<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 1997 Commission File Number 0-27132
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TERRACE HOLDINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0594270
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2699 Stirling Road
Suite C-405
Ft. Lauderdale, Florida 33312
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 894-6000
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of August 19, 1997: 4,306,400
<PAGE>
TERRACE HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended June 30, 1997
- --------------------------------------------------------------------------------
INDEX
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Page
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Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet as of June 30, 1997 [Unaudited]............................. 1
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996 [Unaudited]............................................... 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 [Unaudited]..................................................... 3
Notes to Consolidated Financial Statements [Unaudited]................................. 4....6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 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.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
[UNAUDITED]
- --------------------------------------------------------------------------------
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<CAPTION>
Assets:
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 306,996
Accounts Receivable 1,523,939
Inventory 823,881
Other Current Assets 1,094,306
-----------
Total Current Assets 3,749,122
Furniture, Fixtures and Equipment - At Cost [Net of
Accumulated Depreciation of $228,187] 2,196,839
Intangible Assets [Net of Accumulated Amortization of $388,658] 1,129,136
Other Assets 98,251
-----------
Total Assets $ 7,173,348
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 1,844,063
Accrued Payroll and Payroll Taxes 58,978
Deferred Revenue 40,250
Notes Payable 965,000
-----------
Total Current Liabilities 2,908,291
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Long-Term Debt 344,844
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Common Stock - $.001 Par Value, 10,000,000 Shares
Authorized, 4,306,400 Issued and Outstanding 4,306
Additional Paid-in Capital 5,660,112
Retained Earnings [Deficit] (1,744,205)
-----------
Total Stockholders' Equity 3,920,213
-----------
Total Liabilities and Stockholders' Equity $ 7,173,348
===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
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TERRACE HOLDINGS, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
================================================================================
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<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
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<S> <C> <C> <C> <C>
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
Revenue $5,717,220 $4,207,565 $7,409,007 $4,871,750
Cost of Sales 4,493,945 3,263,248 5,723,015 3,561,363
---------- ---------- ---------- ----------
Gross Profit 1,223,275 944,317 1,685,992 1,310,387
---------- ---------- ---------- ----------
Operating Expenses:
Selling, General and Administrative
Expenses 678,135 718,170 1,169,055 1,172,162
Payroll and Related Expenses 323,872 309,076 668,676 615,100
---------- ---------- ---------- ----------
Total Operating Expenses 1,002,007 1,027,246 1,837,731 1,787,262
---------- ---------- ---------- ----------
Income [Loss] from Operations 221,268 (82,929) (151,739) (476,875)
---------- ---------- ---------- ----------
Other Income [Expense]:
Interest Income 10,200 28,593 22,468 61,920
Interest Expense (30,435) (1,704) (71,100) (5,472)
---------- ---------- ---------- ----------
Other [Expense] Income - Net (20,235) 26,889 (48,632) 56,448
---------- ---------- ---------- ----------
Income [Loss] Before Income Taxes 201,033 (56,040) (200,371) (420,427)
Income Taxes -- -- -- --
---------- ---------- ---------- ----------
Net Income [Loss] $ 201,033 $ (56,040) $ (200,371) $ (420,427)
========== ========== ========== ==========
Income [Loss] Per Share $ .05 $ (.02) $ (.05) $ (.13)
========== ========== ========== ==========
Weighted Average Number of Shares 4,306,400 3,312,500 4,306,400 3,312,500
========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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TERRACE HOLDINGS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
================================================================================
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<CAPTION>
Six months ended
---------------------
June 30,
--------
1 9 9 7 1 9 9 6
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Operating Activities:
Net [Loss] $ (200,371) $ (420,427)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash [Used for]
Provided by Operating Activities:
Depreciation and Amortization 186,283 305,281
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (618,778) (5,140)
Inventory (20,196) (12,473)
Other Current Assets (932,779) (18,229)
Other Assets 168,517 24,598
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 396,146 (71,558)
Payroll Taxes Payable 2,549 23,115
Deferred Revenue (146,162) (105,096)
----------- -----------
Total Adjustments (964,420) 140,498
----------- -----------
Net Cash - Operating Activities (1,164,791) (279,929)
----------- -----------
Investing Activities:
Acquisition of Intangible Assets (19,699) (675,000)
Acquisition of Assets (40,138) (164,956)
----------- -----------
Net Cash - Investing Activities (59,837) (839,956)
----------- -----------
Financing Activities:
Payment of Demand Notes Payable (39,283) (10,000)
Payment of Demand Notes Payable - Stockholders and Related Parties -- (106,267)
----------- -----------
Net Cash - Financing Activities (39,283) (116,267)
----------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents (1,263,911) (1,236,152)
Cash and Cash Equivalents - Beginning of Periods 1,570,907 3,602,009
----------- -----------
Cash and Cash Equivalents - End of Periods $ 306,996 $ 2,365,857
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 71,100 $ 3,493
Taxes $ 32,205 $ --
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
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TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
================================================================================
[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] Income [Loss] Per Share
Income [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 June 30, 1997, 4,306,400 shares of the Registrant's common stock were issued
and outstanding.
