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 MARCH 31, 1996
[ ] 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:
(787) 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 May 13, 1996.
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE FIRST QUARTER ENDED MARCH 31, 1996
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 3. LEGAL PROCEEDINGS 15
ITEM 4. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES
2
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 413,258 $ 785,490
Short term investments 500,000 500,000
Restricted cash 6,824,900 6,732,597
Accounts receivable, net 713,889 692,165
Inventories 2,547,926 2,340,373
Prepaid expenses and other current assets 144,145 166,947
----------- -----------
Total current assets 11,144,118 11,217,572
Property and equipment, net 3,821,536 3,587,982
Notes receivable 387,219 444,411
Other assets 188,082 150,617
----------- -----------
Total assets $15,540,955 $15,400,582
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,654,323 $ 3,663,475
Notes payable 500,000 500,000
Accounts payable 342,413 372,025
Accrued expenses 1,571,037 1,555,187
Due to shareholder 145,625 106,786
----------- -----------
Total current liabilities 6,213,398 6,197,473
Long-term debt 424,496 354,707
----------- -----------
Total liabilities 6,637,894 6,552,180
----------- -----------
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 4,321,554 4,266,895
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss (9,326) (9,326)
----------- -----------
Total shareholders' equity 8,903,061 8,848,402
----------- -----------
Total liabilities and shareholders' equity $15,540,955 $15,400,582
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net sales $1,396,126 $1,300,803
Cost of sales 819,826 699,024
---------- ----------
Gross profit 576,300 601,779
Selling, general and administrative expenses 501,550 470,870
---------- ----------
Income from operations 74,750 130,909
---------- ----------
Other income (expense):
Interest income 100,672 112,993
Interest expense (97,218) (110,791)
Litigation expenses (30,000) (83,816)
Litigation settlement - 120,000
Miscellaneous income 6,455 7,727
---------- ----------
(20,091) 46,113
---------- ----------
Income before provision for income tax 54,659 177,022
Provision for income tax - -
---------- ----------
Net income $ 54,659 $ 177,022
========== ==========
Net income per common share $ 0.03 $ 0.09
========== ==========
Weighted average number of common shares 1,895,322 1,895,322
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
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, 1995 1,895,322 $ 1,915 $4,637,706 $4,266,895 ($ 48,788) ($ 9,326) $8,848,402
Net income -- -- -- 54,659 -- -- 54,659
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1996 1,895,322 $ 1,915 $4,637,706 $4,321,554 ($ 48,788) ($ 9,326) $8,903,061
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,659 $ 177,022
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 106,116 64,378
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (21,724) (139,165)
Inventories (207,553) (182,303)
Prepaid expenses and other current assets 22,802 37,597
Increase in amount due to shareholder (27,667) --
Other assets (46,408) 4,808
Accounts payable (29,612) (21,591)
Accrued expenses 15,850 42,864
----------- -----------
Net cash used in operating activities (133,537) (16,390)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in short term investments -- 210,359
Increase in restricted cash (92,303) (82,256)
Additions to property, plant and equipment (118,870) (212,032)
Collection of (increase in) notes receivable (370) 13,119
----------- -----------
Net cash used in investing activities (211,543) (70,810)
----------- -----------
Cash flows from financing activities:
Repayment of short-term borrowings -- (200,000)
Repayment of long-term debt (27,152) (230)
----------- -----------
Net cash used in financing activities (27,152) (200,230)
----------- -----------
Net decrease in cash (372,232) (287,430)
Cash and equivalents at beginning of year 785,490 1,871,931
----------- -----------
Cash and equivalents at end of period $ 413,258 $ 1,584,501
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(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") Rain Forest Products Group,
Inc. (Rain Forest), 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 three months ended March 31, 1996 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 1996. 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, 1995.
NOTE 2 - RESTRICTED CASH AND RELATED DEBT
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 in
1992, 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 (also in 1992), the Company was required to
deposit $1,970,435 (less court costs of
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$19,677) with the court. At March 31, 1996 and December 31, 1995, these amounts
are as follows:
DESCRIPTION 1996 1995
- ------------------------------------ ---------- ----------
Proceeds from the settlement of tort
claim, including interest income $4,610,973 $4,544,795
Proceeds from Hurricane Andrew,
including interest income 2,213,927 2,187,802
---------- ----------
$6,824,900 $6,732,597
========== ==========
At March 31, 1996 and December 31, 1995, the principal balance of debt subject
to litigation amounted to approximately $3,600,000, and related accrued interest
amounted to approximately $1,385,000 and $1,307,000, respectively. See Item 3
"Legal Proceedings" herein.
