151,200
      Increase (decrease) in liabilities
         Accounts payable                             (283,317)     (829,655)
         Accrued expenses                              (86,498)       21,467
         Deferred income                              (424,986)     (466,680)
                                                   -----------   -----------
          Net cash provided by operating
           activities                                  655,871       242,963
                                                   -----------   -----------
Cash flows from investing activities
    Purchase of machinery and equipment               (529,600)     (678,544)
    Redemption of treasury notes                          --       1,739,232
    Purchase of investments                            303,946    (2,735,919)
    Proceeds from sale of machinery and equipment       18,000         6,000
    Note receivable proceeds                           184,618        41,200
    Proceeds from sale of assets                          --       2,863,322
                                                   -----------   -----------
           Net cash (used in) provided
            by investing activities                    (23,036)    1,235,291
                                                   -----------   -----------
Cash flows from financing activities
    Payment of long-term debt and capital lease       (121,061)     (792,651)
    Purchase of treasury stock                      (2,267,462)      (13,950)
                                                   -----------   -----------
           Net cash used in financing activities    (2,388,523)     (806,601)
                                                   -----------   -----------
           NET (DECREASE) INCREASE IN CASH AND
              CASH EQUIVALENTS                      (1,755,688)      671,653

Cash and cash equivalents at beginning of year       2,882,526     2,210,873
                                                   -----------   -----------
Cash and cash equivalents at end of year           $ 1,126,838   $ 2,882,526
                                                   ===========   ===========
Supplemental disclosure of cash flow information
    Interest paid                                  $    26,060   $   105,084
                                                   ===========   ===========
    Retirement of treasury stock                   $ 2,281,412   $      --
                                                   ===========   ===========



The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1998 and 1997


NOTE A - ORGANIZATION AND PURPOSE

    Acorn Holding Corp. (Acorn) (formerly Acorn Venture Capital Corporation) was
    incorporated under the laws of the State of Delaware on September 8, 1983.

    Acorn filed an election with the  Securities  and Exchange  Commission to be
    treated as a business  development  company under the Investment Company Act
    of 1940,  as amended and operated as such until  November  1997. In November
    1997, Acorn withdrew its election as an investment  company,  ceased to be a
    business  development  company,  and  commenced  business  as  an  operating
    company.  At that date, the name of the company was changed to Acorn Holding
    Corp.

    The effect of the change in status from a business development company to an
    operating company was to decrease retained earnings by $8,728,978 at January
    1,  1997,   principally   due  to  reflecting  its  investment  in  Recticon
    Enterprises,  Inc.,  on a  historical  cost  equity  basis from a fair value
    basis.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    1.  Nature of Business and Principles of Consolidation
        --------------------------------------------------

    The consolidated  financial statements include the accounts of Acorn and its
    two wholly owned subsidiaries: Automotive Industries, Inc. (Automotive), and
    Recticon  Enterprises,  Inc. (Recticon),  (collectively,  the Company).  All
    intercompany  transactions  and balances  have been  eliminated.  Automotive
    operated   full-service   automotive  retail  stores  until  the  assets  of
    Automotive   were   sold  as  of  May  31,   1997.   Recticon   manufactures
    monocrystalline  silicon  wafers  which  are  used  in the  microelectronics
    industry.

    2.  Use of Estimates
        ----------------

    In preparing the financial  statements in accordance with generally accepted
    accounting  principles,   management  is  required  to  make  estimates  and
    assumptions  that affect the reported  amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements,  and revenues and expenses  during the reported  period.  Actual
    results could differ from those estimates.

    3.  Concentration of Risk 
        --------------------- 

    The subsidiaries  provide their products to customers  throughout the United
    States.  The  subsidiaries  perform  ongoing  credit  evaluations  of  their
    customers'  financial  condition  and generally  require no collateral  from
    their customers. Bad debt expense is not significant.

    4.  Cash and Cash Equivalents
    --  -------------------------

    Cash and cash equivalents consist of cash and highly liquid investments with
    a maturity of three months or less when purchased.


                                                                  (Continued)

                                      F-8
<PAGE>

                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    5.  Inventories
        -----------

    Inventories are stated at the lower of cost or market. Cost is determined by
    the first-in, first-out method.

    6.  Machinery and Equipment
        -----------------------

    Machinery and equipment  are stated at cost less  accumulated  depreciation.
    Depreciation is provided by the  straight-line  method over estimated useful
    lives. Maintenance and repair costs are charged to expense as incurred.

