<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                  FORM 10-KSB
(Mark One)

[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934 (Fee required) for the fiscal year ended December 31, 1996.

[ ]  Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 (No fee required)

     for the transition period from _________________ to ___________________

     Commission file number       0-27132
                           ---------------------------------------------------

                            Terrace Holdings, Inc.
       -----------------------------------------------------------------
                (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.)

 2699 Stirling Road, Suite C-405, Ft. Lauderdale, Florida             33312
----------------------------------------------------------        ------------
     (Address of Principal Executive Office)                       (Zip Code)

                                (954) 894-6000
         ------------------------------------------------------------
               (Issuer's Telephone Number, Including Area Code)

        Securities registered under Section 12(b) of the Exchange Act:

                                                Name of Each Exchange
         Title of Each Class                     on Which Registered
--------------------------------------  --------------------------------------
 
______________________________________  ______________________________________
 
______________________________________ _______________________________________

          Securities registered under Section 12(g) of the Exchange Act:

 
                         Common Stock, $.001 par value
-----------------------------------------------------------------------------
                                (Title of Class)
  
                   Redeemable Common Stock Purchase Warrants
-----------------------------------------------------------------------------
                                (Title of Class)

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.

Yes       X                 No __________________
   ---------------------                     

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.   [X]

     Issuer's revenues for its most recent fiscal year. $5,497,130.
                                                         --------- 

     Aggregate market value of the voting stock held by non-affiliates computed
by reference to the price of which the stock was sold, or the average bid and
asked prices of such, as of a specified date within the past 60 days.
The aggregate market value on March 25, 1997: $4,968,750.
                                               --------- 

     As of December 31, 1996, the total number of shares of common stock
outstanding: 3,312,500.
             --------- 

              This is page 1 of 129 sequentially numbered pages.

<PAGE>
 
                                     PART I
                                     ------

Item 1 - Description of Business
--------------------------------

(a)      Business Development

     The Registrant, Terrace Holdings, Inc., was incorporated under the laws of
the State of Delaware on June 15, 1995, to change the state of incorporation of
Bon Adventure Kosher Tours, Inc., a Florida corporation, formerly known as
Embassy Kosher Tours of South Florida, Inc. The Registrant is a holding company
which currently has four wholly-owned operating subsidiaries: (i) The Lasko
Companies, Inc., which owns and operates on leased property the Registrant's
kosher, casual dining restaurant, Terrace Oceanside Restaurant, in Hallandale,
Florida, which opened on October 23, 1995; (ii) A&E Management Corp., which
manages the food and beverage operations of a non-kosher restaurant and catering
operation at The Club at Emerald Hills in Hollywood, Florida; (iii) The Lasko
Family Kosher Tours, Inc., which operates Passover holiday vacations at three
locations within the United States; and (iv) Deering Ice Cream, Inc. which
manufactures frozen desserts in Portland, Maine, under the Deering and Howard
Johnson's name as well as manufactures products for approximately 15 other
unaffiliated companies.

     The Registrant is the successor to a business founded in 1988 to operate a
holiday vacation venue in south Florida. From October, 1993 through May, 1995,
management of the Registrant owned and operated the Terrace-on-the-Lake
Restaurant, a casual, upscale kosher restaurant in Hollywood, Florida. In its
short existence, Terrace on the Lake developed a following among tourists
visiting south Florida who observe the Jewish dietary laws. Also, in 1993, the
Registrant commenced managing and operating the food, beverage and restaurant
operations at The Club at Emerald Hills.

     In July, 1996, the Registrant disposed of all of the operating assets of
its subsidiary, Prime Concern Kosher Foods, Inc., operating as "The Deli Maven"
restaurant/delicatessen in Boca Raton, Florida. Management of the Registrant
believed that in order to fully realize both revenue and net income potential,
the physical size of The Deli Maven had to be increased. Management could not
increase the physical size of The Deli Maven and accordingly closed the
operation.

     Since 1989, the Registrant has operated a kosher Passover holiday vacation
venue at the Bonaventure Resort & Spa, now known as the Registry Resort & Spa,
in Ft. Lauderdale, Florida. Under the Registrant's management and principal
shareholders, this operation has grown from serving approximately 300 guests in
1989 to approximately 1,300 guests for Passover since 1992. Passover occurs each
spring and the Registrant takes over the entire Registry Resort & Spa for the
Passover holiday season.

     On January 17, 1996, the Registrant consummated an agreement with an
unaffiliated entity, to assume operation of the annual Passover vacation venues
at the Fontainebleau Hilton Hotel, Miami Beach, the Rye Town Hilton Hotel, Rye,
New York, and the Tamiment Resort & Conference Center, Tamiment, Pennsylvania.
As a result, for the 1996 Passover holiday, the Registrant operated holiday
vacations at four different locations. The contract to operate a Passover
vacation at the Tamiment

                                       1
<PAGE>
 
Hotel expired after the 1996 Passover holiday and has not been renewed for the
1997 Passover holiday.

     In February, 1997, the Registrant incorporated The Lasko Family Kosher
Tours, Inc., as a wholly-owned subsidiary, for the purpose of managing and
operating its Passover holiday vacations business. Accordingly, the Registrant's
contracts described above have been assigned to this wholly owned subsidiary.

     On February 17, 1997, the Registrant's wholly owned subsidiary, Deering Ice
Cream, Inc., acquired all of the assets and related liabilities of DownEast
Frozen Desserts, LLC, a Delaware limited liability company unaffiliated with the
Registrant, which manufactures and markets frozen desserts under the names
Deering Ice Cream and Howard Johnson's, as well as co-packing for others. Its
principal offices and plant are located in Portland, Maine.

(b)  Businesses of Issuer.
--------------------------
     Restaurants
     -----------
 
     Initially, the Registrant's kosher restaurants, which were to be called
Terrace restaurants, were intended to be located along the Eastern seaboard and
possibly later in the Midwestern United States. During 1996, however, management
determined that the economic feasibility of opening additional kosher Terrace
restaurants would be more difficult, both on an economic and management/employee
basis, than earlier anticipated and decided, instead, to seek possible
acquisitions of going concerns in the food - or leisure - related industries.

     Holiday Vacations
     -----------------

     Since 1989, the Registrant has operated kosher Passover holiday vacation
venues. Passover occurs each spring and the Registrant takes over a portion of
or an entire hotel facility, for the Passover holiday season. In January, 1996,
subsequent to the initial public offering of its securities, the Registrant
expanded its Passover vacation venues to four separate sites when it acquired
from an unaffiliated third party, agreements to operate Passover vacations at
three additional sites: The Fontainebleau Hilton Resort & Spa, Miami Beach,
Florida, the Rye Town Hilton, Rye, New York and the Tamiment Resort & Conference
Center, Tamiment, Pennsylvania. For the 1996 Passover holiday, there were 732
guests registered at the Fontainebleau Hilton, 544 guests registered at the
Tamiment Resort, and 356 guests registered at the Rye Town Hilton. As noted
above, the Registrant will not be operating a vacation venue at the Tamiment
Resort & Conference Center for the 1997 Passover holiday.

     Food and Beverage Management
     ----------------------------

     The Registrant, through its wholly-owned subsidiary, A&E Management Corp.,
currently manages a non-kosher restaurant and catering operation at The Club at
Emerald Hills, an upscale country club in Hollywood, Florida.

                                       2
<PAGE>
 
     Frozen Desserts
     ---------------

     The Registrant, through its wholly-owned subsidiary, Deering Ice Cream,
Inc., with its principal offices located in Portland, Maine, currently operates
the business of manufacturing and marketing frozen desserts under the Deering
and Howard Johnsons brand names, as well as co-packing for approximately 15
other unaffiliated companies. Deering's plant encompasses 55,000 square feet
which is used for the manufacturing and distribution of its products. Deering's
product distribution currently covers the east coast of the United States from
Maine to Florida.

     Disposal of Delicatessen Operations
     -----------------------------------

     As noted above, in July, 1996, the Registrant disposed of all of the
operating assets of The Deli Maven and closed its operations.

Terrace Oceanside Restaurant
----------------------------

(a)  Restaurant Overview
     -------------------

     Terrace Oceanside Restaurant, operated by the Registrant's wholly owned
subsidiary, The Lasko Companies, Inc., is a "casual, upscale, tablecloth"
restaurant located on the Atlantic Ocean beach in a residential condominium
complex of approximately 1,400 units. In addition, the area nearby the
Restaurant has many residential condominium complexes. The Hallandale location
for the Restaurant is between Miami Beach and West Palm Beach is readily
accessible by residents of Dade, Broward and Palm Beach Counties, Florida, all
of which have significant Orthodox Jewish populations that observe Jewish
dietary laws.

     The designation of the Registrant's Terrace restaurant as "kosher" means
that all the foods are kosher and are prepared in accordance with Jewish dietary
laws. Terrace Oceanside Restaurant in Hallandale, Florida is under the
supervision of the Orthodox Rabbinic Board of Broward and Palm Beach County
("ORB"). The ORB must approve the ingredients, foods, and preparation before it
will certify a restaurant as "kosher". Therefore, the ability of the Registrant
to successfully continue the Terrace Oceanside Restaurant's kosher status is
dependent upon its continued compliance with the requirements of Rabbinic
certification.

     The Terrace Oceanside Restaurant has seating for approximately 150 to 180
people. The Restaurant also has a lounge and cocktail area including a full
service bar. Its full service kitchen is approximately 1,500 square feet. The
Restaurant can seat parties of two to forty people comfortably.

(b)  Day-to-Day Restaurant Operations
     --------------------------------

     The Terrace Oceanside Restaurant offers a wide range of moderately priced
food purchased, prepared, plated and served in compliance with applicable kosher
foods laws and regulations. This "tablecloth" Restaurant features full waiter
and bar service, and has a separate and distinct section

                                       3
<PAGE>
 
designated as a private catering facility for parties, bar mitzvahs, small
weddings, special family holidays and private dining experiences for groups
ranging in size from 10 to 50.

     The Terrace Oceanside Restaurant seeks to deliver quality kosher dining at
affordable prices on a consistent basis. The menu for the Terrace restaurants,
which has been fully developed by the Registrant's corporate chef, is intended
to be uniform and feature basic, but uniquely presented, kosher meals. The menu
is of continental cuisine, with the price of entrees currently ranging from
approximately $11 to $24. Since the Restaurant is located in south Florida, its
operations are seasonal in nature and rely, to a significant degree, on tourism
in the winter months to sustain them. Thus, the third calendar quarter (July-
September) of each year, or the summer "slow" season has and is likely to
continue to generate losses. The Registrant continues to review its Restaurant
operations in light of this seasonality.

Kosher Vacations
----------------

     In the spring of 1989, the Registrant offered its first kosher vacation at
the Registry Resort & Spa, f/k/a the Bonaventure Resort & Spa, Fort Lauderdale,
Florida during the Jewish Passover holiday. The Jewish Passover holiday is eight
days in length and occurs in the spring, generally around the Easter season.
During Passover, observant Jews refrain from eating grain and grain-related
products or utilizing utensils normally used with grain or grain-related
products. In the last approximately twenty years, a Passover holiday vacation
"industry" has developed, whereby families who observe the Jewish Passover
rituals may go for the entire holiday and be assured full compliance with the
Passover religious requirements and at the same time enjoy a vacation. The
Registrant's Passover holiday vacation package includes accommodations, food and
beverages, as well as use of all of the Registry's facilities, such as its golf
courses, tennis courts, swimming pools and spa. Today, in addition to vacations
such as the one operated by the Registrant, there are Passover cruise, skiing,
Caribbean, Hawaiian and European vacations, all of which may be deemed to
compete with the Registrant's vacations.

