UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1995
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-15336
MARGO NURSERY FARMS, INC.
A Florida Corporation - I.R.S. No. 59-2807561
Address of Principal Executive Offices:
Road 690, Kilometer 5.8
Vega Alta, Puerto Rico 00692
Registrant's Telephone Number:
(809) 883-2570
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days.
YES [X] NO [ ]
The registrant had 1,895,322 shares of common stock, $.001 par value,
outstanding as of August 11, 1995.
Total Pages in Report: 22
Exhibit Index: 20
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1995
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders'
Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 10
PART II
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES
2
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
(Unaudited)
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,400,674 $ 1,871,931
Short term investments 500,000 710,359
Restricted cash 6,557,030 6,375,847
Accounts receivable, net 937,690 730,111
Inventories 2,240,316 2,019,732
Prepaid expenses and other current assets 112,914 186,314
----------- -----------
Total current assets 11,748,624 11,894,294
Property and equipment, net 3,698,204 3,504,641
Notes receivable 434,412 448,790
Other assets 80,883 82,932
----------- -----------
Total assets $15,962,123 $15,930,657
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,616,059 $ 3,647,353
Notes payable 1,100,000 1,200,000
Accounts payable 186,859 255,285
Accrued expenses 1,265,592 1,195,911
Income taxes payable - 14,829
----------- -----------
Total current liabilities 6,168,510 6,313,378
Long-term debt 370,028 372,424
----------- -----------
Total liabilities 6,538,538 6,685,802
----------- -----------
Commitments and contingencies - -
Shareholders' equity:
Common stock, $.001 par value; 10,000,000
shares authorized; 1,915,122 shares issued,
and 1,895,322 shares outstanding 1,915 1,915
Additional paid-in capital 4,637,706 4,637,706
Retained earnings 4,841,007 4,663,229
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss (8,255) (9,207)
----------- -----------
Total shareholders' equity 9,423,585 9,244,855
----------- -----------
Total liabilities and shareholders' equity $15,962,123 $15,930,657
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods ended June 30, 1995 and 1994
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,365,484 $ 824,027 $2,666,287 $1,659,930
Cost of sales 838,723 573,169 1,537,747 994,523
---------- ---------- ---------- ----------
Gross profit 526,761 250,858 1,128,540 665,407
Selling, general and administrative expenses 478,738 437,718 949,608 835,550
---------- ---------- ---------- ----------
Income (loss) from operations 48,023 (186,860) 178,932 (170,143)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 123,912 63,368 236,905 120,851
Interest expense (112,228) (92,172) (223,019) (177,973)
Litigation expenses (91,970) (155,603) (175,786) (172,538)
Litigation settlement - - 120,000 -
Insurance proceeds - Hurricane Andrew - 577,279 - 886,718
Miscellaneous income 33,019 31,751 40,746 84,306
---------- ---------- ---------- ----------
(47,267) 424,623 (1,154) 741,364
---------- ---------- ---------- ----------
Income before provision for income tax 756 273,763 177,778 571,221
Provision for income tax - 146,000 - 250,000
---------- ---------- ---------- ----------
Net income (loss) $ 756 $ 91,763 $ 177,778 $ 321,221
========== ========== ========== ==========
Net income per common share $ 0.00 $ 0.05 $ 0.09 $ 0.17
========== ========== ========== ==========
Weighted average number of common shares 1,895,322 1,895,322 1,895,322 1,895,322
========== ========== ========== ==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1995
(Unaudited)
COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
--------- ------ ---------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 1,895,322 $1,915 $4,637,706 $4,663,229 ($ 48,788) ($ 9,207) $9,244,855
Net income - - - 177,778 - - 177,778
Foreign currency
translation gain - - - - - 952 952
--------- ------ ---------- ---------- -------- -------- ----------
Balance at June 30,
1995 1,895,322 $1,915 $4,637,706 $4,841,007 ($ 48,788) ($ 8,255) $9,423,585
========= ====== ========== ========== ======== ======== ==========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1995 and 1994
(Unaudited)
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 177,778 $ 321,221
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 128,249 136,873
Decrease (increase) in deferred income taxes, net - 240,000
Gain on insurance proceeds from Hurricane Andrew - (309,439)
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (207,579) (12,107)
Inventories (220,584) (592,109)
Prepaid expenses and other current assets 73,400 (44,705)
Collection of advances to shareholder - 88,267
Other assets 2,049 (6,465)
Accounts payable (68,426) (120,431)
Accrued expenses 69,681 44,662
