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 SEPTEMBER 30, 1999.
[ ] 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 Food Group, Inc.
---------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Delaware 65-0594270
- ---------------------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1351 NW 22nd Street, Pompano Beach, FL 33069
- ---------------------------------------- ------------------------
(Address of Principal Executive Offices) (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 report(s), and (2) has been
subject to such filing requirements for past 90 days. Yes X No .
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 948,342 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format:
Check one: Yes No X
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This is page 1 of 18 sequentially numbered pages.
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
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FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended September 30, 1999
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1999 (Unaudited)........ 3
Consolidated Statements of Operations for the three months and nine
months ended September 30, 1999 and 1998 (Unaudited)................... 4
Consolidated Statements of Cash Flow for the nine months ended
September 30, 1999 and 1998 (Unaudited)................................ 5-6
Notes to Financial Statements.......................................... 7-12
Item 2. Management's Discussion and Analysis................................... 13-15
Part II. OTHER INFORMATION
Item 2. Changes in Securities.................................................. 16
Item 4. Submission of Matters to Votes of Securities Holders................... 16
Item 6. Exhibits and Reports on Form 8-K....................................... 17
Signatures............................................................. 18
</TABLE>
. . . . . . . . . . . .
2
<PAGE>
Item 1.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Accounts Receivable (Less Reserve for
Doubtful Accounts of $105,193) $ 4,205,857
Inventory 1,951,377
Current Portion of Note Receivable - Stockholder 53,000
Other Current Assets 373,030
------------
Total Current Assets 6,583,264
Property and Equipment - At Cost -
(Net of Accumulated Depreciation of $849,534) 5,160,483
Note Receivable - Stockholder 53,000
Cost in Excess of Net Assets of Business Acquired
(Net of Accumulated Amortization of $482,216) 4,029,912
Other Assets - net 327,591
------------
Total $ 16,154,250
============
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts Payable $ 3,582,026
Cash Overdrafts 954,771
Accrued Expenses 741,753
Current Portion of Long-Term Debt 679,983
Line of Credit 3,084,598
------------
Total Current Liabilities 9,043,131
Long-Term Debt 2,188,904
Convertible Subordinated Notes 2,956,682
Other Non-Current Liabilities 151,666
------------
Total Liabilities 14,340,383
------------
Commitments and Contingencies
Preferred Stock 1,878,440
Common Stockholders'Deficit:
Common Stock - $.001 Par Value, 25,000,000 Shares
Authorized, 948,342 Issued and Outstanding 948
Additional Paid-in Capital 10,563,472
Accumulated Deficit (10,628,993)
------------
Total Stockholders' Deficit (64,573)
------------
Total $ 16,154,250
============
See Notes to Financial Statements.
3
<PAGE>
TERRACE FOOD GROUP, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ ------------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 8,891,047 $ 7,960,569 $29,756,053 $21,390,087
Cost of Sales 6,982,070 6,219,064 22,625,748 15,944,242
------------ ------------ ------------ ------------
Gross Profit 1,908,977 1,741,505 7,130,305 5,445,845
------------ ------------ ------------ ------------
Operating Expenses:
Selling, General & Administrative 2,542,364 2,509,499 7,924,651 6,073,212
Provision for Doubtful Accounts 14,433 32,000 52,690 137,608
------------ ------------ ------------ ------------
Total Operating Expenses 2,556,797 2,541,499 7,977,341 6,210,820
------------ ------------ ------------ ------------
Loss from Operations (647,820) (799,994) (847,036) (764,975)
Other Income (Expense)
Royalty Income -- 27,500 -- 53,500
Interest Income 1,930 4,189 7,679 7,369
Interest Expense (452,388) (160,767) (1,176,724) (320,692)
------------ ------------ ------------ ------------
Other (Expense), Net (450,458) (129,078) (1,169,045) (259,823)
Loss from Continuing Operations (1,098,278) (929,072) (2,016,081) (1,024,798)
Loss from Discontinued Operations -- (14,911) -- (14,882)
------------ ------------ ------------ ------------
Net Loss $ (1,098,278) $ (943,983) $ (2,016,081) $ (1,039,680)
============ ============ ============ ============
Basic and Diluted Loss Per Share
of Common Stock
Loss from Continuing Operations $ (1.26) $ (1.30) $ (2.30) $ (1.80)
Loss from Discontinued Operations -- (.02) -- (.03)
------------ ------------ ------------ ------------
Net Loss $ (1.26) $ (1.32) $ (2.30) $ (1.83)
============ ============ ============ ============
Weighted Average Shares of Common
Stock Outstanding 948,342 715,398 948,342 567,513
============ ============ ============ ============
</TABLE>
Basic and Diluted Net Loss per Share of Common Stock include the effect of
$99,773 and $168,547, ($.11 and $.18) Per Share, of accrued Preferred Stock
dividends for the three and nine month periods ended September 30, 1999
respectively.