    7.  Deferred Income
        ---------------

    Deferred  income  is an amount  received  from  customers  in  exchange  for
    Recticon's  commitment to provide certain quantities of product over periods
    extending  until  September  2001.  The deferred  amounts are amortized on a
    straight-line basis over the terms of the agreements.

    8.  Income Taxes
        ------------

    Deferred income tax assets and liabilities represent the tax effects,  based
    on current tax law, of future deductible or taxable amounts  attributable to
    events that have been  recognized  in the financial  statements.  Income tax
    expense  represents  taxes  payable,  net of changes in deferred  income tax
    assets and  liabilities  during the year.  The Company files a  consolidated
    federal income tax return which includes the  subsidiaries'  taxable income.
    Under  the  Company's  tax-sharing  agreement  with  its  subsidiaries,  the
    subsidiaries are required to pay to the Company an amount equivalent to what
    it would  have  paid had it filed a  separate  Company  federal  income  tax
    return.

    9.  Earnings Per Share
        ------------------

    The Company  adopted the  provisions  of Statement  of Financial  Accounting
    Standards (SFAS) No. 128, Earnings Per Share,  which eliminates  primary and
    fully diluted  earnings per share (EPS) and requires  presentation  of basic
    and diluted EPS in conjunction  with the disclosure of the methodology  used
    in  computing  such EPS.  Basic EPS  excludes  dilution  and is  computed by
    dividing income  available to common  shareholders  by the weighted  average
    common shares outstanding during the period.  Diluted EPS takes into account
    the potential  dilution that could occur if securities or other contracts to
    issue common stock were  exercised  and  converted  into common  stock.  The
    adoption of SFAS No. 128 had no impact on EPS of any year presented.


                                                                  (Continued)

                                      F-9
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    10.  Goodwill
         --------

    Goodwill represents the excess of cost over the fair value of the net assets
    acquired for the purchase of Recticon. This excess is being amortized over a
    period of 10 years.

    11.  Comprehensive Income
         --------------------

    On January 1, 1998,  the  Company  adopted  the FASB  issued  SFAS No.  130,
    Reporting  Comprehensive  Income.  SFAS No.  130  establishes  standards  to
    provide prominent  disclosure of comprehensive  income items.  Comprehensive
    income is the change in equity of a business enterprise during a period from
    transactions  and other events and  circumstances  from  non-owner  sources.
    Other  comprehensive  income consists of net unrealized  gains on investment
    securities available for sale.

    12.  Investments
         -----------

    The Company  accounts for its  investments in accordance  with SFAS No. 115,
    Accounting  for  Certain   Investments   in  Debt  and  Equity   Securities.
    Accordingly,  the Company classifies its investments as  available-for-sale,
    whereby net  unrealized  gains and losses,  net of tax,  are  required to be
    recognized as a separate component of stockholders' equity.

NOTE C - SALE OF ASSETS AND LIABILITIES OF AUTOMOTIVE INDUSTRIES, INC.

    Automotive  entered into an agreement to sell its operating assets as of May
    30, 1997. In accordance with the agreement,  Automotive  sold  substantially
    all of its  assets  and  liabilities  for a  price  of  $2,500,000  plus  an
    incentive  amount  equal  to 1% of the  aggregate  gross  sales  of all  the
    currently  existing 28 locations for each of the three years  beginning June
    1, 1997 through May 31, 2000, not to exceed $500,000.

    As of December  31,  1997,  Automotive  and the  purchaser  entered  into an
    agreement  which amended the original  purchase  price.  Automotive  and the
    purchaser  agreed to delete the incentive  purchase amount  discussed above,
    and the parties  agreed for the  purchaser  to pay  Automotive  an aggregate
    amount of $425,000 in equal annual  installments  through June 2000, with no
    interest.

    In accordance with the sale agreement,  essentially all operating  assets of
    that company were sold and liabilities assumed by the buyer.

    In accordance with generally accepted accounting principles,  the operations
    of Automotive are included in the  accompanying  consolidated  statements of
    income as "Discontinued  Operations." In addition,  the net gain on the sale
    of that  subsidiary  is shown " Gain on Sale of Assets  and  Liabilities  of
    Automotive Industries, Inc."



                                      F-10
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE D - RESTRICTED CASH

    Recticon  has entered  into  agreements  with  customers  and has  purchased
    machinery  consisting  of crystal  growing and wafer  finishing  units.  The
    customers  have provided cash to Recticon for the purchase and  construction
    of the units. Title of all machinery and equipment  purchased is in the name
    of the customers.  Amounts received and not utilized are refundable.  At the
    conclusion of the  contracts  with these  customers,  title to the machinery
    will be given to Recticon for a nominal sum.

