<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-27132
Terrace Holdings, Inc.
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(Exact Name of Small Business Issuer in Its Charter)
Delaware 65-0594270
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2699 Stirling Road, Suite C-405, Ft. Lauderdale, Florida 33312
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(Address of Principal Executive Office) (Zip Code)
(954) 894-6000
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(Issuer's Telephone Number, Including Area Code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.
Yes X No
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Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Check whether the registrant filed all documents and reports required to be
filed by Section 12 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
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Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
As of the date of this report, the issuer had 4,306,400 shares of
its common stock issued and outstanding.
Transitional Small Business Disclosure Format:
Check one: Yes No
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This is page 1 of sequentially numbered pages.
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<PAGE>
TERRACE HOLDINGS, INC. AND SUBSIDIARIES
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FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended March 31, 1997
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INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet as of March 31, 1997 [Unaudited].. 1
Statements of Operations for the three months ended
March 31, 1997 and 1996 [Unaudited].......................... 2
Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 [Unaudited].......................... 3
Notes to Financial Statements................................ 4 .... 6
Item 2: Management's Discussion and Analysis..................... 7 .... 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................... 9
Exhibit 11................................................... 10
Signatures................................................... 11
</TABLE>
. . . . . . . . . . .
<PAGE>
Item 1.
TERRACE HOLDINGS, INC.
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
[UNAUDITED]
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<TABLE>
<CAPTION>
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,234,534
Accounts Receivable 1,314,928
Inventory 785,627
Other Current Assets 643,886
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Total Current Assets 3,978,975
Furniture, Fixtures and Equipment - At Cost [Net of
Accumulated Depreciation of $297,950] 2,115,441
Intangible Assets [Net of Accumulated Amortization of $269,275] 1,165,448
Other Assets 339,582
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Total Assets $ 7,599,446
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 1,559,267
Accrued Payroll and Payroll Taxes 88,701
Deferred Revenue 1,030,514
Notes Payable 965,000
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Total Current Liabilities 3,643,482
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Long-Term Debt 364,719
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Commitments and Contingencies --
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Stockholders' Equity:
Common Stock - $.001 Par Value, 10,000,000 Shares
Authorized, 4,306,400 Issued and Outstanding 4,306
Additional Paid-in Capital 5,529,738
Retained Earnings [Deficit] (1,942,799)
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Total Stockholders' Equity 3,591,245
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Total Liabilities and Stockholders' Equity $ 7,599,446
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
TERRACE HOLDINGS, INC.
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STATEMENTS OF OPERATIONS
[UNAUDITED]
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<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1 9 9 7 1 9 9 6
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<S> <C> <C>
Revenue $1,691,787 $ 664,185
Cost of Sales 1,229,070 298,115
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Gross Profit 462,717 366,070
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Operating Expenses:
Selling, General and Administrative Expenses 490,920 453,992
Payroll and Related Expenses 344,804 306,024
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Total Operating Expenses 835,724 760,016
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[Loss] from Operations (373,007) (393,946)
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Other Income [Expense]:
Interest Income 12,268 33,327
Interest Expense (40,665) (3,768)
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Other [Expense] Income - Net (28,397) 29,559
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Net [Loss] $ (401,404) $(364,387)
========== =========
[Loss] Per Share $ (.09) $ (.11)
========== =========
</TABLE>
See Notes to Financial Statements.
<PAGE>
TERRACE HOLDINGS, INC.
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
<CAPTION>
Three months ended
---------------------
March 31,
---------
1997 1996
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<S> <C> <C>
Operating Activities:
Net [Loss] $ (401,404) $ (364,387)
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Adjustments to Reconcile Net [Loss] to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 52,968 22,779
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (409,767) (594,300)
Inventory 18,058 (200,274)
Other Current Assets (482,359) (466,390)
Other Assets (72,814) 6,917
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 161,816 94,467
Accrued Payroll and Payroll Taxes Payable 32,272 35,517
Deferred Revenue 844,102 2,567,185
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Total Adjustments 144,276 1,465,901
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Net Cash - Operating Activities (257,128) 1,101,514
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Investing Activities:
Acquisition of Assets (19,699) (744,046)
Purchase of DownEast Net of Cash Acquired (40,138) --
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Net Cash - Investing Activities (59,837) (744,046)
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Financing Activities:
Payment of Demand Notes Payable (19,408) (60,061)
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Net [Decrease] Increase in Cash and Cash Equivalents (336,373) 297,407
Cash and Cash Equivalents - Beginning of Periods 1,570,907 3,602,009
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Cash and Cash Equivalents - End of Periods $1,234,534 $3,899,416
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 36,719 $ 4,559
Taxes $ 33,426 $ --
</TABLE>
Supplemental Disclosures of Non-Cash Financing Activities:
the three months ended March 31, 1997, the Company issued 993,900
shares of common stock in connection with the acquisition of DownEast Frozen
Desserts, LLC.