See Notes to Financial Statements.
4
<PAGE>
TERRACE FOOD GROUP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
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<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30,
-------------
1999 1998
----------- -----------
Operating Activities:
<S> <C> <C>
Loss from Continuing Operations $(2,016,081) $(1,024,798)
----------- -----------
Adjustments to Reconcile Loss to Net Cash
(Used For) Provided by Operating Activities
Depreciation and Amortization 755,184 425,669
Provision for Doubtful Accounts 52,690 71,738
Subordinated Debt Interest 704,660 80,260
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (250,394) (1,788,726)
Inventory (323,501) (457,198)
Other Current Assets (206,600) (382,084)
Due from Related Party -- 122,752
Note Receivable - Stockholder 53,000 (159,000)
Due on Sale of Discontinued Operations -- 90,000
Restricted Cash and Other Assets (47,536) 117,250
Increase (Decrease) in:
Accounts Payable and Cash Overdrafts 43,901 2,154,403
Accrued Expenses and other Current Liabilities (329,078) 13,171
Other Liabilities (32,500) --
----------- -----------
Total Adjustments 419,826 288,235
----------- -----------
Net Cash - Operating Activities (1,596,255) (736,563)
----------- -----------
Investing Activities:
Acquisition of Equipment, Furniture & Fixtures (415,886) (991,160)
Purchase of Business Net of Cash Acquired -- (3,893,013)
----------- -----------
Net Cash - Investing Activities (415,886) (4,884,173)
----------- -----------
Financing Activities:
Net Borrowings Under Line of Credit 238,789 544,410
Proceeds From Warrants Exercised -- 218,750
Long-term Debt Borrowing (Repayment) (26,548) 2,247,058
Proceeds from Issuance of
Preferred Stock and Warrants 1,799,900 --
Proceeds from Issuance of Convertible
Subordinated Notes -- 2,625,000
----------- -----------
Net Cash-Financing Activities 2,012,141 5,635,218
----------- -----------
Net (Decrease) Increase in Cash & Cash Equivalents
Continuing Operations -- 14,482
----------- -----------
See Notes to Financial Statements.
5
<PAGE>
TERRACE FOOD GROUP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOW, Sheet #2
(UNAUDITED)
- --------------------------------------------------------------------------------
Nine months ended
-----------------
September 30,
-------------
1999 1998
----------- -----------
Decrease in Cash and Cash Equivalents -
Discontinued Operations - 0 - (14,482)
Cash and Cash Equivalents - Beginning of Period - 0 - - 0 -
----------- -----------
Cash and Cash Equivalents - End of Period $ - 0 - $ - 0 -
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Periods For:
Interest $ 385,958 $ 233,112
Taxes - 0 - - 0 -
</TABLE>
Supplemental Disclosures of Non-Cash Investing
And Financing Activities:
During the second quarter of 1999, the Company issued $630,292 of additional
Convertible Subordinated Notes. $280,292 of that amount was reclassified from
accrued expenses.
