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, 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 August 14, 1997.
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SECOND QUARTER ENDED JUNE 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
OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
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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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
----------- ---------
Current assets:
Cash and equivalents $ 854,189 $ 946,490
Short term investments 500,000 1,004,000
Accounts receivable, net 1,197,634 1,007,947
Inventories 2,462,616 2,737,109
Prepaid expenses and other current assets 121,801 116,036
----------- -----------
Total current assets 5,136,240 5,811,582
Property and equipment, net 3,705,193 3,864,646
Due from shareholder 273,652 273,652
Notes receivable 385,983 379,182
Other assets 57,192 67,149
----------- -----------
Total assets $ 9,558,260 $10,396,211
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 153,863 $ 118,085
Notes payable 500,000 500,000
Accounts payable 567,614 630,572
Accrued expenses 418,894 425,634
Income tax payable - 23,492
----------- -----------
Total current liabilities 1,640,371 1,697,783
Long-term debt 314,905 427,078
----------- -----------
Total liabilities 1,955,276 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 3,012,151 3,689,681
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss - (9,164)
----------- -----------
Total shareholders' equity 7,602,984 8,271,350
----------- -----------
Total liabilities and shareholders' equity $ 9,558,260 $10,396,211
=========== ===========
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 June 30, 1997 and 1996
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,865,715 $1,742,806 $3,726,025 $3,138,932
Cost of sales 1,837,023 1,060,931 3,092,961 1,880,757
---------- ---------- ---------- ----------
Gross profit 28,692 681,875 633,064 1,258,175
Selling, general and administrative expenses 734,539 523,618 1,299,911 1,025,168
---------- ---------- ---------- ----------
Income (loss) from operations (705,847) 158,257 (666,847) 233,007
---------- ---------- ---------- ----------
Other income (expense):
Interest income 16,505 90,192 35,793 190,864
Interest expense (20,615) (70,497) (39,887) (167,715)
Litigation expenses - (63,258) - (93,258)
Litigation settlement - (302,884) - (302,884)
Miscellaneous income (expense) (7,829) 24,553 (6,589) 31,008
---------- ---------- ---------- ----------
(11,939) (321,894) (10,683) (341,985)
---------- ---------- ---------- ----------
Loss before provision for income tax (717,786) (163,637) (677,530) (108,978)
Income tax provision - - - -
---------- ---------- ---------- -------
Net loss $ (717,786) $ (163,637) $ (677,530) $ (108,978)
========== ========== ========== ==========
Net loss per common share $ (.38) $ (.09) $ (.36) $ (.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
Six Months ended June 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>
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 - (677,530) - - (677,530)
--------- ------ ---------- ---------- -------- ------- ----------
Balance at June 30, 1997 1,895,322 $1,915 $4,637,706 $3,012,151 ($48,788) $ - $7,602,984
========= ====== ========== ========== ======== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1997 and 1996
(Unaudited)
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss $ (677,530) $ (108,978)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 244,305 221,137
Increase in inventory valuation reserve 125,000 -
Write-off of inventory 340,000 -
Realized loss on translation adjustment 9,164 -
Changes in assets and liabilities affecting
cash flows from operating activities:
Accounts receivable (189,687) (269,881)
Inventories (190,507) (151,368)
Prepaid expenses and other current assets (5,766) 48,057
Increase in due to shareholder, net - (373,677)
Other assets 9,957 69,507
Accounts payable (62,958) (4,983)
Accrued expenses (6,740) (1,374,534)
Income tax payable (23,492) -
---------- ----------
Net cash used in operating activities (428,254) (1,944,720)
---------- ----------
Cash flows from investing activities:
Decrease in short term investments 504,000 -
Decrease in restricted cash - 6,732,597
Additions to property, plant and equipment (84,852) (300,971)
Increase in notes receivable (6,800) (2,165)
---------- ----------
Net cash provided by financing activities 412,348 6,429,461
---------- ----------
Cash flows used in financing activities:
Repayment of long-term debt (76,395) (3,647,611)
---------- ----------
Net increase (decrease) in cash (92,301) 837,130
Cash and equivalents at beginning of year 946,490 785,490
---------- ----------
Cash and equivalents at end of period $ 854,189 $1,622,620
========== ==========
See accompanying notes to consolidated financial statements.
