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 SEPTEMBER 30, 1997
[ ] 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 November 14, 1997.
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statement of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 12
PART II
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE 19
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES
2
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FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "believes", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, natural disasters, competitive and regulatory factors and
legislative changes, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
3
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<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,334,809 $ 946,490
Short term investments 500,000 1,004,000
Accounts receivable, net 1,003,006 1,007,947
Inventories 2,497,841 2,737,109
Prepaid expenses and other current assets 99,457 116,036
----------- -----------
Total current assets 5,435,113 5,811,582
Property and equipment, net 2,951,244 3,864,646
Due from shareholder 273,652 273,652
Notes receivable 385,983 379,182
Other assets 58,794 67,149
----------- -----------
Total assets $ 9,104,786 $10,396,211
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 169,876 $ 118,085
Notes payable 500,000 500,000
Accounts payable 482,987 630,572
Accrued expenses 152,239 425,634
Income tax payable - 23,492
----------- -----------
Total current liabilities 1,305,102 1,697,783
Long-term debt 263,639 427,078
----------- -----------
Total liabilities 1,568,741 2,124,861
----------- -----------
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 2,945,212 3,689,681
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss - (9,164)
----------- -----------
Total shareholders' equity 7,536,045 8,271,350
----------- -----------
Total liabilities and shareholders' equity $ 9,104,786 $10,396,211
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods ended September 30, 1997 and 1996
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,355,690 $1,457,491 $5,081,715 $4,596,423
Cost of sales 1,111,651 909,879 4,204,612 2,790,636
---------- ---------- ---------- ----------
Gross profit 244,039 547,612 877,103 1,805,787
Selling, general and administrative expenses 724,999 558,597 2,024,910 1,583,765
---------- ---------- ---------- ----------
Income (loss) from operations (480,960) (10,985) (1,147,807) 222,022
---------- ---------- ---------- ----------
Other income (expense):
Interest income 15,852 24,010 51,645 214,874
Interest expense (19,821) (17,059) (59,708) (184,774)
Litigation income (expense) - 3,369 - (89,889)
Litigation settlement - - - (302,884)
Gain on sale of land 402,257 - 402,257 -
Miscellaneous income (expense) 15,733 1,327 9,144 32,335
---------- ---------- ---------- ----------
414,021 11,647 403,338 (330,338)
---------- ---------- ---------- ----------
Income (loss) before provision for income tax (66,939) 662 (744,469) (108,316)
Income tax provision - - - -
---------- ---------- ---------- -------
Net loss $ (66,939) $ 662 $ (744,469) $ (108,316)
========== ========== ========== ==========
Net loss per common share $ (.04) $ .00 $ (.39) $ (.06)
========== ========== ========== ==========
Weighted average number of common shares 1,895,322 1,895,322 1,895,322 1,895,322
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months ended September 30, 1997
(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> <C> <C>
Balance at December 31, 1996 1,895,322 $1,915 $4,637,706 $3,689,681 ($ 48,788) ($ 9,164) $8,271,350
Realized loss on translation
adjustment - - - - - 9,164 9,164
Net loss - (744,469) - $ - (744,469)
--------- ------ ---------- ---------- --------- --------- ----------
Balance at September 30, 1997 1,895,322 $1,915 $4,637,706 $2,945,212 ($ 48,788) $ - $7,536,045
========= ====== ========== ========== ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
----------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (744,469) $ (108,316)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 362,961 341,603
Increase in inventory valuation reserve 158,000 -
Write-off of inventory 340,000 -
Gain on sale of land (402,257) -
Realized loss on translation adjustment 9,164 -
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable 4,941 (381,597)
Inventories (258,733) (374,134)
Prepaid expenses and other current assets 16,579 64,561
Increase in due to shareholder, net - (357,613)
Other assets 8,355 76,546
Accounts payable (147,585) (3,004)
Accrued expenses (17,601) (1,392,138)
Income tax payable (23,492) -
----------- ----------
Net cash used in operating activities (694,137) (2,134,092)
---------- ----------
Cash flows from investing activities:
Decrease (increase) in short term investments 504,000 (500,000)
Decrease in restricted cash - 6,732,597
Additions to property, plant and equipment (87,708) (449,761)
Proceeds from sale of land 784,612 -
Increase in notes receivable (6,800) (333)
---------- ----------
Net cash provided by financing activities 1,194,104 5,782,503
---------- ----------
Cash flows used in financing activities:
Repayment of long-term debt (111,648) (3,676,891)
---------- ----------
Net increase (decrease) in cash 388,319 (28,480)
Effect of change in exchange rates on cash - 225
Cash and equivalents at beginning of year 946,490 785,490
---------- ----------
Cash and equivalents at end of period $1,334,809 $ 757,235
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
These interim consolidated financial statements include the financial statements
of Margo Nursery Farms, Inc. and all of its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
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 nine months ended September 30, 1997 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 1997. 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, 1996.