During the second and third quarters of 1999, the Company issued 20,772 shares
of Preferred Stock at a discount of $367,306 from redemption value. The discount
is being amortized to Additional Paid-in Capital over the term of the Preferred
Stock.
See Notes to Financial Statements.
6
<PAGE>
TERRACE FOOD GROUP, INC.
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NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) Basis of Reporting
The accompanying unaudited consolidated 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 Food Group, Inc. and its 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
consolidated financial statements and notes for the year ended December 31, 1998
included in the Terrace Food Group, Inc.
Form 10-KSB.
(2) Reverse Split of Common Stock
Effective March 15, 1999, the Shareholders of the Company approved a one for ten
reverse split of the Company's common stock without any other changes in
authorization par value or otherwise. All per share and share amounts for all
periods presented have been adjusted to reflect this reverse split.
(3) Name Change
In August 1998 the Company's shareholders approved the change of the Company's
name to Terrace Food Group, Inc.
(4) Loss Per Share
The computation of Loss per share of common stock is based on the weighted
average number of common shares outstanding for each period presented. There
were no potential common shares included as they were considered anti-dilutive.
Securities that could potentially dilute earnings per share in the future
include warrants and options to purchase common stock representing approximately
1,197,000 Common Shares. The Company has 948,342 shares of Common Stock issued
and outstanding at September 30, 1999.
7
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #2
(UNAUDITED)
- --------------------------------------------------------------------------------
(5) Inventories
Inventories for the Company's Food Distribution segment include produce, and
dairy products. Food Processing and Manufacturing inventories include raw meat
and seafood, other ingredients and processed products. Inventories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
(6) Line of Credit and Term Loan
The Company and its subsidiaries maintain a financing arrangement with a bank
under which the bank provides a line of credit subject to available collateral
to a maximum of $4,000,000 and a term loan. The loans are collateralized by
virtually all assets of the Company. All cash received by the Company must be
remitted to the bank so long as there is an outstanding balance under the line
of credit, which will expire on July 15, 2001. The line of credit accrues
interest at .5% over the bank's prime lending rate. The term loan is payable in
thirty-six monthly installments of $23,810 plus annual interest of 1% above the
bank's prime rate through July 2001, with the remaining balance then due. At
September 30, 1999 the outstanding balance on the term loan was $1,666,660.
At September 30, 1999, the Company was not in conformity with two covenants of
the financing agreement. The bank has agreed to waive its right to consider the
loans in default. If the Company is unable to comply with these covenants in the
future, there is no assurance the bank will continue to provide waivers of its
rights.
(7) Convertible Subordinated Notes
In 1998, the Company issued to a private investor $2,625,000 principal amount of
Convertible Subordinated Notes ("Notes"), and warrants to purchase 40,000 shares
of Common Stock of the Company. The exercise price of the Warrants is the same
as the conversion rate of the Notes. The Notes could be converted at the option
of the Company, into Redeemable Convertible 8% Cumulative Preferred Stock
("Preferred Stock") of the Company. The Notes, Warrants and any Preferred Stock
issued to the private investor are subject to anti-dilution adjustments,
registration rights, interest and dividend adjustments and payment by the
Company of certain fees and expenses in connection with the transaction. The
Company received proceeds of $2,500,000, with $281,000 attributed to the
Warrants and Option and $2,219,000 to the Note. The Note discount of $406,000 is
being amortized over the term of the Note.
The Note agreement required the Company to attain a specified earnings level for
1998, which was not attained. Accordingly, the Company has issued the private
investor additional warrants to purchase 25,000 shares of Common Stock of the
Company that are exercisable at $6.00 per share and the interest rate of the
notes was increased to 14%.
