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, 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 65-054270
- ---------------------------------- -----------------------------------
(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 Officer) (Zip Code)
(954) 917-7272
------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Terrace Holdings, Inc.
---------------------------------------------------------------------------
(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 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 ___.
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
--- ---
This is page 1 of 15 sequentially numbered pages.
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended March 31, 1999
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page
----
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet as of March 31, 1999 (Unaudited).. 3
Statements of Operations for the three ended March 31, 1999
and 1998 (Unaudited)......................................... 4
Statements of Cash Flow for the three months ended
March 31, 1999 and 1998 (Unaudited).......................... 5&6
Notes to Financial Statements................................ 7-11
Item 2: Management's Discussion and Analysis......................... 12&13
Part II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K............................. 14
Signatures................................................... 15
. . . . . . . . . . . .
2
<PAGE>
Item 1.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Accounts Receivable (Less Reserve for
Doubtful Accounts of $152,154) $ 4,829,286
Inventory 1,833,156
Current Portion of Note Receivable - Stockholder 53,000
Other Current Assets 237,945
------------
Total Current Assets 6,953,387
Property and Equipment - At Cost,
(Net of Accumulated Depreciation of $538,416) 5,133,633
Cost in Excess of Net Assets of Business Acquired
(Net of Accumulated Amortization of $370,192) 4,141,935
Other Assets - Net 425,303
Note Receivable - Stockholder 106,000
------------
Total Assets $ 16,760,258
============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 3,955,406
Cash Overdraft 1,086,795
Accrued Expenses 984,223
Current Portion of Long-Term Debt 606,608
Line of Credit 3,598,948
------------
Total Current Liabilities 10,231,980
Other Non-Current Liabilities 169,165
Long-term Debt 2,193,849
Convertible Subordinated Notes 2,393,000
------------
Total Liabilities 14,987,994
------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $.001 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding
Common Stock - $.001 Par Value, 25,000,000 Shares
Authorized, 948,342 Issued and Outstanding 948
Additional Paid-in Capital 10,642,012
Accumulated Deficit (8,870,696)
------------
Total Stockholder's Equity 1,772,264
------------
Total Liabilities and Stockholders' Equity $ 16,760,258
============
See Notes to Financial Statements
3
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
Three months ended
------------------
March 31,
---------
1999 1998
------------ ------------
Net Sales $ 11,096,995 $ 6,955,120
Cost of Sales 8,183,627 4,884,252
------------ ------------
Gross Profit 2,913,368 2,070,868
------------ ------------
Operating Expenses:
Selling, General & Administrative 2,840,937 1,864,706
Provision for Doubtful Accounts 20,891 2,500
------------ ------------
Total Operating Expenses 2,861,828 1,867,206
------------ ------------
Income from Operations 51,540 203,662
------------ ------------
Other Income (Expense)
Interest Income 3,180 --
Interest Expense (312,505) (77,182)
------------ ------------
Other (Expense), Net (309,325) (77,182)
------------ ------------
Income (Loss) Continuing Operations (257,785) 126,480
Income on Disposal Operations -- 7,494
------------ ------------
Net Income (Loss) $ (257,785) $ 133,974
============ ============
Income (Loss) Per Share of Common Stock
Loss from Continuing Operations $(.27) $.26
Income (Loss) from Discontinued Operations -- --
----- ----
Basic Net Income (Loss) Per Share of
Common Stock $(.27) $.26
===== ====
Diluted Net Income (Loss)
Per Share Common Stock $(.27) $.16
===== ====
Weighted Average Shares of
Common Stock Outstanding 948,342 511,138
See Notes to Financial Statements.
4
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOW
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
1999 1998
----------- -----------
Operating Activities:
<S> <C> <C>
Income (Loss) from Continuing Operations $ (257,785) $ 126,480
----------- -----------
Adjustments to Reconcile (Loss) to Net Cash
(Used For) Provided by Operating Activities
Depreciation and Amortization 299,098 99,407
Provision for Doubtful Accounts 20,891 2,500
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (842,026) (444,853)
Inventory (205,279) (298,903)
Other Current Assets (76,855) (139,319)
Due from Related Party 122,752
Reduction in Restricted Cash and Other Assets 36,661
Increase (Decrease) in:
Accounts Payable 549,306 1,365,369
Accrued Expenses and other Current Liabilities (7,592) (189,625)
Other Liabilities (15,000)
----------- -----------
Total Adjustments (277,457) 553,989
Net Cash - Operating Activities (535,242) 680,469
----------- -----------
Investing Activities:
Acquisition of Equipment, Furniture & Fixtures (77,917) (274,086)
Purchase of Business Net of Cash Acquired (340,814)
----------- -----------
Net Cash - Investing Activities (77,917) (614,900)
Financing Activities:
Net Borrowings Under Line of Credits 753,139 (245,921)
Proceeds From Warrants Exercised 156,250
Net Long-term Debt Borrowing (139,980) 24,102
----------- -----------
Net Cash-Financing Activities 613,159 (65,569)
----------- -----------
Net (Decrease) Increase in Cash & Cash Equivalents - 0 - - 0 -
</TABLE>
See notes to financial statements.