7
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MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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 six
months ended June 30, 1997:
DESCRIPTION AMOUNT
----------- ------
Beginning balance, January 1, 1997 $ 420,000
Charges (Puerto Rico operation) 125,000
Write downs (South Florida operation) (170,000)
---------
Ending balance, June 30, 1997 $ 375,000
=========
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 June 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 June 30, 1997 and December 31, 1996 property and equipment consisted of the
following:
DESCRIPTION 1997 1996
--------------------------------- ---------- ----------
Land and land improvements $ 859,380 $ 859,380
Buildings 448,968 448,968
Equipment and fixtures 1,498,319 1,445,545
Transportation equipment 747,179 728,831
Stock Plants 97,277 97,277
Leasehold improvements 1,858,756 1,845,026
---------- ----------
5,509,879 5,425,027
Less accumulated depreciation and
amortization (1,804,686) (1,560,381)
---------- ----------
$3,705,193 $3,864,646
========== ==========
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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 six months ended June 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.
Regarding 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 six months ended June 30, 1997 and
1996, include interest payments amounting to approximately $40,500 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 six months ended June
30, 1997 amounted to approximately $23,500.
11
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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, distributing and installing
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 three locations, two in Puerto
Rico and another 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. Margo Landscaping is a wholesaler for Monsanto
Corporation's Solaris Group which includes the Ortho, Roundup and Greensweep
product lines (chemicals and pesticides). 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 Landscaping. 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 South Florida operation is conducted through Margo Bay Farms, Inc.("Bay
Farms") at 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. Approximately 20 acres are currently in
production. Bay Farms resumed sales during 1994. However, due to the significant
competition in South Florida, it has not been able to achieve adequate sales
levels and profitability through June 30, 1997. See "FUTURE OPERATIONS" herein.
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EUROPEAN OPERATIONS
In 1991, the Company formed Margo Imports, B.V., a Netherlands corporation, to
market the Company's products in Europe. In March 1993, the Company discontinued
the operations of Margo Imports in connection with the sale of Cariplant, S.A.,
a former subsidiary, but kept Margo Imports active for possible future sales to
Europe. Effective January 1, 1997, the Company closed Margo Imports.
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.
Historically, the Company has obtained better margins in Puerto Rico because of
the variety and quality of its inventory. The Company believes that it can
continue to increase its sales and margins by investing in more sophisticated
facilities and by controlling the size and variety of its inventory.
Effective January 1, 1997, the Company leased a 13 acre facility in the town of
Barranquitas, Puerto Rico, which includes approximately 110,000 square feet of
enclosed bench space for production of orchids, bromeliads, anthuriums,
poincettias and other ornamental and flowering plants. The Company believes that
the lease of this additional space will allow it to supply its customers with a
more complete product mix, thus increasing the Company's sales.
At June 30, 1997, Margo Landscaping had sufficient landscaping projects in the
pipeline to maintain operations through early 1998. Among the landscaping
projects that were in process 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.
The sale of hard goods through Margo Garden Products, Inc. will continue
representing an increasing proportion of the Company's overall sales. The
distribution of the Solaris product line (a Puerto Rico division of the Monsanto
Company), Sunniland Corporation's fertilizer and pesticides products, together
with Italian terracotta and plastic pottery, and all planting media related
products (bagged potting soil, peat moss, cypress mulch, etc) should continue to
provide increased sales. During late 1996 and early 1997, the Company became a
distributor of additional product lines which will complement its lawn and
garden products in order to provide a more complete mix of products to mass
merchandisers, retail chains, garden centers, supermarkets and landscapers.