On April 13, 1999, the Company and the private investor agreed to amend the
terms of the Notes. The maturity date was extended to March 31, 2000, the
Conversion Price of the Notes to either Common or Preferred Shares and the
Exercise Price of the Warrants was set at $6.00 per share through the maturity
date. Any default which may have occurred under the agreement was waived or
deemed cured. The
8
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #3
(UNAUDITED)
- --------------------------------------------------------------------------------
Company has issued the private investor an additional $631,000 in Notes as
payment for accrued and unpaid interest on the Notes through April 13, 1999 and
other considerations. The Company has also issued the private investor 25,000
additional Warrants to purchase the Company's Common Stock at $9.00 per share.
(8) Commitments
In connection with the acquisition of A-One-A Produce & Provisions, Inc., the
Company entered into 5-year employment agreements with two of its officers,
effective July 1, 1997. The employment agreements call for aggregate annual
compensation of $240,000.
In connection with the acquisition of Banner Beef and Seafood, Inc., the Company
entered into a 5-year employment agreement with its Operations Vice President at
an annual base salary of $200,000.
The Company has an employment agreement with Jonathan S. Lasko, Executive Vice
President, through August 31, 2000, for a base salary of $125,000 per year.
Additionally, the agreement provides that certain other benefits be made
available to the Executive.
(9) Preferred Stock
In the second and third quarters, the Company issued 20,772 shares of newly
authorized Series of Preferred Stock together with Warrants to purchase 360,000
shares of the Company's Common Stock. The shares and warrants were purchased by
a private investor group that included four of the Company's Directors. The
Company received proceeds of approximately $1,800,000 in these transactions that
are being used for operating purposes.
The Preferred Stock was issued at a discount, calculated to yield an effective
annual dividend of approximately 15%. The Preferred Stock is redeemable, in
cash, at the option of the Company through March 30, 2000, when it becomes
mandatorily redeemable either in cash or through conversion into 17% Senior
Notes which would mature on March 31, 2003. The stock purchase warrants, which
expire four years from their date of issue, provide for the purchase of
Company's Common Stock at $9.00 per share during the first year, $7.50 per share
during the second year and $6.00 per share thereafter. The discount of $367,306
from the redemption value of $2,077,200 is being amortized to Additional Paid-in
Capital to March 31, 2000.
(10) Segment Data
The Company's two business units have distinct management teams and
infrastructures, offer different products and are evaluated separately in
assessing performance and allocating resources. These units are being reported
as two segments: Food Distribution and Food Processing and Manufacturing. Each
segment is managed separately, has a distinct customer base and requires
different strategic and marketing efforts. Food Distribution includes the
operations of the Company's A-One-A Produce and Provisions, Inc. and Fresh, Inc.
subsidiaries. The Food Processing and Manufacturing segment is represented by
Banner Beef and Seafood Co. Inc.
9
<PAGE>
TERRACE FOOD GROUP, INC.
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NOTES TO FINANCIAL STATEMENTS, Sheet #4
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
Terrace evaluates performance based on operating profit before interest and
taxes. Accordingly, interest has not been allocated to the operating segments.
Quarter ended September 30, 1999
- --------------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $7,415,355 $1,475,692 $ 8,891,047
Depreciation and amortization 138,778 141,411 280,189
Loss from operations (146,104) (298,309) (444,413)
Segment assets 9,468,256 6,109,487 15,577,743
Expenditures for segment property
and equipment 22,123 125,808 147,931
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total segments $ (444,413)
Interest expense (452,388)
Amortization of deferred financing costs ( 39,679)
Interest income 1,930
Corporate expenses (163,728)
-------------
Total $ (1,098,278)
=============
Assets:
Total segments $15,577,743
Note Receivable 106,000
Other current assets 142,916
Other Assets 327,591
--------------
Total $ 16,154,250
==============
</TABLE>
Quarter ended September 30, 1998
- --------------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $6,401,279 $1,559,290 $7,960,569
Depreciation and amortization 139,966 17,316 157,282
Loss from operations (390,084) (81,959) (472,043)
Segment assets 9,312,164 4,293,622 13,605,786
Expenditures for segment property
and equipment 22,123 260,068 282,191
10
<PAGE>
TERRACE FOOD GROUP, INC.