[4] Intangible Assets
In January 1996, the Registrant entered into an assignment agreement to operate
Passover vacations at hotels located in Miami, Florida, Rye Town, New York and
Tamiment, Pennsylvania. The Registrant 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 and $107,851 for
the three and six months ended June 30, 1997, respectively. The change in
amortization expense is a result of the Registrant's seasonality [See Note 5].
[5] Seasonality
The Registrant's holiday vacation operations are 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 occur in the second quarter.
During the Summer months, when the restaurant industry in Southern Florida is at
a normal low, the Registrant temporarily closes the Terrace Oceanside
restaurant.
[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 and $40,250 and $58,964 for
the three and six months ended June 30, 1997 and 1996, respectively.
4
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TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
================================================================================
[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 Registrant 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 Registrant'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 Registrant 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 Registrant'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 Registrant as a wholly-owned subsidiary.
[10] Business Acquisition
On February 17, 1997, the Registrant 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 Registrant 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 Registrant 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 was accounted for as a purchase, effective January 1, 1997. The
operations of Deering are included in the Registrant's results of operations
from that date.
5
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TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- --------------------------------------------------------------------------------
[10] Business Acquisition [Continued]
In connection with the business acquisition, the Registrant 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 of Terrace Holdings, Inc. and Subsidiaries and Deering, treating the
latter as if it were a subsidiary of the Registrant 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 six months ended June 30, 1996:
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<CAPTION>
<S> <C>
Total Revenues $6,076,319
Net [Loss] $ (593,132)
Net [Loss] Per Share $ (.18)
</TABLE>
In connection with the acquisition, the Registrant issued to each Samuel H.
Lasko and Jonathan D. Lasko [collectively the "Laskos"] warrants to purchase
375,000 shares of the Registrant's common stock at $1.1875 per share. The Laskos
surrendered their respective performance options to purchase up to 750,000
shares of the Registrant's common stock, contained in their respective
employment agreements. In addition, 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 Registrant'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.
[11] Subsequent Events
On July 1, 1997, the Registrant acquired all of the assets and related
liabilities of A One A Wholesale Produce, Inc. ["A One A"] a Ft. Lauderdale,
Florida based produce distributor sells and distributes fresh fruit and
vegetables to hotels, restaurants and other businesses in the south Florida
region.
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 Registrant issued to A One A 500,000
shares of common stock. The asset purchase agreement also provides for
contingent consideration based upon the achievement of specified earnings levels
in future periods. The Registrant also paid A One A $3,130,000.
The acquisition was accounted for as a purchase, effective July 1, 1997. The
operations of A One A will be included in the Registrant's results of operations
from that date.
The Registrant intends to change its operating cycle to conform to Deering's
fiscal year end (See MD&A). This change will take effect for the next quarterly
period.
. . . . . . . . . .
6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations - Lasko Family Kosher Tours (Passover Holiday Vacations)
Six months ended June 30, 1997 compared to six months ended June 30, 1996.
The Registrant operates it Passover holiday vacation segments at three resort
locations. The Registry Resort & Spa in Ft. Lauderdale, Florida, the
Fontainebleau Hilton in Miami Beach, Florida, the Rye Town Hilton in Ryebrook,
New York. While the Passover vacation operations generate revenue and income and
require year-round management activity, the concentrations of revenues and
expenses occur in the second quarter.
Revenues for the six months ended June 30, 1997 were approximately $3,500,000
compared to $3,750,000 in 1996. The decrease in revenue was a result of the
companies decision not to renew its operation of a Passover vacation at the
Tamiment Hotel in Tamarac, Pennsylvania. Management felt that, in the future,
the Tamiment would not be as profitable as expected and, on this basis, chose to
no longer operate a Passover vacation at this particular venue.
Net income for the six month period ended June 30, 1997 was approximately
$354,300, a 116% increase from the same period in 1996. This increase is
primarily due to better cost control, both with operating expenses as well as
lower selling general and administrative expenses.
Results of Operations - A & E Management Corp.
Six months ended June 30, 1997 compared to six months ended June 30, 1996.
The Registrant's operations at The Club at Emerald Hills in Hollywood, Florida
are derived from the operations of the food & beverage operation in the Country
Club. Revenues for six months ended June 30, 1997 were approximately $450,000 or
17% lower than the prior year period. The net loss for the period in 1997 was
approximately $3,940 compared to $6,051 for the same period in 1996. Management
believes that continued promotion and advertising of its operations should
produce better results in the future.
