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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED COMMISSION FILE
DECEMBER 31, 1997 NO. 0-15336
MARGO NURSERY FARMS, INC.
A PUERTO RICO CORPORATION - I.R.S. NO. 66-0550881
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
ROAD 690, KILOMETER 5.8
VEGA ALTA, PUERTO RICO 00692
REGISTRANT'S TELEPHONE NUMBER:
(787) 883-2570
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.001 par value,
held by non-affiliates of the registrant: $1,756,260 based on the last sales
price of $2.75 per share on March 13, 1998 and 638,640 shares held by
non-affiliates.
The registrant had 1,875,322 shares of common stock, $.001 par value,
outstanding as of March 13, 1998.
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<PAGE>
MARGO NURSERY FARMS, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES.....................................................9
ITEM 3. LEGAL PROCEEDINGS.............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...........................................11
ITEM 6. SELECTED FINANCIAL DATA.......................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................15
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK..........................................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........22
ITEM 11. EXECUTIVE COMPENSATION.......................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...................................................30
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The principal business of Margo Nursery Farms, Inc. and its subsidiaries
(collectively, the "Company") is the production and distribution of tropical and
flowering plants, the sale and distribution of lawn and garden products (plastic
and terracotta pottery, potting soils, chemicals and fertilizers) as well as
landscaping design and installation services.
CORPORATE REORGANIZATION
Effective December 31, 1997, after obtaining shareholder approval, the
Company changed its jurisdiction of incorporation from Florida to the
Commonwealth of Puerto Rico. The reincorporation was accomplished by means of
the merger of Margo Nursery Farms, Inc., a Florida corporation ("Old Margo")
into a newly created Puerto Rico corporation, Margo Transition Inc. ("New
Margo") with New Margo being the surviving corporation of such merger. As part
of the merger, New Margo then changed its name to Margo Nursery Farms, Inc., and
continued to operate the business previously operated by Old Margo with the same
officers and directors. The primary reasons for the reorganization was the
phase-out of Section 936 of the Internal Revenue Code of 1986, as amended, which
would have subjected Old Margo to U. S. income taxes from its operations in
Puerto Rico (see "Income Taxes" under Item 1-"Business" herein) as well as the
avoidance of further payment of taxes and franchise fees to the State of
Florida, where the Company no longer conducts business.
Prior to the consummation of the above reincorporation, Margo Bay Farms,
Inc., a wholly-owned subsidiary operating in South Florida, was merged with and
into Old Margo. Prior to this merger, the Company had closed its South Florida
operations due to its lack of profitability, and sold the two nursery farms
which comprised its operation (see "South Florida Operations" under Item
1-"Principal Operations" herein).
Prior to April 1, 1997, Margo Landscaping & Design, Inc. ("Old
Landscaping") provided landscaping services to customers in Puerto Rico and the
Caribbean. Old Landscaping was also engaged in sales and distribution of lawn
and garden products ("hard goods"). Effective April 1, 1997, the Company
reorganized its landscaping as well as its hard goods businesses. Pursuant to
the reorganization, the landscaping business previously conducted by Old
Landscaping was transferred to a new subsidiary that changed its name to Margo
Landscaping & Design, Inc. ("Landscaping") and Old Landscaping changed its name
to Margo Garden Products, Inc. ("Garden Products") and will henceforth conduct
the Company's hard goods business. The reorganization was directed at separating
landscaping services from the sales and distribution of hard goods. Landscaping
and Garden Products are both wholly-owned Puerto Rico subsidiaries.
PRINCIPAL OPERATIONS
During 1997 and 1996, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico") and South Florida. These operations are described
below.
