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 JUNE 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________
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 Jusisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1351 N.W. 22nd Street, Pompano Beach, Florida 33069
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(Address of Principal Executive Office) (Zip Code)
(954) 917-7272
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(Issuer's Telephone Number, Including Area Code)
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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 5,270,348 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.
<PAGE>
TERRACE HOLDINGS, INC. AND SUBSIDIARIES
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FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended June 30, 1998
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INDEX
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Page
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Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet as at June 30, 1998 (Unaudited)....... 1
Statements of Operations for the three and six month
periods ended June 30, 1998 and 1997 (Unaudited)................. 2
Statements of Cash Flow for the six months ended
June 30, 1998 and 1997 (Unaudited)............................... 3 & 4
Notes to Financial Statements.................................... 5 - 7
Item 2: Management's Discussion and Analysis.................... 8 & 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 10
Signatures....................................................... 11
. . . . . . . . . . . . . .
<PAGE>
Item 1.
TERRACE HOLDINGS, INC.
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TERRACE HOLDINGS, INC
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998
(UNAUDITED)
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<TABLE>
<CAPTION>
Assets:
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 793,159
Accounts Receivable (Less Reserve for Doubtful Accounts of $118,000) 2,136,865
Inventory 556,625
Restricted Cash 94,497
Current Portion of Note Due from Officer 53,000
Other Current Assets 463,459
------------
Total Current Assets 4,097,605
Equipment, Furniture and Fixtures - At Cost (Net of
Accumulated Depreciation of $176,711) 1,270,353
Intangible Assets (Net of Accumulated Amortization of $206,167) 4,537,811
Note Due from Officer 106,000
Other Assets 180,000
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Total Assets $ 10,191,769
============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,818,596
Accrued Expenses 634,900
Current Portion of Long Term Debt 182,321
Line of Credit 1,064,729
Term Loan 50,000
Other Current Liabilities 87,499
------------
Total Current Liabilities 3,838,045
Long-Term Debt 209,745
Convertible Subordinated Notes 2,625,000
Commitments and Contingencies --
------------
Total Liabilities 6,672,790
Stockholders' Equity:
Convertible Preferred Stock $.001 Par Value, 10,000,000
Shares Authorized, 1,523,825 Shares Issued and Outstanding 1,524
Common Stock - $.001 Par Value, 25,000,000 Shares
Authorized, 5,270,348 Issued and Outstanding 5,270
Additional Paid-in Capital 9,501,330
Retained Earnings (Deficit) (5,989,145)
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Total Stockholders' Equity 3,518,979
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Total Liabilities and Stockholders' Equity $ 10,191,769
============
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
TERRACE HOLDINGS,INC.
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STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
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1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 6,176,446 -- $ 13,429,518 --
Cost of Sales 4,541,595 -- 9,725,178 --
------------ ------------
Gross Profit 1,634,851 -- 3,704,340 --
------------ ------------
Operating Expenses:
Selling, General & Administrative 1,700,386 $ 247,182 3,563,713 $ 411,651
Provisions for Doubtful Accounts 103,108 -- 105,608 --
------------ ------------ ------------ ------------
Total Operating Expenses 1,803,494 247,182 3,669,321 411,651
------------ ------------ ------------ ------------
Income (Loss) from Operations (168,643) (247,182) 35,019 (411,651)
------------ ------------ ------------ ------------
Other Income (Expense)
Royalty Income 26,000 -- 26,000 --
Interest Income 3,180 10,171 3,180 21,712
Interest Expense (82,743) -- (159,925) --
------------ ------------ ------------ ------------
Other Income (Expense), Net (53,563) 10,171 (130,745) 21,712
------------ ------------ ------------ ------------
Income (Loss) from
Continuing Operations (222,206) (237,011) (95,726) (389,939)
------------ ------------ ------------ ------------
Income (Loss) from
Discontinued Operations (7,465) 438,044 29 189,568
------------ ------------ ------------ ------------
Net Income (Loss) $ (229,671) $ 201,033 $ (95,697) $ (200,371)
============ ============ ============ ============
Income (Loss) Per Share of Common Stock
(Loss) from Continuing Operations $ (.04) $ (.05) $ (.02) $ (.09)
Income from Discontinued Operations
(Net of Income Tax of $0.) $ -- $ .10 $ -- $ .04
------------ ------------ ------------ ------------
Basic Net Income (Loss)
Per Share of Common Stock $ (.04) $ .05 $ (.02) $ (.05)
============ ============ ============ ============
Diluted Net Income (Loss)
Per Share of Common Stock $ (.04) $ .05 $ (.02) $ (.05)
============ ============ ============ ============
Weighted Average Shares of Common Stock 5,262,106 4,306,400 5,187,161 4,306,400
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
TERRACE HOLDINGS, INC.