NOTE 2 - USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS - INVENTORY VALUATION ALLOWANCE
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The inventory valuation allowance is an estimate which is established through
charges to cost of goods sold. Management's judgement in determining the
adequacy of the allowance is based on several factors which include, but are not
limited to, costs of specific inventory items, sales histories of these items
and management's judgement with respect to future marketability of the
inventory. Based on the above, it is possible that the Company's estimate of the
inventory valuation allowance could change in the near term.
8
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Set forth below is the movement of the inventory valuation allowance for the
nine months ended September 30, 1997:
DESCRIPTION AMOUNT
Beginning balance, January 1, 1997 $ 420,000
Charges (Puerto Rico operation) 158,000
Write downs ($170,000 at the South
Florida operation) (318,000)
Ending balance, September 30, 1997 $ 260,000
=========
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 comply with the terms of the note.
Due to the unfavorable collection experience as well as the 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 in the consolidated statements of operations for
the year ended December 31, 1994.
9
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On February 12, 1997, the Company obtained a second mortgage on Cariplant's
property and equipment and entered into an agreement with Altec to modify the
repayment terms of the unpaid principal balance of $996,962, with payments
commencing in the year 2000.
At September 30, 1997 and December 31, 1996, notes receivable included the
following:
DESCRIPTION 1997 1996
- ---------------------------------- -------- ------
Note receivable from Altec $301,621 $301,621
10% note, due October 1996,
collateralized by real property 26,331 26,331
8% notes, due on demand, personally
guaranteed by various Company personnel
(no collections are expected in 1997) 58,031 51,230
-------- --------
$385,983 $379,182
======== ========
NOTE 4 - PROPERTY AND EQUIPMENT
At September 30, 1997 and December 31, 1996 property and equipment consisted of
the following:
DESCRIPTION 1997 1996
--------------------------------- ---------- -------
Land and land improvements $ 315,400 $ 859,380
Buildings 407,659 448,968
Equipment and fixtures 1,499,175 1,445,545
Transportation equipment 747,179 728,831
Stock Plants - 97,277
Leasehold improvements 1,860,755 1,845,026
---------- ----------
4,830,168 5,425,027
Less accumulated depreciation and
amortization (1,878,924) (1,560,381)
---------- ----------
$2,951,244 $3,864,646
========== ==========
10
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NOTE 5 - NET INCOME PER COMMON SHARE
Net income per share of common stock is computed by dividing net income 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 nine months ended September 30, 1997, the Company wrote off
stock plants with a cost of $97,277 and a book value of $72,140. The
write off was charged to an accrual made as of December 31, 1996 for
the possible impairment of assets at the Company's South Florida
location. In addition, the remaining balance of this accrual at
September 30, 1997, amounting to $183,654 was included in the
determination of the gain of land sold at the South Florida location.
