U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(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, 2000.
[ ] 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)
- --------------------------------------------------------------------------------
(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), 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 17 sequentially numbered pages.
<PAGE>
TERRACE FOOD GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
For the Three Months Ended March 31, 2000
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999 ............................................. 3
Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 (Unaudited)................................ 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (Unaudited)............................... 5
Notes to Financial Statements.....................................6-11
Item 2: Management's Discussion and Analysis.............................12-15
Part II. OTHER INFORMATION
Item 3: Default Upon Senior Securities..................................... 16
Item 6: Exhibits and Reports on Form 8-K................................... 16
Signatures.................................................................. 17
. . . . . . . . . . . .
2
<PAGE>
Item 1.
TERRACE FOOD GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited)
Assets:
Current Assets:
<S> <C> <C>
Accounts Receivable (Less Reserve for Doubtful $ 5,399,190 $ 5,334,715
Accounts of $311,709 and $303,944)
Inventories 1,719,779 1,878,081
Current Portion of Note Receivable - Stockholder 53,000 53,000
Other Current Assets 439,743 239,272
-------------- ------------
Total Current Assets 7,611,712 7,505,068
-------------- ------------
Property and Equipment - At Cost,
(Net of Accumulated Depreciation of $1,148,389 and $968,846) 4,684,815 4,631,962
Cost in Excess of Net Assets of Business Acquired
(Net of Accumulated Amortization of $521,211 and $469,465) 3,314,833 3,366,679
Deferred Financing Cost
(Net of Accumulated Amortization of $437,680 and $361,818) 173,458 249,322
Note Receivable - Stockholder - 0 - 53,000
-------------- ------------
Total Assets $ 15,784,818 $ 15,806,031
============= ============
Liabilities and Stockholders' Deficiency
Current Liabilities:
Cash Overdraft $ 1,435,890 $ 1,510,380
Accounts Payable 4,623,919 4,707,832
Accrued Expenses 1,664,727 1,802,931
Line of Credit 4,460,000 4,056,528
Term Loan 1,308,900 1,380,330
Current Portion of Long-Term Debt 280,783 271,788
Convertible Subordinated Notes 3,255,292 3,105,987
----------- -------------
Total Current Liabilities 17,029,511 16,835,776
Note payable - related party 625,000 300,000
Long-Term Debt, Net of Current Portion 403,117 477,496
Other Non-Current Liabilities 124,166 136,666
------------ -------------
Total Liabilities 18,181,794 17,749,938
------------ -------------
Commitments and Contingencies (Note 9)
Series C & D Redeemable Preferred Stock - $.001 Par Value,
21,308 Shares Authorized; 20,772 Issued and Outstanding 2,077,200 1,927,989
------------ -------------
Stockholders' Deficiency:
Common Stock - $.001 Par Value, 25,000,000 Shares
Authorized; 948,342 Issued and Outstanding 948 948
Additional Paid-in Capital 10,364,713 10,513,923
Accumulated Deficit (14,839,837) (14,386,767)
------------ -------------
Total Stockholders' Deficiency (4,474,176) (3,871,896)
------------ -------------
Total Liabilities and Stockholders' Deficiency $15,784,818 $15,806,031
=========== =============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
TERRACE FOOD GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 12,998,410 $ 11,096,995
Cost of Sales 10,044,639 8,183,627
------------ ------------
Gross Profit 2,953,771 2,913,368
------------ ------------
Operating Expenses:
Selling, General & Administrative 2,951,708 2,840,937
Provision for Doubtful Accounts 15,727 20,891
------------ ------------
Total Operating Expenses 2,967,435 2,861,828
------------ ------------
Income from Operations (13,664) 51,540
------------ ------------
Other Income (Expense)
Interest Expense (440,907) ( 312,505)
Interest Income 1,501 3,180
------------ ------------
Other (Expense), Net (439,406) ( 309,325)
------------ ------------
Net Loss $ (453,070) $ (257,785)
============ ============
Basic and Diluted Net Loss Per Share of Common Stock $ (.64) $ (.27)
============ ============
Basic and Diluted Weighted Average Shares of Common
Stock Outstanding 948,342 948,342
============ ============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
TERRACE FOOD GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
---- ----
Operating Activities:
<S> <C> <C>
Net Loss $(453,070) $(257,785)
--------- ---------
Adjustments to Reconcile Net Loss to Net Cash
Used For Operating Activities
Depreciation and Amortization 456,557 299,098