     The Registrant's 1989 Passover vacation was attended by approximately 300
persons, its 1990 Passover vacation by approximately 600 persons, and since
Passover 1992, the Registrant has taken over the entire capacity of the Registry
Resort & Spa for its annual Passover vacation operation at which it serves
approximately 1,300 guests. Since 1992, the Registrant has had no difficulty in
selling space for Passover at the full capacity of the Registry Resort & Spa. In
each of the last four years, there has been a waiting list, and potential guests
have had to be turned away. The average family of four pays approximately 
$6,000-$8,000 for the entire Passover vacation package, which generally runs 9
to 12 days depending each year upon what day of the week Passover begins.

     In February, 1997, the Registrant incorporated The Lasko Family Kosher
Tours, Inc., as a wholly-owned subsidiary of the Registrant, for the purpose of
managing and operating the Registrant's Passover holiday vacations business. All
of the Registrant's agreements to operate Passover vacations, have been assigned
to it wholly owned subsidiary The Lasko Family Kosher Tours, Inc.

                                       4
<PAGE>
 
     The accommodations at the Registry Resort & Spa include nine guest
buildings, totaling 497 rooms, including suites (approximately 1,300 guests).
The main conference center includes extensive kitchen facilities, three
ballrooms, a substantial number of small meeting rooms and a health spa.  On
adjacent property, there are two world-class championship golf courses, as well
as a tennis and racquet club.  The Registrant's contract with the Registry
Resort & Spa to use its facilities during the Passover holiday expires after the
1997 Passover holiday, although the Registrant has the option to extend the
contract for an additional five years.

     The Fontainebleau Hilton Resort & Spa, located in Miami Beach, Florida, has
over 1,200 guest rooms on 20 acres of oceanside gardens with rooms featuring
magnificent ocean views.  The Registrant utilizes approximately 260 of such
rooms for its Passover program at this resort (approximately 700 guests).  Each
room has three telephones, a large screen television and a luxury marble bath
and vanity area.  There is a tropical lagoon, half acre rock grotto swimming
pool, along with seven lighted tennis courts, two nearby championship golf
courses, wind surfing, and of course, the ocean.  The 30,000 square foot
beachside spa features state of the art equipment, aerobics classes and modern
spa facilities.

     The Rye Town Hilton is located in Rye, New York, approximately 40 minutes
from New York City on 40 acres of landscaped land with spacious accommodations
in 400 luxury rooms and suites.  The facility includes indoor pool, a whirlpool,
sauna, tennis courts and basketball court. Rooms range from a standard room to
one bedroom suites, with views of the garden or pool areas. The Registrant is
responsible for 148 rooms (approximately 400 guests).

     Management believes that in addition to providing world-class kosher
vacation destinations, such as these three venues to attract guests, personal
on-site management and operation is necessary for a successful outcome.
Management believes that the Registrant and The Lasko Family Kosher Tours, Inc.,
through the various Lasko family members, has developed the reputation,
expertise and personnel depth to market and operate its kosher Passover or other
vacation sites successfully.


Food and Beverage Management
----------------------------

     A&E Management Corp. ("A&E"), a wholly owned subsidiary of the Registrant,
manages the food and beverage operations at The Club at Emerald Hills in
Hollywood, Florida.  Under its agreement with Emerald Golf, Inc., an unrelated
corporation which operates The Club at Emerald Hills, A&E manages Reflections
Restaurant as well as the bar and lounge area and the catering operations at The
Club at Emerald Hills.  Reflections is a 165 seat restaurant and lounge.
Reflections is not a kosher facility and none of A&E's other management
activities at The Club at Emerald Hills involve kosher food or facilities.
Neither operating personnel nor food products or preparation handled in
conjunction with the Registrant's Terrace restaurants or Passover holiday
vacations is commingled, at any time or in any manner, with A&E's management
operations at The Club at Emerald Hills.  These procedures are to ensure
absolute adherence to Orthodox Jewish requirements to maintain the highest
kosher standards and certifications at the Registrant's Terrace Oceanside
Restaurant and Passover vacation venues.

                                       5
<PAGE>
 
Frozen Desserts
---------------

     On February 17, 1997, the Registrant acquired all of the assets and related
liabilities of DownEast Frozen Desserts, LLC, a Delaware limited liability
company unaffiliated with the Registrant, which manufactures and markets frozen
desserts under the names Deering Ice Cream and Howard Johnson's with its
principal offices and plant located in Portland, Maine. ("DownEast"). Under the
Asset Acquisition Agreement signed as of December 9, 1996, and as amended as of
February 7, 1997, the Registrant's new wholly-owned subsidiary, Deering Ice
Cream, Inc., ("Deering") acquired such assets and related liabilities to
continue the business of manufacturing and marketing frozen desserts.

     DownEast, formed in January, 1996, acquired the assets and some of the
liabilities of Frozen Desserts, Inc., which owned and produced Deering Ice
Cream. The Deering brand of ice cream has been available in the Northeastern
United States since 1886.

     Deering currently manufactures and markets ice cream products under the
Deering Ice Cream brand name ("branded products") and manufactures products for
others ("co-packed products"). Both types of products are manufactured in an
approximately 55,000 square foot building in Portland, Maine, which is leased at
a rental of $125,000 per annum.

     Subsequent to October 26, 1996, DownEast entered into a Sublicense
Agreement to acquire a license to manufacture and distribute Howard Johnson
brand ice cream. This agreement, which has an initial term of four years and
three three-year renewal periods thereafter, covers manufacturing and
distributing products to stores and restaurants in the entire United States,
excluding Florida and Puerto Rico. Under the terms of this agreement, Deering
pays a royalty of 4% on all net sales of bulk ice cream and 2% on net sales of
pre-packed ice cream. In addition, the agreement gives Deering the right to
manufacture retail pack ice cream for the entire United States, including
Florida. This includes the sale of Howard Johnson brand ice cream in pint and
quart sizes to chain supermarkets, independent food markets, and convenience
stores. The market for the pint and quart sizes is primarily in metropolitan New
York City, the New England states, Florida and in those locations where the
Howard Johnson restaurants exist.

     Management of Deering believes that the prior year sales of Howard Johnson
products by the former manufacturer and distributor amounted to approximately
$1,450,000. Howard Johnson restaurants purchased approximately 60% of all such
products, with the remaining approximately 40% being sold to various types of
food retailers. Howard Johnson restaurants are located from Maine to Florida and
as far west as St. Louis, Missouri. Deering has arrangements to deliver Howard
Johnson products to all these stores by common carrier truck or through
distributors, depending on the location. Supermarket sales of Howard Johnson
products are primarily in New England and metropolitan New York. It is Deering's
intention to pursue vigorously increased sales of both bulk ice cream and pre-
packed to all types of customers.

                                       6
<PAGE>
 
     Deering solicits business directly from supermarkets for its Deering
branded pre-packed products. Except for one major customer, all products are
delivered to supermarkets through two main distributors. These distributors are
located in Maine and Massachusetts. Both handle pre-packed ice cream (quarts,
half gallon and three gallon cans). Deering is substantially dependent on the
distribution services of these two distributors. Prior to the Howard Johnson
brand license acquisition, it was estimated that such distributions of Deering's
product accounted for approximately 70% of its total business. Other
distribution is achieved through a direct sale to one major supermarket chain,
and the use of several smaller distributors in New England and the New York City
metropolitan area.

     Deering's manufacturing operations fall into the following three general
areas:

     (1) Manufacturing of pre-packed ice cream and bulk ice cream, which
includes rounds, squares, individual servings and the like.

     (2) Manufacturing of ice cream specialties, which includes ice cream pies,
cakes and rolls sold primarily under the Deering and Howard Johnson names.
Deering has two separate lines, one to manufacture pies and cakes and the other
for a variety of rolls.

     (3) Manufacturing of stickless novelties. These items are manufactured in a
"glacier room," which is a self-contained unit to freeze, form, harden and box
items, such as block bars, brownies bars, chip sandwiches and all other forms of
stickless novelties.

     Branded Product: Prior to acquiring the license to manufacture and
distribute Howard Johnson brand ice cream, the Deering ice cream brand business
amounted to 47% of total sales for the first nine months of 1996. Its primary
market area has been in Maine and New Hampshire.

     During its year of operation of Deering, the management of DownEast
expanded the distribution of the Deering brand from Maine and New Hampshire into
the six state New England region. Previous to DownEast's acquisition of Frozen
Desserts, Inc., the Deering brand was primarily sold by two supermarket chains;
however, during 1996 its distribution was expanded into every major supermarket
chain in New England.

     Deering manufactures both quarts and half gallons of its Deering brand ice
cream. These quarts and half gallons are sold in a "convocan" style round
container. The packaging of Deering brand products, its theme and its format
were all redeveloped during early 1996 to stress "Deering...Maine's Premium Ice
Cream." Deering manufactures approximately twenty-five flavors in this line.

     Deering also manufactures bulk ice cream in three gallon cans. These are
sold and distributed to ice cream stands and other food service operators. It
also manufactures approximately twenty-five flavors in this line. Flavors are
updated and changed as management determines according to management's
perceptions on competitive conditions.

                                       7
<PAGE>
 
     Deering and Howard Johnson brand products are considered to be premium ice
cream since the butterfat content is relatively high (12%), and air content is
relatively low. Both Deering and Howard Johnson ice cream are made using all
natural flavors at a high level of intensity.

     Prior to the Howard Johnson brand license acquisition, Deering's line of
ice cream, cakes and rolls amounted to approximately 10% of its total branded
business. Distribution and method of marketing is identical to ice cream
distributed and sold in the convocan style round container. This product line is
more unique since there are substantially fewer manufacturers of these type of
products. Sales of this product line are typically seasonal, with some items
selling during warm weather and others selling during the Thanksgiving and
Christmas seasons.

     Deering is highly dependent on its supermarket customers as well as its
distributors. There are approximately six major supermarket customers which buy
Deering brand products from its two distributors. Excluding its Howard Johnson
brand products, these six major supermarket chains currently account for the
bulk of Deering's business. The largest chain accounts for approximately 19% of
total sales, or 38% of total Deering branded sales.

     Raw materials, such as dairy products, sugar, corn syrup and flavorings for
Deering's products, are in plentiful supply, although the price can fluctuate
materially depending upon market supply and demand.

     Deering owns registered trademarks for the name "Deering" as well as
several other names which are currently not in use. It also has, under the
Sublicense Agreement with Howard Johnson, exclusive use of the Howard Johnson
trademark for its frozen desserts. Nutritional labeling is required by the
Federal government. Also, the Department of Agriculture of the State of Maine
has certain inspection requirements with which Deering must comply at all times.
There are no proposed governmental regulations known to management that could
seriously affect the future business at this time. Deering brand products are
certified kosher by the Union of Orthodox Jewish Congregations of America.

     The estimated amount of money spent on research and development during the
past two fiscal years is under $30,000 per annum. Most research and development
for customers is billed at the time it is incurred.

     The cost of complying with environmental laws is not specifically
ascertainable; however, it is relatively low compared to the total cost of other
expenditures such as plant and equipment maintenance.

     Co-Packing: Deering also manufactures ice cream products for others, which
is commonly referred to as co-packing. This business accounted for approximately
52% of DownEast's business for the first nine months of 1996. Deering
manufactures pre-packed ice cream and novelties for supermarket chains, other
brands, and ice cream distributors. This business is highly competitive and most
competitors are substantially larger and better financed than Deering.
Management believes,

                                       8
<PAGE>
 
however, that it has certain unique advantages, since it attracts brands which
desire high quality products or which have products that require special
attention or care.

     The bulk of products made in Deering's glacier room are stickless novelties
made for co-packing customers of Deering. These products include brownies,
certain types of ice cream sandwiches, block bar and other products which
generally require enrobing or covering an individual serving of ice cream with
either chocolate or some form of cookie.

     Deering services co-packing customers throughout the United States. The
three largest co-packing customers amount to 33% of Deering's total co-packing
sales.

     Deering believes it has a somewhat unique position in the co-packing
business, since there are relatively few companies which can make stickless
novelties due to the high cost of the specialized equipment involved. Management
of Deering believes that there are approximately five companies serving this
rapidly growing marketing segment in the eastern United States.