Results of Operations - The Lasko Companies, Inc.
Six months ended June 30, 1997 compared to six months ended June 30, 1996.
The Lasko Companies, Inc. generates its revenues through the operation of
Terrace Oceanside Restaurant in Hallandale, Florida. Net income for the six
months ended June 30, 1997 was approximately $28,469 compared to a net loss of
$74,632 for the six months ended June 30, 1996. This change for the period in
1997 can be attributed to several different factors. The Registrant realized an
8% decrease in its purchases as well as a 4% decrease in wages. Management
believes that the overall cost control methods that it has implemented will
continue to allow The Lasko Companies to realize net income although this
segment of the Registrant's overall business is very seasonal and is heavily
affected by this factor in the industry. During the Summer months, when the
restaurant industry in Southern Florida is at a normal low, the Registrant
temporarily closes the Terrace Oceanside restaurant.
Results of Operations - Deering Ice Cream, Inc.
Period ended June 28, 1997 to period ended June 29, 1996
Revenues for the period ending June 28, 1997 were approximately $3,113,200 or 6%
higher than the $2,943,400 for the same period of 1996, although overall volume
produced and shipped increased approximately 40% over the same period for 1996.
The large difference in these reported amounts was caused by a change in billing
methods with several large co-packing customers. As of January 26th, the
Registrant's largest co-packing customer is providing Deering with materials at
their cost. Deering is only charging a processing fee which includes direct
labor overhead and profit. This billing procedure was also adopted for another
major co-packing customer. In total, this has reduced co-packing revenues
$800,000 as compared to what would have been charged in 1996 for equivalent
volume, without any effect on profit.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Branded sales for this period were up 22% over the prior year primarily due to
the advent of the Howard Johnson line. Placement for this line has been
obtained in major markets outside New England, including the New York
Metropolitan area, Baltimore, Washington D.C. and Florida.
Operating income (loss) was $(28,400) an improvement of $396,600 over 1996.
This stronger performance can be attributed to a reduction in overhead per
gallon of approximately $0.51, a reduction in plant labor per gallon of $.17,
and an improvement in yield of 7%. Selling and marketing expenses as a percent
of net revenues are approximately 2% lower than last year due to more effective
in-store promotion and a reduced level of slotting fees. Administration
remained equivalent to last year despite the approximate 40% growth in sales
related transactions.
Results of Operations - Terrace Holdings, Inc. (Consolidated)
- -------------------------------------------------------------
Six months ended June 30, 1997 to six months ended June 30, 1996
The Registrant's consolidated net loss for the six months ended June 30, 1997
was approximately $200,400 compared to a net loss of approximately $420,400 for
the six months ended June 30, 1996. This sharp decrease in the Subsidiaries'
losses for 1997 are due to the following factors. The Registrant was able to
realize an increase in net income for its Passover package operations of
approximately $200,000. The Registrant was able to realize higher efficiency in
all of its operations which resulted in a much lower loss for the six month
period. Management believes that with the addition of A One A Produce &
Provisions, Inc. in July of 1997, that the Registrant will begin to see the
acretive results that it is committed to for the remainder of 1997 and into the
future.
The amounts above for 1996 do not include the operations of DownEast Frozen
Desserts, Inc.
As a result of the DownEast and A One A Produce acquisitions, the effects of the
Registrant's seasonality should be reduced in the future.
8
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(i) Articles of Incorporation *
--------------------------------
(3)(ii) By-laws *
---------------
(4) Instruments defining the rights of holders *
----------------------------------------------
(10) Material Contracts **
-----------------------
(11) Statement Re: Computation of per Share Earnings
----------------------------------------------------
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, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the Registrant during the period ended
June 30, 1997.
9
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SIGNATURE
================================================================================
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: August 19, 1997 By: /s/ Milton Namiot
---------------------------------------------
Milton Namiot, Chief Executive Officer
Dated: August 19, 1997 By: /s/ Joseph Dane
---------------------------------------------
Joseph Dane, Corporate Controller
(Principal Financial Officer)
10
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TERRACE HOLDINGS, INC.
================================================================================
EXHIBIT 11
================================================================================
<TABLE>
<CAPTION>
June 30,
1 9 9 7 1 9 9 6
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Average Shares Outstanding Disregarding Potentially Dilutive
Common Stock Purchased Warrants 4,306,400 3,312,500
Assuming Conversion of Warrants [1] -- --
---------- ----------
Common Shares Outstanding 4,306,400 3,312,500
========== ==========
[Loss] for Fully Diluted Calculations $ (200,371) $ (420,427)
========== ==========
[Loss] Per Common Share $ (.05) $ (.13)
========== ==========
</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.