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STATEMENTS OF CASH FLOW
(UNAUDITED)
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<TABLE>
<CAPTION>
Six months ended
June 30,
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1998 1997
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Operating Activities:
<S> <C> <C>
Loss from Operations $ (95,726) $ (389,939)
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Adjustments to Reconcile Loss from Operations
Net Cash Provided by Operating Activities:
Depreciation and Amortization 225,265
Increase in Reserve for Doubtful Accounts 58,000
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (325,667)
Inventory (276,167)
Other Current Assets (355,636)
Due from Related Party 122,752
Due from Officer (159,000)
Due on Sale of Discontinued Operations 90,000
Other Assets (165,754)
Increase (Decrease) in:
Accounts Payable 925,854
Accrued Expenses and other Current Liabilities (153,491)
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Total Adjustments (13,844)
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Net Cash - Operating Activities (109,570) (389,939)
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Investing Activities:
Acquisition of Equipment, Furniture & Fixtures (712,316)
Purchase of Business Net of Cash Acquired (745,948)
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Net Cash - Investing Activities (1,458,264)
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Financing Activities:
Restricted Cash 43,204
Proceeds from Subordinated Convertible Notes 2,625,000
Cash Overdrafts (372,451)
Line of Credits (289,355)
Current Portion of Long Term Debt 19,951
Proceeds from Warrants Exercised 156,250
Net Long-term Debt Borrowing 178,365
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Net Cash-Financing Activities 2,360,964
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Net (Decrease) Increase in Cash and Cash Equivalents 793,130 (389,939)
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</TABLE>
3
<PAGE>
TERRACE HOLDINGS, INC.
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STATEMENTS OF CASH FLOW
(UNAUDITED)
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<TABLE>
<CAPTION>
Six months ended
June 30,
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1998 1997
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Discontinued Operations:
<S> <C> <C>
Income from Discontinued Operations 29 189,568
Adjustments to Reconcile Income to Net Cash
Provided by Discontinued Operations:
Depreciation & Amortization -- 186,283
Changes In Net Assets & Liabilities:
Current Assets -- (1,403,236)
Current Liabilities -- 252,533
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Investing Activities:
Acquisition of Assets -- (19,699)
Purchase of Business Net of Cash Acquired -- (40,138)
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Financing Activities:
Payment of Demand Notes Payable -- (39,283)
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Net Cash- Discontinued Operations 29 873,972
Cash and Cash Equivalent - Beginning of Period -- 1,570,907
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Cash and Cash Equivalent - End of Period $ 793,159 $ 306,996
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 165,689 $ 71,100
Taxes -- $ 32,205
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the six months ended June 30, 1998, the Company issued 138,948 shares of
common stock in connection with the acquisition of Fresh Inc.
</TABLE>
See Notes to Financial Statements.
4
<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
310(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, 1997 included
in the Terrace Holdings, Inc. 10-KSB.
(2) Income Per Share
Income per share of common stock is based on weighted average number of common
shares outstanding for each period presented. There were no potential common
shares included as they were all considered to be anti-dilutive. Securities that
could potentially dilute earnings per share in the future include convertible
preferred stock, common stock purchase warrants and options to purchase common
stock representing approximately 10,805,800 common shares. The Company has
5,270,348 (5,187,161 on a weighted average basis) shares outstanding as well as
1,523,825 shares of Preferred Stock (convertible into two shares of common for
each share of preferred) totaling 8,234,811 shares of Diluted Common Shares
outstanding. The Preferred Stock converts to the Company's Common Stock in July
1998.
(3) Common Stock
At June 30, 1998, 5,270,348 shares of the Company's Common Stock were issued and
outstanding.
(4) Inventories
Inventories consist of produce, grocery dry goods and dairy products for its
foodservice distribution and its vegetable precut businesses and are stated at
the lower of cost (determined by the first-in, first-out method) or market.
5
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
(UNAUDITED)
(5) Convertible Subordinated Notes
As of June 25, 1998, the Company issued to a private investor $2,625,000
principal amount of 12% Convertible Subordinated Notes ("Notes") and warrants to
purchase 400,000 shares of Common Stock of the Company. The Notes are
convertible at the rate of one share for each $1.25 of principal and accrued but
unpaid interest. The warrants are exercisable at a price of $1.25 per share. The
Notes and warrants are convertible and exercisable, respectively, at any time
subsequent to the expiration of a 60-day "Temporary Exercise Period" being
offered to holders of the Company's publicly traded warrants to purchase Common
Stock. During the Temporary Exercise Period, such holders are offered the
opportunity to exercise their warrants at $1.25 per share, rather than the $4.00
per share exercise price contained in those warrants. The proceeds of the Notes
have been added to the working capital of the Company.