Income taxes payable (14,829) (24,946)
---------- ----------
Net cash used in operating activities (60,261) (279,179)
---------- ----------
Cash flows from investing activities:
Proceeds on insurance claims from Hurricane Andrew - 309,439
Decrease (increase) in short term investments 210,359 (5,090)
Increase in restricted cash (181,183) (111,995)
Additions to property, plant and equipment (321,812) (635,146)
Increase in notes receivable 14,378 -
---------- ----------
Net cash used in investing activities (278,258) (442,792)
---------- ----------
Cash flows from financing activities:
Proceeds form short-term borrowings - 500,000
Repayment of short-term borrowings (100,000) -
Repayment of long-term debt (33,690) (1,295)
---------- ----------
Net cash provided by (used in) financing activities (133,690) 498,705
---------- ----------
Net decrease in cash (472,209) (223,266)
Effect of change in exchange rates on cash 952 (742)
Cash at beginning of year 1,871,931 2,615,096
---------- ----------
Cash at end of period $1,400,674 $2,391,088
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
These interim consolidated financial statements include the
financial statements of Margo Nursery Farms, Inc. and its wholly
owned subsidiaries, Margo Landscaping and Design, Inc. ("Margo
Landscaping") and Margo Bay Farms, Inc. ("Bay Farms")
These interim consolidated financial statements are unaudited, but
include all adjustments that, in the opinion of management, are necessary for a
fair statement of the Company's financial position, results of operations and
cash flows for the periods covered. These statements have been prepared in
accordance with the United States Securities and Exchange Commission's
instructions to Form 10-Q, and therefore, do not include all information and
footnotes necessary for a complete presentation of financial statements in
conformity with generally accepted accounting principles.
The preparation of interim financial statements relies on estimates.
Therefore, the results of operations for the six months ended June 30, 1995 are
not necessarily indicative of the operating results to be expected for the year
ending December 31, 1995. These statements should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included in
the Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
NOTE 2 - RESTRICTED CASH
During 1991, one of the Company's principal lenders commenced
litigation against the Company due to the Company's non-compliance with several
covenants under a modified loan agreement. In connection with the settlement of
a tort claim, the Company was required to place $4,000,000 of the settlement
proceeds in an escrow account. In connection with the settlement of the
Company's insurance claims arising from Hurricane Andrew, the Company was
required to deposit $1,970,435 (less court costs of $19,677) with the court. At
June 30, 1995 and December 31, 1994, these amounts are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
- ------------------------------- ---------- ----------
<S> <C> <C>
Proceeds from the settlement of
tort claim, including interest $4,425,165 $4,300,650
Proceeds from Hurricane Andrew,
including interest 2,131,865 2,075,197
---------- ----------
$6,557,030 $6,375,847
========== ==========
</TABLE>
7
<PAGE>
NOTE 3 - NOTES RECEIVABLE
During 1994, the Company had a note receivable with an outstanding
principal balance of $996,962, from the sale in March of 1993, of Cariplant to
Altec International, C. por A. ("Altec"), another Dominican Republic company.
The note was originally due in 180 equal monthly installments of $9,638,
including interest at 8%, through April 2008. The note is secured by the common
stock and personal guarantee of the major shareholder of Cariplant.
From the inception of the note, the Company received six payments
through October 1993. Since then, Altec has been unable to meet its obligation.
As of March 31, 1995, the Company is in process of obtaining a mortgage on
Cariplant's property and equipment, as well as negotiating a modification of the
repayment terms of the outstanding unpaid principal balance of $996,962.
Company management anticipates that Altec will accept the modification,
however, due to the unfavorable collection experience since October 1993, as
well as the current difficulties of operating in the Dominican Republic, at
December 31, 1994 Company management wrote down the carrying amount of the note
to $316,000, representing the estimated value of Cariplant's land and related
improvements, including buildings, shadehouses, and fixed and installed
equipment. The write-down, amounting to $680,962 was included as other expense
in the consolidated statements of operations for the year ended December 31,
1994.
As of June 30, 1995, the Company applied approximately $14,400 to the
principal balance of the note, representing payments received from Altec during
the six month period.