     In consideration for the acquisition of DownEast's assets the Registrant
issued to DownEast: (1) 918,900 shares of the Registrant's Common Stock; and (2)
Warrants to purchase 250,000 additional shares of the Registrant's Common Stock
at a exercise price of $1.1875 exercisable commencing February 17, 1997, and
expiring August 31, 2000. The Registrant also paid DownEast approximately
$114,000 in cash.

     In connection with the acquisition, the Registrant issued to each of Samuel
H. Lasko and Jonathan D. Lasko (collectively the "Laskos") Warrants to purchase
375,000 shares of the Registrant's common stock at $1.1875 per share. The Laskos
surrendered their respective performance options to purchase up to 750,000
shares of the Registrant's common stock, contained in their respective
Employment Agreements. In addition, the Laskos entered an option agreement to
purchase the businesses, assets or capital stock of three of the Registrant's
wholly owned subsidiaries, The Lasko Family Kosher Tours, Inc., The Lasko
Companies, Inc. and A&E Management, Inc. at the fair market value thereof to be
independently determined. The option is exercisable for approximately three
years commencing April 1, 1998 until February 17, 2001, or earlier under certain
circumstances, and will be presented to the Registrant's shareholders for
approval at the 1997 Annual Shareholders meeting.

Disposal of Delicatessen Operations
-----------------------------------

     As noted above, in July, 1996, the Registrant disposed of all of the
operating assets of The Deli Maven and closed its operations in Boca Raton,
Florida.

                                       9
<PAGE>
 
Advertising and Marketing
-------------------------

     The Registrant currently markets its vacation and restaurant products and
services primarily through local newspapers and the use of mailing lists.
Deering advertises in newspapers, Sunday supplements, on radio and has limited
TV exposure. It also utilizes public relations campaigns in the Portland, Maine,
Boston, Massachusetts and Providence, Rhode Island markets.

     The Registrant presently anticipates engaging in the future outside
professional marketing firms to conduct its marketing activities, none of whom
yet have been engaged. Such marketing activities may include an evaluation of
all aspects of the Registrant's products and services. Depending upon the
outcome of any such marketing evaluations, the Registrant may decide to make
changes with respect to the marketing of its products and services.

Competition
-----------

     The casual dining restaurant industry is intensely competitive with respect
to price, service, location, themes and food quality. However, the kosher
upscale restaurant dining industry is not nearly as competitive as the non-
kosher restaurant industry. While there are many casual dining and themed
restaurant competitors in the marketplace, there are few kosher casual dining
restaurants. There are, however, several kosher restaurants in the South Florida
area which compete with the Registrant's restaurant operations.

     It must be noted that the restaurant business is often affected by
arbitrary changes in consumer tastes, national, regional and local economic
conditions, demographic trends, traffic patterns, the number and locations of
competing restaurants and employment trends.

     The Registrant believes that there are many other kosher holiday vacation
packages offered in the United States and Caribbean, all of which provide
intense competition to the Registrant's kosher holiday vacation packages.

     The ice cream business is very competitive, and the Registrant's subsidiary
faces competition from other companies which are substantially larger and better
financed. However, Deering competes through intensive marketing, public
relations and in-store demonstrations. Many supermarkets charge slotting fees,
which is a fee imposed by the retailer for placing particular products in their
stores. Slotting fees are high and can be a barrier to entry for those companies
which cannot afford these charges.

Government Regulation
---------------------

     The Registrant is subject to various federal, state and local laws
affecting its businesses. Each of the Registrant's food service operations is
subject to licensing regulation by numerous governmental authorities which may
include alcohol beverage control, building, health and safety and fire agencies
in the state or municipality in which the restaurant is located. Difficulties in
obtaining

                                      10
<PAGE>
 
or failures to obtain the necessary licenses or approvals could delay or prevent
the development of a new Terrace restaurant in a given area.

     Alcoholic beverage control regulations generally require that the
Registrant's restaurants apply to the specific authority for a license or permit
to sell alcoholic beverages on the premises. Typically, an alcoholic beverage
license must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of the Registrant's restaurants, including minimum age of
patrons and employees, hours of operation, advertising, purchasing, inventory
control and handling, storage and dispensing of alcoholic beverages. The failure
of a restaurant to obtain or retain a liquor or food service license would
adversely affect that particular restaurant's operations.

     Restaurants in most states are subject to "dram shop" laws and legislation,
which impose liability on licensed alcoholic beverage servers for injuries or
damages caused by their negligent service of alcoholic beverages to a visibly
intoxicated person or to a minor, if such service is the proximate cause of the
injury or damage and such injury or damage is reasonably foreseeable. The
Registrant maintains liquor liability insurance as part of its existing
comprehensive general liability insurance.

     In the opinion of Deering's management, it complies with all state and
federal government regulations applicable to the frozen dessert industry.

     In addition to federal, state and local laws affecting its businesses, the
Registrant's operations serving kosher foods must adhere to Jewish religious
dietary laws.

Employees
---------

     The Lasko Family Kosher Tours, Inc. employs 7 full time employees and 2
part time persons to manage the reservations and confirmations for the its
Passover holiday vacations. During the Passover holiday, it temporarily
increases its staff to service the guests at each of the vacation venues it
operates by approximately 75 to 100 people.

     A&E Management Corp., managing the food and beverage and restaurant
operations at the Club at Emerald Hills, currently employs a total of 55 people,
full and part time, in its operations, of which all are kitchen, banquet and
wait staff.

     At the present time, The Lasko Companies, Inc., operating the Terrace
Oceanside Restaurant, has two administrative employees, a full time kitchen
staff of 5, a wait staff of 12, a Maitre' D, and a corporate chef.

     Deering Ice Cream, Inc. currently employs approximately 30 full-time
employees and hires up to 20 temporary employees, as necessary. Eight employees
are in administration and sales, the remainder are in production and shipping.
In addition, as a result of the DownEast acquisition, the Registrant entered
into a three year employment agreement with Mr. Milton Namiot, President of

                                      11
<PAGE>
 
DownEast, whereby Mr. Namiot serves as the President and Chief Executive Officer
("CEO") of the Deering subsidiary in addition to serving as CEO of the
Registrant.

     The Registrant also filled the two vacancies on its Board of Directors with
the appointment of Steven Shulman and Richard Power to its Board. Messrs.
Shulman and Power are members of DownEast and intend to stand for election the
at 1997 Annual Shareholders' meeting.


Item 2 - Description of Property
--------------------------------

     The Registrant has a five-year lease ending in May, 2000, with a five-year
option exercisable under certain circumstances, for the Terrace Oceanside
restaurant facility of approximately 3,750 square feet located on the Atlantic
Ocean beach in Hallandale, Florida, with the condominium association which owns
the facility. The Terrace Oceanside Restaurant opened at this location on
October 23, 1995.

     The Lasko Family Kosher Tours, Inc. operates its current kosher holiday
vacations under separate agreements with three different venues which expire at
different times:

     1.   Registry Resort & Spa, in Ft. Lauderdale, Florida. The Registrant's
          agreement to operate a Passover holiday vacation at the Registry
          Resort & Spa f/k/a the Bonaventure Resort & Spa extends through the
          1997 Passover holiday, and the Registrant has exercised its option to
          extend the agreement for an additional five years.

     2.   The Fontainebleau Hilton Resort & Spa. The Registrant has an agreement
          to operate a Passover holiday vacation at The Fontainebleau Hilton
          Resort & Spa through Passover, 1999.

     3.   Rye Town Hilton. The Registrant has an agreement with the Rye Town
          Hilton to operate its kosher holiday vacation operations through
          Passover 1999.

     A&E Management Corp. has a five year lease with Emerald Golf, Inc., to
lease property located at The Club at Emerald Hills to operate a restaurant,
cocktail lounge and a banquet and/or catering operation. A&E has the option to
renew the lease for an additional five years upon the same terms and conditions
provided it is not in default and proper notice of the exercise of the option is
given.

     Deering Ice Cream, Inc. leases approximately 55,000 square feet at 135
Walton Street in Portland, Maine, for use as its principal offices and
manufacturing plant. The lease term is for five years at a rate of $125,000 per
year.

     The Registrant leases approximately 2,000 square feet at 2699 Stirling Road
in Ft. Lauderdale, Florida, for use as its executive offices and reservation
center. The lease term is for 3

                                       12
<PAGE>
 
years at a rate of $25,440 per year. Management believes that the above
facilities will be sufficient for its operations in the foreseeable future.

Item 3 - Legal Proceedings
--------------------------

     The Registrant is not currently a party to any material legal proceeding.

Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

     During the past fiscal year, the Registrant has not submitted any matter to
a vote of security holders other than election of directors and appointment of
independent auditors at its 1996 annual Meeting of Shareholders.

                                      13
<PAGE>
 
                                    PART II
                                    -------

Item 5 - Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

     (a)  Market Information. Since the Registrant's initial public offering in
early December, 1995, the Registrant's common stock and common stock purchase
warrants have been and currently are traded in the NASDAQ SmallCap Market.

     Set forth below is the range of high and low sales prices of the common
stock and common stock purchase warrants for each month since the Registrant's
initial public offering as reported by NASDAQ for those periods. The prices
represent quotations between dealers. The quotations do not include retail
markups, markdowns, or commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
 
                                                        Bid           Ask
                                                        ---           --- 
Type of Security     Quarter Ended                 High    Low     High    Low
----------------     -------------                 -----   ---     ----    ---
<S>                  <C>                           <C>    <C>     <C>     <C>
 
Common Stock         December 29, 1995/(1)/        6 1/8  2 1/4   7 1/8   4 1/4
 
                                                       High            Low
                                                       ----            ---

                     March 31, 1996 /(2)/               6 3/4          4 1/4
                     June 30, 1996/(2)/                 4 5/8            3
                     September 30, 1996/(2)/            4 1/2          2 3/4
                     December 31, 1996/(2)/             1 1/16          7/8
                     Jan. 2, 1997 - Mar. 25/(2)/        1 1/2          1 5/16  
                                                                                

                     Quarter Ended                 High    Low     High    Low
                     -------------                 ----    ---     ----    ---
                                           
Purchase Warrants    December 29, 1995/(1)/        1 1/2   3/4       2    1 1/2 
                                                    
                                                       High            Low
                                                       ----            ---

                     March 31, 1996/(2)/               2 1/2           1 1/4
                     June 30, 1996/(2)/                1 3/4             1     
                     September 30, 1996/(2)/           1 5/8            1/2
                     December 31, 1996/(2)/              5/16           5/16   
                     Jan. 2, 1997 - Mar. 25/(2)/         5/8            5/8
</TABLE>
-------------------

/(1)/ Includes only the period December 6, 1996 through December 29, 1996.
/(2)/ In February, 1996, NASDAQ changed its reporting system to no longer
      including Bid and Ask amounts; therefore, the prices shown for these dates
      only reflect the High and Low actual sales price.

                                      14
<PAGE>
 
     (b)  Holders. As of December 31, 1996, there were 19 holders of record of
the Registrant's common stock, and 2 holders of record of its common stock
purchase warrants. The Registrant believes that it has a greater number of
shareholders because the Registrant believes that a substantial amount of its
common stock is held of record in street name by broker-dealers for their
customers.

     (c)  Dividends. As of December 31, 1996, the Registrant has not paid any
dividends on its common stock and does not expect to pay a cash dividend in the
foreseeable future, but intends to devote all funds to the operation of its
business.


Item 6 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

Results of Operations -- Terrace Holdings, Inc.
-----------------------------------------------

Year ended December 31, 1996 compared to year ended December 31, 1995

     The Registrant's consolidated net loss for the year ended December 31, 1996
was approximately $1,156,000 compared with its combined net loss of
approximately $591,000 for the year ended December 31, 1995. This substantial
increase is due to the following factors. In 1996, the Registrant purchased
additional Passover holiday contracts the required amortization of which
resulted in a net loss of $185,528. Selling, general and administrative expenses
increased by 221% from $581,200 in 1995 to $1,612,179 in 1996 primarily due to
increases in professional fees, payroll and related expenses, and costs
associated with the purchases of the new holiday venues. In addition, the
Registrant's aggressive attempts at possible acquisition candidates has also
increased the associated fees and other costs even though benefits were not
realized in 1996.