NOTE E - INVESTMENT SECURITIES

    The amortized cost,  unrealized  gains and losses,  and fair market value of
    the Company's available-for-sale  investment securities at December 31, 1998
    are:

                                               Gross       Gross      Fair
                                 Amortized  unrealized  unrealized    market
                                     cost      gain        loss       value  
                                ----------  ----------  ----------   -------    

U.S. Government and agency       $   5,943  $      82   $     --    $   6,025
State and municipal obligations    677,690        --      (15,276)    662,414
                                 ---------  ---------   ---------   ---------
                                 $ 683,633  $      82   $ (15,276)  $ 668,439
                                ==========  =========   =========   =========

    The following table lists the contractual maturities of investments:

                                                   Fair
                                  Amortized        market
                                    cost           value      
                                  ---------       --------

     Less than one year            $115,331       $115,044
     After ten years                568,302        553,395
                                   --------       --------
                                   $683,633       $668,439
                                   ========       ========

    At  December  31,  1997,  investments  consisting  U.S.  Treasury  bills had
    amortized cost and fair market value of $986,706.

NOTE F - INVENTORIES

    Inventories consist of the following:
                                             1998             1997     
                                        ---------------  --------------

       Raw materials and supplies        $   961,333      $ 1,122,426
       Work in process                       943,134        1,273,883
       Finished goods                        151,360          110,454
                                          ----------       ----------
                                         $ 2,055,827      $ 2,506,763
                                          ==========       ==========

                                      F-11
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE G - CREDIT ARRANGEMENTS

    Recticon has available a $750,000  revolving  line of credit which is due on
    demand. Interest is payable monthly at the prime rate (7.75% at December 31,
    1998).  The line is  available  through  April 30,  1999,  and is secured by
    Recticon's assets and is guaranteed by Acorn. At December 31, 1998 and 1997,
    there was $750,000 available under the line of credit.

NOTE H - LONG-TERM DEBT

    Recticon has long-term debt consisting of the following:

                                                      1998             1997     
                                                  ------------     ------------
       Term loan at 8.25% interest per annum;  
          principal payable in 48 monthly
          installments of $10,088, with final 
          payment due December 30, 2000; 
          secured by Recticon's assets             $   242,123      $   363,184

       Less current maturities                         121,062          121,062
                                                   -----------      -----------
                                                   $   121,061      $   242,122
                                                   ===========      ===========

    Annual maturities of long-term debt are as follows:

       Year ending December 31,
       ------------------------

                  1999                  $   121,062
                  2000                      121,061
                                        -----------
                                        $   242,123
                                        ===========

NOTE I - DEFERRED INCOME

    Recticon  received  nonrefundable  payments of $2,300,000  from customers in
    exchange for its  commitment to provide  certain  quantities of product over
    periods  extending  until  September  2001. The payments  received have been
    recorded as deferred  income and are being amortized over the periods of the
    contracts.  The  sales  price  of the  product  to be  delivered  under  the
    agreements  is  permitted  to provide a gross  profit not to exceed 35%. The
    customers  are not  required  to  purchase  any amount of product  under the
    agreements.

    Annual recognition of deferred income is as follows:

         Year ending December 31,
         ------------------------

                  1999                        $   300,000
                  2000                            300,000
                  2001                            225,000
                                              -----------

                                              $   825,000
                                              ===========

                                      F-12
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE J - INCOME TAXES

    The Company  depreciates its machinery and equipment for income tax purposes
    at rates which vary from those used for  financial  reporting  purposes.  In
    addition,  the Company has reported certain income for tax purposes which is
    being  recognized  over a period of years for financial  statement  purposes
    (note I).

    The income tax provision consists of the following:

                                             1998           1997 
                                      -----------    -----------
   Current
       Federal                        $      --      $    35,000
       State                                8,286         19,731
   Deferred
       Federal                             89,207        512,036
       State                                 --           36,531
                                      -----------    -----------

                                      $    97,493    $   603,298
                                      ===========    ===========

Deferred tax assets consist of
  the following:
                                             1998           1997 
                                      -----------    -----------

   Net operating loss carryforwards   $ 2,013,000    $ 2,079,000
   Depreciation                          (174,000)      (137,000)
   Deferred income                        334,000        507,000
   Carrying value of assets               332,000        386,000
   Note receivable                        192,000           --
   Other                                   93,464         47,000
                                      -----------    -----------
                                        2,790,464      2,882,000
   Less valuation allowance             1,397,000      1,397,000
                                      -----------    -----------

                                      $ 1,393,464    $ 1,485,000
                                      ===========    ===========

    A valuation  allowance has been established  against the deferred tax assets
    of net operating loss  carryforwards due to separate return limitations that
    are applicable to $4,109,000 of net operating losses.