<PAGE>
PUERTO RICO OPERATIONS
The Company's operations in Puerto Rico are conducted at a 117 acre nursery
farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan, and a
13 acre nursery in the Municipality of Barranquitas, Puerto Rico. The 117 acre
farm is leased from Michael J. Spector and Margaret Spector, who are directors,
officers and principal shareholders of the Company. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS -- Lease and Option to Purchase Puerto Rico Nursery
Farm" herein. The Company's operations in Puerto Rico include Margo Nursery
Farms, Inc. (the parent company), Landscaping, Garden Products, and Rain Forest
Products Group, Inc. ("Rain Forest"), 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 under
Puerto Rico law from income derived from its nursery business in Puerto Rico.
The Company was also entitled to receive a credit against a portion of federal
income taxes under Section 936 of the Internal Revenue Code through December 31,
1997. See "Income Taxes" herein.
Landscaping provides landscaping services to customers in Puerto Rico and
the Caribbean, including commercial as well as residential landscape design and
landscaping.
Garden Products is engaged in sales of lawn and garden products, including
plastic and terracotta pottery, planting media (soil, peat moss, etc.) and
mulch. Among the various lawn and garden product lines it distributes, Garden
Products is the exclusive distributor of Sunniland Corporation's fertilizer and
pesticide products for Puerto Rico and the Caribbean.
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 Garden Products. The Company
enjoys a tax exemption grant from the Government of Puerto Rico for the
manufacturing operations of Rain Forest.
On October 31, 1996, the Company entered into an agreement with Cali
Orchids, Inc. ("Cali"), a Puerto Rico based grower of orchids, bromeliads,
anthuriums, poincettas 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 in the town of Barranquitas (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.
SOUTH FLORIDA OPERATIONS
During 1997, the Company's South Florida operation (Margo Bay Farms, Inc.)
continued to incur operating losses. Since resuming sales in 1994 (after
Hurricane Andrew), the South Florida operation has not been able to obtain
adequate sales levels sufficient to make the operation feasible due to the
strong competition in South Florida.
2
<PAGE>
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 Company's Board of Directors determined to close this operation effective
September 30, 1997, and dispose of all related assets. On September 29 and
November 28, 1997, the Company sold the two nursery farms (a 54 acre and a 20
acre tract) which comprised the Company's operation in South Florida.
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.
PRODUCTION
The Company's plants are propagated by using cuttings, plugs, liners, air
layers, seeds and tissue cultures. Cuttings are obtained from the Company's own
stock plants and from other nurseries for grow-out at the Company's facilities.
The newly planted cuttings take from two months to five years to mature into
finished products, depending on variety. Bedding plants and annuals take from
four to eight weeks to mature.
The Company's products are either field grown or container grown, depending
on the variety of plants and where they are grown. Most of these products start
out in small pots and are "stepped up" to larger pot sizes over time. The
Company produces both field and container grown material, as well as bedding
plants and hanging baskets.
MARKETING
The Company's marketing efforts have been primarily directed at customers
throughout Puerto Rico and the Caribbean.
The principal customers of the Company are wholesalers, mass merchandisers,
chain stores, retailers, garden centers, hotels, landscapers, government
projects and commercial businesses located in Puerto Rico and the Caribbean. The
Company targets construction and government projects which require extensive
landscaping. In addition, Margo Landscaping provides landscaping design,
installation and maintenance services which complement the sales function. For
large retailers in Puerto Rico (such as WalMart, Kmart, Masso Expo, and
Pueblo/Xtra) the Company develops promotional programs which include deliveries
to customer outlets and special pricing based on volume.
During 1997, 1996 and 1995, the Company's single largest customer Masso
Expo (formerly Builders Square) accounted for approximately 24%, 27%, and 28% ,
respectively, of the Company's net sales.
The Company does not have any significant long-term (over one year)
delivery contracts with customers, including landscaping contracts.
3
<PAGE>
FINANCIAL INFORMATION RELATING TO PRINCIPAL OPERATIONS
The following table sets forth information regarding operations at each of
the Company's operating locations for the years ended December 31, 1997, 1996
and 1995 as well as information regarding assets by location as of December 31,
1997, 1996 and 1995. The information is provided after the elimination of
intercompany transactions.