The Notes will be repaid from the first net proceeds, if any, received by the
Company from the exercise of its $4.00 warrants at the temporary $1.25 per share
exercise price. To the extent the Notes are not so repaid, the Company has the
right to convert the Notes into a series of Convertible 8% Cumulative Preferred
Stock ("Preferred Stock"). The Notes, warrants and Preferred Stock issued to the
private investor are subject to anti-dilution adjustments, registration rights,
interest and dividend adjustments and payment by the Company of certain fees and
expenses in connection with the loan transaction.
(6) Commitments
In connection with the acquisition of A-One-A Produce & Provisions, Inc., the
Company entered into 5-year employment agreements with two officers, effective
July 1, 1997, and ending July 30, 2002. The employment agreements call for
aggregate annual compensation of $240,000.
In connection with the Bay Purveyors acquisition, A-One-A entered into a 5-year
employment agreement effective September 1, 1997 with an upper level manager for
a base salary of $65,000 per year.
The Company has an employment agreement with Jonathan S. Lasko, through August
31, 2000, for a base salary of $125,000 per year. Additionally, the agreement
was amended to provide that certain other benefits be made available to the
executive.
(7) Incorporation of New Subsidiary
On June 4, 1997 the Company incorporated Terrace Fresh Inc. as a wholly owned
subsidiary to operate the business of A-One-A's affiliate, Fresh. The Registrant
consummated its purchase of Fresh, Inc. on February 2, 1998, effective as of
January 1, 1998. In consideration for the purchase, the company paid $105,000 in
cash and issued 138,948 shares of common stock valued at $270,000.
The acquisition of Fresh Inc. was accounted for as a purchase, effective January
1, 1998. The operations of Fresh Inc. are included in the Company's results of
operations from that date.
The cost in excess of net assets acquired recorded for the acquisition is to be
amortized over 20 years using the straight-line method.
(8) No Comparable Results for 1997 Periods
In November 1997, the Company's management decided to dispose of certain of its
subsidiaries: including its Restaurant, Catering and Hospitalilty businesses.
These operations which represented all of the Company's operations in 1997 were
discontinued as of year-end and therefore there are no comparable results for
1997 periods.
6
<PAGE>
TERRACE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
(UNAUDITED)
(9) Subsequent Events
Acquisition of Banner Beef and Seafood Co., Inc. - On July 15, 1998, the Company
acquired all of the operating assets and liabilities of Banner Beef and Seafood
Company, Inc. ("Banner"). As consideration for the acquisition, the Company paid
Banner $1,800,000 in cash. The acquisition will be accounted for as a purchase
effective July 17, 1998. The operations of the Banner business will be included
in the Company's results of operations from that date. The excess of purchase
price over the book value of the net assets acquired will be allocated to
property and equipment based upon an independent appraisal.
Financing Arrangement - In July 1998, the Company and its subsidiaries secured a
financing agreement with a bank under which the bank agreed to provide a
revolving loan subject to available collateral to a maximum of $4,000,000. The
loan is collateralized by virtually all assets of the Company and accrues
interest at .5% over the bank's prime lending rate.
The Company and its subsidiaries also obtained a term note from the same bank in
the principal amount of $2,000,000. The note is payable in thirty-six monthly
installments of $23,810 plus annual interest of 1% above the bank's prime rate
through July 2001, with the remaining balance then due. The loan is
collateralized by virtually all assets of the Company.
. . . . . . . . . .
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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The Company operates in the distribution and processing of fresh produce and
dairy segments of the food industry. All of the companies non-core businesses
have been divested as of the end of the second quarter of 1998. The Company's
continuing operations comprise two subsidiaries. A-One-A Produce & Provisions,
Inc. distributes fresh produce and dairy products to foodservice, and export
customers throughout South Florida. Fresh, Inc. is the value-added produce
processing subsidiary of the Company. Fresh, Inc. cleans, cuts and prepares
ready to use produce and sells its products through A-One-A's sales and
distribution facility. The Company intends to continue its growth plan as a
distributor and added value processor in the food industry as illustrated by its
recent acquisition of Banner Beef and Seafood Co., Inc. in Miami. The Company's
revenues for the six months ended June 30, 1998 were approximately $13,429,000
with a net loss from continuing operations of approximately $95,700. The
Company's net loss for the six months resulted from several aspects of its
growth within the continuing operations:
Computer System Upgrade - During the second quarter the Company implemented a
new computer system for its warehouse, distribution and processing operations.