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NOTES TO FINANCIAL STATEMENTS, Sheet #5
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Segment $ (472,043)
Interest expense (160,767)
Interest income 4,189
Royalty income 27,500
Corporate expenses (327,951)
--------------
Total $ (929,072)
==============
Assets:
Segment $ 13,605,786
Restricted cash 34,893
Notes Receivable 159,000
Other current assets 293,089
---------------
Other Assets 693,378
---------------
Total $ 14,786,146
===============
</TABLE>
Nine Months ended September 30, 1999
- ------------------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $26,186,579 $3,569,474 $29,756,053
Depreciation and amortization 413,222 201,126 614,348
Income (loss) from operations 748,620 (939,682) (191,062)
Segment assets 9,468,256 6,109,487 15,577,743
Expenditures for segment property
and equipment 185,819 260,068 445,887
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total segments $ (191,062)
Interest expense (1,176,724)
Amortization of deferred financing costs (140,842)
Interest income 7,679
Corporate expenses (515,132)
-------------
Total $ (2,016,081)
=============
</TABLE>
11
<PAGE>
TERRACE FOOD GROUP, INC.
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NOTES TO FINANCIAL STATEMENTS, Sheet #6
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Segment Data - continued
Nine months ended September 30, 1998
- ------------------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $19,830,797 $1,559,290 $ 21,390,087
Depreciation and amortization 299,647 17,316 316,963
Loss from operations (172,737) (81,959) (254,696)
Segment assets 9,468,256 6,109,487 15,577,743
Expenditures for segment property
and equipment 185,819 260,068 445,887
Reconciliation of segment amounts
to consolidated amounts:
Loss from continuing operations:
Segment $ (254,696)
Interest expense (320,692)
Interest income 7,369
Royalty income 53,500
Corporate expenses (510,279)
-----------
$(1,024,798)
===========
</TABLE>
12
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The Company's revenues are derived from A-One-A Produce & Provisions, its
distribution and processing subsidiary and Banner Beef & Seafood, a value added
Home Meal Replacement and custom manufacturing unit. The Company's consolidated
revenues for the nine months ended September 30, 1999 were approximately
$29,756,000 compared to approximately $21,390,000 for the same period in 1998 an
increase of approximately $8,366,000 or 39%. Losses before interest, taxes,
depreciation and amortization (EBITDA) were approximately $92,000 compared to
approximately $403,000 in 1998, a 77% improvement. Losses from continuing
operations were approximately $2,016,000, approximately $991,000 higher than
1998, due largely to increased interest expense of approximately $856,000. Of
the total 1999 interest of approximately $1,176,000, approximately $705,000
relates to the Company's Convertible Subordinated Notes. This interest is not
payable until the maturity of the notes in March 2000. For the quarter,
consolidated sales of approximately $8,891,000 were approximately $930,000, or
12% higher than the comparable 1998 quarter. EBITDA improved approximately
$415,000 or 61% over 1998 from a loss of approximately $676,000 to approximately
$261,000 in 1999. The loss from continuing operations was approximately
$1,098,000, approximately $169,000 higher than the comparable 1998 quarter.
Interest expense of which approximately $340,000 related to the Convertible
Subordinated Notes was approximately $355,000 higher than in 1998. The Company
realized strong growth in its distribution subsidiaries sales and operating
income and further integration at Banner Beef & Seafood was experienced during
the third quarter of 1999.
SEGMENT ANALYSIS
- ----------------
Food Distribution
- -----------------
The Company's distribution segment is comprised of A-One-A Produce & Provision
and Fresh, Inc. which distributes and processes fresh produce and dairy products
to its customers in South Florida as well as cruise ship and export accounts.
Sales for the nine months ended September 30, 1999 reached approximately
$26,187,000 an increase approximately $6,356,000 or 32% from the same period
1998. The Segment's operating income for the nine months reached approximately
$749,000 compared to an operating loss of approximately $173,000 during 1998.