During the nine months ended September 30, 1996, the Company acquired a
residence (previously leased by the Company) from a partnership, whose
partners included among others, the Company's major shareholders. The
purchase price of the residence, based on an appraisal prepared by an
independent certified real estate appraiser, amounted to $220,800. As
part of the acquisition, the Company assumed a commercial loan
amounting to $87,789, owed by the partnership, recorded an account
payable to the Company's major shareholders 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 nine months ended September 30,
1997 and 1996, include interest payments amounting to approximately
$60,300 and $1,474,447 (of which $1,411,296 represents the accrued
interest regarding a settlement agreement with the Company's former
principal lender) respectively. Income tax payments for the nine months
ended September 30, 1997 amounted to approximately $23,500.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Margo Nursery Farms, Inc. and its subsidiaries, (collectively, the "Company")
are primarily engaged in the business of growing and distributing tropical
plants and trees. The Company is also engaged in the manufacturing and
distribution of its own line ("Rain Forest") of planting media and aggregates,
sales of lawn and garden products and also provides landscaping design and
installation services.
PRINCIPAL OPERATIONS:
The Company's business is currently conducted at two locations in Puerto Rico.
Effective September 30, 1997 the Company closed its operation in South Florida.
These operations are described below:
PUERTO RICO OPERATIONS
The Company's principal operation in Puerto Rico is conducted at a 117 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.
On October 31, 1996, the Company entered into an agreement with Cali Orchids,
Inc. ("Cali"), a Puerto Rico based grower of orchids, bromeliads, anthuriums,
poincettias and ornamental foliage, to purchase certain assets of Cali,
including its live goods inventory and inventory of pots, peat, soil, chemical
and fertilizers. The purchase price was approximately $190,000 and the
transaction was closed on January 1, 1997. The agreement also provided for the
leasing of Cali's facilities (13 acres) and equipment for a five year term
(subject to two additional five year renewals) and the hiring of Cali's
President as a general manager for the Company's new location.
The Company's operations in Puerto Rico include Margo Nursery
Farms, Inc. (a Florida corporation), Margo Landscaping and Design,
Inc., Margo Garden Products, Inc., and Rain Forest Products Group,
Inc. (all Puerto Rico corporations).
Margo Nursery Farms, Inc., which operates under the trade name of Margo Farms
del Caribe, is engaged in the production and distribution of tropical and
flowering plants. Its 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, bedding plants
and ground covers. Its customers include wholesalers, retailers, chain stores
and landscapers primarily located in Puerto Rico and the Caribbean. As a bona
fide agricultural enterprise, the Company enjoys a 90% tax exemption
12
<PAGE>
under Puerto Rico law from income derived from its nursery business in Puerto
Rico. The Company also receives a credit under Section 936 of the Internal
Revenue Code against a portion of federal income taxes payable from its
operations in Puerto Rico.
Prior to April 1, 1997, Margo Landscaping and Design, Inc. ("Margo
Landscaping"), provided landscaping services to customers in Puerto Rico and the
Caribbean. Margo Landscaping was also engaged in sales of lawn and garden
products, including plastic and terracotta pottery, planting media (soil, peat
moss, etc.) and mulch. It is also the exclusive distributor of Sunniland
Corporation's fertilizer and pesticide products, as well as Milorganite for
Puerto Rico and the Caribbean.
Effective April 1, 1997, the Company reorganized its landscaping and hard goods
business. Pursuant to the reorganization, the landscaping business previously
conducted by Margo Landscaping was transferred to a new subsidiary that changed
its name to "Margo Landscaping and Design, Inc." and Margo Landscaping changed
its name to "Margo Garden Products, Inc." and will henceforth conduct the
Company's hard good business. The reorganization was directed at separating
those activities (landscaping) that are entitled to certain beneficial tax
treatments under the Puerto Rico Agricultural Incentives Act from those (sale of
hard goods) that are not entitled to such benefits.