1997 1996 1995
---- ---- ----
(Amounts in 000's)
SALES BY LOCATION:
South Florida $ 478 $ 471 $ 446
Puerto Rico:
Plants 2,957 3,192 3,093
Lawn and Garden products 1,390 1,429 940
Landscaping 1,724 1,017 455
------- ------- -------
$ 6,549 $ 6,109 $ 4,934
======= ======= =======
OPERATING PROFIT (LOSS) BY LOCATION:
South Florida $ (517) $ (95) $ (501)
Puerto Rico (722) 102 173
Netherlands - - (5)
------- ------- -------
$(1,239) $ 7 $ (333)
======= ======= =======
IDENTIFIABLE ASSETS BY LOCATION:
South Florida $ - $ 2,370 $ 8,803
Puerto Rico 8,952 8,022 6,596
Netherlands - 4 2
------- ------- -------
$ 8,952 $10,396 $15,401
======= ======= =======
TRADE NAMES AND TRADEMARK
The Company utilizes the Trade Names "Margo Farms" and "Margo Farms Del
Caribe", and has registered the name "Margo Farms" as a trademark with the
United States Department of Commerce Patent and Trademark Office. In addition,
the Company has registered "Margo Farms del Caribe" (as a trade name) and "Rain
Forest" (as a trademark) with the Department of State of the Commonwealth of
Puerto Rico.
COMPETITION
At the present time, the Company's sales efforts are primarily focused in
Puerto Rico and the Caribbean. Although competition increased slightly during
1997, the Company enjoys a significant advantage over its competitors because it
is the largest producer of quality nursery products in Puerto Rico. The Company
continues expanding its operations in Puerto Rico. Most of the Company's
competitors in Puerto Rico and the Caribbean are small nurseries and
landscapers.
4
<PAGE>
SEASONALITY
The demand for plants in Puerto Rico is year round, with increased demand
during spring, late fall and winter.
WORKING CAPITAL REQUIREMENTS OF THE INDUSTRY
The nursery industry requires producers to maintain large quantities of
stock plants and inventory to meet customer demand and to assure a new source of
products in the future. As a result, producers need to invest significant
amounts of capital in stock plants and inventory. The Company believes that it
has sufficient working capital for its operations from cash flow generated from
operations and short-term borrowings.
EMPLOYEES
At December 31, 1997, the Company had 122 full time employees, of which 104
were directly involved in nursery production activities, and 18 in sales,
accounting and administration. None of its employees are represented by a union.
GOVERNMENT REGULATION
The United States Department of Agriculture ("USDA") inspects cuttings
imported into the United States by the Company. In addition, USDA regulations
control various aspects of the Company's plant production process, including
restrictions on the types of pesticides and fertilizers. All pesticides and
fertilizers utilized by the Company are approved by the Environmental Protection
Agency, as required by USDA regulations. The USDA prohibits the importation of
foreign soil into the United States and limits the size of plants that can be
imported into the United States. Puerto Rico is considered part of the United
States for purposes of the USDA regulations.
Shipments of products may also be subject to inspections by certain Puerto
Rico or state officials. These officials may quarantine or destroy plants that
are contaminated or infected by hazardous organisms.
The Company's operations are subject to the Fair Labor Standards Act which
governs such matters as minimum wage requirements, overtime and other working
conditions. A large number of the Company's personnel are paid at or just above
the federal minimum wage level and, accordingly, changes in such minimum wage
rate affect the Company's labor costs.
NATURAL HAZARDS
The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of March 13, 1998, the Company had been unable to
obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
5
<PAGE>
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. The Company's newer facilities are
being constructed with fabricated steel in an attempt to reduce the damage from
any future storms. Each of the Company's locations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
INDUSTRY SEGMENTS
The Company is primarily engaged in one industry segment, the production
and marketing of tropical and flowering plants, the sale of related lawn and
garden products and the provision of landscaping services. Certain financial
information concerning this industry segment is set forth in Item 7 -
Management's Discussion and Analysis of Results of Operations and Financial
Condition and in the Company's Consolidated Financial Statements included as
Item 8 to this Annual Report on Form 10-K.