NOTE 3 - NOTES RECEIVABLE
At December 31, 1993, the Company had a note receivable with an outstanding
principal balance of $996,962, from the sale of Cariplant S.A. (a former
Dominican Republic subsidiary) 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 collateralized by the common stock and personal guarantee of the
major shareholder of Cariplant.
From the inception of the note in March 1993, the Company received several
payments. However, Altec has been unable to meet its obligation. As of March 31,
1996, 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, as well as the current
difficulties of operating in the Dominican Republic, in 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 an other expense
8
<PAGE>
in the consolidated statements of operations for the year ended December 31,
1994.
At March 31, 1996 and December 31, 1995, notes receivable included the
following:
DESCRIPTION 1996 1995
- ----------------------------------- -------- ------
Note receivable from Altec $301,621 $301,621
10% note, due October 1996,
collateralized by real property 24,288 23,918
8% notes, due on demand, personally
guaranteed by various Company personnel
(no collections are expected in 1996) 61,310 118,872
-------- --------
$387,219 $444,411
======== ========
NOTE 4 - PROPERTY AND EQUIPMENT
At March 31, 1996 and December 31, 1995 property and equipment consisted of the
following:
DESCRIPTION 1996 1995
--------------------------------- ---------- ----------
Land and land improvements $ 859,380 $ 859,380
Buildings 445,146 219,404
Equipment and fixtures 1,230,233 1,187,716
Transportation equipment 604,173 571,736
Stock Plants 97,277 97,277
Leasehold improvements 1,699,490 1,675,605
Construction in progress 96,157 81,068
---------- ----------
5,031,856 4,692,186
Less accumulated depreciation and
amortization (1,210,320) (1,104,204)
---------- ----------
$3,821,536 $3,587,982
========== ==========
9
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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
a) NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1996, the Company acquired a
residence (previously leased by the Company) from a partnership, whose
partners included among others, Michael J. Spector and Margaret D.
Spector, who are directors, officers and principal shareholders of the
Company. The purchase price of the residence, determined by an
independent certified real estate appraiser, amounted to $220,800.
Regarding the acquisition, the Company assumed a commercial loan
amounting to $87,789, owed by the partnership, recorded an account
payable to the Spectors amounting to $66,506, and applied $57,562 and
$8,943 to the principal and interest, respectively, of a note
receivable owed by a consultant to the Company (who was also a
shareholder in the partnership).
b) OTHER CASH FLOW TRANSACTIONS
Other cash flow transactions for the three months ended March 31, 1996
and 1995, include interest payments amounting to approximately $19,000
and $23,300, respectively. No income tax payments were made for the
three months ended March 31, 1996 and 1995.
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") Rain Forest Products Group,
Inc. ("Rain Forest") 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,
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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, potting soils, chemicals and fertilizers) and also provides
landscaping design and installation services.
PRINCIPAL OPERATIONS
The Company's business is currently conducted at two locations, one in Puerto
Rico and another in 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 D. 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, flowing 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, 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.
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. During the fourth quarter of 1995, Margo Landscaping became a
wholesaler for Monsanto Corporation's Solaris Group, which includes the Ortho,
Roundup and Greensweeep product lines (chemicals and pesticides).
11
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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. During 1993 and 1994, the Company rebuilt a
portion of its facilities. During 1994, South Florida resumed sales.
Approximately 20 acres are currently in production.
FUTURE OPERATIONS
The Company will continue to concentrate its economic and managerial resources
in expanding its operations in Puerto Rico. The Company's Board of Directors has
concluded that these operations present attractive opportunities for the future.
The Board believes that the Company should continue to capitalize its advantage
as one of the largest, full service nurseries in the region.
The Company has achieved a history of good margins in Puerto Rico because of the
variety and quality of its inventory. The Company believes that it can increase
its sales and margins by investing in a larger and more sophisticated facility
and by increasing the size and variety of its inventory. During January 1994,
the Company leased approximately 27 more acres adjacent to its nursery
facilities in Vega Alta, Puerto Rico and is in the process of completing this
tract of land for additional production. The Company also began production and
sales of bedding plants and annuals during late 1993 which provided increased
sales during 1994 and 1995 and should continue to provide increased sales in the
future.