Rain Forest Products Group, Inc. ("Rain Forest") commenced operations in April
1996. It is engaged in the manufacturing of potting soils, mulch, professional
growing mixes, river rock and gravels. Rain Forest's products are marketed by
Margo Garden Products, Inc. The Company has been granted a tax exemption grant
from the Government of Puerto Rico for the operations of Rain Forest. The grant
includes a 90% tax exemption from income and property taxes and a 60% exemption
from municipal taxes for a period of 15 years, commencing January 1, 1997.
SOUTH FLORIDA OPERATIONS
The Company's South Florida operations conducted through Margo Bay Farms, Inc.
have continued to incur operating losses since resuming sales in 1994. It has
not been able to obtain adequate sales levels sufficient to make the operation
feasible due to the strong competition in South Florida. Based on the foregoing,
at December 31, 1996 the Company's Board of Directors requested management to
review the continued viability of this operation with the goal of making a final
determination during 1997 whether this operation should be closed and the
related assets disposed of.
13
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On August 15, 1997, after a review of past and present performance of the South
Florida operation, and in view of the strong competition in that market, the
Board determined to close the South Florida operations effective September 30,
1997. In connection with such determination, the Company took a charge of
approximately $340,000 to cost of sales during the second quarter of 1997,
thereby writing down the carrying value of the South Florida inventory and
incurred approximately $125,000 in closing costs during the third quarter of
1997.
On September 29, 1997, the Company sold its 54 acre farm in South Florida for
$800,000 cash and realized a gain of approximately $402,000 on the sale. The
Company owns another 20 acre farm in South Florida, for which it has also
received an offer to purchase. The Company is in process of negotiating the
terms and conditions for this sale, which is expected to occur before December
31, 1997. Refer to "Results of Operations for the Nine Months and Third Quarters
ended September 30, 1997 and 1996" herein.
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 the Company's most 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, as well as to explore the possibility of diversifying
into other activities in Puerto Rico, including but not limited to, real estate
development.
14
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RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THIRD QUARTERS ENDED
SEPTEMBER 30, 1997 AND 1996
During the nine months ended September 30, 1997, the Company incurred a net loss
of approximately $744,000, or $.39 per share, compared to net loss of $108,000,
or $.06 for the same period in 1996.
For the quarter ended September 30, 1997, the Company incurred a net loss of
approximately $67,000, or $0.04 per share, compared to net income of $1,000 for
the same period in 1996, or $0.00 per share.
The increase in net losses for the nine months, as well as the quarter ended
September 30, 1997, when compared to the same periods in 1996, is principally
due to a significant decrease in gross profit and an increase in administrative
expenses, arising in part, from the closing of operations in South Florida.
These increases in costs were offset in part, by a gain on the sale of land in
South Florida.
SALES
The Company's consolidated net sales for the nine months ended September 30,
1997 were approximately $5,082,000, compared to $4,596,000 for the same period
in 1996, or an increase of 10.5%. The increase in sales for 1997 when compared
to 1996, is principally due to a significant increase in sales of landscaping
services, which increased by 100% ($1,308,000 in 1997 vs. $654,000 in 1996).
However, sales of plant material for the nine months, ended September 30, 1997
decreased by 7% when compared to the same period in 1996 ($2,440,000 in 1997 vs.
$2,629,000 in 1996).
Consolidated net sales for the third quarter of 1997 were approximately
$1,356,000, compared to $1,457,000 for the same period in 1996, or a decrease of
7%. The decrease in sales for the third quarter of 1997 when compared to the
same period in 1996 is principally due to a reduction in sales of plant material
of 23% ($630,000 in 1997 vs. $815,000 in 1996). The decrease in sales of plant
material during the third quarter of 1997 was principally due to a reduction in
sales volume to various retail chain stores in Puerto Rico.
GROSS PROFITS
The Company's gross profit for the nine months ended September 30, 1997 was 17%,
compared to 39% for the same period in 1996, or a decrease of 22%. Gross profit
for the third quarter of 1997 was 18%, compared to 38% for the same period in
1996, or a decrease of 20%.