At June 30, 1995 and December 31, 1994, notes receivable included the
following:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
- --------------------------------------- -------- --------
<S> <C> <C>
Note receivable from Altec $301,622 $316,000
10% note, due October 1996,
collateralized by real property 23,918 23,918
8% notes, due on demand, personally
guaranteed by various Company personnel
(no collections are expected in 1995) 108,872 108,872
-------- --------
$434,412 $448,790
======== ========
</TABLE>
8
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
At June 30, 1995 and December 31, 1994 property and equipment
consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1994
--------------------------------- --------- ----------
<S> <C> <C>
Land and land improvements $ 859,380 $ 859,380
Buildings 219,404 196,877
Equipment and fixtures 1,165,066 1,105,629
Transportation equipment 573,265 531,439
Stock Plants 97,277 97,277
Leasehold improvements 1,342,955 1,068,793
Construction in progress 333,819 409,959
---------- ----------
4,591,166 4,269,354
Less accumulated depreciation and
amortization (892,962) (764,713)
---------- ----------
$3,698,204 $3,504,641
========== ==========
</TABLE>
NOTE 5 - NET INCOME PER COMMON SHARE
Net income (loss) per share of common stock is computed by dividing the
net income or loss by the weighted average number of shares of common stock
outstanding during the relevant periods.
NOTE 6 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS
OF CASH FLOWS
Other cash flow transactions for the six months ended June 30, 1995
include interest payments of approximately $43,300. Income tax payments for the
six months ended June 30, 1995, amounted to $15,000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Margo Nursery Farms, Inc. and its subsidiaries, Margo Landscaping &
Design, Inc. ("Margo Landscaping") and Margo Bay Farms, Inc. ("Bay Farms"), are
primarily engaged in the business of growing, distributing and installing
tropical plants and trees. The Company has historically sold its products to
wholesalers, retailers, interiorscapers, landscapers, builders, plant leasing
companies and other growers located throughout the United States, the Caribbean,
Canada and Europe. The Company is also engaged in sales of lawn and garden
products (principally plastic pots, terracotta pottery and potting soils) and
also provides landscaping design and installation services.
PRESENT OPERATIONS
The Company conducts operations in Puerto Rico and South
Florida. These operations are described below:
PUERTO RICO OPERATIONS
The Company's operation in Puerto Rico is conducted at a 119 acre
nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan.
This farm is leased from Michael J. Spector and Margaret Spector, who are
directors, officers and principal shareholders of the Company. The Company's
products are primarily utilized for the interior and exterior landscaping of
office buildings, shopping malls, hotels and other commercial sites, as well as
private residences. The Company produces various types of palms, flowering and
ornamental plants, trees, shrubs and ground covers. Its customers are primarily
located in Puerto Rico and the Caribbean.
As a bona fide agricultural enterprise, under Puerto Rico law the
Company enjoys a 90% tax deduction from income derived from its production for
sales in Puerto Rico. It has also been granted a 90% tax exemption for income
derived from its export sales. The Company also receives credits for certain
federal income taxes under Section 936 of the Internal Revenue Code.
In January 1993, the Company formed a new wholly-owned subsidiary,
Margo Landscaping and Design, Inc. to continue its landscaping business. Margo
Landscaping provides landscaping services to customers in Puerto Rico and the
Caribbean, including landscape design and installation. Margo Landscaping is
also engaged in sales of plastic and terracotta pottery, as well as lawn and
garden products.
10
<PAGE>
SOUTH FLORIDA OPERATIONS
The South Florida operation, conducted through Bay Farms consists of a
71 acre nursery farm located approximately 20 miles south of Miami, Florida. In
August 1992, substantially all of the Company's facilities in South Florida were
destroyed by Hurricane Andrew. Prior to Hurricane Andrew, this farm produced a
large variety of palms, ficus, dracaena, aglonema and scheffelera. These plants
were sold to wholesalers, retailers and other customers located throughout the
United States, Canada and Western Europe. The Company's products were primarily
utilized for interior and exterior landscaping of office buildings, shopping
malls, hotels, other commercial sites and private residences. During 1993 and
1994, the Company rebuilt a portion of its facilities. Approximately 20 acres
are now back in production. During 1994, South Florida resumed sales, on a
limited basis. During the first six months of 1995, sales from the South Florida
operation continued to improve.