    The income tax  provision  reconciled  to the tax computed at the  statutory
    federal rate was as follows:

                                                 1998         1997     
                                               -------      -------

Tax at statutory federal rate                    34.0%       34.0%
State income taxes, net of federal benefits       3.3         4.5
Net operating losses                               --        (8.6)
Other                                              --        (1.0)
                                                 ----        ----
                                                 37.3%       28.9%
                                                 ====        ====

                                      F-13
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE K - COMMITMENTS

    Recticon  leases its  facilities  under a lease  agreement  which expires on
    February 28, 2009. Minimum lease payments are as follows:

         Year ending December 31,
         ------------------------

                     1999                  $     96,000
                     2000                        96,000
                     2001                       116,000
                     2002                       120,000
                     2003                       120,000
                     Thereafter                 656,000
                                             ----------

                                            $ 1,204,000
                                            ===========

NOTE L - CONCENTRATIONS

    Three  customers  of the Company  accounted  for 53%, 15% and 5% of sales in
    1998 and 39%, 18%, and 11% of sales in 1997.

    For 1998 and 1997,  one vendor  accounted  for 13% and 12% of the  Company's
    materials purchases, respectively.

    The  Company  and its  subsidiaries  maintain  cash  balances  at  financial
    institutions,  mutual funds and brokerage  accounts  located  throughout the
    United  States.  Accounts  with  financial  institutions  are insured by the
    Federal Deposit Insurance  Corporation up to $100,000.  The Company believes
    it is  not  exposed  to  any  significant  credit  risk  on  cash  and  cash
    equivalents.

NOTE M - RELATED PARTY TRANSACTIONS

    During 1998 and 1997, the Company and its  subsidiaries  paid a law firm, of
    which the  Company's  Chief  Executive  Officer and Chairman was of counsel,
    approximately  $116,000  and  $100,000  for  services  rendered,   including
    reimbursement of expenses.

    During 1998,  the Company and its  subsidiaries  entered into two consulting
    agreements for  approximately  $25,000 each with two of its Board members to
    provide professional services for 1999.

                                      F-14
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE N - EARNINGS PER SHARE

    The Company's  calculation of earnings per share in accordance with SFAS No.
    128 is as follows:
<TABLE>
<CAPTION>

                                     Income            Number of Shares
                                   (numerator)           (denominator)       Per share amount   
                             ---------------------     ----------------      ----------------   
                                 1998       1997        1998        1997      1998     1997   
                                 ----       ----        ----        ----      ----     ----   
<S>                          <C>         <C>          <C>         <C>        <C>      <C>     
Basic EPS
   Income from continuing
       operations            $  163,845  $  763,459   4,179,542   5,538,164  $  .04   $ .14
   Income from discontinued
       operations                  --       715,692        --     5,538,164      --     .13
                             ----------  ----------                          ------   -----
       Net income            $  163,845  $1,479,151                          $  .04   $ .27
                             ==========  ==========                          ======   =====
</TABLE>

    Diluted  EPS is  not  presented,  as  the  effect  of  dilutive  securities,
    consisting of options, has no impact.

    Of the total  options  outstanding,  options to purchase  720,000  shares of
    common stock ranging from $0.91 to $3.38 per share, were outstanding  during
    the year.  They were not included in the  computation of diluted EPS because
    the option exercise price was greater than the average market price.

NOTE O - STOCK OPTIONS

    The Company has issued stock options to various officers of the Company. The
    stock  options  were issued at fair value as of the date of grant and have a
    term of 10 years from the date of grant. The following is a summary of stock
    options outstanding at December 31, 1998 and 1997:

                                           1998                   1997
                                -----------------------   ---------------------
                                              Weighted                Weighted
                                              average                 average
                                              exercise                exercise
                                   Shares      price       Shares      price
                                ----------    --------    --------   -----------
  Outstanding at January 1,        900,000    $   1.83     900,000   $    1.85
  Granted                           60,000        0.91     100,000        1.58
  Cancelled                        (60,000)       2.61    (100,000)       1.16
                                ----------                --------
  Outstanding at December 31,      900,000        1.81     900,000        1.83
                                ==========                ========
  Options exercisable at
    December 31,                   900,000        1.81     900,000        1.83
                                ==========                ========



                                                                  (Continued)