Provision for Doubtful Accounts 15,727 20,891
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (80,202) (842,026)
Inventories 158,302 (205,279)
Note Receivable - Stockholder 53,000 -0-
Other Current Assets (200,471) (76,855)
Increase (Decrease) in:
Accounts Payable and Cash Overdraft (158,402) 549,306
Accrued Expenses (138,204) (7,592)
Other Non-Current Liabilities (12,500) (15,000)
--------- ---------
Total Adjustments 93,807 (277,457)
--------- ---------
Net Cash Used in Operating Activities (359,263) (535,242)
--------- ---------
Investing Activities:
Acquisition of Equipment, Furniture & Fixtures (232,394) (77,917)
--------- ---------
Net Cash Used in Investing Activities (232,394) (77,917)
--------- ---------
Financing Activities:
Borrowing Under Line of Credit 403,472 753,139
Borrowings from Related Parties 325,000
Net Long-term Debt and Term Loan Repayment (136,815) (139,980)
--------- ---------
Net Cash Provided by Financing Activities 591,657 613,159
--------- ---------
Net Change in Cash and Cash Equivalents -0- -0-
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 $ 167,274 $ 124,380
--------- ---------
Income Taxes $ -0- $ -0-
========= =========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
TERRACE FOOD GROUP, INC.
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-Q and Rule 10-01 of
Regulation S-X. 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 as of and for the year ended December 31, 1999
included in the Terrace Food Group, Inc. Form 10-KSB.
(2) Nature of Operations
Terrace Food Group, Inc. (the "Company") operates in two segments of the food
industry, Food Distribution and Food Processing and Manufacturing.
The Food Distribution segment includes the operations of the Company's A-One-A
Produce and Provisions, Inc. ("A-One-A") and Fresh, Inc. ("Fresh") subsidiaries.
A-One-A distributes fresh and precut produce, and dairy products to foodservice,
cruise line and export customers throughout South Florida. Fresh processes
precut produce, which is marketed primarily by A-One-A.
The Food Processing and Manufacturing segment includes the operations of the
Company's Banner Beef & Seafood Co., Inc. ("Banner") subsidiary. Banner is a
custom value added processor of meat, seafood and poultry products marketed
nationally to retail and foodservice customers.
(3) Going Concern & Management Plans
Going Concern - The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has incurred recurring operating losses. At March 31, 2000 there is a
working capital deficiency and a stockholders' deficiency; the Company is in
default of its bank borrowing agreement. These conditions may indicate that the
Company may be unable to continue as a going concern for a reasonable period of
time.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management of the Company is taking
several actions in its attempts to alleviate this situation.
Management Plans - Negotiations are in process to replace the current bank
borrowing arrangement with a new arrangement with a different financial
institution that would provide for additional working capital, which would
enable the Company to fund its operations and obligations for at least fiscal
2000. Several
6
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
(UNAUDITED)
lenders expressed interest in providing financing to the Company. The Company is
in the process of negotiating terms with the prospective lenders.
The Company's Convertible Subordinated Notes matured on March 31, 2000; however,
the Company is in negotiations with the holders to extend their maturity. As
part of the negotiations, the holders of the notes are being asked to convert
all or part of the notes into common stock.
Management has taken actions to improve operations at Banner. Cost reduction
programs have reduced salaries and overhead. The product line has been
streamlined and marketing efforts have been targeted at proven and growing
market segments. Banner's ethnic product line revenues for the first quarter of
fiscal 2000 have exceeded the revenues for the entire fiscal 1999 year and, as
such, management expects that revenues for the full fiscal 2000 will be
significantly in excess of fiscal 1999 as a result of the product line
continuing to receive market acceptance.
Food Distribution revenues for the first quarter of fiscal 2000 exceeded similar
revenues of fiscal 1999 by approximately 18% and the Company is in the process
of negotiating for new food service contracts with cruise lines. Accordingly,
management expects the Food Distribution business to grow substantially during
fiscal 2000.
Management believes the implementation of a new bank borrowing arrangement, the
restructuring of its Convertible Subordinated Notes and improved operating
performance would provide for the Company's continuing operations through fiscal
2000.