Passover Holiday Vacations Segment

     Through Passover 1995, the Registrant operated one Passover vacation venue
at the Registry Resort & Spa, f/k/a the Bonaventure Resort & Spa in Fort
Lauderdale, Florida. In January, 1996, the Registrant purchased additional
Passover holiday contracts for three other venues. Revenues for the year ended
December 31, 1996 were $3,751,700 or 103% higher than the $1,844,000 recorded in
the comparable period of 1995. The substantial increase in revenue resulted from
the addition of three Passover holiday contracts. Cost of sales increased by
138% from $1,315,500 in 1995 to $3,134,500 in 1996. This increase is due to the
three additional venues. The gross profit percentage decreased to 16% from 28%
at December 31, 1995 mainly because increased costs and required amortization
(as noted below) associated with the new venues. Management currently believes
that it can realize maximum profitability potential from these venues through
the remaining contract lives, although no assurance to that effect can be given.

     Selling, general and administrative expenses increased by 357% from
$139,060 in 1995 to $636,100 in 1996. The increase is due primarily to the costs
related to the purchase of the additional

                                      15
<PAGE>
 
holiday venues. These costs include a charge to amortization expense of
$260,000, as well as other costs associated with the new venues, such as travel
expense associated with new locations. Operating expenses also increased due to
professional fees associated with the Registrant's expansion into the pubic
marketplace. As a result of the above, the net loss for the year ended December
31, 1996, was $18,800 as compared to net income of $292,300 for the
corresponding period of 1995.

Restaurant and Catering Segment.
--------------------------------

     The Registrant's operations at The Club at Emerald Hills in Hollywood,
Florida are derived from its wholly owned subsidiary, A&E Management Corp.'s
operation of the Reflections Restaurant and catering private functions. During
1996, the golf club where the restaurant and catering facility are located
changed its membership policies resulting in a slightly higher number of golfers
and, thus, people using the Registrant's food and beverage operations there.
This translated into slightly higher revenues in the restaurant of approximately
$909,200 for the year ended December 31, 1996 compared to approximately $856,800
for the year ended December 31, 1995.

     Net loss for the year ended December 31, 1996 was approximately $59,150 as
compared to net loss of approximately $137,886 for the year ended December 31,
1995. This decrease in loss was primarily due to an overall decrease in cost of
sales.

     With respect to the Terrace Oceanside Restaurant, net loss for the year
ended December 31, 1996 was $130,000 as compared to a net loss of $137,738 for
the year ended December 31, 1995. The Registrant currently believes that the
costs it has incurred associated with its initial start up have substantially
ended and that the Registrant should be able to increase its profitability with
each coming season, although no assurance to that effect can be given.

Disposal of Delicatessen Operations.
------------------------------------

     In July, 1996, the Registrant disposed of all of the operating assets of
its subsidiary, Prime Concern Kosher Foods, Inc., operating "The Deli Maven"
delicatessen in Boca Raton, Florida. Management of the Registrant believed that
in order to fully realize both revenue and net income potential, the physical
size of The Deli Maven had to be increased. Management could not increase the
physical size of The Deli Maven and accordingly closed the operation.

New Acquisition -- Frozen Dessert Segment.
------------------------------------------

     As stated above, in February, 1997, the Registrant's new wholly-owned
subsidiary, Deering Ice Cream, Inc., ("Deering") acquired all of the assets and
related liabilities of DownEast Frozen Desserts, LLC, which manufactures and
markets frozen desserts under the name Deering Ice Cream. ("DownEast").

     Due to the lack of comparable audited financial data for the prior year, it
is impossible to compare results of DownEast to the equivalent period of 1995.
Sales for nine month period ended October 26, 1996 totaled $5,008,049. Gross
profit for that period was $431,821, or 8.6% of sales,

                                      16
<PAGE>
 
yielding a loss of $796,872, which was substantially greater than had been
anticipated. Management believes that this was due to several reasons.

     First, cream prices increased from $0.65 to $1.55 per gallon of finished
product during the first nine months of 1996 before starting to recede in
October. The net impact of this additional cost was $202,000 on Deering branded
product and an additional $23,000 on co-packed product, resulting in an
aggregate increase of $225,000 over planned expense.

     Second, DownEast's plant sustained excessive down time due to
malfunctioning equipment during the first five months of 1996. Management of
DownEast believes that this accounted for an estimated $100,000 in excess labor
and material costs. The high level of maintenance of $268,000, charged to cost
of sales, can be attributed to equipment problems sustained during the period
February to June, 1996. Management of DownEast believes that the $327,000
expended for capital equipment during the period, plus the high level of
maintenance experienced, will result in future operations of DownEast being less
prone to lost production and more efficient machinery operation.

     Sales and marketing expenses of $512,000 for branded product during the
nine month period ended September 30, 1996, although high, were necessary to
complete the DownEast's objective of expanding the Deering brand into the six
state New England area while maintaining market share in the base markets of
Maine and New Hampshire. These expenditures included $156,850 of promotional
discounts and allowances intended to compete with the reduced prices and
aggressive promotion of a large national manufacturer and a leading regional
brand. The effectiveness of these expenditures was partially diminished due to
the later than planned introduction of Deering products by some chains, as well
as "start-up" distributional inefficiencies. Management of DownEast believes
that these problems should not be present in 1997, although no assurances can be
given.

     Current market prices for ingredients used in Deering's products have
fallen to their levels of February, 1996. Management believes that if these
prices remain relatively stable in the near future, recent sales price increases
instituted should contribute to improved future performance. Additionally,
DownEast has retained a consulting firm which suggested certain operating
improvements which include reduction of overhead expense, more efficient use of
labor, better production planning techniques and methods to reduce material
shrinkage. These suggestions are currently being implemented.

     Management of Deering anticipates that the addition of the Howard Johnson
line will increase branded sales by at least 50% and total sales by 24% from
1996, although these can be no assurance that either or both will occur.
DownEast is in the process of formulating an aggressive marketing plan, which
includes repackaging and representing the line, establishing a larger and
stronger sales representation force and creating broader distribution.

                                       17
<PAGE>
 
Liquidity and Capital Resources
-------------------------------

     At December 31, 1996, the Registrant had cash of approximately $1,571,000
and working capital of approximately $1,410,000 substantially all of which was a
result of the proceeds received from the Registrant's public offering of its
securities. Prior to its public offering, the Registrant, and its subsidiaries,
relied principally on certain bridge and related party loans and internally
generated funds to fund its working capital expenditures.

Seasonality
-----------

     The Registrant's sales in its restaurant operations in South Florida are
highly seasonal, with the third quarter being substantially lower than the other
quarters of the year, due to weather and the dining habits of the Registrant's
guests. Additionally, the extremely seasonal nature of Passover holiday will
also continue to affect that aspect of the Registrant's business.

Item 7 - Financial Statements
-----------------------------

     The financial statements to this Form 10-KSB are attached commencing on
Page F-1.

Item 8 - Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

     The Registrant did not have any changes in, or any material disagreements
on accounting and financial disclosure with, its accountants in fiscal 1996 or
1995.

                                      18
<PAGE>
 
                                    PART III
                                    --------
                                        
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
---------------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act
-------------------------------------------------

     As of December 31, 1996, and April 14,1997, the Registrant's directors and
executive officers were:

<TABLE>
<CAPTION>

Name                  Age    Position Held
<S>                   <C>     <C>

Milton Namiot          56     Chief Executive Officer /(1)(6)/

Dr. Samuel H. Lasko    52     Chairman of the Board of Directors, Treasurer and
                              Chief Executive Officer, President and Director
                              /(2)(6)/

Jonathan S. Lasko      26     Executive Vice-President,/(3) / Secretary, Chief
                              Operating Officer and Director /(6)/

Bruce S. Phillips      54     Director

Howard Zimmerman       54     Director /(4)/

Bernard Rubin, M.D.    49     Director /(5)/

Steven Shulman         58     Chairman of the Board of Directors /(6)/

Richard Power          48     Director /(6)/
</TABLE>


/(1)/ In connection with, and as of the consummation of the DownEast
      transaction, effective February 17, 1997, Mr. Namiot was appointed as
      Chief Executive Officer.

/(2)/ Dr. Lasko served Chairman of the Board, Treasurer, Chief Executive Officer
      and President from inception.  Effective February 17, 1997, he served only
      as President, Treasurer and as a Director.

/(3)/ Effective February 17, 1997, the Registrant discontinued the position of
      Executive Vice President.

/(4)/ As described below, Mr. Zimmerman voluntarily resigned as of November 4,
      1996.

/(5)/ As described below, Dr. Rubin voluntarily resigned as of February 17,
      1997.

/(6)/ In connection with the DownEast transaction described above, effective
      February 17, 1997, Messrs. Shulman and Power were appointed directors of
      the Registrant. Subsequent thereto, the Board of Directors elected Mr.
      Shulman as Chairman of the Board, Milton Namiot as Chief Executive
      Officer, Samuel Lasko as President and Jonathan Lasko as Chief Operating
      Officer. In addition, Milton Namiot was elected the President and Chief
      Executive Officer of Deering, the Registrant's wholly owned

                                      19
<PAGE>
 
     subsidiary, and  Samuel and Jonathan Lasko were elected as the President
     and Chief Executive Officer, and the Executive Vice President and Chief
     Operating Officer, respectively, of each of the Registrant's other wholly
     owned subsidiaries  The Lasko Companies, Inc., A&E Management, Inc. and The
     Lasko Family Kosher Tours, Inc.

     MILTON NAMIOT, age 56, is currently the President of Deering as well as the
Manager of DownEast. In addition, since consummation of the DownEast
transaction, Mr. Namiot has served as Chief Executive Officer of the Registrant.
From 1989 through 1995, he was president and chief executive officer of
Brigham's, Inc., Arlington, Mass, a manufacturer and marketer of "upscale" ice
cream and yogurt in the Northeast United States and operator of approximately 50
family style restaurants. From 1986 to 1989, he was an independent consultant to
a number of food companies. From 1983 to 1986, Mr. Namiot was a senior vice
president, consumer products and business development at Gulf & Western
Industries, Inc. Prior thereto, he held a number of executive positions in food
and related products companies. Mr. Namiot holds an A. B. in chemistry from
Brandeis University, an M.S. in chemistry from Boston University and an M.S. in
Management from the Massachusetts Institute of Technology.

     DR. SAMUEL H. LASKO, age 52, has been President, Treasurer and a director
of the Registrant since its inception in October, 1988, and was Chairman of the
Board of Directors and Chief Executive Officer from August, 1995 until February
17, 1997, immediately following the DownEast transaction. Dr. Lasko has also
been president of A&E Management Corp. since October 27, 1993, The Lasko
Companies, Inc. since May 11, 1995, and Prime Concern Kosher Foods, Inc. since
December, 1995. From 1990 to 1994, Dr. Lasko was also the owner and director of
Just for Kids Academy in Fort Lauderdale, Florida, a private child care and
school facility. From 1983-1985, Dr. Lasko owned and operated Abbott School of
Miami Beach, an educational institution specializing in the care and education
of Jewish children. From 1985-1989, Dr. Lasko served as the Headmaster of the
Beth Shalom Academy in Hollywood, Florida, a Jewish elementary day school
comprised of two campuses. Dr. Lasko holds a B.A. from Yeshiva University in New
York City and received his Ed.D. in 1984 from the University of Maryland. Dr.
Lasko is the father of Jonathan S. Lasko, currently the Secretary and the Chief
Operating Officer of the Registrant and one of its Directors, and the
brother-in-law of Bruce S. Phillips, a director of the Registrant.