                                      F-15
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE O - STOCK OPTIONS - Continued

    The  following  table  summarizes  information  about  fixed  stock  options
    outstanding at December 31, 1998:

                                 Options outstanding and exercisable
                         -----------------------------------------------------
                                          Weighted                  Weighted
      Range of                            remaining                 average
   exercise price         Shares       contractual life         exercise price
   --------------        -------       ----------------         --------------
       1998
       ----
     $   3.38            130,000            3 years               $   3.38
     $1.84 - 2.19        440,000            5 years                   1.94
     $   1.16             50,000            6 years                   1.16
     $   0.88            120,000            7 years                   0.88
     $   1.58            100,000            9 years                   1.58
     $   0.91             60,000            10 years                  0.91
                         -------
                         900,000
                         =======

    According  to  the  stock  option  agreements,  outstanding  options  can be
    exercised at the fair value of the Company's common stock as of November 22,
    1994  ($0.5625) if a "change of control" of the  Company,  as defined in the
    agreements,  occurs.  The  agreements  were  amended  on March 2,  1998,  to
    increase the exercise  price to $1.25 in the event of a "change in control."
    Assuming these shares were  exercised,  there would be no material impact on
    EPS.

    As of December 31, 1998, no options had been exercised.

    The Company has adopted only the  disclosure  provisions of SFAS No. 123. It
    applies APB Opinion No. 25 and related interpretations in accounting for its
    plans  and does  not  recognize  compensation  expense  for its  stock-based
    compensation  plans. Had compensation cost been determined based on the fair
    value of the options at the grant date  consistent  with SFAS No.  123,  the
    Company's  net  earnings  and EPS for the years ended  December 31, 1998 and
    1997, would have been reduced to the pro forma amounts indicated below:

                                                     1998            1997     
                                               ---------------- --------------

       Net earnings
          As reported                           $   163,845       $1,479,151
          Pro forma                                 138,897        1,378,151

       EPS
          As reported                           $       .04       $     0.27
          Pro forma                                     .03             0.25


                                                                  (Continued)

                                      F-16
<PAGE>


                      Acorn Holding Corp. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE O - STOCK OPTIONS - Continued

    These pro forma  amounts  may not be  representative  of future  disclosures
    because they do not take into effect pro forma compensation  expense related
    to grants  before  January  1,  1998.  The fair  value of these  options  is
    estimated on the date of grant using the Black-Scholes  option pricing model
    with the following  weighted  average  assumptions for grants in fiscal year
    1998:  expected  volatility of 53%,  risk-free  interest rate of 4.91%,  and
    expected  life of 10 years.  The  weighted  average  fair  value of  options
    granted during fiscal year 1998 was $0.91.

NOTE P - COMMON STOCK

    At December  31,  1998,  the Company had  20,000,000  shares of common stock
    authorized, 4,068,406 shares issued and outstanding.

    At December  31,  1997,  the Company had  20,000,000  shares of common stock
    authorized, 5,538,906 shares issued, and 5,529,908 shares outstanding.

    During 1998 and 1997, the Company repurchased  1,461,500 and 9,000 shares of
    its common stock through the open market. All treasury shares were retired.

NOTE Q - SEGMENT INFORMATION

    The Company is a holding  company  which owns and  operates  one  subsidiary
    which   manufactures    monocrystalline   silicon   wafers   used   in   the
    microelectronics  industry. The Company considers its business to consist of
    one reportable operating segment.

    Until May 31, 1997, the Company also owned another subsidiary which operated
    automobile  retail store.  These  operations  are shown in the  accompanying
    consolidated statements of income as discontinued operations.

NOTE R - SUBSEQUENT EVENT

    The Board of  Directors  has approved  the  submission  of a proposal to the
    shareholders  for a two  shares  for  five  shares  "Reverse  Split"  of the
    Company's  common  stock.  A special  meeting of the  stockholders  has been
    called for April 15, 1999 to consider the proposal.


                                      F-17
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors
Automotive Industries, Inc.

We have audited the accompanying balance sheet of Automotive Industries, Inc., a
wholly owned  subsidiary of Acorn  Venture  Capital  Corporation,  as of May 31,
1997,  and the related  statement of operations,  shareholder's  equity and cash
flows for the five months ended May 31, 1997. 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 generally accepted auditing standards.
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 financial  statements  referred to above present fairly, in
all material respects, the financial position of Automotive Industries,  Inc. as
of May 31, 1997,  and the results of its  operations  and its cash flows for the
five months ended May 31, 1997, in conformity with generally accepted accounting
principles.