(4) 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.
(5) Loss Per Share
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 for either period as they were all considered to be
anti-dilutive. The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net loss per share.
2000 1999
---- ----
Net loss $ (453,070) $ (257,785)
Amortization of preferred stock discount (149,211) -0-
------------ ------------
Net loss (numerator), basic and diluted $ (602,281) $ (257,785)
------------ ------------
Shares (denominator):
Weighted average common shares outstanding,
basic and diluted 948,342 948,342
------------ ------------
Net loss per share, basic and diluted $ (.64) $ (.27)
------------ ------------
7
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
(UNAUDITED)
For the above-mentioned periods, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following, exercisable for the number of shares of
Common Stock indicated:
2000 1999
Options 153,950 114,300
Warrants 1,049,943 673,943
Convertible Subordinated Notes 542,549 517,665
--------- ----------
Total 1,746,442 1,305,908
--------- ----------
(6) 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. Inventories at March 31, 2000 consisted of:
Raw Materials $ 443,258
Semi-Processed Goods 49,428
Finished Goods 1,227,093
---------
Total $1,719,779
---------
(7) Line of Credit and Term Loan
In July 1998, the Company and its subsidiaries entered into a financing
agreement with a bank under which the bank provided a line of credit, subject to
available collateral, as defined in the agreement, to a maximum of $4,000,000
and a term loan of $2,000,000. The loans are collateralized by virtually all of
the assets of the Company. All cash received by the Company must be remitted to
the bank as 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 interest rate on the line of credit at
March 31, 2000 was 9.5%. 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 15, 2001. The interest rate at March 31, 2000 was 10%.
The loan agreement requires the Company to maintain certain financial ratios. In
addition, the loan agreement restricts additional borrowings, dividends and
acquisitions, as defined. The Company was in default of certain covenants at
March 31, 2000 and December 31, 1999, and accordingly, the term loan is included
in current liabilities in the consolidated balance sheets. The bank has
continued to provide funds under the agreement and the line has been temporarily
increased.
The Company is negotiating with several other banks to replace this arrangement.
(8) Convertible Subordinated Notes
In 1998, the Company issued to a private investor $2,625,000 principal amount of
Convertible Subordinated Notes ("Notes"), warrants to purchase 40,000 shares of
common stock and options to purchase 50,000 shares of common stock of the
Company. The options expired December 31, 1998. The exercise price of the
warrants and the conversion rate of the Notes are at $6 a share. The Notes can
be converted at the option of the Company into Redeemable Convertible 8%
Cumulative Preferred Stock
8
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
(UNAUDITED)
("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 options and $2,219,000 to the Notes. The discount on the Notes in
the amount of $406,000 was amortized over the term of the Notes.
The Notes agreement required the Company to attain a specified earnings level
for 1998, which was not attained. Accordingly, the Company has issued to 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%.
In April, 1999, the Company and the private investor agreed to amend the terms
of the Notes. The maturity date was extended to March 31, 2000, and the Notes
are able to be converted to either common stock or Preferred Stock at a rate of
$6.00 per share 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 has issued the private
investor an additional $631,090 in Notes as payment for accrued and unpaid
interest on the Notes through April 13, 1999 and other considerations. The
Company also issued the private investor 25,000 additional warrants to purchase
the Company's common stock at $9.00 per share. Of this amount $350,000
represented additional discount to the Notes and was amortized over the extended
term of the Notes.
As of March 31, 2000, the Company has not paid the principal or any accrued
interest on the Notes and the holders have not converted the Notes. Accordingly,
the convertible subordinated debt is included in current liabilities in the
consolidated balance sheets. The Company is negotiating with the holders of the
Notes to extend their maturity, convert them to common stock, or a combination
thereof.
(9) Commitments and Contingencies
Litigation - The Company is a party to litigation arising from the normal course
of business. The Company is a defendant in an action brought by a former
marketing agent alleging breach of contract, misappropriation of trade assets,
unfair competition and violation of Florida's Deceptive and Unfair Trade
Practices Act. The complaint seeks unspecified damages. The Company is
vigorously defending the matter and, when appropriate, expects to assert
counterclaims. Additionally, the Company is currently in dispute with a former
employee relating to a compensation matter. In management's opinion, the
litigation and dispute will not materially affect the Company's financial
position, results of operations or cash flows.