See Notes to Financial Statements.
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Basis of Reporting
The accompanying unaudited consolidated and combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
301(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, such statements include all adjustments
[consisting only of normal recurring items] which are considered necessary in
order to make the financial statements not misleading. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full year.
The accompanying unaudited consolidated financial statements include the
accounts of Terrace Holdings, Inc. and subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes for the period ended December 31, 1996 included
in the Terrace Holdings, Inc. 10-KSB.
[2] [Loss] Per Share
[Loss] per share of common stock is based on weighted average number of common
shares outstanding for each period presented. Common stock equivalents are
included if dilutive.
[3] Common Stock
At March 31, 1997, 4,306,400 shares of the Company's common stock were issued
and outstanding.
[4] Intangible Assets
In January 1996, the Company entered into an assignment agreement to operate
Passover vacations at hotels located in Miami, Florida, Rye Town, New York and
Tamiment, Pennsylvania. The Company paid $675,000 for these agreements. This
amount net of accumulated amortization is included in intangible assets. The
intangible assets are amortized over four years, the life of the related
contracts. The contract to operate a Passover vacation at the Tamiment Hotel
expired after the 1996 Passover Holiday; therefore, the asset has been written
off in its entirety. Amortization expense amounted to $9,400 for the three
months ended March 31, 1997.
[5] Seasonality
The Company's holiday vacation is limited to Passover, which, in date
occurrence, approximates Easter. While the Passover vacation operations generate
revenue and income and require year-round management activity, the
concentrations of revenues and expenses will not occur until the next quarter.
[6] Deferred Revenue
Deferred revenue consists of deposits collected for future vacations at the
Kosher holiday vacation venue and deposits on hand for future catering events.
Deferred revenue totaled $1,030,514 and $2,731,245 for the three months ended
March 31, 1997 and 1996, respectively.
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[7] Inventories
Inventories consist of food and beverages for the Kosher holiday vacation
venues, restaurant and catering operations and frozen desserts for its
manufacturing subsidiary and are stated at the lower of cost [determined by the
first-in, first-out method] or market.
[8] Commitments
Effective September 1, 1995, the Company entered into 5-year employment
agreements with two executives, through August 31, 2000 for an aggregate base
salary of $165,000 for the first two years, $220,000 for the third year,
$265,000 for the fourth year and $300,000 in the fifth year.
The employment agreements were amended on February 14, 1997. The amendment
eliminates options in such agreements in consideration of the issuance of
warrants to purchase 1,500,000 shares of the Company's common stock in
connection with a business acquisition [See Note 10]. Additionally, the
agreements were amended to provide that certain other benefits are made
available to the executives.
[9] Incorporation of New Subsidiaries
On February 14, 1997, the Company incorporated The Lasko Family Kosher Tours,
Inc., as a wholly-owned subsidiary for the purpose of managing and operating its
Passover holiday vacations business. Accordingly, the Company's contracts
related to that business segment have been assigned to this wholly-owned
subsidiary. Additionally, on February 10, 1997, Deering Ice Cream, Inc.
["Deering"] was incorporated by the Company as a wholly-owned subsidiary.
[10] Business Acquisition
On February 17, 1997, the Company acquired all of the assets and related
liabilities of DownEast Frozen Desserts, LLC ["DownEast"]. DownEast, with
principal offices and plant located in Portland, Maine, manufactures and markets
frozen desserts under the name Deering Ice Cream. Under the Agreements signed
originally on December 9, 1996, and as substantially amended on February 7,
1997, the Company acquired such assets and related liabilities to continue the
business of manufacturing and marketing frozen desserts through Deering.
Such assets include all accounts receivable of the business, inventories, and
certain furniture and equipment. The stated liabilities assumed were principally
trade payables to suppliers of the business and certain long-term debt.
In consideration for the acquisition, the Company issued to DownEast: (1)
918,900 shares of its common stock; and (2) warrants to purchase 250,000
additional shares of its common stock at an exercise price of $1.1875 per share,
exercisable commencing February 17, 1997, through August 31, 2000. The
Registrant also paid DownEast approximately $114,000 in cash.
The acquisition will be accounted for as a purchase, effective January 1, 1997.