FUTURE OPERATIONS
The Company's main focus continues in Puerto Rico. The Board has
concluded that the Company should concentrate its economic and managerial
resources in expanding its operations in Puerto Rico, and in rebuilding a
portion of its operations in South Florida. The Board concluded that these
operations present attractive opportunities for the future. In Puerto Rico, the
Board believes that the Company should continue to obtain a greater share of the
market and exploit its advantage as one of the largest, full service nurseries
in the region. In South Florida, the Board believes that demand for the
Company's products may continue to increase (on a limited basis) depending on
market conditions and competition.
In Puerto Rico, the Company has achieved a history of good margins
because of the variety and quality of its inventory. The Company believes that
it can increase its sales and margins by continued investment in a larger and
more sophisticated facility and by increasing the size and variety of its
inventory. Based on the foregoing, during 1994, the Company substantially
expanded its growing facilities in Puerto Rico by leasing approximately 27 more
acres adjacent to its nursery facilities. As of June 30, 1995, the Company is in
the process of completing this tract of land for additional production. The
Company is also engaged in production and sales of bedding plants and annuals
which will continue to provide increased sales. The Company has become a
supplier to Wal-Mart Stores, which entered the Puerto Rico market in 1992 with
two stores. Wal-Mart presently has five stores and has announced plans to open
ten additional stores in Puerto Rico during 1995 and 1996. The Company is also a
supplier for Builders Square which has five stores in Puerto Rico and announced
plans to open one more store during September 1995.
11
<PAGE>
During the second quarter of 1995, the Company was named the exclusive
distributor for Sunniland Corporation's fertilizer and pesticide products for
Puerto Rico. Sunniland Corporation, based in Sanford, Florida, is a leading
manufacturer of fertilizer and pesticide products for mass merchandisers, retail
chains, garden centers, supermarkets and landscapers. Sales of these products
will commence during the third quarter of 1995. The Company expects that the
addition of the Sunniland product line will have a favorable impact on the
Company's future sales.
During the third quarter of 1993, Margo Landscaping commenced with
sales of hard goods, principally Italian terracotta pottery. During 1994, sales
of plastic pottery proved to have a high demand. During the first quarter of
1995, Margo Landscaping became involved in the sale of planting media which
includes bagged potting soil, peat moss, cypress mulch, pine bark nuggets, etc.
Management anticipates that sales of hard goods may significantly increase the
Company's sales volume for 1995.
In South Florida, the Board decided to rebuild a portion of the
Company's facilities and resume limited production and marketing of plants. In
this regard the Company has a 3.9 acre siran house, a 20,000 square foot
propagation house, and has completed construction of a 16 acre parcel for plant
production. During 1994, the South Florida operation resumed sales on a limited
basis. The Company intends to carefully monitor the viability of the South
Florida operation, particularly in light of the difficulties in obtaining low
cost labor in South Florida and rising insurance costs. The Company is
optimistic that demand for tropical plants will remain strong in South Florida
and that the Company will be able to increase its sales to its former customers.
If the demand for the Company's plants is sufficient, the Company will continue
to rebuild its nursery farm and expand production in Florida.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 1995 AND 1994
During the first six months of 1995, net income was approximately
$178,000, or $.09 per share, compared to $321,000 for the same period in 1994,
or $.17 per share.
For the quarter ended June 30, 1995, the Company had net income of
approximately $1,000, or $0.00 per share, compared to $92,000 for the same
period in 1994, or $0.05 per share.
The decrease in net income for the first six months, as well as the
second quarter of 1995 when compared to the same periods in 1994, is the result
of significant changes in income (loss) from operations, as well as components
of other income (expense), as discussed below.
12
<PAGE>
Income from operations for the first six months of 1995 was
approximately $179,000, which was reduced by other expenses (net) of $1,000. The
first six months of 1994 resulted in a loss from operations of $170,000, which
was increased by other income (net) of $741,000, principally as a result of
insurance proceeds arising from damage caused by Hurricane Andrew of $887,000,
reduced by a provision for income tax of $250,000.
Income from operations for the second quarter of 1995 was approximately
$48,000, which was reduced by other expenses (net) of $47,000. The second
quarter of 1994 resulted in a loss from operations of $187,000, which was
increased by other income (net) of $425,000, also as a result of insurance
proceeds from Hurricane Andrew of $577,000, reduced by a provision for income
tax of $146,000.
SALES
The Company's consolidated net sales for the first six months of 1995
were approximately $2,666,000, compared to $1,660,000 for the same period in
1994, or an increase of approximately 61%. The increase in sales for 1995 when
compared to 1994, is due to increased sales of ornamental plants (in both Puerto
Rico and South Florida), plastic and terracotta pottery, landscaping services as
well as sales of lawn and garden products whose related sales commenced during
1995.