(10) Series C & D Redeemable Preferred Stock
In the second and third quarters of 1999, the Company issued 20,772 shares of
newly authorized Series C & D Redeemable Preferred Stock together with warrants
to purchase 360,000 shares of the Company's common stock. The Series C & D
Redeemable Preferred Stock 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 and was used for
operating purposes.
The Series C & D Preferred Stock was issued at a discount, calculated to yield
an effective annual dividend of approximately 15%. The Series C & D Redeemable
Preferred Stock were redeemable, in cash, at the option of the Company through
March 30, 2000, when it became mandatorily redeemable either, at the option of
the Company, in cash or through conversion into 17% Senior Notes which would
9
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
(UNAUDITED)
mature on March 31, 2003. As of March 31, 2000, the Series C & D Redeemable
Preferred Stock had not been redeemed by the Company as discussions were being
held with the holders to convert such stock to common stock of the Company. The
stock purchase warrants, valued at $277,200, 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 $554,400 from the redemption value of
$2,077,200 has been amortized by charges to Additional Paid-in Capital.
(11) 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 A-One-A and Fresh and Food Processing and Manufacturing is
represented by Banner.
The Company evaluates performance based on operating profit before interest and
taxes. Accordingly, interest has not been allocated to the operating segments.
Quarter ended March 31, 2000
<TABLE>
<CAPTION>
Food Food Processing
Distribution & Manufacturing Total
------------ --------------- -----
<S> <C> <C> <C>
Sales $ 11,826,696 $ 1,171,714 $ 12,998,410
Depreciation and amortization 120,388 111,000 231,388
Operating income (Loss) 581,218 (317,460) 263,758
Segment assets 10,316,360 5,230,540 15,546,900
Expenditures for segment property
and equipment 167,104 65,290 232,394
Reconciliation of segment amounts to consolidated amounts:
Net Loss:
Total segments, income from continuing operations $ 263,758
Interest expense (440,907)
Amortization of deferred financing costs (59,544)
Interest income 1,501
Corporate expenses (217,878)
-----------
Total $ (453,070)
============
Assets:
Total segments $ 15,546,900
Note receivable 53,000
Other assets 173,458
Other current assets 11,460
------------
Total $ 15,784,818
============
</TABLE>
10
<PAGE>
TERRACE FOOD GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31, 1999
Food Food Processing
Distribution & Manufacturing Total
<S> <C> <C> <C>
Sales $10,015,395 $1,081,600 $11,096,995
Depreciation and amortization 135,225 55,981 191,206
Operating income (loss) 532,652 (291,461) 241,191
Segment assets 10,464,107 5,667,753 16,131,860
Expenditures for segment property
and equipment 51,811 26,106 77,917
Reconciliation of segment amounts to consolidated amounts:
Net Loss:
Total Segment, income from operations $ 241,191
Interest expense (312,505)
Amortization of Deferred Financing Cost (107,892)
Interest Income 3,180
Corporate Expense (81,759)
------------
Total $ (257,785)
============
Assets:
Segment 16,131,860
Other Assets 159,000
Restricted cash 377,767
Other current assets 92,131
-----------
Total $16,760,258
===========
</TABLE>
11
<PAGE>
Item 2.
TERRACE FOOD GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company operates in two segments of the food industry, Food Distribution and
Food Processing and Manufacturing.
The Food Distribution segment includes the operations of A-One-A and Fresh.
A-One-A distributes fresh and precut produce and dairy products to foodservice,
cruise lines and export customers throughout the South Florida Region. Fresh
processes fresh fruits and vegetables that are ready for use by its customers.
Fresh utilizes A-One-A's sales and marketing organization as its primary source
of distribution.
The Food Processing and Manufacturing segment includes Banner, which
manufactures meat, poultry and seafood products, primarily in the ethnic foods
area for both retail and foodservice customers on a national basis.
Consolidated revenues for the three months ended March 31, 2000 were
approximately $12,998,000 compared to $11,097,000 for the same period in 1999 an
increase of approximately 17%. The Company's operating segment income increased
by 10% from $241,000 for the first quarter of 1999 to $264,000 for the same
period in 2000. This increase resulted from continued growth at A-One-A
predominantly from the strong results of the cruise ship and export segments of
the business. The Company's net loss for the first quarter of 2000 was
approximately $453,000 of which $269,000 was from a non-cash interest charge
related to the subordinated debt the Company issued in June of 1998.