     JONATHAN S. LASKO, age 26, has been a Director of the Registrant since
September, 1994, and its Chief Operating Officer and Secretary since August,
1995. He was also the Registrant's Executive Vice-President from May, 1993 until
February 17, 1997, immediately following the DownEast transaction, when the
Registrant discontinued that position. Mr. Lasko has also been vice-president of
A&E Management Corp. since October 27, 1993, The Lasko Companies, Inc. since May
11, 1995 and Prime Concern Kosher Foods, Inc. since December, 1995. Mr. Lasko
began in the food service industry in 1985, working for a corporate event
planning firm, Parties by Neil, in Miami, Florida. Mr. Lasko attended Yeshiva
University, New York, New York, in 1988 and 1989, and Bernard Baruch College of
City University of New York, New York in 1990 and 1991. From November, 1989
until October, 1991, Mr. Lasko worked part-time for Ram Caterers, a kosher
caterer in the New York City metropolitan area, as a manager and salesman. In
addition, from January, 1990 until October, 1993, when he became a full-time
employee of the Registrant, Mr. Lasko was a part-time employee of the Registrant
and managed its food and beverage operations for its Passover holiday vacation.
Mr. Lasko is the son of Dr. Samuel H. Lasko, currently the President

                                       20
<PAGE>
 
and Treasurer of the Registrant and one of its directors, and the nephew of
Bruce S. Phillips, a director of the Registrant.

     BRUCE S. PHILLIPS, age 54, has been a director of the Registrant since
August, 1995. He is a graduate of City College of New York. From April, 1988
until August, 1994, Mr. Phillips was president and director of Frem Corp., a
plasticware manufacturer. Since August, 1994, Mr. Phillips has owned PFS Venture
Group, a business management and financial consulting firm. Mr. Phillips is the
brother-in-law of Dr. Samuel H. Lasko, a director of the Registrant and its
President and Treasurer, and the uncle of Jonathan S. Lasko, a director of the
Registrant and its Secretary and Chief Operating Officer.

     HOWARD ZIMMERMAN, age 54, was a director of the Registrant from August,
1995 until he voluntarily resigned from that position on November 4, 1996.

     BERNARD RUBIN, M.D., age 49, was a director of the Registrant from August,
1995 until he voluntarily resigned from that position on February 17, 1997.

     STEVEN SHULMAN, age 58, has been an active independent investment banker
since 1984. He has served as a director of number of public and private
companies and is currently a director of Beacon Properties Corporation, a New
York Stock Exchange listed corporation. Mr. Shulman holds an M.S. in Industrial
Management from the Stevens Institute of Technology, where he currently serves
as Vice Chairman of its Board. In connection with the DownEast transaction
described above, Mr. Shulman was appointed a director of the Registrant and
elected the Chairman of the Board of Directors.

     RICHARD POWER, age 48, has been the President of Carlisle Plastics, Inc., a
division of Tyco International Ltd., a New York Stock Exchange listed
corporation, since January, 1997. He served as a consultant to Tyco from 1995
through 1996, Vice President and Chief Financial officer of Abex Inc. a New York
Stock Exchange listed corporation between 1994 and 1995, and was the Managing
Director of a private investment company from 1992 through 1994. Mr. Power holds
a B.S. and an M.B.A. from Boston College. In connection with the DownEast
transaction described above, Mr. Power was appointed a director of the
Registrant.

     Directors are elected on an annual basis. All directors of the Registrant
hold office until the next annual meeting of the shareholders or until their
successors are elected and qualified. At present, the Registrant's by-laws
provide for not less than one director nor more than seven. Until the DownEast
transaction there were five directors, and as of February 17, 1997, there are
seven directors. The Registrant's by-laws permit the Board of Directors to fill
any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers are
elected to serve, subject to the discretion of the Board of Directors, until
their successors are appointed.

Director Compensation

     Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors and commencing in fiscal 1996, non-
employee directors were paid $750

                                      21
<PAGE>
 
for each directors' meeting attended.  The Registrant anticipates that the Board
of Directors will meet at least four times a year.

Item 10 - Executive Compensation
--------------------------------

     The following table sets forth all compensation paid or distributions made
during the fiscal years ended December 31, 1996, 1995 and 1994, by the
Registrant or any of its subsidiaries to the Chief Executive Officer of the
Registrant and to each of its most highly compensated executive officers, other
than the Chief Executive Officer, whose compensation exceeded $100,000.

<TABLE>
<CAPTION>


                           SUMMARY COMPENSATION TABLE
                                                                                 Long-Term
                                                                                 Compensation
                                          Annual Compensation                    Awards
                                          --------------------                   ------
Name and Principal Position       Year Ended      Salary        Other Annual     Options
                                  December 31                   Compensation
---------------------------       -----------     ------        ------------     -------
<S>                               <C>             <C>            <C>             <C>  
Samuel H. Lasko                   1994            $13,600/(1)/   $274,365/(2)/       ---
Chief Executive Officer and       1995            $31,403        $169,081/(3)/     750,000/(7)/
President                         1996            $95,000        $  9,517/(4)(5)/

Jonathan S. Lasko                 1994            $21,600        $ 40,409/(6)/       ---
Executive Vice President and      1995            $24,592        $169,081/(3)/     750,000/(7)/
Secretary                         1996            $70,000        $  7,255/(4)/
</TABLE>


/(1)/   Paid by A&E Management Corp. ("A&E").

/(2)/   Represents "S" corporation distributions in the nature of dividends of
        $233,957 and $40,409.

/(3)/   Represents combined "S" corporation distributions in the nature of
        dividends through December 5, 1995, when the Registrant first offered
        and sold its securities to the public.

/(4)/   Represents amounts paid for lease of automobile and automobile
        insurance.

/(5)/   Does not include repayments of loans from A&E, the Lasko Companies, Inc.
        and the Registrant.

/(6)/   Represents "S" corporation distributions in the nature of dividends.

/(7)/   In connection with the DownEast acquisition, each of Samuel Lasko and
        Jonathan Lasko surrendered their respective right to performance
        options, contained in their respective Employment Agreements and, in
        lieu thereof, the Registrant issued to each of Samuel H. Lasko and
        Jonathan D. Lasko warrants to purchase 375,000 shares of the
        Registrant's common stock at $1.1875 per share exercisable immediately
        and expiring August 31, 2000.

                                       22
<PAGE>
 
              Aggregated Option/SAR Exercises in Last Fiscal Year
                          and FY-End Option/SAR Values

     The following table sets forth options exercised by the Registrant's chief
executive officer and the Registrant's two other most highly compensated
executive officers during fiscal 1996, and the number and value of all
unexercised options at year end. The value of "in-the-money" options refers to
options having an exercise price which is less than the market price of the
Registrant's stock at fiscal year-end. On that date, none of the Registrant's
executive officers held exercisable options which were "in-the-money".


<TABLE>
<CAPTION>

                                                                          Number of
                                                                          Securities             Value of
                                                                          Underlying           Unexercised
                                                                         Unexercised           In-The-Money
                                                                         Options/SARs          Options/SARs
                                                                        at FY-End (#)         at FY-End ($)

                          Shares Acquired         Value                  Exercisable/          Exercisable/
Name                      on Exercise (#)         Realized ($)          Unexercisable         Unexercisable
----                      ---------------         ------------          -------------         -------------
<S>                       <C>                     <C>                   <C>                   <C>  
Milton Namiot /(1)/            ---                       ---                 ---                   ---

Samuel H. Lasko                ---                       ---           0/750,000 /(2)/             $0/0

Jonathan S. Lasko              ---                       ---           0/750,000 /(2)/             $0/0
</TABLE>

---------------------------------------
/(1)/   Mr. Namiot was not an officer of the Registrant in 1996. He was elected
        an officer on February 17, 1997, following the DownEast transaction.

/(2)/   Represents options(based on performance by the Registrant) contained in
        the Laskos employment agreements. In connection with the DownEast
        acquisition, effective February 17, 1997, each of Messrs. Samuel and
        Jonathan Lasko voluntarily surrendered their respective right to these
        options and, in lieu thereof, the Registrant issued to each of Samuel H.
        Lasko and Jonathan D. Lasko warrants to purchase 375,000 shares of the
        Registrant's common stock at $1.1875 per share exercisable immediately
        and expiring August 31, 2000.

Employment Agreements and Aggregate Options Holdings

        The Registrant has entered into 5-year employment agreements, ending
August 31, 2000, with each of Dr. Samuel H. Lasko and Jonathan S. Lasko.

        Under his employment agreement, Dr. Samuel H. Lasko receives an annual
base salary of $95,000 for the first two years, $125,000 for the third year,
$150,000 for the fourth year and $175,000 for the fifth year of his employment.
Under his employment agreement, Jonathan S. Lasko receives an annual base salary
of $70,000 for the first two years, $95,000 for the third year, $115,000 for the
fourth year and $125,000 for the fifth year of his employment. In connection
with the DownEast transaction, by amendments dated

                                      23
<PAGE>
 
February 17, 1997, to their respective employment agreements, Dr. Lasko and
Jonathan Lasko volutarily surrendered their one-time performance based options
under their respective employment agreements to purchase up to an aggregate of
750,000 shares of common stock, and in lieu thereof, the Registrant issued to
each of Samuel Lasko and Jonathan Lasko, warrants to purchase 375,000 shares of
its common stock at an exercise price of $1.1875 per share.  The employment
agreements also entitle the individuals to the use of an automobile and to
employee benefit plans, such as group life, health , hospitalization and life
insurance.  Under each of these employment agreements, employment terminates
upon death or total disability of the employee and may be terminated by the
Registrant for "cause," which is defined, among other things, as the willful
failure to perform duties, embezzlement, conviction of a felony, or breach of
the employee's covenant not to compete or maintain confidential certain
information.  The Registrant maintains a $1 million life insurance policy on the
life of Jonathan Lasko.

     In connection with the DownEast transaction, the Registrant entered into a
3-year employment agreement, effective February 17, 1997, and ending August 31,
2000, with Milton Namiot, whereby Mr. Namiot will serve as the President and
Chief Executive Officer of Deering and Chief Executive Officer of the
Registrant. Under his employment agreement, Mr. Namiot receives an annual base
salary of $175,000.

Item 11 - Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

     The following table provides information concerning the beneficial
ownership of common stock of the Registrant by each director, certain executive
officers, and by all directors and officers of the Registrant as a group as of
December 30, 1996. In addition, the table provides information concerning the
beneficial owners known to the Registrant to hold more than 5 percent of the
outstanding common stock of the Registrant as of December 30, 1996.

<TABLE>
<CAPTION>
 
                                               Amount and Nature of
Name of Beneficial Owner                     Beneficial Ownership/(1)/  Percent of Class/(1)(2)/ 
------------------------                     -------------------------  ------------------------
<S>                                          <C>                        <C>
Dr. Samuel H. Lasko/(3)/                         383,750/(4)/                   11.58%
Jonathan S. Lasko/(3)/                           380,000                        11.47%
Bruce S. Phillips                                    ---                          ---
Bernard Rubin                                        ---                          ---
                                                                               
All Directors and Executive Officers as a                                      
Group  (4 persons)/(5)/                          763,750                        23.05%
</TABLE>

--------------------
/(1)/   In each case the beneficial owner has sole voting and investment power
        except that shares held by Dr. Samuel H. Lasko are held in joint tenancy
        with his wife Arlene Lasko and the shares held by Jonathan S. Lasko are
        held in joint tenancy with his wife Ellen J. Lasko.

/(2)/   The calculation of percent of class is based upon the number of shares
        of common stock outstanding as of December 30, 1996.

/(3)/   c/o Terrace Holdings, Inc. 2699 Stirling Road, Suite C-405, Fort
        Lauderdale, Florida 33312.

/(4)/   Includes 3,750 shares held for the benefit of Dr. Lasko's minor child.

/(5)/   Howard Zimmerman resigned as director of the Registrant effective
        November 4, 1996.