In addition to the capital investment in the technology upgrade, substantial
training and initial operational start-up expense was incurred. This computer
implementation has been completed and management believes efficiencies from the
computer system will be realized.
Warehouse upgrade and logistics software - During the second quarter of 1998 the
Company took measures to realize greater efficiencies in the warehousing and
distribution of its products. The 57,000 square foot facility was slotted by
pallet location to properly receive, store and ship merchandise for its produce
operation. This locating system is intended to reduce mispulls and misrotation
of product which should in turn reduce the cost of redistribution caused by
warehousing errors. In addition the Company purchased logistics software, which
is specifically formatted to route the distribution fleet in a financially and
customer service efficient manner. As the Company continues to refine this
software use to its specifications, further expense reduction should be
realized.
Dairy Division and Fleet Upgrade - In the first quarter of 1998, the Company
began the rollout of the foodservice and export dairy division. Management with
the knowledge and expertise in this specific segment of the industry, was hired.
Sales for this new division were approximately $1,000,000 for the first six
months of 1998. In order to continue to properly maintain the appropriate
distribution temperature for both dairy and produce, the Company is in the
process of upgrading its fleet of distribution vehicles. The upgrade process
should be complete by the end of 1998. This fleet upgrade should position the
Company for continued growth in the perishable commodity distribution arena.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS, Sheet #2
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Provisions For Doubtful Accounts - The Company increased its provision for
doubtful accounts during the second quarter of 1998 by approximately $100,000 in
order to provide for a number of dry grocery accounts. Management believes that
this provision is sufficient to cover these accounts and going forward this
account will be reduced to lower historical rates as greater credit control
standards are put into place.
Each of the improvement programs discussed above play an integral part in the
Company's plan for rapid growth in both sales and profitability. The costs
associated with the implementation of these programs had a significant impact on
the Company's performance during the first six months of 1998. The recent
upgrades to the Company's information systems and warehousing operations will
provide a basis for expense reduction, increased operational efficiencies and
improved profitability. The recent acquistion of Banner Beef and Seafood Co.,
Inc. has furthered the Company's expansion plan in the "value added" processing
of food products business. In accordance with this plan, the Company's non-core
subsidiaries have been divested as of the end of this six month period. All of
the Company's resources are now focused on the continued expansion through
internal sales growth and possible acquisitions. Management expects to realize a
positive contribution to earnings from continued sales growth.
Discontinued Operations
Lasko Family Kosher Tours & A & E Management Corp.
Effective January 1, 1998 the Company sold its Hospitality and catering
operations to Dr. Samuel Lasko, the Company's President. Dr. Lasko has agreed to
resign his position as President and as a member of the Board of Directors upon
shareholder approval of the transaction. In connection with the sale of these
subsidiaries Dr. Lasko has surrendered his employment agreement gave the Company
a three-year note for $159,000. This consideration equalled the independent fair
market value of these the businesses. Management decided in November of 1997 to
dispose of these businesses and concentrate on its core businesses of
distribution and processing of fresh produce and other goods. The hospitality
and catering operations were discontinued as of year end of 1997 and therefore
there are no comparable results for the first six months of 1998.
The Lasko Companies, Inc. (Terrace Oceanside Restaurant)
On May 29, 1998, the Company sold the Terrace Oceanside Restaurant, the last
non-core subsidiary to an unaffiliated third party. All of the contractual
liabilities of this company were assumed by the Purchaser. Minimal future costs
are expected as a result of the divestiture of this business.
9
<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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* Incorporated by this reference to the Registrant's registration
statements # 33-96892-A and 333-45195
** All material contracts presently in full force and effect have been
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
The Registrant filed a Report on Form 8-K dated July 30, 1998, for the
purpose of reporting its purchase of all of the operating assets and liabilities
of Banner Beef and Seafood Co., Inc. The Registrant also filed two reports on
Form 8-K/A both dated April 28, 1998, for the purpose of reporting pro forma
financial information as it related to the 1997 acquisition of A-One-A Produce
and the sale of the Deering Ice Cream business in December 1997, respectively.
10
<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: August 18, 1998 By: /s/Jonathan S. Lasko
----------------------------
Jonathan S. Lasko,
Executive Vice President &
Chief Operating Officer
Dated: August 18, 1998 By: /s/William P. Rodrigues, Jr.
-----------------------------
William P. Rodrigues, Jr.,
Principal Financial Officer
11