Management believes that its distribution business will continue to report
strong revenue and profit results as the growth plan continues to be
implemented. In addition, the Company is continuing to reduce expenses and
expand its product exposure at Banner Beef's current marketing opportunities are
aggressively being sought to grow Banner business base and should result in
further reduction of the operating loss the Company has incurred in the first
quarter of 2000.
SEGMENT ANALYSIS
Food Distribution
Segment revenues for the three months ended March 31, 2000 were approximately
$11,827,000 compared to $10,015,000 for the same period in 1999 an increase of
approximately 18%. Income from operations increased by $49,000 or 9% from the
first quarter in 1999 to approximately $581,000 from approximately $532,000 in
1999.
Food Processing and Manufacturing
Segment revenues for the three months ended March 31, 2000 were approximately
$1,172,000 compared to $1,082,000 for the same period in 1999. Segment loss from
operations was $317,000, $26,000 higher than the loss for the same period in
1999. Depreciation expense of $111,000 was $55,000 higher than in 1999. Banner's
selling proposition has shifted focus with the changing market in the "Home Meal
Replacement" sectors towards the carryout supply rather than the fully prepared
meal. This change has come about from the continuous desire to actually choose
all of the components that go along with a meal. The Company has geared its
selling efforts towards ethnic products particularly the Hispanic prepared foods
market.
Liquidity and Capital Resources
At March 31, 2000, the Company had a cash deficit of approximately $1,436,000, a
working capital deficiency and Stockholders' Deficiency. These conditions may
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time.
12
<PAGE>
TERRACE FOOD GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Sheet #2)
The Company is exploring a restructuring of most of its long-term indebtedness
although there can be no assurance that such efforts will be successful.
The Company has not complied with certain covenants of its bank borrowing
agreement. Although the lender has continued to provide funding under terms of
the agreement and temporarily increased the line of credit, it has not formally
waived its rights under the borrowing agreement. Negotiations are in process to
replace the current bank borrowing arrangement with one that will provide for
additional working capital with a higher line of credit to fund the Company's
continued growth. Several lenders have expressed interest in providing financing
to the Company, but there can be no assurance thereof.
The Company's Convertible Subordinated Notes matured on March 31, 2000. Based
upon negotiations, the holders of the notes are expected to agree to extend the
term of the notes, convert their interest into Common Stock or some combination
thereof, although there can be no assurance such negotiations will be
successful.
Management believes the implementation of a new bank borrowing arrangement, the
restructuring of it Convertible Subordinated Notes and improved operating
performance will provide for the Company's improved liquidity, although there
can be no assurance thereof.
In December 1999, January 2000 and February 2000 two of the Company's Executive
Officers loaned the Company a total of $625,000. Each has expressed a
willingness to convert his loans into common stock of the Company.
During April, May and July of 1999, the Company issued 20,772 shares of the
Series C & D Redeemable Preferred Stock together with warrants to purchase
360,000 shares of the Company's Common Stock to a private investment group which
included four of the Company's Directors. The proceeds of approximately
$1,800,000 were used for working capital purposes. The Series C & D Redeemable
Preferred Stock became mandatorily redeemable by the Company on March 31, 2000
either in cash, or, at Company's election, by the issuance of 17% notes maturing
March 31, 2003. The Series C & D Redeemable Preferred Stock has not been
redeemed as the Company is negotiating with the holders to convert their
interests therein to Common Stock of the Company. There can be no assurance that
such negotiations will be successful.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this quarterly report may be forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. 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 the
projections will prove to be accurate and the Company does not, nor should any
investor, consider these projections to be representations by the Company.
Potential investors of the Company are cautioned that all forward-looking
statements involve risks and uncertainty. Such risks and uncertainties include,
but are not limited to, the risk factors set forth below:
1. Deficits and Borrowing Defaults. The Company has incurred
recurring operating losses, has a significant working capital
and Stockholders' deficiencies, and is in default of its bank
borrowing agreement. In addition, the Company's Convertible
Subordinated Notes matured on March 31, 2000 and have not been
paid. These factors may indicate that the Company may be
unable to continue to operate for a reasonable period of time
and there can be no assurance that the Company's efforts to
restructure its indebtedness will be successful.