                                       24
<PAGE>
 
Item 12 - Certain Relationships and Related Transactions
--------------------------------------------------------

  In September, 1995, in a tax-free reorganization under federal income tax laws
and rules, Bon Adventure Kosher Tours, Inc. ("BAKT") was merged into the
Registrant.  In connection with such merger, Samuel H. Lasko received 672,500
shares of the Registrant in exchange for his shares of common stock of BAKT, and
Jonathan S. Lasko received 632,500 shares of the Registrant in exchange for his
shares of common stock of BAKT.

  In December, 1995, in separate tax-free reorganizations, the Registrant
acquired from Samuel Lasko and Jonathan Lasko all of the outstanding stock of
A&E Management Corp. and The Lasko Companies, Inc.  In connection with such
reorganizations, Samuel H. Lasko and Jonathan S. Lasko each received 30,000
shares of the Registrant in exchange for his respective shares of A&E Management
Corp. and 25,000 shares of the Registrant in exchange for his respective shares
of The Lasko Companies, Inc.

  In December, 1995, the Registrant acquired from Irving Kraut, an unaffiliated
party, all of the issued and outstanding shares of common stock of Prime Concern
Kosher Foods, Inc. in exchange for 250,000 shares of Common Stock of the
Registrant.

  Effective July 1, 1995, A&E Management Corp. ("A&E") and Prime Concern Kosher
Foods, Inc. ("Prime Concern") entered into an agreement whereby A&E provided
certain management services to Prime Concern and acted as the primary operator
of the Deli Maven, Prime Concern's retail kosher delicatessen in Boca Raton,
Florida, for a period of six months for a non-refundable fee of $50,000 payable
on the earlier of the closing of the Registrant's public offering or March 31,
1996.  As noted, the Registrant's public offering was closed on December 11,
1995.

  Samuel Lasko has lent Terrace Holdings, Inc., the Lasko Companies, Inc. and
A&E Management Corp. the sums of $7,276, $42,715 and $235,558, respectively, for
an aggregate of $285,549.  Each loan provides that interest is payable at the
prime rate of interest and principal and interest is due on demand. $100,000 of
principal of these loans was repaid from the proceeds of the Registrant's
offering.  Pursuant to agreements, the remaining principal of $185,549, together
with all accrued interest, was payable out of the Registrant's working capital
in twelve equal monthly installments commencing in December, 1995.  At December
31, 1996, the principal balance of these loans was paid in full.

Item 13 - Exhibits and Reports on Form 8-K
------------------------------------------

(a) Exhibits

      (3)(i) Articles of Incorporation *
      ----------------------------------
  
      (3)(ii) By-laws *
      -----------------
  
      (3)(iii) Instruments defining the rights of holders *
      -----------------------------------------------------  

                                      25
<PAGE>
<TABLE>
<CAPTION>

  (10) Material Contracts **
  -----------------------

  The following Material Contracts are filed herewith:
<S>                   <C>
         10.1              Assignment of Passover Contract from Registrant to The Lasko Family
                           Kosher Tours, Inc. for the Registry Resort & Spa f/k/a the Bonaventure Resort &
                           Spa

         10.2              Assignment of Passover Contract from Registrant to The Lasko Family
                           Kosher Tours, Inc. for The Fontainebleau Hilton Resort & Spa

         10.3              Assignment of Passover Contract from Registrant to The Lasko Family
                           Kosher Tours, Inc. for the Rye Town Hilton

         10.4              Asset Acquisition Agreement and Amendment thereto between Terrace
                           Holdings, Inc. and DownEast Frozen Desserts, LLC.

         10.5              Sublicense Agreement between DownEast Frozen Desserts, LLC and
                           Franchise Associates, Inc.

         10.6              Consent to Assignment of Sublicense Agreement from Franchise
                           Associates, Inc. and HFS Incorporated to DownEast Frozen Desserts,
                           LLC.

  (21) Subsidiaries of the Registrant
  -----------------------------------

  The Registrant's four operating wholly owned subsidiaries are:

     1. The Lasko Companies, Inc.
        2699 Stirling Road
        Suite C - 405
        Ft. Lauderdale, Florida 33312

     2. The Lasko Family Kosher Tours, Inc.
        2699 Stirling Road
        Suite C - 405
        Ft. Lauderdale, Florida 33312

     3. A&E Management Corp.
        699 Stirling Road
        Suite C - 405
        Ft. Lauderdale, Florida 33312

     4. Deering Ice Cream, Inc.
        135 Walton Street
        Portland, Maine 04103
______________________________________
 *   Incorporated by this reference to the Registrant's registration statement #
     33-96892-A.

**   All material contracts presently in full force and effect and heretofore filed
     with the Commission are hereby incorporated by this reference to Registrant's
     registration statement #33-96892-A, and to Registrant's Form 10-KSB for the year
     ended December 31, 1995, Commission file number 0-27132.

                                       26
</TABLE> 
<PAGE>
 
b)  Reports on Form 8-K

             The Registrant did not file any Current Reports on Form 8-K for the
last quarter of the period covered by this report.

                                       27
<PAGE>

TERRACE HOLDINGS, INC. AND SUBSIDIARIES
================================================================================
 
INDEX TO FINANCIAL STATEMENTS
================================================================================

<TABLE>
<CAPTION>
 
<S>                                                   <C>     <C>
Report of Independent Auditors......................  F-2 ...
 
Consolidated Balance Sheet as of December 31, 1996..  F-3 ...
 
Consolidated Statements of Operations...............  F-4 ...
 
Consolidated Statements of Stockholders' Equity.....  F-5 ...
 
Consolidated Statements of Cash Flows...............  F-6 ...
 
Notes to Consolidated Financial Statements..........  F-7 ... F-15
 
</TABLE>
                       .   .   .   .   .   .   .   .   

                                      F-1
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS


To the Stockholders and Board of Directors of
 Terrace Holdings, Inc.



          We have audited the accompanying consolidated balance sheet of Terrace
Holdings, Inc. and its subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

          We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Terrace Holdings, Inc. and its subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.



                                    MOORE STEPHENS, P. C.
                                    Certified Public Accountants.

Cranford, New Jersey
February 17, 1997

                                      F-2
<PAGE>
 
TERRACE HOLDINGS, INC.
================================================================================

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
================================================================================

<TABLE>
<CAPTION>
 
 
Assets:
<S>                                                                  <C>
Current Assets:
 Cash and Cash Equivalents                                           $ 1,570,907
 Accounts Receivable                                                     123,243
 Inventory                                                                27,239
 Other Current Assets                                                     70,779
                                                                     -----------
 
 Total Current Assets                                                  1,792,168
 
Property and Equipment - Net                                             392,741
 
Intangible Assets - [Net of Accumulated Amortization of $259,875]        415,125
 
Other Assets                                                             190,432
                                                                     -----------
 
 Total Assets                                                        $ 2,790,466
                                                                     ===========
 
Liabilities and Stockholders' Equity:
Current Liabilities:
 Accounts Payable and Accrued Expenses                               $   168,164
 Accrued Payroll and Payroll Taxes                                        28,024
 Deferred Revenue                                                        186,412
                                                                     -----------
 
 Total Current Liabilities                                               382,600
                                                                     -----------
 
Commitments and Contingencies                                                 --
                                                                     -----------
 
Stockholders' Equity:
 Common Stock - $.001 Par Value, 10,000,000 Shares
  Authorized, 3,312,500 Issued and Outstanding                             3,313
 
 Additional Paid-in Capital                                            3,945,948
 
 Retained Earnings [Deficit]                                          (1,541,395)
                                                                     -----------
 
 Total Stockholders' Equity                                            2,407,866
                                                                     -----------
 
 Total Liabilities and Stockholders' Equity                          $ 2,790,466
                                                                     ===========
 
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>
 
TERRACE HOLDINGS, INC.
================================================================================

CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>
 
 
                                                        Years ended
                                                 -------------------------
                                                       December 31,
                                                 -------------------------
                                                     1 9 9 6      1 9 9 5
                                                 -----------   ----------
<S>                                              <C>           <C> 
Revenue                                          $ 5,497,130   $3,043,056
 
Cost of Sales                                      3,965,512    1,959,863
                                                 -----------   ----------
 
 Gross Profit                                      1,531,618    1,083,193
                                                 -----------   ----------
 
Operating Expenses:
 Selling, General and Administrative Expenses      1,612,792      581,216
 Payroll and Related Expenses                      1,041,285      686,905
 Loss on Disposal                                    129,826           --
                                                 -----------   ----------
 
 Total Operating Expenses                          2,783,903    1,268,121
                                                 -----------   ----------
 
 [Loss] from Operations                           (1,252,285)    (184,928)
                                                 -----------   ----------
 
Other Income [Expense]:
 Interest Income                                     103,925       10,584
 Interest Expense                                     (7,667)     (41,810)
 Non-Cash Finance Charge                                  --     (375,000)
                                                 -----------   ----------
 
 Other [Expense] - Net                                96,258     (406,226)
                                                 -----------   ----------
 
 Net [Loss]                                      $(1,156,027)  $ (591,154)
                                                 ===========   ==========
 
 [Loss] Per Share                                      $(.35)       $(.33)
                                                 ===========   ==========
 
 Weighted Average Shares Outstanding               3,312,500    1,791,643
                                                 ===========   ==========
 
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>
 
TERRACE HOLDINGS, INC.
================================================================================

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================

<TABLE>
<CAPTION>
 
 
                                                              Additional      Retained        Total
                                                             -----------  --------------  ------------
                                           Common Stock        Paid-in       Earnings     Stockholders'
                                      ---------------------  -----------  --------------  ------------
                                         Shares     Amount     Capital      [Deficit]        Equity
                                      ------------  -------  -----------  --------------  ------------
<S>                                   <C>           <C>      <C>          <C>             <C>
 
Balance - January 1, 1994                1,675,000   $1,675  $      (75)    $  (230,557)  $  (228,957)
 
 S Corp. Distributions                          --       --          --        (338,162)     (338,162)
 
 Initial Public Offering [Net of
  Offering Costs of $1,043,459]          1,437,500    1,438   4,345,728              --     4,347,166
 
 Issuance of Bridge Units                  200,000      200     374,800              --       375,000
 
 Reclassification upon Termination
  of Subchapter S Election                      --       --    (774,505)        774,505            --
 
 Net [Loss]                                     --       --          --        (591,154)     (591,154)
                                      ------------  -------  ----------     -----------   -----------
 
Balance - December 31, 1995              3,312,500    3,313   3,945,948        (385,368)    3,563,893
 
 Net [Loss]                                     --       --          --      (1,156,027)   (1,156,027)
                                      ------------  -------  ----------     -----------   -----------
 
 Balance - December 31, 1996             3,312,500   $3,313  $3,945,948     $(1,541,395)  $ 2,407,866
                                      ============  =======  ==========     ===========   ===========
 
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>
 
TERRACE HOLDINGS, INC.
================================================================================

CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

<TABLE>
<CAPTION>
 
    
                                                                                Years ended
                                                                                -----------
                                                                                December 31,
                                                                          ------------------------
                                                                              1 9 9 6      1 9 9 5
                                                                          -----------   ----------
<S>                                                                       <C>           <C>
Operating Activities:
 Net [Loss]                                                               $(1,156,027)  $ (591,154)
                                                                          -----------   ----------
 Adjustments to Reconcile Net [Loss] to
  Net Cash Provided by Operating Activities:
  Depreciation and Amortization                                               340,086       35,635
  Non-Cash Finance Charge                                                          --      375,000
  Loss on Disposal of Assets                                                  100,326           --
 
 Changes in Assets and Liabilities:
  [Increase] Decrease in:
   Accounts Receivable                                                        (18,503)     (45,241)
   Inventory                                                                    4,326      (11,510)
   Other Current Assets                                                       (38,370)      (3,117)
   Other Assets                                                               (89,726)       4,978
 