FUTURE OPERATIONS
The Company will continue to concentrate its economic and managerial
resources in expanding and improving its present operations in Puerto Rico. The
Company's Board of Directors has determined that these operations present the
Company's most attractive opportunities for the near 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 is also exploring the possibility of diversifying into other
activities within Puerto Rico, including but not limited to, real estate
development. In this regard, during January 1998, the Company incorporated a new
subsidiary, Margo Development Corporation. During 1998, the Company will be
seeking to acquire options to purchase and/or purchase real estate sites for the
development of residential projects in Puerto Rico.
INCOME TAXES
FEDERAL TAXES
As a Florida corporation, through December 31, 1997, the Company was
subject to federal income taxes on its worldwide operations. For U.S. income tax
purposes, the Company has elected the benefits of Section 936 ("Section 936") of
the Internal Revenue Code ("the "Code"). To qualify under Section 936 in any
given taxable year, a corporation must derive for the three-year period
immediately preceding the end of such taxable year, (i) 80% or more of it gross
income from sources within Puerto Rico and (ii) 75% or more of its gross income
from the active conduct of a trade or business in Puerto Rico. For taxable years
beginning prior to December 31, 1993, corporations that met certain requirements
and elected the benefits of Section 936 ("Section 936 Corporations") were
entitled to a credit against their United States corporate income tax for the
portion of such tax attributable to (i) income derived from the active conduct
of a trade or business within Puerto Rico ("active business income") or from the
sale or exchange of substantially all assets used in the active conduct of such
trade or business and (ii) qualified possession source investment income
("QPSII"). These benefits were reduced for taxable years commencing after
December 31, 1993, as described below.
6
<PAGE>
The Omnibus Budget Reconciliation Act of 1993 amended various provisions of
Section 936. The amendments (the "OBRA Amendments"), which were generally
effective for taxable years beginning after December 31, 1993, permit a taxpayer
to compute the tax credit available under Section 936 as under prior law but
limit the amount of credit allowed as determined under one of two alternatives
to be selected at the option of the taxpayer. Under the first alternative (the
"income credit"), the limit was equal to a fixed percentage of the amount of tax
credit allowable under prior law. This fixed percentage commenced at 60% for
taxable years beginning in 1994 and is reduced by 5% per year until 1998. For
taxable years beginning in 1998 such percentage would be 40%. Under the second
alternative (the "economic activity method"), which is based on the amount of
economic activity conducted by the taxpayer in Puerto Rico, the credit may not
exceed the sum of the following three components: (i) 60% of the qualified
possession wages and 15% of
allocable fringe benefits paid by the taxpayer, (ii) applicable percentages of
certain depreciation deductions claimed for regular tax purposes by the taxpayer
with respect to qualified tangible property and (iii) a portion of the
possession income taxes paid by the taxpayer except where the taxpayer uses the
profit-split method for determining its income.
The Small Business Job Protection Act of 1996 (the "1996 Amendments")
enacted into law on August 20, 1996, further amended Section 936 by repealing
the income tax credit available under such Section subject to a ten-year
grandfather rule applicable only for corporations that were actively conducting
a trade or business in Puerto Rico on October 13, 1995 and moving the economic
activity credit to a new Section 30A of the Code.
With respect to the income tax credit, the 1996 Amendments provide for a
five year period from 1994 to 1998 during which period the allowable credit is
reduced from 60% to 40%. Thereafter, and until the elimination of the credit,
which occurs for taxable years beginning in 2006, the credit is limited to 40%
subject to certain caps based on the taxpayer's Puerto Rico income over a base
period ending on October 1995.