As  more  fully  described  in  Note  2,  on  May  30,  1997  the  Company  sold
substantially all of its assets and liabilities to a third party.

PricewaterhouseCoopers LLP

Jacksonville, Florida
August 31, 1997, except for the second paragraph of Note 2, as to which the date
is December 3, 1997

                                      F-18
<PAGE>



                           Automotive Industries, Inc.

                                  BALANCE SHEET

                                  May 31, 1997




                ASSETS

Current assets
    Cash and cash equivalents                                     $  1,888,277
    Receivable from parent                                             562,500
    Receivable from purchaser                                          121,696
    Prepaid expenses                                                     4,500
                                                                  ------------

                Total current assets                                 2,576,973

Deferred taxes                                                         553,560
Receivable from purchaser                                              243,393

                Total assets                                      $  3,373,926
                                                                  ============

                LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities
    Accounts payable                                              $     44,442
    Current portion of long-term debt                                  562,500
    Accrued expenses                                                    81,602
                                                                  ------------

                Total current liabilities                              688,544

Contingencies and commitments (Notes 4 and 6)

Shareholder's equity
    Common stock, $.01 par value; 3,000 shares authorized,
       142 shares issued and outstanding                                     1
    Additional paid-in capital                                       2,359,234
    Retained earnings                                                  326,147
                                                                  ------------

                Total shareholder's equity                           2,685,382

                Total liabilities and shareholder's equity        $  3,373,926
                                                                  ============



The accompanying notes are an integral part of these financial statements.

                                      F-19
<PAGE>


                           Automotive Industries, Inc.

                             STATEMENT OF OPERATIONS

                     for the five months ended May 31, 1997




Sales
    Merchandise sales                                    $  5,112,751
    Labor sales                                             2,658,613
                                                         ------------

                Total sales                                 7,771,364

Cost of sales                                               3,528,024
                                                         ------------
                Gross profit                                4,243,340

Operating expenses                                          4,393,415
Depreciation                                                  196,342
Amortization                                                   35,799
                                                         ------------

                Operating loss                               (382,216)

Other (expense) income
    Gain on sale of assets and liabilities                  1,795,225
    Management fees to parent                                (475,000)
    Severance pay to former employees                        (160,000)
    Interest expense                                          (82,529)
    Other income                                                5,761

                Total other income, net                     1,083,457

Net income before income taxes                                701,241

Income tax provision                                          275,299

Net income                                               $    425,942
                                                         ============




The accompanying notes are an integral part of these financial statements.

                                      F-20
<PAGE>


                           Automotive Industries, Inc.

                        STATEMENT OF SHAREHOLDER'S EQUITY

                     for the five months ended May 31, 1997




<TABLE>
<CAPTION>
                                                  
                                       Common Stock       Additional       Retained        Total       
                                   -------------------      Paid-In        Earnings     Shareholder's
                                     Shares    Amount       Capital        (Deficit)       Equity      
                                   ---------  --------    -----------    ------------   -------------
<S>                                <C>        <C>         <C>            <C>            <C>        
Balance at December 31, 1996           142           1    $ 2,793,234    $   (99,795)   $ 2,693,440

Dividends ($3,056 per share)          --            --       (434,000)          --         (434,000)

Net income                            --            --            --         425,942        425,942
                                   --------   --------    ------------   -----------    -----------

Balance at May 31, 1997                142    $      1    $ 2,359,234    $   326,147    $ 2,685,382
                                   ========   ========    ===========    ===========    ===========


</TABLE>











The accompanying notes are an integral part of these financial statements.

                                      F-21
<PAGE>


                           Automotive Industries, Inc.

                             STATEMENT OF CASH FLOWS

                     for the five months ended May 31, 1997




Cash flows from operating activities
    Net income                                                     $    425,942
    Adjustments to reconcile net income to net cash
     used in operating activities
       Deferred taxes                                                   275,299
       Gain on sale of assets                                        (1,795,225)
       Depreciation and amortization                                    232,141
       Imputed interest                                                  53,321
       Loss on sale of property and equipment                             3,645
       Changes in operating assets and liabilities:
          Trade accounts receivable and other receivables                93,873
          Inventory                                                      98,524
          Prepaid and other assets                                       89,292
          Accounts payable                                             (485,960)
          Accrued expenses                                              103,070
          Deferred credit                                               (53,321)
                                                                   ------------
                Net cash used in operating activities                  (959,399)
                                                                   ------------
Cash flows from investing activities
    Proceeds from sale of property and equipment                          6,000
    Purchases of property and equipment                                (148,366)
                                                                   ------------
                Net cash used in investing activities                  (142,366)
                                                                   ------------
Cash flows from financing activities
    Payments on long-term debt and capital lease obligations           (109,090)
    Loan to parent                                                     (600,000)
    Repayment of loan to parent                                          37,500
    Proceeds from sale of assets                                      2,500,000
                                                                   ------------
                Net cash provided by financing activities             1,828,410
                                                                   ------------
Increase in cash and cash equivalents                                   726,645
Cash and cash equivalents at beginning of year                        1,161,632
                                                                   ------------
Cash and cash equivalents at end of year                           $  1,888,277
                                                                   ============
Supplemental Disclosure of Cash Flow Information
       Cash paid for interest                                      $     57,678