The operations of Deering are included in the Company's results of operations
from that date.
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[10] Business Acquisition [Continued]
In connection with the business acquisition, the Company entered into an
employment agreement with an executive who became the CEO of Terrace Holdings,
Inc. The three year renewable employment agreement provides for an annual base
salary of $175,000 and certain other benefits including severance pay.
The goodwill recorded for the acquisition is to be amortized over 20 years using
the straight-line method.
The following pro forma information presents the results of the combined
operations, for the three months ended March 31, 1996 of Terrace Holdings, Inc.
and Subsidiaries and Deering, treating the latter as if it were a subsidiary of
the Company for the full period then ended. This pro forma information does not
purport to be indicative of what would have occurred had the acquisition been
completed as of January 1, 1996 or results which may occur in the future.
Pro forma information for the three months ended March 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Total Revenues $1,467,510
Net [Loss] $ (525,209)
Net [Loss] Per Share $ (.12)
</TABLE>
In connection with the acquisition, the Company issued to each Samuel H. Lasko
and Jonathan D. Lasko [collectively the "Laskos"] warrants to purchase 375,000
shares of the Company's common stock at $1.1875 per share. The Laskos
surrendered their respective performance options to purchase up to 750,000
shares of the Company's common stock, contained in their respective employment
agreements. In addition, the Laskos entered an option agreement to purchase the
businesses, assets or capital stock of three of the Registrant's wholly-owned
subsidiaries, The Lasko Family Kosher Tours, Inc., The Lasko Companies, Inc. and
A&E Management, Inc. at the fair market value thereof, to be independently
determined. The option is exercisable for three years commencing April 1, 1998
until February 17, 2001, or earlier under certain circumstances, and will be
presented to the Company's shareholders for approval at the 1997 annual
shareholders meeting. If exercised, the disposal of these three wholly-owned
subsidiaries will be accounted for as a divestment.
............
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations - Terrace Holdings, Inc. (Passover Holiday Vacation)
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Versus Lasko Family Kosher Tours - 1997
- ---------------------------------------
Three months ended March 31, 1997 compared to three months ended March 31, 1996.
The Registrant transferred its Passover operations into a newly formed
subsidiary called The Lasko Family Kosher Tours, Inc. This season, the Passover
holiday occurred beginning April 21, 1997.
Inasmuch as Passover is a spring holiday, all of the revenues derived from this
segment of the Registrant's overall business occur in the second quarter, ending
June 30th. For March 31, 1997, deferred revenue was approximately $1,030,000
versus approximately $2,677,000 for the period ended March 31, 1996. The
decrease in deferred revenue is a result of the date which Passover falls in
1997 compared to 1996. Management believes that 1997 operational results from
the Passover operation will exceed the comparable results from 1996. Net losses
for the three months ended March 31, 1997 were approximately $198,680 compared
to approximately $316,000 for the same period in 1996. The decrease in net
losses are attributable to better expense containment and Management's efforts
to be more select in its advertising and promotion campaigns.
Management believes that its 1996 acquisitions of additional Passover holiday
contracts at the Fontainebleau Hilton in Miami Beach and Rye Town Hilton in Rye
Brook, New York will also contribute to positive net income from operations for
the subsidiary from Passover 1997.
Results of Operations - A & E Management Corp.
- ----------------------------------------------
Three months ended March 31, 1997 compared to three months ended March 31, 1996.
The Registrant's operations at The Club at Emerald Hills in Hollywood, Florida
are derived from its operation of the Reflections Restaurant, as well as its
catering hall in the golf club. Revenues for three months ended March 31, 1997
decreased from the same period in 1996 primarily as a result of a slower winter
season in South Florida. Notwithstanding the large decrease in revenue, the
Registrants net losses were $1,000 less for this period in 1997 than in 1996.
Management believes that continued promotion and advertising of its operations
will result in better results in the future.
Results of Operations - The Lasko Companies, Inc. (Terrace Oceanside Restaurant)
- --------------------------------------------------------------------------------
The Registrant's revenues are decreased from its operation of Terrace Oceanside
Restaurant, an upscale Glatt Kosher Restaurant in Hallandale, Florida. Revenues
for the period ended March 31, 1997 were approximately $272,600 compared to
$304,166 for the period ended March 31, 1996. Management believes this decrease
of approximately 10%, is directly attributable to a weak winter season in South
Florida. Although the Registrant's subsidiary had a decrease in revenue, the net
income for the period ended March 31, 1997 was approximately $47,440 compared to
a net loss of approximately $18,782 for the period ended March 31, 1996.