The 1996 Amendments moved the economic activity credit to new Section 30A
of the Code which applies for taxable years beginning after December 31, 1995
and before January 1, 2006. The economic activity credit is computed in
substantially the same manner as under the prior law, providing a credit equal
to the sum of (i) 60% of qualified possession wages as defined in the Code,
which includes wages up to 85% of the maximum earnings subject to the OASDI
portion of Social Security and plus allocable fringe benefits of up to 15% of
qualified possession wages, (ii) a specified percentage of depreciation
deductions ranging from 15% to 65%, based on the class life of qualified
tangible property and (iii) a portion of the Puerto Rico income taxes paid by a
qualified domestic corporation (as defined), up to a 9% effective tax rate. For
taxable years beginning after December 31, 2001, the amount of income that would
qualify for the economic activity credit under new Section 30A would be subject
to a new cap based on the taxpayer's possession income for an average base
period ending before October 14, 1995.
In light of the phase-out of the benefits of Section 936 and new Section
30A, the Company decided to change its jurisdiction of incorporation to Puerto
Rico, where it enjoys substantial tax benefits discussed below. As a Puerto Rico
corporation, the Company, effective January 1, 1998, will generally only be
subject to U.S. income taxation to the extent it is engaged in a trade or
business in the United States or receives income from sources in the United
States.
7
<PAGE>
PUERTO RICO TAXES
The Company is also subject to Puerto Rico income taxes from its Puerto
Rico operations. Subject to certain limitations, the Company's federal income
tax liability is creditable against its Puerto Rico income tax liability.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico
(Act. No. 225 of December 1, 1995, as amended) provides the Company with a 90%
tax exemption for income derived from "bonafide" agricultural activities within
Puerto Rico, including sales within and outside Puerto Rico, as well as a 100%
exemption from property, municipal and excise taxes. The Act defines "bona fide
agricultural activity" to include the nursery business. The Act became effective
for taxable years commencing on or after December 1, 1995.
Prior to the adoption of the Agricultural Incentives Act, the Company had
obtained a grant of tax exemption from the Puerto Rico government under the
Puerto Rico Tax Incentives Act of 1987, granting it an exemption from income tax
on 90% of its income derived on the Company's export sales from Puerto Rico. The
grant expires in 2002. Due to the benefits of Act. No. 225, the Company is in
process of relinquishing the export sales grant.
Rain Forest obtained a grant of tax exemption for its manufacturing
operations from the Puerto Rico Government under the Tax Incentives Act of 1987.
The grant provides a 90% tax exemption from income and property taxes and a 60%
exemption from municipal taxes. The grant is for a period of 15 years,
commencing January 1, 1997.
8
<PAGE>
ITEM 2. PROPERTIES
During 1997, the Company conducted its operations from nursery facilities
located in Puerto Rico and South Florida.
PUERTO RICO NURSERY FACILITIES
The Company leases a 117 acre nursery facility in Vega Alta, Puerto Rico,
approximately 25 miles west of San Juan. The facility, which includes the
Company's corporate offices, consists of approximately 1,130,000 square feet of
shade houses, propagation and mist facilities, as well as a 10,000 square foot
warehouse for the Company's lawn and garden products. The nursery facility also
has irrigation equipment and pump houses, shipping and storage areas, as well as
two homes for field supervisors.
The Puerto Rico facility is leased from Michael J. Spector and Margaret D.
Spector (the "Spectors"), who are officers, directors and the major shareholders
of the Company, pursuant to a lease agreement dated as of January 1, 1993. The
lease had an initial term of five years subject to one additional renewal term
of five years at the option of the Company. During the initial term of the
lease, rent is $19,000 per month. During the renewal term, the rent increases to
the greater of $24,000 per month, or the original $19,000 per month adjusted on
the basis of the increase in the Wholesale Price Index ("WPI") published by the
United States Department of Labor, Bureau of Labor Statistics, from the WPI
which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998.
Additionally, the Company must pay all taxes on the property, maintain certain
insurance coverage and otherwise maintain and care for the property. The lease
also contains an option which permits the Company to purchase the property at
its appraised value at any time during the term of the lease. In consideration
of the option, the Company must pay $1,000 per month. On January 1, 1998, the
Company exercised its renewal option at a monthly rental of $24,000.