15
<PAGE>
The overall decrease in gross profit experienced by the Company during the nine
months as well as the third quarter ended September 30, 1997, when compared to
the same periods in 1996, is due to significant charges to cost of sales,
including the closing of the South Florida operation.
Regarding the South Florida operation, during the second quarter of 1997, the
Company charged approximately $340,000 to cost of sales (in addition to $170,000
which had been previously included in the inventory valuation reserve at
December 31, 1996) representing a substantial write down of inventory at this
location. The write down of this inventory resulted from the Company's review of
the continued viability of the operation, which included overproduction of plant
material with substantial storage and maintenance costs. Sales of remaining
inventory during the third quarter of 1997 yielded only marginal gross profits,
in view of the fact that the Company's intention was to dispose of the inventory
by September 30, 1997 in order to close the operation.
Charges to cost of sales for the nine months ended September 30, 1997 also
include an increase in the Puerto Rico inventory valuation reserve of $158,000
(of which $33,000 were reserved during the third quarter of 1997), arising from
increased storage and maintenance costs of remaining plant material incurred in
connection with various sales contracts, as well as delays in the commencement
of certain landscaping projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General, and Administrative Expenses ("SG&A") were approximately
$2,025,000 and $1,584,000 for the nine months ended September 30, 1997 and 1996
respectively. This represented a 28% increase in dollar terms and a 5% increase
over 1996 as a percentage of sales. The increase in SG&A for the nine months
ended September 30, 1997 when compared to the same period in 1996 is due
principally to higher payroll costs, increases in repairs and maintenance of
landscaping equipment as well as an accrual for legal and other professional
services recorded during the second and third quarters of 1997, in connection
with the proposed reincorporation of the Company. In addition to the above
increases, during the third quarter of 1997, certain costs associated with the
closing of the South Florida operation were expensed as SG&A (approximately
$125,000).
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<PAGE>
SG&A for the third quarter of 1997 was approximately $725,000 compared to
$559,000 for the same period in 1996. This represented a 30% increase in dollar
terms and a 15% increase over 1996 as a percentage of sales. This sharp increase
in SG&A for the third quarter of 1997 is due to the increases previously
mentioned for the nine months ended September 30, 1997.
OTHER INCOME AND EXPENSES
Decreases in interest income, interest expense as well as litigation expense
(and related litigation settlement) for the nine months ended September 30,
1997, when compared to the same period in 1996, are due to the settlement of
litigation with the Company's former principal lender in May 1996. Decreases in
interest income as well as interest expense result from the application of
restricted cash (in escrow through May 1996) used for the payment of principal
and interest on the outstanding loans, subject of the litigation. Accordingly,
other income and expenses for the nine months ended September 30, 1997
principally reflect interest income and interest expense regarding the Company's
investments and debt other than those related to the settlement of litigation.
In connection with the Board of Directors' decision to close the South Florida
operation and dispose of its assets, on September 29, 1997, the Company sold a
54 acre nursery farm at this location for $800,000, resulting in a pre-tax gain
of approximately $402,000. The gain on the sale of this property was recorded
during the third quarter of 1997.
FINANCIAL CONDITION
The Company's financial condition at September 30, 1997 remains comparable with
that of December 31, 1996. The Company's current ratio increased to 4.2 to 1 at
September 30, 1997, from 3.4 to 1 at December 31, 1996, principally due to
decreases in accounts payable, accrued expenses and the proceeds from the sale
of land in South Florida.
At September 30, 1997 the Company had cash of $1,335,000 and short term
investments of $500,000, compared to cash of $946,000 and short term investments
of $1,004,000 at December 31, 1996. The decrease in cash and short term
investments at September 30, 1997 is principally due to a cash outflow from
operations of approximately $694,000, additions to property plant and equipment
of $88,000 and repayment of long term debt of $112,000. These cash outflows were
offset by proceeds of $785,000 from the sale of land in South Florida.