  Increase [Decrease] in:
   Accounts Payable and Accrued Expenses                                     (135,347)     257,763
   Payroll Taxes Payable                                                      (10,362)      13,390
   Deferred Revenue                                                            22,352       15,749
                                                                          -----------   ----------
 
  Total Adjustments                                                           174,782      642,647
                                                                          -----------   ----------
 
 Net Cash - Operating Activities                                             (981,245)      51,493
                                                                          -----------   ----------
 
Investing Activities:
 Acquisition of Assets                                                       (179,308)    (381,525)
 Acquisition of Intangible Asset                                             (675,000)          --
                                                                          -----------   ----------
 
 Net Cash - Investing Activities                                             (854,308)    (381,525)
                                                                          -----------   ----------
 
Financing Activities:
 Cash Proceeds from Initial Public Offering                                        --    4,642,769
 Offering Costs                                                                    --     (295,603)
 Proceeds from Demand Notes Payable                                                --      410,000
 Payment of Demand Notes Payable                                              (10,000)    (530,000)
 Payments of Demand Notes Payable - Stockholders and Related Parties         (185,549)          --
 Proceeds from Demand Notes Payable - Stockholders and Related Parties             --       12,630
 S Corp. Distributions                                                             --     (338,162)
 Bank Overdrafts                                                                   --      (39,373)
                                                                          -----------   ----------
 
 Net Cash - Financing Activities                                             (195,549)   3,862,261
                                                                          -----------   ----------
 
 Net [Decrease] Increase in Cash and Cash Equivalents                      (2,031,102)   3,532,229
 
Cash and Cash Equivalents - Beginning of Years                              3,602,009       69,780
                                                                          -----------   ----------
 
 Cash and Cash Equivalents - End of Years                                 $ 1,570,907   $3,602,009
                                                                          ===========   ==========
 
Supplemental Disclosures of Cash Flow Information:
 Cash paid during the years for:
  Interest                                                                $     9,020   $   40,837
  Income Taxes                                                            $        --   $       --
</TABLE>
See Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


[1] Financial Statement Presentation, Organization and Nature of Operations

The financial statements as of and for the year ended December 31, 1996 are
presented on a consolidated basis and include Terrace Holdings, Inc. [formerly
known as Bon Adventure Kosher Tours, Inc.] ["Terrace"] and its wholly-owned
subsidiaries, A&E Management Corp. ["A&E"], Prime Concern Kosher Foods, Inc.
["Prime"] and The Lasko Companies ["Lasko"] [collectively, the "Company"]. The
consolidated financial statements for the period ended December 31, 1995,
include the results of operations, cash flows and changes in stockholders'
equity for the twelve months then ended with respect to Terrace, A&E and Prime;
and the results of operations, cash flows and changes in stockholders' equity
from May 11, 1995 [date of inception] to December 31, 1995, with respect to
Lasko. In July 1996, the Company disposed of all of the operating assets of
Prime [See Note 14].

As of December 31, 1996, the Company operates kosher Passover holiday vacation
venues, kosher and non-kosher restaurants and a catering operation in southern
Florida and New York.

For the year ended December 31, 1995, the Company operated one Passover holiday
vacation venue. In January 1996, the Company consummated an agreement to assume
operation of the Passover vacation venues at the Fontainbleau ["Fontainbleau"]
Hilton Hotel, Miami Beach, the Rye Town ["Rye Town"] Hilton Hotel, Rye, New
York, and the Tamiment Resort & Conference Center ["Tamiment"], Tamiment,
Pennsylvania. As a result, for the 1996 Passover holiday, the Company operated
holiday vacations at four different locations. The contract at the Fontainbleau
and Rye Town expire after Passover 1999. The contract to operate a Passover
vacation at the Tamiment Hotel expired after the 1996 Passover holiday and has
not been renewed for the 1997 Passover holiday.

The designation of the Company's restaurants and Passover holiday vacation as
"Kosher" means that all the foods are prepared in accordance with Jewish dietary
laws. The ability of the Company to continue successfully to maintain Kosher
status for its restaurants and holiday vacation venue is dependent upon its
continued compliance with the requirements of Rabbinic certification. Loss of
Kosher certification would have a materially adverse effect upon the Company.

[2] Summary of Significant Accounting Policies

Consolidation Policy - The accompanying consolidated financial statements as of
December 31, 1996 and for the two years then ended, include the accounts of
Terrace and its subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.

Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
carrying amount of cash and cash equivalents approximates their fair value.

Furniture, Fixtures and Equipment and Depreciation - Furniture, fixtures and
equipment are stated at cost. Depreciation and amortization is provided using
the straight-line method over the estimated useful lives of the related assets
or the remaining lease term. The costs of repairs and maintenance are expensed
as incurred.

Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk include cash and cash equivalents
and accounts receivable arising from its normal business activities. The Company
places its cash and cash equivalents with high credit quality financial
institutions. At December 31, 1996, the Company had approximately $1,375,500 in
a financial institution subject to normal credit risk beyond insured amounts.

                                      F-7
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
================================================================================

[2] Summary of Significant Accounting Policies [Continued]

Concentration of Credit Risk [Continued] - The Company's restaurant and catering
operation in Hollywood, Florida is leased. The landlord acts as a conduit
between the Company and its customers, and collects the Company's accounts
receivable. Amounts collected by the landlord are then disbursed to the Company.
The Company's credit risk is limited by the financial strength of the landlord
and it believes such credit risk to be limited. An allowance for doubtful
accounts is deemed to be unnecessary based upon this assessment.

The accounts receivable for the Company's other operations consist mostly of
amounts due from credit card companies which are deemed financially sound.

The Company purchases food and beverages from distributors which account for
approximately 50% of total purchases.  No formal contracts exist but the Company
believes there is limited business vulnerability regarding this concentration of
purchases as the supply is available from other sources.

The hospitality industry is often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing facilities. In addition,
factors such as inflation, increased food, labor and employee benefit costs and
availability of experienced management and hourly employees may also adversely
affect the hospitality industry in general and the Company's restaurants and
holiday vacation venues in particular.

The Company does not require collateral as a condition of sale.

Advertising - The Company expenses advertising costs as incurred.  Total
advertising costs charged to expense for the periods ended December 31, 1996 and
1995 amounted to $141,839 and $60,780, respectively.

[Loss] Per Share - [Loss] per share of common stock is based on the weighted
average number of common shares outstanding for each period presented.  Such
shares amounted to 3,312,500 and 1,791,643 for the years ended December 31, 1996
and 1995, respectively.  Shares issuable upon the exercise of common stock
purchase warrants are excluded from the computations since the effect on net
loss per common share would be anti-dilutive.

Inventories - Inventories consist of food and beverages for the restaurant and
catering operation and are stated at the lower of cost [determined by the first-
in, first-out method] or market.

Deferred Revenue - Deferred revenue consists of deposits collected for future
vacations at the Kosher holiday vacation venues and deposits on hand for future
catering events.

Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets." Management considers
assets to be impaired if the carrying value exceeds the future projected cash
flows from related operations [undiscounted and without interest charges].  If
impairment is deemed to exist, the assets will be written down to fair value.
Management also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of December 31, 1996, management expects these assets to be fully 
recoverable.

[3] Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.  Accordingly, actual results
could differ from those estimates.

                                      F-8
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
================================================================================


[4] Fair Value of Financial Instruments

Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.

In assessing the fair value of these financial instruments, the Company used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time.  For cash and cash equivalents,
trade receivables and trade payables, it was assumed that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturities.

[5] Property and Equipment

The following is a summary of furniture, fixtures and equipment:
<TABLE>
<CAPTION>
                                                               Estimated
                                                               ---------
                                                              Useful Life
                                                              -----------
<S>                                                 <C>       <C>
 
Furniture, Fixtures and Equipment                   $451,030  5-7 Years
Leasehold Improvements                                27,481  3-5 Years
                                                    --------
 
Total                                                478,511
Less: Accumulated Depreciation and Amortization       85,770
                                                    --------
 
 Net                                                $392,741
 ---                                                ========
</TABLE>
Depreciation and amortization expense related to property and equipment amounted
to $80,211 and $35,635 for the years ended December 31, 1996 and 1995,
respectively.

[6] Intangible Assets

In January 1996, the Company entered into an assignment agreement to operate
Passover vacations at hotels located in Miami, Florida, Rye Town, New York and
Tamiment, Pennsylvania. The Company paid $675,000 for these agreements. This
amount net of accumulated amortization is included in intangible assets. The
intangible assets are amortized over four years, the life of the related
contracts. As stated in Note 11, the contract to operate a Passover vacation at
the Tamiment Hotel expired after the 1996 Passover Holiday; therefore, the asset
has been written off in its entirety. Amortization expense amounted to $259,875
for the year ended December 31, 1996.

[7] Public Offering

In December 1995, the Company completed a public offering [the "Offering"] of
1,437,500 units ["Units"] of its securities at $3.75 per Unit.

                                      F-9
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
================================================================================

[7] Public Offering [Continued]

Each Unit consisted of one share of common stock and one redeemable common stock
purchase warrant exercisable at $4.00 per share during the four year period
commencing one year after the December 5, 1995 effective date of the Offering.
The warrants are redeemable under certain conditions.  The Offering resulted in
net proceeds of approximately $4,347,000 to the Company.  In connection with the
Offering, the underwriter purchased an option from the Company to purchase up to
125,000 Units [each Unit identical to the Units sold in the Offering] and up to
16,500 shares of common stock.  The option is exercisable for a four-year period
commencing one year from the effective date of the Offering and entitles the
underwriter to purchase each unit and each share of common stock at an exercise
price of $4.50, subject to adjustment in certain events.

[8] Income Taxes

Under generally accepted accounting principles, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled.  Temporary differences include different tax and book
bases of property and equipment.  Generally accepted accounting principles
requires the establishment of a deferred tax asset for all deductible temporary
differences and operating loss carryforwards.  The operating loss carryforwards
at December 31, 1996, [assuming all operating loss carryforwards will be
available] amount to approximately $1,550,000.  Such loss carryforwards will
expire at the rate of $350,000 in 2011 and $1,200,000 in 2010.  At December 31,
1996, based on the amount of operating loss carryforwards, the Company would
have a deferred tax asset of approximately $526,000.  Because of the uncertainty
that the Company will generate income in the future sufficient to fully or
partially utilize these carryforwards, a valuation allowance of $526,000 has
been established.  Accordingly, no deferred tax asset is reflected in these
financial statements.

[9] Related Parties Transactions

During 1996, the Company paid off an outstanding loan due to a stockholder,
which was payable on demand plus interest at the prime rate of a bank in
Southern Florida.  The interest rate on the loan was 8.5%.  Interest expense
related to this loan amounted to $7,667 and $15,123 for the periods ended
December 31, 1996 and 1995, respectively.

[10] Bridge Financing - Non Cash Finance Charge

During 1995, prior to the Offering, the Company received an aggregate of
$400,000 in bridge loans.  The loans were repaid from the proceeds of the
Offering.  Interest expense related to the loans amounted to approximately
$16,300 for the year then ended.

As additional consideration, solely for making the loans, the Company granted
the lenders the right to receive an aggregate of 200,000 units ["Bridge Units"]
which were substantially similar to the units sold in the Offering.  The Company
valued these units at $1.87 per unit.  This valuation represented a fifty
percent discount from the $3.75 Offering price.  Such discount was reflected due
to restrictions imposed on the holders of the Bridge Units as to the salability
of the Bridge Units issued.  Accordingly, the statement of operations for the
year ended December 31, 1995, includes a non-cash finance charge of $375,000.

[11] Commitments

[A] Operating Leases - The Company conducts some of its operations using
facilities classified as operating leases.  These facilities are primarily
restaurants and catering premises and office premises and vehicles, which expire
during the next three years.  The leases for the restaurant and office space
contains renewal options set forth in the lease agreements.

                                     F-10
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
================================================================================


[11] Commitments [Continued]

[A] Operating Leases [Continued] - Annual rent for its restaurant and catering
facility located in Hollywood, Florida, includes use of the entire premises, and
is subject to increases for utility charges in excess of a stipulated amount.