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Rain Forest is presently engaged in the manufacturing and distribution of
potting soils, professional growing mixes, peat moss, mulch and aggregates under
its trade name of Rain Forest, throughout Puerto Rico and the Caribbean. These
products should also provide the Company with increased sales during 1997.
The Company's South Florida operations through Bay Farms 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.
During 1997, after a review of past and present performance of the South Florida
operation, and in view of the strong competition, the Company has determined to
recommend to the Board the closing of operations on or before September 30,
1997. In connection with such determination, the Company has taken a charge of
approximately $340,000 to cost of sales during the second quarter of 1997,
thereby writting down the carring value of the South Florida inventory to
approximately $77,000. See "Results of Operations for the Six Months and Second
Quarters ended June 30, 1997 and 1996 - Gross Profits" herein.
RESULTS OF OPERATIONS FOR THE SIX MONTHS AND SECOND QUARTERS ENDED
JUNE 30, 1997 AND 1996
During the first six months of 1997, the Company incurred a net loss of
approximately $678,000, or $.36 per share, compared to net loss of $109,000, or
$.06 for the same period in 1996.
For the quarter ended June 30, 1997, the Company incurred a net loss of
approximately $718,000, or $0.38 per share, compared to a net loss of $164,000
for the same period in 1996, or $0.09 per share.
The increase in net losses for the six months, as well as the quarter ended June
30, 1997, when compared to the same periods in 1996, is principally due to a
significant decrease in gross profit, as discussed below.
SALES
The Company's consolidated net sales for the first six months of 1997 were
approximately $3,726,000, compared to $3,139,000 for the same period in 1996, or
an increase of 19%. 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 150% ($977,000 in 1997 vs. $391,000 in 1996).
15
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Consolidated net sales for the second quarter of 1997 were approximately
$1,866,000, compared to $1,743,000 for the same period in 1996, or an increae of
7%. The increase in sales for the second quarter of 1997 when compared to the
same period in 1996 is also due to increased sales of landscaping services,
which increased by 97% ($470,000 in 1997 vs. $239,000 in 1996).
GROSS PROFITS
The Company's gross profit for the first six months of 1997 was 17%, compared to
40% for the same period in 1996, or a decrease of 23%. Gross profit for the
second quarter of 1997 was 2%, compared to 39% for the same period in 1996, or a
decrease of 37%.
The overall decrease in gross profit experienced by the Company during the first
six months as well as the second quarter of 1997, when compared to the same
periods in 1996, is principally due to significant charges to cost of sales,
recorded during the second quarter of 1997, including the anticipated 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. Inventory balance at
the South Florida operation, at June 30, 1997, after the write down, amounted to
approximately $77,000. Inventory on hand at the Company's South Florida location
will be sold and or disposed of at substantially reduced sales prices, in order
to close this operation on or before September 30, 1997.
Charges to cost of sales also include an increase in the Puerto Rico inventory
valuation reserve of $125,000, resulting 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. In addition to the fact that plant material with increased storage and
maintenance costs result in significant lower gross profit when sold, the
remaining plant material on hand requires additional monthly provisions to the
inventory valuation reserve, which further reduces gross profit as the
provisions are charged to cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General, and Adminitrative Expenses ("SG&A") were approximately
$1,300,000 and $1,025,000 for the first six months of 1997 and 1996
respectively. This represented a 27% increase in dollar terms and a 2.2%
increase over 1996 as a percentage of sales. The increase in SG&A for the first
six months of 1997 when compared to the same period in 1996 is due principally
to higher
16
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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 quarter of 1997, in connection with the proposed reorganization of the
Company.
SG&A for the second quarter of 1997 was approximately $735,000 compared to
$524,000 for the same period in 1996. This represented a 40% increase in dollar
terms and a 9.4% increase over 1996 as a percentage of sales. This sharp
increase in SG&A for the second quarter of 1997 is due to the increases
previously mentioned for the first six months of 1997.