As a result of decreases in accounts payable and accrued expenses at September
30, 1997, the Company's debt to equity ratio improved to 21% when compared to
26% at December 31, 1996.
Stockholders equity at September 30, 1997 decreased due to the net loss incurred
during the nine month period. There were no dividends declared nor issuance of
capital stock.
17
<PAGE>
CURRENT LIQUIDITY AND CAPITAL RESOURCES
The Company is presently current on all its obligations. 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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending or threatened legal
proceedings of which management is aware will not have a material adverse effect
on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITIES HOLDERS
The Company held its annual meeting of shareholders on August 15, 1997.
At this meeting, shareholders were asked to vote on the election of directors
and the appointment of Deloitte & Touche LLP as auditors of the Company for the
year ended December 31, 1997. The directors of the Company were reelected for an
additional one-year term. Quorum at the meeting consisted of 1,857,184 shares,
or 98% 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 1,856,784 400 0
Blas R. Ferraiouli 1,856,784 400 0
Frederick Moss 1,856,784 400 0
Margaret D. Spector 1,856,784 400 0
Michael J. Spector 1,856,784 400 0
2. APPOINTMENT OF DELOITTE & TOUCHE LLP AS AUDITORS
FOR AGAINST ABSTAIN
1,857,184 0 0
There were no broker non-votes with respect to any of the two
proposals.
19
<PAGE>
ITEM 5. OTHER INFORMATION
The Company's Board of Directors has called a special meeting
of stockholders to be held on December 15, 1997, to vote on a
proposal to reincorporate the Company from a Florida
corporation to a Puerto Rico corporation.
The reincorporation would be accomplished by the merger of the
Company into an indirect wholly-owned subsidiary incorporated
under the laws of the Commonwealth of Puerto Rico.
Reincorporation as a Puerto Rico corporation could eliminate
possible double taxation of the Company in the future as a
result of the recent amendments to Section 936 of the Internal
Revenue Code. The reincorporation as a Puerto Rico corporation
is also consistent with the fact that the Company's principal
executive offices and principal operations are located in
Puerto Rico.
If the proposed reincorporation is effected, each share of
Common Stock of the Company will be deemed to be exchanged for
one share of the Common Stock of the new Puerto Rico company
that will have identical rights and limitations, except that
the new company will be a Puerto Rico corporation rather than
a Florida corporation.
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, 1997:
(i) Form 8-K dated July 2, 1997, reporting under Item 4,
a change in Registrant's Certifying Accountant.
(ii) Form 8-K dated September 30, 1997, reporting under
Item 2, the sale of land at the Company's location in
South Florida and under Item 5 a proposal to
reincorporate the Company as a Puerto Rico
corporation.
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: NOVEMBER 14, 1997 BY: /S/ MICHAEL J. SPECTOR
------------------ --------------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: NOVEMBER 14, 1997 BY: /S/ ALFONSO ORTEGA
------------------ ----------------------
Alfonso Ortega,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
21
<PAGE>
EXHIBIT INDEX
EXHBIT DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,834,809
<SECURITIES> 0
<RECEIVABLES> 1,088,006
<ALLOWANCES> (85,000)
<INVENTORY> 2,497,841
<CURRENT-ASSETS> 5,435,113
<PP&E> 4,830,168
<DEPRECIATION> (1,878,924)
<TOTAL-ASSETS> 9,104,786
<CURRENT-LIABILITIES> 1,305,102
<BONDS> 263,639
1,915
0
<COMMON> 0
<OTHER-SE> 7,534,130
<TOTAL-LIABILITY-AND-EQUITY> 9,104,786
<SALES> 5,081,715
<TOTAL-REVENUES> 5,544,761
<CGS> 4,204,612
<TOTAL-COSTS> 6,229,522
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,708
<INCOME-PRETAX> (744,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (744,469)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