5
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOW, Sheet #2
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
1999 1998
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents -
<S> <C> <C>
Discontinued Operations - 0 - (6,960)
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 $ 124,380 $ 77,182
Taxes
</TABLE>
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
financial statements and notes for the period 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) Income Per Share
Income 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 for 1999 as they were all considered to be anti-dilutive.
Securities that could potentially dilute earnings per share in the future
include warrants and options to purchase common stock representing approximately
777,000 Common Shares. The Company has 948,342 shares of Common Stock issued and
outstanding at March 31, 1999. In 1998 the Company had 1,523,825 shares of
Preferred Stock outstanding which was convertible into 304,765 shares of Common
Stock, resulting in total weighted average of Diluted Common Stock outstanding
of 815,903 shares.
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, grocery
dry goods, 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
March 31, 1999 the outstanding balance on the loan was $1,809,520.
(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 is obligated to issue 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 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 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 Company will issue additional $621,000 in Notes as payment for accrued and
unpaid interest on the Notes through April 13, 1999 and other consideration to
the private investor. The Company will also issue the private investor
additional 25,000 Warrants to purchase the Company's Common Stock at an exercise
price of $9.00 per share.
8
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #3
(UNAUDITED)
- --------------------------------------------------------------------------------
(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) 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 and Food Processing and Manufacturing is represented by Banner Beef
and Seafood Co. Inc.
Terrace evaluates performance based on operating profit before interest and
taxes. Accordingly, interest has not been allocated to the operating segments.
Quarter ended March 31, 1999
- ----------------------------
<TABLE>
<CAPTION>
Food
Food Processing and
Distribution Manufacturing Total
------------ ------------- -----
<S> <C> <C> <C>
Sales $10,015,395 $1,081,600 $11,096,995
Depreciation and amortization 133,345 55,981 191,206
Operating income (loss) 532,652 (291,461) 241,191
Segment assets 9,434,332 5,715,787 15,150,119
Expenditures for segment property
and equipment 51,811 26,107 77,918
</TABLE>
9
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #4
(UNAUDITED)
- --------------------------------------------------------------------------------
(9) Segment Data - continued
Reconciliation of segment amounts to consolidated amounts:
Loss from continuing operations:
Total segments $ 241,191
Interest expense (312,505)
Amortization of deferred financing costs (107,892)
Interest income 3,180
Corporate expenses (81,759)
-----------
Total $ (257,785)
===========
Assets:
Total segments $ 15,150,119
Note Receivable 159,000
Other Assets 377,267
Other current assets 87,077
------------
$ 15,773,463
============
Quarter ended March 31, 1998
- ----------------------------
Food
Distribution Total
------------ -----------
Sales $ 6,955,120 $ 6,955,120
Depreciation and amortization 99,407 99,407
Operating income 361,880 361,880
Segment assets 8,247,136 8,247,136
Expenditures for segment property
and equipment 274,086 274,086
Reconciliation of segment amounts to consolidated amounts:
Income (Loss) from continuing operations:
Segment $ 361,880
Interest expense (77,182)
Corporate expenses (158,218)
----------
$ 126,480
==========
Assets:
Segment 8,247,136
Other Assets 40,920
Restricted cash 65,439
Other current assets 189,291
----------
Total $8,542,786
==========
10
<PAGE>
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #5
(UNAUDITED)
- --------------------------------------------------------------------------------
(10) Subsequent Event
In April and May 1999, the Company issued 19,618 shares of a newly authorized
Series C Preferred Stock together with Warrants to purchase 340,000 shares of
the Company's Common Stock. The shares and warrants were purchased by a private
investor group that included three of the Company's Directors. The Company
received proceeds of approximately $1,700,000 in this transaction which will be
used for operating purposes.