In January 1993, the Company formed a new wholly-owned subsidiary, Margo
Landscaping and Design, Inc. ("Margo Landscaping") to perform the Company's
landscaping business in Puerto Rico. Among various landscaping projects that
Margo Landscaping has for 1996 is a contract with a local construction company
to landscape a new U.S. Coast Guard Housing Project located in Bayamon, Puerto
Rico for approximately $645,000.
During the third quarter of 1993, Margo Landscaping commenced with sales of hard
goods, principally Italian terracotta pottery.
12
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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.
In August 1995, the Company formed another wholly-owned Puerto Rico subsidiary,
Rain Forest Products Group, Inc. ("Rain Forest"). Commencing in 1996, Rain
Forest will be engaged in the manufacturing and distribution of its own line of
potting soils, sugar cane mulch, professional growing mixes, river rock and
gravels throughout Puerto Rico and the Caribbean. The Company has requested a
tax exemption grant from the government of the Commonwealth of Puerto Rico for
the operations of Rain Forest.
During 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.
On September 28, 1995, the Company entered into a wholesale agreement with
Monsanto Puerto Rico, a division of Monsanto Company, to become a wholesaler of
the Solaris product line, which includes Roundup, Ortho and Greensweep, in
Puerto Rico and certain other locations in the Caribbean. The Company is already
marketing the Solaris product line in Puerto Rico, the U.S. Virgin Islands, the
Netherlands Antilles and the British West Indies.
The Company believes that the addition of the Sunniland and Solaris product
lines together with increased sales of the Rain Forest line and other products
will result in lawn and garden products representing an increasing proportion of
the Company's overall sales.
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
connection, during 1993 the Company built a 3.9 acre saran house and prepared 16
acres of sun growing area for new plant production. During 1994, the South
Florida operation resumed sales. 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, and lack of profitability.
13
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RESULTS OF OPERATIONS FOR THE FIRST QUARTERS OF 1996 AND 1995
During the first three months of 1996, the Company had net income of
approximately $55,000, or $.03 per share, compared to $177,000 for the same
period in 1995, or $.09 per share.
The decrease in net income for the three months ended March 31, 1996, when
compared to the same period in 1995, is due to changes in income from
operations, as well as the components of other income (expense), as discussed
below.
SALES
The Company's consolidated net sales for the first three months of 1996 were
approximately $1,396,000, compared to $1,301,000 for the same period in 1995, or
an increase of approximately 7%. The increase in sales for 1996 when compared to
1995, is due to a significant increase in sales of lawn and garden products,
coupled with a decrease in sales of field nursery plants.
GROSS PROFITS
The Company's gross profit for the first quarter of 1996 was 41.3% compared to
46.3% for 1995, or a decrease of 5%. This decrease in gross profit is due to the
significant increase in sales of lawn and garden products during 1996, which
result in a lower gross profit than plants.
Also, during the first three months of 1996, sales of field nursery plants
decreased when compared to the same period in 1995. Field nursery plants, used
principally for landscaping services, have a higher gross profit than ornamental
plants, thus a decrease in these sales results in a decrease in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were approximately $502,000
and $471,000 for the first three months of 1996 and 1995, respectively, or an
increase of 6.5%. The increase for 1996 is principally due to an increase in
general and administrative expenses, as a result of additional administrative
personnel and an increase in depreciation expense. Notwithstanding the increase,
SG&A as a percentage of sales remains comparable (36%) for both periods of 1996
and 1995.
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OTHER INCOME AND EXPENSES
Interest income and interest expense for the first three months of 1996
decreased by 11% and 12%, respectively, when compared to the same period in
1995. This decrease is due to lower outstanding principal balances on short-term
investments and notes payable during 1996 when compared with 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. For the first three months of
1996, litigation expenses decreased by approximately $54,000 when compared to
the same period in 1995.
Litigation settlement of $120,000 net of expenses for the first three months of
1995 represents a settlement agreement received from the Puerto Rico Department
of Agriculture whose case dates to 1991.
FINANCIAL CONDITION
The Company's financial condition at March 31, 1996 remains comparable with
December 31, 1995. The Company's current ratio continues to be strong, with a
ratio of 1.8 to 1 at March 31, 1996, and at December 31, 1995. The Company
believes it has adequate resources to meet its current liquidity and capital
requirements, including its principal liability of $4,985,000 (including accrued
interest of $1,385,000 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.