On January 1, 1994, the lease agreement was amended to include an
additional 27 acres of land adjacent to the nursery facility at a monthly rental
of $1,750. This amendment did not provide for renewal or purchase options for
this tract of land. Effective January 1, 1998, the Company and the Spectors
entered into an amendment to the lease agreement which grants the Company the
right to continue to lease the 27 acre parcel on a month to month basis. Either
party may terminate this portion of the lease upon 30 days prior written notice.
In connection with this amendment, the Spectors also agreed to reimburse the
Company, no later than March 1, 2001, the unamortized value of the leasehold
improvements applicable to such parcel as of the date of termination.
During the years ended December 31, 1997 and 1996, total lease payments to
the Spectors amounted to $249,000 per year (not including the monthly payments
for the option referred to above).
Effective January 1, 1997, the Company entered into lease a agreement with
Cali Orchids, Inc., to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial term of the lease, monthly payments amount to
$4,500. During the remaining four years of the initial term of the lease,
monthly payments amount to $5,000. During the first and second renewal terms,
monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
For the year ended December 31, 1997, total lease payments amounted to
$54,000.
9
<PAGE>
SOUTH FLORIDA NURSERY FACILITY
The Company's original nursery farm was located on a 54 acre parcel,
approximately 20 miles southwest of downtown Miami. This facility, including the
land, was owned by the Company. The Company also owned an additional 20 acre
parcel of land located near its South Florida nursery farm. These facilities
were sold during 1997, in connection with the closing of the South Florida
operations.
ITEM 3. 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 Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 15, 1997, the Company held a special meeting of shareholders to
consider a proposal to reincorporate the Company as a Puerto Rico corporation
pursuant to the merger of Old Margo with and into the Company. The
reincorporation proposal was approved and the reincorporation was effective
December 31, 1997. The results of the voting were as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- - --------- ------- ------- ---------
1,071,833 38,200 1,600 783,689
========= ====== ===== =======
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market ("NASDAQ")
under the symbol MRGO.
The following table sets forth the high and low sales prices for the
Company's common stock, as reported by NASDAQ, for each of the calendar quarters
of 1997 and 1996. The last reported sales price for the Common Stock on March
13, 1998 was $2.75 per share.
1997 1996
------------------------ ------------------------
QUARTER: HIGH LOW HIGH LOW
- - -------- ---- --- ---- ---
First $3 5/8 $2 1/2 $4 5/8 $2 5/8
Second 3 1 1/2 5 2 3/8
Third 3 3/8 1 3/8 4 1/4 3
Fourth 2 7/8 1 1/2 3 7/8 2 5/8
There were approximately 86 holders of record of the common stock as of
December 31, 1997. This amount includes custodians, brokers and other
institutions which hold the common stock as nominees for an undetermined number
of beneficial owners.
On February 27, 1998, the Company purchased 20,000 shares of common stock
at a cost of $47,500 in connection with the payment of shares to shareholders
who exercised their statutory dissenter's rights in connection with the
reincorporation of the Company. As of March 13, 1998, the Company had 1,875,332
shares of common stock outstanding.
The Company did not pay any dividends on its common stock during 1997 or
1996. The payment of cash dividends in the future is dependent upon the
earnings, cash position and capital needs of the Company, as well as other
matters deemed relevant by the Company's Board of Directors.
Dividends paid on the Company's Common Stock are generally subject to a 10%
withholding tax at source under Puerto Rico tax laws. United States shareholders
may be entitled to a foreign tax credit, subject to certain limitations, in
connection with the imposition of the withholding tax.
Prior to the first dividend distribution for the taxable year, individuals
who are residents of Puerto Rico may elect to be taxed on the dividends at the
regular graduated rates, in which case the special 10% tax will not be withheld
from such year's distributions.