For the quarter ended September 30, 1999 sales increased approximately
$1,014,000 or 11.6% to approximately $7,400,000. The operating loss of
approximately $146,000 represents a approximately $244,000 improvement over the
preceding year period. The Company continued its aggressive sales and marketing
initiative directed at large hotels, hospitals and cruise ship accounts that had
a strong impact on sales. Management believes that its distribution segment is
appropriately positioned to continue it profitability and maximize its account
exposure into future periods.
Food Processing and Manufacturing
- ---------------------------------
The Company's food processing and manufacturing segment is comprised of its
Banner Beef & Seafood subsidiary. The Company continues to pursue growth for
this segment in the value added segment of the food industry. This market
includes Home Meal Replacement, custom manufactured product lines and retail
ethnic products. Revenues for the nine months ended September 30, 1999 reached
approximately $3,569,000 with an operating loss of approximately $940,000. There
is no comparable revenue or operating income information for the same period in
1998, as the Company purchased Banner Beef & Seafood in July of that year. For
the quarter, segment sales were approximately
13
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS, Sheet #2
- --------------------------------------------------------------------------------
$1,476,000 with an operating loss of approximately $298,000 compared to sales of
approximately $1,559,000 and an operating loss of approximately $82,000 in the
comparable 1998 quarter. The Company continues to work towards it goals of
revenue growth and profitability with its test marketing and roll out of several
new products within its manufacturing program. The Company's test markets
include several of the largest retail and mass merchandisers in the country. The
Company is focusing on the Home Meal Solution and ethnic markets that are among
the fastest growing segments in the food industry. The Company has tailored
these programs in accordance with its desire to offer the consumer high quality
prepared convenience products. With continued effort on the sales and marketing
and product development of new items, management believes positive results will
be realized in future periods.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999 the Company had a cash deficit of approximately $954,000
and a working capital deficit of approximately $2,459,000.
During the first six months of 1999, management believes the food distribution
operations have improved with the securing of substantial new business,
particularly with high volume institutional accounts. Management intends to
continue its aggressive marketing efforts in these areas as well as to cruise
line and export customers.
Management further believes that a key element in its plan is to substantially
increase sales volume at Banner, where the Company has developed the capability
of producing high quality innovative products for the Home Meal Replacement
market.
During 1999, the Registrant issued 20,772 shares of a newly authorized Preferred
Stock together with Warrants to purchase 360,000 shares of the Registrant's
Common Stock. The shares and warrants were purchased by a private investor group
that included four of the Registrant's Directors. The Registrant received
proceeds of approximately $1,800,000 in this transaction which are being used
for working capital.
The Company and its subsidiaries maintain a financing arrangement with a bank
under which the bank provides a line of credit subject to available collateral
to a maximum of $4,000,000 and a term loan. The loans are collateralized by
virtually all assets of the Company. At September 30, 1999 the outstanding
balance on the line of credit was $3,084,598 amd $1,666,660 on the term loan. At
that date the Company was not in conformity with two covenants of the financing
agreement and the bank has agreed to waive its right to consider the loans in
default. If the Company is unable to comply with these covenants in the future,
there is no assurance the bank will continue to provide waivers of its rights.
Year 2000 Compliance
- --------------------
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly access data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. Such
systems that are not Year 2000 compliant may not be able to properly interpret
dates beyond the Year 1999, which could lead to business disruptions in the U.S.
and internationally. The potential costs and uncertainties associated with the
Year 2000 issue will depend on a number of factors, including software, hardware
and the nature of the industry in which a company operates. Additionally,
companies must coordinate with other entities with which they electronically
interact, such as customers, creditors and borrowers.
14
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS, Sheet #3
- --------------------------------------------------------------------------------
During 1998, the Company completed the replacement of the Company's accounting
system as part of an overall plan to update these systems and related software.
The Company has received Year 2000 compliance certification from the supplier of
its new accounting system and software. In addition, the Company has completed
an assessment of other internal systems that could potentially be affected by
Year 2000, which consist principally of personal computers and related software.