Sales for the second quarter of 1995 were approximately $1,365,000,
compared to $824,000 in 1994, representing an increase of 66%. Increase in sales
for the second quarter of 1995 when compared to 1994 is also due to increased
sales of ornamental plants, plastic and terracotta pottery, etc. experimented
during the first six months of 1995.
GROSS PROFITS
The Company's gross profit for the first six months of 1995 was 42%
compared to 40% for the same period in 1994, or an increase of 2%. Although the
increase is favorable, management understands it is still not representative of
its operations due to various factors described below.
From the commencement of the second quarter of 1994 through the first
quarter of 1995, Puerto Rico and the northeast Caribbean suffered a severe
drought. This drought reduced the Company's product turnover, causing plants to
absorb increased overhead costs. The result was a significant reduction in gross
profit throughout 1994, as well as the first quarter and a portion of the second
quarter of 1995.
13
<PAGE>
To a lesser extent, the Company's production costs have also increased
since late 1994. Among the various costs which have increased are rent for the
Company's facilities, chemicals and fertilizers and various payroll taxes.
Notwithstanding the increase in production costs, Company management determined
not to increase selling prices through the end of the second quarter of 1995 in
order to continue to obtain a greater share of the market. Effective July 1,
1995 selling prices of several high demand products were increased together with
reductions in volume discounts to various customers.
Company management believes that the conclusion of the drought as well
as the price increases and reductions in volume discounts will provide for
increased gross profits during the third and fourth quarters of 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were approximately
$950,000 for the first six months of 1995, compared to $836,000 for the same
period in 1994, or an increase of 14%. The increase for 1995 is principally due
to increases in shipping and warehousing expenses when compared to the same
period in 1994. As a result of increased sales during the first six months of
1995, SG&A as a percentage of sales decreased to 36% when compared to 50% for
the same period in 1994.
For the second quarter of 1995, SG&A amounted to approximately $479,000
compared to $438,000 for the same period in 1994, or an increase of 9%. As
explained above, the increase for 1995 results from increased shipping and
warehousing expenses when compared to 1994. Due to increased sales for the
second quarter of 1995, SG&A as a percentage of sales decreased to 35% when
compared to 53% for the same period in 1994.
OTHER INCOME AND EXPENSES
Interest income for the first six months and second quarter of 1995
both increased by 96% when compared to the same periods in 1994. This increase
was due to higher yields obtained from amounts invested (principally restricted
cash) during the above periods for 1995.
Interest expense for the first six months and second quarter of 1995
increased by 25% and 22%, respectively, when compared to the same periods in
1994. The increase results from higher outstanding debt balances during the
above periods for 1995.
Litigation expenses represent legal fees incurred in connection with
ongoing litigation and will vary depending on developments on each particular
case and the time incurred by the Company's legal counsel in handling such
cases.
14
<PAGE>
Litigation settlement of $120,000 (net of related expenses) for the
first six months of 1995 represents a settlement agreement to be received from
the Puerto Rico Department of Agriculture whose case dates to 1991.
During the quarter and six months ended June 30, 1994, the Company received
$577,000 and $887,000, respectively, from its insurers as a result of losses
sustained at the Company's South Florida facilities from Hurricane Andrew in
August 1992. At June 30, 1995, the Company did not have any pending claims
arising from Hurricane Andrew.
FINANCIAL CONDITION
The Company's financial condition at June 30, 1995 remains comparable
with December 31, 1994. The Company's current ratio continues to be strong, with
a ratio of 1.9 to 1 at June 30, 1995, and at December 31, 1994. The Company
believes it has adequate resources to meet its current liquidity and capital
requirements, including its principal liability of $4,742,000 (including accrued
interest of $1,150,000 computed at a rate which approximates the annual
borrowing rate) in debt currently subject to litigation with its principal
lender, First Union National Bank of Florida. See "Part II - Item 1. LEGAL
PROCEEDINGS" herein.
For the first six months of 1995, the Company invested approximately
$322,000 to improve and acquire additional plant and equipment in Puerto Rico
and to a lesser extent, in South Florida. This is on line with the Board's
continued intent to become the largest grower and distributor of tropical and
flowering plants in the Caribbean.