11
<PAGE>
United States citizens who are non-residents of Puerto Rico may also make
such an election, except that notwithstanding the making of such election of the
10% withholding tax will still be made on any dividend
distribution unless the individual files with the Company prior to the first
distribution date for the taxable year a certificate to the effect that said
individual's gross income from sources within Puerto Rico during the taxable
year does not exceed $1,300 if single, or $3,000 if married, in which case
dividend distributions for said year will not be subject to Puerto Rico taxes.
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been taken from the Consolidated
Financial Statements included with this Annual Report on Form 10-K. The selected
financial data should be read in conjunction with Item 7 - Management's
Discussion and Analysis of Results of Operations and Financial Condition and the
Company's Consolidated Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Net Sales $ 6,548,912 $ 6,108,865 $ 4,933,718 $ 3,679,367 $ 2,489,881
Gross Profit 1,365,335 2,137,340 1,777,358 1,467,202 1,282,636
Selling, general and administrative expenses 2,604,106 2,130,114 2,110,380 1,782,840 1,735,929
Income (loss) from operations (1,238,771) 7,226 (333,022) (315,638) (453,293)
Loss before income tax provision
extraordinary item and cumulative effect on prior years
of accounting change (750,534) (553,722) (386,334) (386,798) (420,280)
Extraordinary item, net - - - - 4,358,147
Cumulative effect on prior years of applying new method
of accounting for income taxes - - - - 899,220
Net income (loss) (750,534) (577,214) (396,334) (510,798) 4,949,887
Net income (loss) per common share - basic ($.40) ($.30) ($.21) ($.27) $2.62
Weighted average number of common shares outstanding 1,895,322 1,895,322 1,895,322 1,895,322 1,892,572
Balance Sheet Data:
Working capital $ 4,151,894 $ 4,113,799 $ 5,020,099 $ 5,580,916 $ 6,039,687
Total assets 8,952,088 10,396,211 15,400,582 15,930,657 15,325,420
Long-term debt 252,883 427,078 354,707 372,424 5,293
Stockholders' equity 7,529,980 8,271,350 8,848,402 9,244,855 9,755,704
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
For the year ended December 31, 1997, the Company incurred a net loss of
approximately $751,000, compared to a net loss of $577,000 and $396,000 in 1996
and 1995, respectively. These amounts represent a loss per common share (basic)
of $.40, $.30 and $.21 for 1997, 1996 and 1995, respectively.
As previously mentioned, during 1997 the Company closed its South Florida
operation and sold its major assets, represented by two tracts of land. Although
the sale of these two properties resulted in a gain of $474,574 for 1997, this
gain was more than offset, however, by a loss from operations of $517,000 from
the South Florida operation, arising from storage and maintenance costs as well
as the write down associated with unsalable inventory and certain other
administrative costs related to the closing of the operation.
Operations in Puerto Rico during 1997 were negatively impacted by two
increases in minimum wage effective September 1996 and 1997, both representing
an increase of approximately 21% in production, warehouse and shipping, and
landscaping labor costs. All of the Company's production costs (including labor)
are capitalized as part of inventory. These wage increases combined with storage
and maintenance costs of slow moving inventory caused significant provisions to
the inventory valuation reserve in Puerto Rico.
Operations for 1996 and 1995 were also directly affected with storage and
maintenance costs of slow moving inventory. In an effort to control production
costs allocated to slow moving inventory, the Company has already identified
plant varieties that it does not intend to continue producing, in order to focus
on high volume varieties with high turnover and profit. In order to satisfy all
of its customer needs, the Company will broker from other nurseries those
varieties it does not intend to continue growing.
The Company's operations are also vulnerable to severe weather conditions.
Notwithstanding the precautionary measures taken to mitigate physical damage
from severe weather conditions, the indirect effects on the consumer, and hence,
the local economy, will have an impact an the Company's operations. During
September 1996 and 1995, various hurricanes affected Puerto Rico and the
Northeast Caribbean. Although Puerto Rico did not receive direct strikes from
those hurricanes, tropical storm winds and gusts were experienced, resulting in
loss of sales during the fourth quarter of both years.