The Preferred Stock provides for a cumulative annual coupon dividend of 13% and
the issue was priced to yield an effective annual dividend of 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 a price of $9.00 per share.
11
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The Company operates in two distinct segments of the Food Industry. It's
distribution and produce processing subsidiary A-One-A Produce and Provisions,
Inc. distributes fresh produce and dairy products to the foodservice, cruise
ship and export customers in South Florida. The Company's manufacturing and
processing subsidiary Banner Beef and Seafood Company, Inc. operates in the
value added Home Meal Replacement sector and sells to the retail and foodservice
distribution channels. The Company's consolidated revenues for the three months
ended March 31, 1999 is approximately $11, 096,000 compared to $6,955,00 for the
same period in 1998 or an increase of approximately 71%. The Company's income
from operations decreased to approximately $51,500 for the three months ended
March 31, 1998 as a result of its integration and start-up as Banner Beef and
Seafood subsidiary.
Management believes that as its plan for growth in its newly acquired
manufacturing subsidiary continues to be implemented profitable operating levels
should be obtained for each company.
SEGMENT ANALYSIS
- ----------------
Food Distribution
- -----------------
The Company's food distribution segment is comprised of companies A-One-A
Produce and Provisions, Inc. and Fresh, Inc. operations which distribute and
process fresh produce and dairy products throughout South Florida as well as
export and cruise ship customers for the local ports. Revenues for this segment
were $10,000,000 for the three months ended March 31, 1999 compared to
$6,955,000 for the three months ended March 31, 1998 and increase of
approximately 43%. Operating income was $530,000 for the first three months of
1999 compared to $361,000 for the same period in 1998. This increase of
approximately 47% is reflective of management's plan for increased volume and
cost controls in the segment. Management believes that with its current sales
opportunities as well as further reduction of its operating expenses through
continued utilization of its capital investment into the facility and technology
in prior periods consistent sales and operating income growth from prior
comparable period should be attained.
Food Processing and Manufacturing
- ---------------------------------
The Company's food processing and manufacturing segment is comprised of its
recently acquired Banner Beef and Seafood subsidiary. The company purchased
Banner to enter the value added higher margin segment of the food industry.
Management saw a strong opportunity to enter the fastest growing segment Home
Meal Replacement in the industry. Revenues for the three months ended March 31,
1999 were $1,081,000 and on operating loss of $291,400. There are no comparable
results for 1998 as the Company did not own Banner Beef and Seafood. The test
marketing that the Company has been through in the first quarter has been
successful with major chains around the Country. Management believes that as it
continues its aggressive sales effort, further success with the products will be
achieved. In addition, the Company continues its sales
12
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS, Sheet #2
- --------------------------------------------------------------------------------
effort to Banner's historic core customers in the foodservice arena. These
products offer growth opportunities for the Company as well. Initial feedback
from the Company's sales and marketing prospects has been extremely positive and
management believes as its plan continues to take shape with increasing volume
through further market exposure. Management believes the Company will realize
positive results from this segment.
13
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
=========================================
Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated April 26, 1999 to report a press
release announcing the completion of its $1.6 million preferred equity financing
and issuance of its Series C Preferred Stock.
14
<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: May 18, 1999 By: /s/Jonathan S. Lasko
---------------------------------
Jonathan S. Lasko,
Executive Vice President &
Chief Operating Officer
Dated: May 18, 1999 By: /s/William P. Rodrigues, Jr.
---------------------------------
William P. Rodrigues, Jr.,
Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AS
OF MARCH 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001001051
<NAME> TERRACE FOOD GROUP
<MULTIPLIER> 1
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,981,440
<ALLOWANCES> 152,154
<INVENTORY> 1,833,156
<CURRENT-ASSETS> 6,953,387
<PP&E> 5,672,049
<DEPRECIATION> 538,416
<TOTAL-ASSETS> 16,760,258
<CURRENT-LIABILITIES> 10,231,980
<BONDS> 4,586,849
0
0
<COMMON> 948
<OTHER-SE> 1,771,316
<TOTAL-LIABILITY-AND-EQUITY> 1,772,264
<SALES> 11,096,995
<TOTAL-REVENUES> 11,096,995
<CGS> 8,183,627
<TOTAL-COSTS> 8,183,627
<OTHER-EXPENSES> 2,837,757
<LOSS-PROVISION> 20,891
<INTEREST-EXPENSE> 312,505
<INCOME-PRETAX> (257,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (257,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (257,785)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