Despite the fact that the additional 27 acres were not all in
production during the first six months of 1995, the Company increased its
production inventory by $221,000 in order to meet the increased demand it will
have during 1995 with the additional openings of national chain stores at
various sites in Puerto Rico.
The Company's liabilities at June 30, 1995 remain comparable with that
at December 31, 1994, with bank debt subject to litigation representing
approximately 72% and 69% of total liabilities, respectively.
Stockholders' equity at June 30, 1995 increased due to results of
operations for the first quarter. There were no dividends declared nor issuance
of capital stock.
CURRENT LIQUIDITY AND CAPITAL RESOURCES
The Company is presently current on all its obligations except certain
bank debt in litigation. See "Part II - Item 1. LEGAL PROCEEDINGS" herein.
Excess funds have been invested in short-term bank instruments. The Company
believes it has adequate resources to meet its anticipated liquidity and capital
requirements.
15
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
FIRST UNION NATIONAL BANK
On November 17, 1988, the Company obtained a $4,300,000 term loan and a
revolving credit facility (the "Facility") with an institutional lender. The
Facility consisted of two term loans in the aggregate amount of $2,800,000 and a
revolving term line of credit in the amount of $1,500,000. The Facility was
modified on March 16, 1990 and May 31, 1991.
The first term loan was originally payable in equal monthly principal
payments of $12,500 plus interest commencing on January 2, 1989, with a final
payment of $1,512,500 due on December 2, 1993. The second term loan was payable
in equal monthly principal payments of $3,055 plus interest commencing on
September 2, 1989, with a final payment of $394,167 due on December 2, 1993. The
amounts available under the revolving credit line were originally scheduled to
be reduced to $700,000 on July 2, 1991 and $300,000 on July 2, 1992, with a
final maturity on June 2, 1993.
On May 31, 1991, the Company entered into a modification to its loan
agreement (the "Modification"), under which the Company's lender waived the
Company's violations of the loan agreement as of December 31, 1990. The
Modification also established new covenants and required the Company to repay
the Facility as follows: (a) past due interest of $231,328 through April 15,
1991 was payable in seven equal monthly installments of $33,047 commencing on
May 15, 1991; (b) accrued interest after April 15, 1991 was payable monthly,
commencing on June 15, 1991; (c) the principal balance of $2,492,327 under the
term loans was payable in monthly installments of $15,555 commencing on December
15, 1991, with a final installment of $2,134,562 due December 2, 1993; (d) the
principal balance of $1,099,914 under the revolving credit line was payable on
May 31, 1992 (with the option to postpone $550,000 until December 2, 1993 if the
Company was not in default under the Facility).
Under the provisions of the term loans and revolving credit line, the
Company's future borrowings were restricted and it was required, among other
things, to maintain certain liquidity and other financial ratios. During 1991,
the Company violated some of these covenants primarily due to losses suffered by
the Company as a result of the Company's use and application of Benlate DF 50, a
fungicide manufactured by E.I. DuPont de Nemours & Co. ("DuPont"). The Company
wrote down its inventories after experts determined that the Company's
inventories were contaminated.
In September 1991 First Union National Bank of Florida ("First Union")
acquired the Company's loans from the Federal Deposit Insurance Corporation
("FDIC"). In December 1991, First Union filed a complaint against the Company,
Margo Imports, Tropiflower, Inc. and Michael J. Spector, the Company's President
and principal
16
<PAGE>
shareholder, in the Circuit Court for Dade County, Florida. In its complaint,
First Union alleged that the Company was in default under its loan agreement.
As of June 30, 1995, the principal balance of the loan was approximately
$3,600,000. The loan was guaranteed by Margo Farms del Caribe, Inc. (now Margo
Nursery Farms, Inc.), Margo Imports, and Tropiflower, Inc., another of the
Company's subsidiaries. Mr. Spector also guaranteed $500,000 of the loan.
The Facility bears interest at 45 basis points over the prime rate.
After default, the Facility calls for the interest rate to increase by 5% per
annum. At June 30, 1995, the annual borrowing rate was 9% and the default rate
was 14 %. The Company is continuing to accrue interest at a rate that
approximates the annual borrowing rate. Accrued interest on the Facility,
included in the accompanying consolidated financial statements amounted to
approximately $1,150,000 at June 30, 1995. Accrued interest at June 30, 1995,
calculated at the default rate is approximately $1,700,000 . This latter sum is
the approximate amount First Union is claiming it is owed interest through June
30, 1995.