For the first three months of 1995, the Company has invested approximately
$119,000 to improve and acquire additional plant and equipment in Puerto Rico.
This is on line with the Board's intent to continue as the largest grower and
distributor of tropical plants and lawn and garden products in the Caribbean.
The Company continues to increase its production inventory as well as lawn and
garden products in order to meet the increased demands it expects to have during
the remainder of 1996. In this regard, the Company increased inventories by
approximately $208,000 during the first three months of 1996.
15
<PAGE>
The Company's liabilities at March 31, 1996 remain comparable with those at
December 31, 1995, with bank debt subject to litigation representing
approximately 75% of total liabilities.
Stockholders' equity at March 31, 1996 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 "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.
ITEM 3. 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,
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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
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 March 31, 1996, 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 March 31, 1996, the annual borrowing rate was 8.70% and the default rate was
13.70%. 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
$1,385,000 at March 31, 1996. Accrued interest at March 31, 1996, calculated at
the default rate is approximately $2,100,000 . This latter sum is the amount
First Union is claiming it is owed in interest through March 31, 1996.
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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 March 31, 1996 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 is seeking punitive
damages from First Union.
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 March 31, 1996,
the Company had on deposit approximately $2,200,000 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.
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 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
18
<PAGE>
Benlate), a claim for strict liability against DuPont, a claim for negligence
and a claim against the Company for an alleged fraudulent conveyance. First
Union is also seeking unspecified punitive damages in connection with its
defamation claim.
The Company has answered First Union's new claims and has reasserted its
counterclaims. The Company also moved for summary judgement on some of First
Union's new claims and in response to such motion, the Florida court dismissed
First Union's conversion claim.
Shortly after First Union filed its new complaint, DuPont moved to dismiss First
Union's claims against it. After a hearing on DuPont's motion, the court granted
DuPont's motion. Thus far, First Union has not refiled its claims against
DuPont.
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.
During the course of the litigation, First Union has repeatedly moved for
partial summary judgment against the Company on First Union's claims on the
promissory notes executed by the Company, the guaranty executed by the Company
in Puerto Rico, and the Company's counterclaims. To date, all such motions have
been denied.
In addition, after two prior unsuccessful attempts, First Union has recently
prevailed in its efforts to have this case tried without a jury. The Company has
appealed this ruling to the Third District Court of Appeal.
Moreover, First Union has convinced the United States District Court in Puerto
Rico to stay the case in Puerto Rico. Thereafter, the Puerto Rican court
dismissed the case without prejudice, with the view to allowing the litigation
to take place exclusively before the Florida court at this time. Accordingly,
the Company does not expect there to be any activity in the Puerto Rico case in
the near future.
19
<PAGE>
The Company has been engaged in settlement discussions with First Union over the
last several months. If a settlement of the litigation cannot be consummated,
the Company will continue to vigorously defend against the claims brought by
First Union and pursue its counterclaims against First Union. Absent a
settlement or delay due to the appeal of the ruling striking the Company's jury
demands, this case will be tried some time during the two week trial calendar
commencing July 1, 1996.
ITEM 4. 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 March 31, 1996, 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 5. 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 March 31,
1996:
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: MAY 13, 1996 BY: /S/ MICHAEL J. SPECTOR
------------- --------------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: MAY 13, 1996 BY: /S/ ALFONSO ORTEGA
------------- ----------------------
Alfonso Ortega,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 413,258<F1>
<SECURITIES> 0
<RECEIVABLES> 1,237,212
<ALLOWANCES> 136,104
<INVENTORY> 2,547,926
<CURRENT-ASSETS> 11,144,118
<PP&E> 5,031,856
<DEPRECIATION> 1,210,320
<TOTAL-ASSETS> 15,540,955
<CURRENT-LIABILITIES> 6,213,398
<BONDS> 424,496
0
0
<COMMON> 1,915
<OTHER-SE> 8,901,146
<TOTAL-LIABILITY-AND-EQUITY> 15,540,955
<SALES> 1,396,126
<TOTAL-REVENUES> 1,503,253
<CGS> 819,826
<TOTAL-COSTS> 1,448,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,218
<INCOME-PRETAX> 54,659
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,659
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<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
$6,824,900 (in escrow), pending resolution of litigation with financial
institution.
</FN>
</TABLE>