The Company believes that all noncompliant internal software and hardware have
been replaced or upgraded to reach Year 2000 compliance.
To date, all third party suppliers that the Company has communicated with have
advised the Company that they are Year 2000 compliant or plan to be Year 2000
complaint or substantially compliant by year end. However, there can be no
assurance that the computer systems of third party suppliers will be Year 2000
compliant on a timely basis.
The Company relies principally on produce and other food wholesalers to supply
most of the products sold or used as ingredients by the Company. If these
vendors were to experience Year 2000 computer failures, these failures could
have a material adverse affect on the Company's business, including the
possibility of delivery delays in deliveries. The Company believes that such an
adverse impact would not be prolonged because there are several alternative
sources of supply that could be accessed by the Company.
The Company does not expect to expend a significant amount to address the
Company's Year 2000 compliance issues.
---xxxx---
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created hereby. All forward-looking statements involve risks
sand uncertainty. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be
accurate. Important factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to, the
adequacy of the Company's financial resources, the Company's Food Processing and
Manufacturing business reaching a profitable level of operations, changing
market conditions, the Company's success in establishing new corporate alliances
and the impact of competitive pricing and products. In light of the
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
15
<PAGE>
Part II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 2. Changes in Securities - The following unregistered securities were
issued by the Company during the quarter ended September 30, 1999.
Description of Number of Shares/ Offering
Date Securities Issued Warrants Sold Price Per Share
- ---- ----------------- ------------- ---------------
July 1999 Series C Preferred Stock 1,154 $86.65
With Common Stock
Purchase Warrants 20,000
The issuance of these securities is claimed to be exempt from registration
pursuant to Section 4 (2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
Item 4. Submission of Matters to Vote of Securities Holders - An Annual Meeting
of Shareholders was held on September 15, 1999. All nominees for
director, as listed in the Proxy Statement for the Annual Meeting were
elected. Listed below are the matters voted on by stockholders and the
number of votes cast at the Annual Meeting.
(a) Election of Members of Board of Directors
Votes Broker Non-Votes
Voted For Against Withheld and Abstentions
--------- ------- -------- ---------------
Steven Shulman 598,921 1,195 ---- ----
Jon Lasko 598,921 1,195 ---- ----
Richard Power 598,921 1,195 ---- ----
Fred Seigel 598,921 1,195 ---- ----
Houssam Aboukhater 598,921 1,195 ---- ----
Salvatore Bommarito 598,921 1,195 ---- ----
(b) Amendment to Company's 1997 Stock Option Plan to increase the number of
shares of Common Stock which may be subject to Stock Options granted under
the Plan from 175,000 to 350,000.
Voted For: 314,260
Voted Against: 8,960
Voted Abstained: 100
Broker Non-Votes: 278,076
(c) Ratification of Deloitte and Touche, LLP as independent public accountants
for fiscal year ending December 31, 1999.
Voted For: 599,156
Voted Against: 2,240
Voted Abstained: ----
Broker Non-Votes: ----
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated August 13, 1999 to report
the dismissal of Moore Stephens, P.C. the independent accounting firm
previously engaged as the principal accountant to audit the Registrant's
financial statements.
The Registrant filed a Report on Form 8-K dated October 26, 1999 to report
the engagement of Deloitte & Touche LLP as independent accountant and
auditor for the fiscal year ending December 31, 1999.
17
<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 FOOD GROUP, INC.
(Registrant)
Dated: November 15, 1999 By: /s/Jonathan S. Lasko
-------------------------------------
Jonathan S. Lasko,
Executive Vice President &
Chief Operating Officer
Dated: November 15, 1999 By: /s/William P. Rodrigues, Jr.
-------------------------------------
William P. Rodrigues, Jr.,
Principal Financial Officer
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDING SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFRENCE TO SUCH FORM 10-Q.
</LEGEND>
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