OTHER INCOME AND EXPENSES
Decreases in interest income, interest expense as well as litigation expense
(and related litigation settlement) for the first six months and second quarter
ended June 30, 1997, when compared to the same periods 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 first six months of 1997
principally reflect interest income and interest expense regarding the Company's
investments and debt other than those related to the settlement of litigation.
FINANCIAL CONDITION
The Company's financial condition at June 30, 1997 remains comparable with that
of December 31, 1996. The Company's current ratio continues strong with a ratio
of 3.1 to 1 at June 30, 1997, and 3.4 to 1 at December 31, 1996.
At June 30, 1997 the Company had cash of $854,000 and short term investments of
$500,000, compared to cash of $946,000 and short terms investments of $1,004,000
at December 31, 1996. The decrease in cash and short term investments at June
30, 1997 is principally due to a cash outflow from operations of approximately
$428,000, additions to property plant and equipment of $85,000 and repayment of
long term debt of $76,000.
Except for a small decrease in accounts payable and long term debt, the
Company's liabilities at June 30, 1997 remain comparable to those at December
31, 1996. The Company's debt to equity ratio as of both balance sheet dates
remains at 26%, despite the Company's loss for the six months ended June 30,
1997.
Stockholders equity at June 30, 1997 decreased due to the net loss incurred
during the first six months of 1997. There were no dividends declared nor
issurance 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
Not applicable.
ITEM 5. OTHER INFORMATION
The Company is currently considering a corporate reorganization to
accomplish two goals: (i) creating a holding company form of
organizational structure and (ii) reincorporating 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. A holding company structure generally
would allow for and accommodate future growth from internal operations,
acquisitions or joint ventures, broaden the alternative for future
financing and provides for greater administrative and operational
flexibility and tax planning. The reincorporation as a Puerto Rico
corporation is consistent with the fact that the Company's principal
executive offices and principal operations are located in Puerto Rico.
Reincorporation as a Puerto Rico corporation could also eliminate
possible double taxation for the Company as a result of the recent
amendments to Section 936 of the Internal Revenue Code.
19
<PAGE>
If the proposed reorganization 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 holding company that will have identical rights
and limitations, except that the new holding company will be a Puerto
Rico corporation rather than a Florida corporation. Under the Florida
Business Corporation Act, stockholder approval for the reorganization
is not required, and, therefore, will not be sought and appraisal
rights will not be available to stockholders.
The proposed reorganization is subject to the approval of the Board of
Directors of the Company. If approved, the reorganization is scheduled
to become effective on or about September 30, 1997. If effected, the
Company will file a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing the effective date of the
reorganization.
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.
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 14, 1997 BY: /s/ MICHAEL J. SPECTOR
----------------------------------------
Michael J. Spector,
President and Chief
Executive Officer
Date: AUGUST 14, 1997 BY: /s/ ALFONSO ORTEGA
----------------------------------------
Alfonso Ortega
Vice President, Treasurer,
Principal Financial and
Accounting Officer
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule (for SEC use only).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 854,189
<SECURITIES> 0
<RECEIVABLES> 1,276,634
<ALLOWANCES> (79,000)
<INVENTORY> 2,462,616
<CURRENT-ASSETS> 5,136,240
<PP&E> 5,509,879
<DEPRECIATION> (1,804,686)
<TOTAL-ASSETS> 9,558,260
<CURRENT-LIABILITIES> 1,640,371
<BONDS> 314,905
0
0
<COMMON> 1,915
<OTHER-SE> 7,601,069
<TOTAL-LIABILITY-AND-EQUITY> 9,558,260
<SALES> 3,726,025
<TOTAL-REVENUES> 3,761,818
<CGS> 3,092,961
<TOTAL-COSTS> 4,399,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,887
<INCOME-PRETAX> (677,530)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (677,530)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