First Union's complaint also seeks an award of First Union's attorneys'
fees and costs. First Union has advised the Company that First Union's
attorneys' fees and collection costs through June 30, 1995 are in excess of
$2,000,000. The additional interest and attorneys' fees claimed by First Union
are not reflected in the accompanying consolidated financial statements. The
Company believes that the amounts sought by First Union are unreasonable and
that there is significant uncertainty as to First Union's entitlement to these
amounts.
In early 1992, First Union amended its complaint to foreclose its
mortgage on the Company's nursery farm in Dade County, Florida. First Union also
brought an action in Puerto Rico against the Company. The Company has filed
counterclaims against First Union, alleging that the bank tortiously interfered
with the Company's negotiations with DuPont and breached its fiduciary duties to
the Company. In connection with its counterclaims, the Company has filed a
motion to permit the Company to seek punitive damages from First Union. While
the Florida court has heard argument on such motion, no ruling has been received
as of this date.
In 1992, the Florida court denied several of First Union's motions,
including motions to strike or dismiss the Company's counterclaims, and for
partial summary judgement on the Company's counterclaim. In addition, the United
States District Court for the District of Puerto Rico denied First Union's
motions to remand the case to Puerto Rico state court, dismiss the Company's
counterclaim, and strike the Company's prayers for punitive damages (in the
amount of 10% of First Union's net worth).
In March 1993, First Union filed a second amended complaint in the
Florida action against the Company and its subsidiaries, Michael Spector and
DuPont. In this complaint, First Union restated most of its prior allegations,
including those made
17
<PAGE>
against the Company in Puerto Rico. In addition, First Union brought a claim for
restitution seeking a constructive trust on the proceeds from the Company's
settlement of its tort claims against DuPont, a claim for restitution arising
from the insurance payments received by the Company as a result of Hurricane
Andrew (which seeks a constructive trust on such funds), a claim for defamation
against the Company and Michael Spector based upon statements made by Mr.
Spector regarding First Union and its dealings with the Company, a claim against
Mr. Spector, the Company and DuPont for conversion and destruction of collateral
(arising from the damages caused by Benlate), a claim for strict liability
against DuPont, a claim for negligence and a claim against the Company for an
alleged fraudulent conveyance. Moreover, First Union has recently filed a motion
requesting permission to seek punitive damages in connection with its defamation
claim.
The Company has answered First Union's new claims and has reasserted
its counterclaims. The Company has also moved for summary judgment on some of
First Union's new claims. The Company anticipates that the court will hear
argument on the Company's summary judgment motion in the near future.
In addition, DuPont moved to dismiss First Union's claims against it
and the court granted DuPont's motion. Thus far, First Union has not refiled its
claims against DuPont.
In late 1993, First Union moved for partial summary judgement against
the Company on First Union's claims on the promissory notes executed by the
Company, as well as the guaranty executed by the Company in Puerto Rico. As part
of its motion, First Union again sought the entry of judgment against the
Company on its counterclaims. The Company vigorously opposed First Union's
motion on numerous grounds and the court denied First Union's motion in its
entirety. Notwithstanding this ruling, First Union recently filed another
summary judgement motion, which the Company has once again opposed. No date for
the argument of such motion has been set yet.
Moreover, First Union has convinced the United States District Court
for the District of Puerto Rico to stay the case in Puerto Rico. Accordingly,
the Company does not expect there to be any activity in the Puerto Rico case in
the near future.
The Company intends to continue to vigorously defend against the claims
brought by First Union and pursue its counterclaims against First Union. In
Miami, the Court has recently advised the parties that this action will be tried
some time after October 15, 1995.
At the time of the Company's September 1992 settlement with DuPont,
DuPont required the Company to deposit $4,000,000 of the settlement amount with
a third party escrow agent to cover the amounts First Union is seeking under the
loan agreement. First Union has sought to garnish these funds and the Company
has opposed First Union's garnishment motion. Additionally, as of June 30,
18
<PAGE>
1995, the Company had on deposit $2,100,000 of insurance payments (including
interest) received as a result of Hurricane Andrew damage with the Clerk of the
Court of Dade County pending the outcome of the litigation. These amounts are
reflected on the Company's balance sheet as restricted cash.