Supplemental Schedule of Noncash Investing and 
  Financing Activities
    Dividend declared to parent for satisfaction 
     of receivable                                                 $    434,000





The accompanying notes are an integral part of these financial statements.

                                      F-22
<PAGE>


                           Automotive Industries, Inc.

                          NOTES TO FINANCIAL STATEMENTS




1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

    Organization and Nature of Operations

    Automotive  Industries,  Inc.  (the  Company)  is  a  Delaware  corporation,
    headquartered  in  Jacksonville,  Florida.  The  Company  operated 28 retail
    stores  which sold  automotive  tires,  accessories,  and  related  services
    through a network of company-owned  retail stores located primarily in North
    Florida and South Georgia. See Note 2 for sale of assets of the Company. The
    Company is a wholly owned subsidiary of Acorn Holding Corp. (Acorn).

    Cash and Cash Equivalents

    Cash and cash  equivalents  represent  demand  deposits  in banks  and money
    market accounts.

    Deferred Taxes

    The Company's parent company, Acorn, files a consolidated federal income tax
    return  which  includes  the  Company's   taxable   income.   Under  Acorn's
    tax-sharing agreement with its subsidiaries,  the Company is required to pay
    or receive to/from Acorn an amount  equivalent to what it would have paid or
    received had the Company filed a separate federal income tax return.

    Deferred income tax  liabilities  and assets are determined  using currently
    enacted tax rates applicable to the period in which deferred tax liabilities
    or  assets  are  expected  to be  settled  or  realized.  The  tax  benefits
    recognized must be reduced by a valuation allowance to the extent it is more
    likely than not the benefits may not be realized.

    Use of Estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
    accepted  accounting  principles  requires  management to make estimates and
    assumptions  that affect the reported  amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements  and the reported  amounts of revenues  and  expenses  during the
    reporting period. Actual results could differ from those estimates.

2.  SALE OF ASSETS AND LIABILITIES

    The Company entered into an agreement to sell its operating assets as of May
    30,  1997.  In  accordance   with  the  agreement,   the  Company  has  sold
    substantially  all of its assets and  liabilities  for a price of $2,500,000
    plus an incentive  amount equal to one percent (1%) of the  aggregate  gross
    sales of all the currently existing 28 locations for each of the three years
    beginning June 1, 1997 through May 31, 2000 not to exceed $500,000.







                                                                  (Continued)

                                      F-23
<PAGE>


                           Automotive Industries, Inc.

                          NOTES TO FINANCIAL STATEMENTS




2.  SALE OF ASSETS AND LIABILITIES - Continued

    As of December 3, 1997, the Company and purchaser  entered into an agreement
    which amended the original  purchase price. The Company and purchaser agreed
    to delete the  incentive  purchase  amount  discussed  above and the parties
    agreed for the purchaser to pay the Company an aggregate  amount of $425,000
    to be paid in equal annual installments through June 2000, with no interest.
    The $425,000 has been  recorded at its present  value  assuming a 8% imputed
    interest rate.

    In accordance with the agreement,  the following assets were sold: all trade
    accounts   receivable   and  other   miscellaneous   receivables   excluding
    receivables from Acorn and from any officers,  directors or affiliates;  all
    inventory;  all  property and  equipment;  all leases used in the conduct of
    business;  all prepaid  expenses  excluding any prepaid  income  taxes;  all
    guarantees, warranties, indemnities and similar rights related to any asset;
    all goodwill; and all cash and cash equivalents.

    In  addition,   the  Company  assigned  the  following  liabilities  to  the
    purchaser:  All  current  and  long-term  debt  other than such debt owed to
    Falken Tire in excess of $300,000;  all regular accounts  payable  excluding
    amounts due to officers or  affiliates;  all accrued  expenses;  all current
    sales tax payable;  all deferred revenue; all capitalized lease obligations;
    all liabilities and obligations  under contracts  accrued or to be performed
    from and after the closing date;  all  indemnities,  warranties,  service or
    other  obligations  and  liabilities  arising  out of or  relating  to goods
    manufactured  or sold or  services  provided  by the seller on or before the
    closing date.