13
<PAGE>
TERRACE FOOD GROUP, INC.
MANAGEMENT DISCUSSION AND ANAYLSIS (Sheet #3)
2. Need for Additional Financing. The Company will be required to
obtain additional debt and/or equity financing to fund the
costs of continuing operations and there can be no assurance
that it will be able to obtain such financing.
3. Competition. The produce distribution and food processing
businesses are highly competitive and there are numerous
well-established competitors possessing substantially greater
financial, marketing, personnel and other resources than the
Company. These competitors include national, regional and
local firms. There can be no assurance that consumers will
regard the Company's products and services as significantly
distinguishable from competitive products and services, or
that substantially equivalent products will not be introduced
by the Company's competitors or that the Company will be able
to compete successfully.
4. Changes and Other Factors Affecting Business. The produce and
grocery distribution and food processing industries are often
affected by changes in consumer tastes, national, regional and
local economic conditions, demographic trends, traffic
patterns and the type, number and location of completing
facilities. In addition, the labor intensiveness of these
businesses, as well as factors such as inflation, increased
food, labor and employee benefit costs and availability of
experienced management and hourly employees may also adversely
affect the Company's operations.
5. Current Seasonal Nature of Certain Operations. The Company's
current operations are located in South Florida and are
seasonal in nature since such operations rely, to a certain
degree, on tourism in the winter months to sustain them.
6. Government Regulations. Food businesses are subject to various
federal, state and local laws and regulations. The failure to
obtain and retain licenses or any other governmental approvals
or to pass periodic governmental inspections would have a
material adverse effect on the Company. In addition, food
processing and other operating costs are affected by increases
in the minimum hourly wage, unemployment tax rates, sales
taxes and similar matters over which the Company has no
control.
7. PACA Licenses. A-One-A and Fresh are subject to the Perishable
Agricultural Commodities Act ("PACA"), which regulates
"commission merchants," "brokers" and "dealers" engaged in the
business of shipping or receiving perishable agricultural
commodities in interstate commerce. A-One-A and Fresh
currently maintain PACA licenses to distribute fresh produce,
fruits and vegetables. The ability of the Company to continue
successful distribution and sales of its fresh produce, fruits
and vegetables is dependent upon its continued compliance with
PACA. Loss of its PACA license would have a materially adverse
effect on the Company.
8. Dependence on Key Personnel. The Company's success depends to
a significant extent on the continued service of certain key
management personnel, the loss of interruption of services of
which could have a material adverse effect on the Company.
14
<PAGE>
TERRACE FOOD GROUP, INC.
MANAGEMENT DISCUSSION AND ANAYLSIS (Sheet #4)
9. No Assurance of Continued Public Trading Market or Continued
Qualification for Continued Listing on the Over the Counter
Bulletin Board ("OTCBB") Inclusion; "Penny Stock." The
Company's Common Stock and Warrants are listed on the OTCBB.
If a public trading market does not continue for the Company's
securities, purchasers of the Company's securities may have
difficulty selling their securities should they desire to do
so. If the Company is unable to satisfy the requirements for
continued listing on OTCBB, trading, if any, in the securities
offered hereby would be conducted in the "pink sheets." The
Company is also subject to the Securities and Exchange
Commission's "Penny Stock" regulations. As a result, an
investor may find it more difficult to dispose or to obtain
accurate quotations as to the price of the securities offered
hereby. The above-described rules may materially adversely
affect the liquidity of the market for the Company's
securities.
15
<PAGE>
TERRACE FOOD GROUP
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
(a) See Footnotes 7 and 8 to the Consolidated Financial Statements in
reference to certain provisions of the Company's Line of Credit and Term
Loan and to the Company's default on its Convertible Subordinated Notes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
- ----------------------------------------
(b) Reports on Form 8-K - There were no current reports filed for the first
quarter of 2000.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
TERRACE FOOD GROUP, INC.
Dated: May 24, 2000 By: /s/Jonathan S. Lasko
--------------------------------------------
Jonathan S. Lasko, Executive Vice President
& Chief Operating Officer
Dated: May 24, 2000 By: /s/William P. Rodrigues, Jr.
----------------------------
William P. Rodrigues, Jr.,
Principal Financial Officer
17
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