As part of the Company's settlement with DuPont, the Company agreed to
indemnify DuPont from liability to First Union that might arise out of the
payment by DuPont to the Company in settlement of the Benlate claims. The
Company does not expect that it will be required to indemnify DuPont from the
claims made by First Union. Nevertheless, DuPont has demanded indemnity from the
Company for DuPont's having been sued by First Union. At this point, the Company
has denied DuPont's request for indemnity. However, this issue has not been
conclusively determined and DuPont has not filed suit against the Company on
this issue.
CLASS ACTION COMPLAINT BY SHAREHOLDER
In June 1992, a shareholder claiming to represent a group of
shareholders filed a class action complaint against the Company and certain of
its directors and officers in the United States District Court for the Southern
District of Florida. The complaint was amended to add a second plaintiff. The
complaint alleges that the Company misrepresented and failed to disclose certain
information related to the Company's inventories. The plaintiffs sought
certification of the class and damages.
In response to the Company's motion to dismiss, the Plaintiffs' claims
for fraud and negligent misrepresentation were dismissed. The remaining claims
have been answered by the Company as well as its officers and directors. In
addition, one of the plaintiffs has withdrawn as a proposed class
representative.
The Company opposed the motion to certify this case as a class action.
While no written ruling has been received, the Court denied the plaintiff's
motion for class certification at a December 1994 hearing. Thus, this case is
proceeding solely as an individual action by the remaining named plaintiff.
The Company and its directors and officers believe the complaint is
without merit and are vigorously defending their position. This case is
currently scheduled to be tried on August 14, 1995.
19
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default of certain provisions of its loan agreements
with its principal lender (see Item 1, Legal Proceedings). At June 30, 1995, the
principal amount in default was approximately $3,600,000. The provisions in
default included the Company's failure to maintain certain levels of liquidity,
capital, insurance, and financial ratios. Due to the Company's improved
financial condition, the Company is now in compliance with many of these
provisions. Long term debt in default is classified as a current liability in
the Consolidated Balance Sheets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its annual meeting of shareholders on July 14, 1995.
At this meeting, shareholders were asked to vote on the election of directors
and the appointment of Kaufman, Rossin & Company as auditors of the Company. The
directors of the Company were reelected for an additional one-year term. In
addition, Michael A. Rubin was elected for a one-year term to fill a newly
created Board seat. Quorum at the meeting consisted of 1,758,857 shares, or 93%
of 1,895,322 total outstanding common shares. The results of the meeting were as
follows:
1. ELECTION OF DIRECTORS
NOMINEES FOR AGAINST ABSTAIN
- -------- --------- ------- -------
Michael A. Rubin 1,756,357 2,500 0
Blas R. Ferraiouli 1,756,357 2,500 0
Frederick Moss 1,756,357 2,500 0
Margaret D. Spector 1,756,357 2,500 0
Michael J. Spector 1,756,357 2,500 0
2. APPOINTMENT OF KAUFMAN, ROSSIN & COMPANY AS AUDITORS
FOR AGAINST ABSTAIN
--------- ------- -------
1,756,857 2,000 0
There were no broker non-votes with respect to any of the two
proposals.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
-27- Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K. The Company filed the following Reports on
Form 8-K during the quarter ended June 30, 1995:
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MARGO NURSERY FARMS, INC.
Date: AUGUST 11, 1995 BY: /S/ MICHAEL J. SPECTOR
-----------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: AUGUST 11, 1995 BY: /S/ ALFONSO ORTEGA
------------------
Alfonso Ortega,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,400,674<F1>
<SECURITIES> 0
<RECEIVABLES> 1,508,206
<ALLOWANCES> 136,104
<INVENTORY> 2,240,316
<CURRENT-ASSETS> 11,748,624
<PP&E> 4,591,166
<DEPRECIATION> 892,962
<TOTAL-ASSETS> 15,962,123
<CURRENT-LIABILITIES> 6,168,510
<BONDS> 370,028
<COMMON> 1,915
0
0
<OTHER-SE> 9,421,670
<TOTAL-LIABILITY-AND-EQUITY> 15,962,123
<SALES> 2,666,287
<TOTAL-REVENUES> 3,063,938
<CGS> 1,537,747
<TOTAL-COSTS> 2,710,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,019
<INCOME-PRETAX> 177,778
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,778
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>Cash does not include short term investment in certificate of deposit of
$500,000, as well as restricted cash, also in certificates of deposit, for
$6,557,030 (in escrow), pending resolution of litigation with financial
institution.
</FN>
</TABLE>