3.  LONG-TERM DEBT

    The current  portion of long-term  debt consists of a  non-interest  bearing
    note of $562,500  issued in connection with Falken Tire  Corporation  supply
    agreement due December 31, 2001  (discounted at an imputed  interest rate of
    13%) without collateral.

    The  non-interest  bearing  note issued in  connection  with the Falken Tire
    Corporation  (Falken) supply  agreement was renegotiated on January 1, 1997,
    which  provided  additional  proceeds of  $600,000  and  extended  the terms
    through  December 31, 2001.  Interest was imputed on this  transaction  at a
    rate  deemed   commensurate   with  the  current  rate  of  borrowing   and,
    accordingly,  debt discount totaling $312,810 was recorded as a reduction of
    the carrying value of this debt. The Falken  agreement  provides that if the
    amount of tire purchases required by the agreement is not met over specified
    periods of time, the debt becomes due upon demand and interest  accrues at a
    rate of 1.5% per month or at the maximum rate permitted by law, whichever is
    less  thereafter.  As of May 31, 1997,  the purchaser  assumed a significant
    amount of the Company's  outstanding  debt,  and the portion of the debt not
    assumed by the purchaser of $562,500 at May 31, 1997 was paid by the Company
    on June 2, 1997.

                                                                  (Continued)

                                      F-24
<PAGE>


                           Automotive Industries, Inc.

                          NOTES TO FINANCIAL STATEMENTS



4.  LEASES

    The Company leases certain store sites,  office space,  and equipment  under
    operating  leases.  The leases expire at various  dates  through  August 15,
    2000.  Total  rent  expense  for the  five  months  ended  May 31,  1997 was
    $562,601.

    All of the leases were assumed by the purchaser.

5.  INCOME TAXES

    The  provision  for  income  taxes for the five  months  ended May 31,  1997
    consists of the following:

       Current                                                $      -
       Deferred                                                  275,299
                                                              ----------

       Income tax expense                                     $  275,299
                                                              ==========

    The provision for income taxes on income differs from the amount computed by
    applying  the U.S.  federal  income  tax (35%)  because of the effect of the
    following items:

       Tax expense at federal statutory rate                  $   245,434
       State tax, net of federal benefit                           25,028
       Other                                                        4,837
                                                             ------------

                                                              $   275,299
                                                             ============

    The  Company's  deferred tax asset as of May 31, 1997  consists of operating
    loss carryforwards of $553,560 expiring in 2010.

    Pursuant  to a  tax  sharing  agreement  with  Acorn,  deferred  tax  assets
    (principally  arising from net  operating  loss  carryforwards)  can be used
    within the  consolidated  group,  therefore no valuation  allowance has been
    recognized,  since it is more likely than not that the  deferred  tax assets
    will be realized.







                                                                  (Continued)

                                      F-25
<PAGE>


                           Automotive Industries, Inc.

                          NOTES TO FINANCIAL STATEMENTS




6.  DEFINED CONTRIBUTION PENSION PLAN

    The  Company  had a defined  contribution  pension  plan  which  covers  all
    full-time  employees  who have  completed  six months of service  and are 21
    years of age or older.  Employer  matching  contributions to the plan are at
    the discretion of management.  No employer  contributions  were made for the
    five months ended May 31, 1997.

7.  FINANCIAL INSTRUMENTS

    Financial  instruments that subject the Company to  concentrations of credit
    risk  are cash  and  receivables.  The  Company  places  its cash in what it
    believes  to be high  quality  financial  institutions  which may, at times,
    exceed  FDIC  insurance  limits.  In  management's  opinion,  there  are  no
    significant concentrations of credit risk at May 31, 1997.

8.  RELATED PARTY TRANSACTIONS

    In  1997,  the  Company  declared  a  dividend  of  $434,000  to  Acorn  for
    satisfaction  of a receivable  in connection  with a tax sharing  agreement.
    During  1997,  the Company  advanced  $1,075,000  to Acorn.  This amount was
    comprised of $475,000 of management fees and a $600,000 note receivable from
    Acorn at 8% interest with the principal due on May 31, 1997.

    Subsequent to May 31, 1997, the Company  declared a liquidating  dividend of
    its remaining assets to Acorn.

                                      F-26