Future minimum rentals payments under the agreements are approximately as
follows:

<TABLE>
<CAPTION>
Year ending                             Amount
--------------                         --------
December 31,
--------------
<S>                                    <C>
 1997                                  $101,700
 1998                                    84,700
 1999                                     1,300
                                       --------
 
 Total                                 $187,700
 -----                                 ========
</TABLE>

Rent expense related to the leases for the years ended December 31, 1996 and
1995 was approximately $148,079 and $87,000, respectively.

[B] Vacation Venues - In August 1992, the Company entered into a five-year
contract with an unrelated resort in Southern Florida for exclusive rights to
the entire premises for the Passover holiday seasons for 1993 through 1997.  The
contract includes a five-year renewal option which expired in January 1997. The
guaranteed annual rental for the use of the resort is based on the 1993 holiday
season minimum of $860,000 increased in each subsequent year by increases in the
Consumer Price Index ["CPI"].  The maximum increase in any one year is four
percent.  The estimated minimum payment under the contract, based on an
anticipated annual increase in the CPI of two percent, is $950,000 for the year
ended December 31, 1997.

For the year ended December 31, 1995, the Company operated one Passover holiday
vacation venue. In January 1996, the Company consummated an agreement to assume
operation of the annual Passover vacation venues at the Fontainbleau Hilton
Hotel ["Fontainbleau"], Miami Beach, the Rye Town Hilton Hotel ["Rye Town"],
Rye, New York, and the Tamiment Resort & Conference Center ["Tamiment"],
Tamiment, Pennsylvania.  As a result, for the 1996 Passover holiday, the Company
operated holiday vacations at four different locations.  The contract at the
Fontainbleau and Rye Town expire after Passover 1999.  The agreements include
guest room commitments of 250 and 890 rooms per year for the Fontainbleau and
Rye Town, respectively.  The contract to operate a Passover vacation at the
Tamiment Hotel expired after the 1996 Passover holiday and has not been renewed
for the 1997 Passover holiday.

[C] Employment Agreements - Effective September 1, 1995, the Company entered
into 5-year employment agreements with two executives, through August 31, 2000
for an aggregate base salary of $165,000 for the first two years, $220,000 for
the third year, $265,000 for the fourth year and $300,000 in the fifth year.

The employment agreements were amended on February 14, 1997.  The amendment
eliminates options in such agreements in consideration of the issuance of
warrants to purchase 1,500,000 shares of the Company's common stock in
connection with a business acquisition [See Notes 16 and 17B]. Additionally, the
agreements were amended to provide that certain other benefits are made
available to the executives.

                                     F-11
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
================================================================================


[12] Description of Securities

[A] Common Stock - The Company is authorized to issue 10,000,000 shares of
common stock, par value $.001 per share.

Holders of common stock are entitled to dividends when, as and if declared by
the Board of Directors out of funds available therefrom, subject to any priority
as to dividends for any preferred stock that may be outstanding.  There
currently is no preferred stock authorized or outstanding.  Holders of common
stock are entitled to cast one vote for each share held at all stockholder
meetings for all purposes, including the election of Directors.

[B] Warrants - At December 31, 1996, the Company had outstanding warrants [the
"Public Warrants"] to purchase 1,762,500 shares of the Company's common stock at
four dollars [$4.00] per share issued in conjunction with the public offering.
The Public Warrants became exercisable, for a period of four years on December
5, 1996.  Each Public Warrant is redeemable by the Company for $.05 per warrant,
at any time after that date, upon thirty days' prior written notice under
certain conditions.

Additionally, at December 31, 1996, the Company had outstanding warrants [the
"Bridge Warrants"] to purchase 200,000 shares of its common stock at ten dollars
[$10.00] per share.  The terms and conditions of the Bridge Warrants [other than
the exercise price] are identical to the terms and conditions of the Public
Warrants [See Note 10].

[13] Industry Segments

The Company operates predominantly in the hospitality industry which are
segmented into two categories for reporting purposes.  Kosher holiday vacations
includes the Company's activities related to its Passover vacation venue.
Restaurant and catering represent the Company's restaurant, catering and
delicatessen operations.

The relative contributions to net sales, income from operations and identifiable
assets of the Company's two industry segments for the two-year period ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
 

                                                 1 9 9 6    1 9 9 5
                                               ----------  ----------
<S>                                            <C>         <C> 
Net Sales [1]:
 Kosher Holiday Vacations                      $3,751,651  $1,844,021
 Restaurant and Catering                        1,745,479   1,199,035
                                               ----------  ----------
 
 Consolidated Net Sales                        $5,497,130  $3,043,056
 ----------------------                        ==========  ==========
 
Depreciation and Amortization:
 Kosher Holiday Vacations                      $  284,819  $    3,782
 Restaurant and Catering                           55,267      31,853
                                               ----------  ----------
 
 Consolidated Depreciation and Amortization    $  340,086  $   35,635
 ------------------------------------------    ==========  ==========
 
Capital Expenditures:
 Kosher Holiday Vacations                      $  150,352  $   35,291
 Restaurant and Catering                           28,956     346,234
                                               ----------  ----------
 
 Consolidated Capital Expenditures             $  179,308  $  381,525
 ---------------------------------             ==========  ==========
 
</TABLE>

                                     F-12
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
================================================================================

<TABLE>
<CAPTION>
 
 
[13] Industry Segments [Continued]
                                          1 9 9 6      1 9 9 5
                                      -----------   ----------
<S>                                   <C>           <C>
[Loss] Income From Operations:
 Kosher Holiday Vacations             $   (18,819)  $  292,323
 Restaurant and Catering                 (413,728)    (477,251)
                                      -----------   ----------
 
 Totals                                  (432,547)    (184,928)
 Less: Corporate and Other [2]           (723,480)    (406,226)
                                      -----------   ----------
 
 Consolidated [Loss] Income           $(1,156,027)  $ (591,154)
 --------------------------           ===========   ==========
 
Identifiable Assets [3]:
 Kosher Holiday Vacations             $   875,628   $  141,173
 Restaurant and Catering                  439,312      794,342
                                      -----------   ----------
 
 Totals                                 1,314,940      935,515
 Add: Corporate and Other               1,475,526    3,306,820
                                      -----------   ----------
 
 Consolidated Assets                  $ 2,790,466   $4,242,335
 -------------------                  ===========   ==========
</TABLE>
[1] There were no sales between separate lines of business.

[2] Corporate and other includes corporate general and administrative expenses,
    net interest expense and non-cash finance charge.

[3] Identifiable assets by industry segment exclude intercompany loans. There
    were no intercompany trade receivables between segments. Corporate assets
    consist of cash and cash equivalents.

[14] Loss on Disposal

In July 1996, the Company disposed of all of the operating assets of Prime,
which operated a kosher delicatessen/fast food operation in Boca Raton, Florida
incurring a loss of $129,826.  Other subsidiaries of the Company continue to
service customers in the restaurant and catering business.

[15] New Authoritative Accounting Pronouncements

The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities."  SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996.  The provisions of SFAS No. 125
must be applied prospectively; retroactive application is prohibited, and early
applications is not allowed. SFAS No. 125 is not expected to have a material
impact on the Company.  Some provisions of SFAS No. 125, which are unlikely to
apply to the Company, have been deferred by the FASB.

The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," in February 1997.

                                     F-13
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
================================================================================


[15] New Authoritative Accounting Pronouncements [Continued]

SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period.  Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15.  SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted.  When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.

SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.

[16] Business Acquisition

On December 9, 1996, the Company entered into an asset acquisition agreement
[the "Agreement"] with DownEast Frozen Desserts, LLC ["DownEast"] to acquire all
of DownEast assets and liabilities related to such assets.  The Agreement was
contingent upon a number of significant factors and was substantially amended in
February 1997 [See Note 17B].

[17] Subsequent Events

[A] Incorporation of New Subsidiaries - On February 14, 1997, the Company
incorporated The Lasko Family Kosher Tours, Inc., as a wholly-owned subsidiary
for the purpose of managing and operating its Passover holiday vacations
business.  Accordingly, the Company's contracts related to that business segment
have been assigned to this wholly-owned subsidiary.  Additionally, on February
10, 1997, Deering Ice Cream ["Deering"] [See Note 17B] was incorporated by the
Company as a wholly-owned subsidiary.

[B] Business Acquisition - On February 17, 1997, the Company acquired all of the
assets and related liabilities of DownEast.  DownEast, with principal offices
and plant located in Portland, Maine, manufactures and markets frozen desserts
under the name Deering Ice Cream.  Under the Agreements signed originally on
December 9, 1996, and as substantially amended on February 7, 1997, the Company
acquired such assets and related liabilities to continue the business of
manufacturing and marketing frozen desserts through Deering.

Such assets include all accounts receivable of the business, inventories, and
certain furniture and equipment.  The stated liabilities assumed were
principally trade payables to suppliers of the business and certain long-term
debt.

In consideration for the acquisition, the Company issued to DownEast: (1)
918,900 shares of its common stock; and (2) warrants to purchase 250,000
additional shares of its common stock at an exercise price of $1.1875 per share,
exercisable commencing February 17, 1997, through August 31, 2000.  The
Registrant also paid DownEast approximately $114,000 in cash.

                                     F-14
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
================================================================================


[17] Subsequent Events [Continued]

[B] Business Acquisition [Continued] - The acquisition will be accounted for as
a purchase, effective February 17, 1997.  The operations of Deering will be
included in the Company's results of operations from that date.

In connection with the business acquisition, the Company entered into an
employment agreement with an executive who became the President and CEO of
Deering.  The three year renewable employment agreement provides for an annual
base salary of $175,000 and certain other benefits including severance pay.

In connection with the acquisition, the Company issued to each Samuel H. Lasko
and Jonathan D. Lasko [collectively the "Laskos"] warrants to purchase 375,000
shares of the Company's common stock at $1.1875 per share.  The Laskos
surrendered their respective performance options to purchase up to 750,000
shares of the Company's common stock, contained in their respective employment
agreements. In addition, the Laskos entered an option agreement to purchase the
businesses, assets or capital stock of three of the Registrant's wholly-owned
subsidiaries, The Lasko Family Kosher Tours, Inc., The Lasko Companies, Inc. and
A&E Management, Inc. at the fair market value thereof, to be independently
determined.  The option is exercisable for three years commencing April 1, 1998
until February 17, 2001, or earlier under certain circumstances, and will be
presented to the Company's shareholders for approval at the 1997 annual
shareholders meeting.



                     .   .   .   .   .   .   .   .   .   .

                                     F-15
<PAGE>
 
                                   SIGNATURES

     In accordance with Section 13 of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


 
                                                            
                           TERRACE HOLDINGS, INC.
-------------------------------------------------------------------------------

By:                    /s/ Samuel H. Lasko, President    
   ----------------------------------------------------------------------------
                           Samuel H. Lasko, President

Date:                      April 14, 1997
     -------------------------------------------------------------------------

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE> 
<CAPTION> 

Signature                               Title                                   Date
---------                               -----                                   ----
<S>                                     <C>

/s/ Milton Namiot                        Chief Executive officer                April 14, 1997
-----------------------------
Milton Namiot

/s/ Samuel H. Lasko                      President                              April 14, 1997
-----------------------------
Samuel H. Lasko

/s/ Jonathan S. Lasko                    Vice President and                     April 14, 1997
-----------------------------            Chief Operating Officer 
Jonathan S. Lasko                                                

/s/ Joseph Dane                          Corporate Controller                   April 14, 1997
-----------------------------
Joseph Dane

/s/ Bruce S. Phillips                    Director                               April 14, 1997
-----------------------------
Bruce S. Phillips

/s/ Richard Power                        Director                               April 14, 1997
-----------------------------
Richard Power

/s/ Steven Shulman                       Director                               April 14, 1997
-----------------------------
Steven Shulman

</TABLE>