Management attributes this gain to better expense, payroll and overall cost
analysis and expenditure.
Because of both seasonality of operations and the restaurant's management
intensive requirements, the Registrant is reviewing its commitment to this
business in light of the restaurant's position as an integral part of its
marketing plan for its other food related businesses.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations - Terrace Holdings, Inc. (Consolidated)
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Three months ended March 31, 1997 to three months ended March 31, 1996
The Registrant's consolidated net loss for the quarter ended March 31, 1997 was
approximately $401,000 compared with $364,387 for the period ended March 31,
1996. The higher net loss was primarily due to the acquisition of Deering Ice
Cream and the seasonality that is associated with this type of business.
Revenues for the period ended March 31, 1997 were approximately $1,692,000
compared to approximately $664,000 for the period ended March 31, 1996. This
250% increase in revenue was due to the addition of Deering to the Registrant's
operations. Management believes that Deering Ice Cream will continue to
contribute higher revenues and positive income in the future.
All of the revenues derived from the operation of the Passover holiday venues
will be recognized in the second quarter ending June 30, 1997.
Usually, Deering Ice Cream derives 13% of its total revenue during the first
quarter of the year. In fiscal 1997, first quarter revenues were $1,280,500 or
13% of planned annual revenues. However, this year there has been a change to
the Registrant's revenue base. Currently, Deering's largest co-packing customer
absorbs the costs of all materials and packaging. As such, revenues derived
from the customer are reduced 75% though profitability to Deering is unaffected.
In relation to Deering's 1996 sales figures, Deering is currently 40% ahead
based on the old billing method (or based on units sold) and approximately 12%
ahead based on the current method of billing.
Net loss for the period was $212,000 as opposed to $239,300 for the prior year.
Net losses are not unusual for the first quarter of a seasonal business such as
Deering which has a relatively high fixed overhead, and requires proportionately
high sales volume to yield a profit. To some extent, this loss was also
exacerbated by an increase of 26% in the price of cream over the period, which
was not experienced during the same time frame last year.
However, certain other operating parameters did exhibit favorable performances
relative to last year. Material yield improved approximately 8%, labor per
gallon decreased approximately 19%, and overhead per gallon fell 31%. Volume
increases due to normal seasonal patterns, the impact of Howard Johnson products
being sold through new distributors in more areas, and wider distribution of the
Deering's ice cream rolls may impact future performance favorably.
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(i) Articles of Incorporation *
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(3)(ii) By-laws *
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(4) Instruments defining the rights of holders *
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(10) Material Contracts **
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(11) Statement Re: Computation of per Share Earnings
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See Exhibit 11 filed herewith.
______________________________________
* Incorporated by this reference to the Registrant's registration statement
# 33-96892-A.
** All material contracts presently in full force and effect and heretofore
filed with the Commission are hereby incorporated by this reference to
Registrant's registration statement #33-96892-A, and to its Form 10-KSB,
which was filed with the Commission April 15, 1997.
(b) Reports on Form 8-K
The Registrant filed Current Reports on Form 8-K dated January 27, 1997,
for the purpose of reporting the resignation of Howard J. Zimmerman as a
director of the Registrant, and also filed Current Reports on Form 8-K dated
February 17, 1997, and amended May 5, 1997, for the purpose of reporting its
acquisition of the assets of Downeast Frozen Desserts, LLC.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TERRACE HOLDINGS, INC.
(Registrant)
Dated: May 20, 1997 By:/s/ Milton Namiot
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Milton Namiot, Chief Executive Officer
Dated: May 20, 1997 By:/s/ Joseph Dane
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Joseph Dane, Corporate Controller
(Principal Financial Officer)
<PAGE>
TERRACE HOLDINGS, INC.
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EXHIBIT 11
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<TABLE>
<CAPTION>
March 31,
------------------------
<S> <C> <C>
1 9 9 7 1 9 9 6
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Fully Diluted:
Average Shares Outstanding Disregarding Potentially
Dilutive Common Stock Purchased Warrants 4,306,400 3,312,500
Assuming Conversion of Warrants [1] -- --
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Common Shares Outstanding 4,306,400 3,312,500
========== ==========
[Loss] for Fully Diluted Calculations $ (401,404) $ (364,387)
========== ==========
Fully Diluted [Loss] Per Common Share $ (.09) $ (.11)
========== ==========
</TABLE>
[1] Class A and Class B warrants are excluded from the calculation as they are
considered anti-dilutive. However, if effect was given to the exercise of all
such warrants, common shares outstanding would have been increased by 1,981,250.