The Company believes that it currently maintains adequate insurance
coverage for its facilities and equipment. However, as of March 13, 1998, the
Company had been unable to obtain adequate crop insurance coverage at a
reasonable cost for its inventories nor business interruption coverage for its
operations. The Company intends to continue to seek to obtain crop insurance and
business interruption insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be successful in obtaining such
coverages.
15
<PAGE>
RESULTS OF OPERATIONS
SALES
Consolidated net sales for the year ended December 31, 1997 were
approximately $6,549,000, representing a 7% increase from sales of $6,109,000 in
1996. This increase in sales for 1997 is principally due to increased sales of
landscaping services ($1,724,000 in 1997 versus $1,017,000 in 1996). The
increase in sales of landscaping services was offset by a decrease in sales of
plant material of approximately $235,000. This decrease was due to a reduction
in sales to two of the Company's major customers during the third and fourth
quarters of 1997.
Consolidated net sales for the year ended December 31, 1996 were
approximately $6,109,000, compared to sales of $4,934,000 for 1995. The increase
in sales of 24% for 1996 when compared to 1995, was mainly due to increased
sales of lawn and garden products ($1,429,000 in 1996 versus $940,000 in 1995),
as well as landscaping services ($1,017,000 in 1996 versus $455,000 in 1995) .
GROSS PROFITS
The following table sets forth certain information regarding the Company's
costs and expenses as a percentage of net sales.
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
----- ----- -----
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 79.2 65.0 63.9
----- ----- -----
Gross profit.................................. 20.8 35.0 36.1
Selling, general and administrative expenses.. 39.8 34.9 42.7
----- ----- -----
Income (loss) from operations................. (19.0) .1 (6.6)
Interest income (expense), net................ - (.2) .6
Other income (expenses) - net................. 7.5 (9.0) (1.8)
Loss before income tax provision.............. (11.5) (9.1) (7.8)
Income tax provision.......................... - .3 .2
----- ----- -----
Net loss...................................... (11.5) (9.4) (8.0)
===== ===== =====
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 21%, 35%, and 36%, for the years ended December 31,
1997, 1996 and 1995, respectively.
16
<PAGE>
The Company's gross profit for the year ended December 31, 1997 was 21%,
compared to 35% for 1996, or a decrease of 14%. The overall decrease in gross
profit for 1997 was due to significant charges to cost of sales, including the
write down of inventory resulting from the closing of the South Florida
operation.
Regarding the South Florida operations, during the second quarter of 1997,
the Company charged approximately $340,000 (in addition to $170,000 previously
included in the inventory valuation reserve at December 31, 1996) to cost of
sales, representing a substantial write down of inventory at this location.
Charges to cost of sales during 1997 also included a provision of $250,000
to the Puerto Rico inventory valuation reserve, arising from storage and
maintenance costs associated with overproduction and slow moving inventory.
As previously mentioned, during 1997, the Company experienced the effect of
two minimum wage increases of approximately 21%. Production labor comprises
approximately 35% of production costs, being the single highest production cost.
Selling prices are controlled by the market, and as inventory is sold and its
cost expensed, any increase in its components reduces gross profit.
To a lesser extent, gross profit was also affected during 1997 as a result
of decreases in selling prices of lawn and garden products, specifically to
large retail chains. Decreases in selling prices were necessary in order for the
Company to keep its competitive position in the market.
Gross profit for 1996 (35%) was adversely affected by provisions to
inventory valuation reserves amounting to $150,000 in Puerto Rico and $102,000
in South Florida. The provision in Puerto Rico was principally required due to
the maintenance of plant material produced in connection with various sales
contracts, as well as delays in the commencement of certain landscaping
projects. Gross profit for 1995 (36%) was also adversely affected by a provision
to an inventory valuation reserve of $250,000 in South Florida due to
overproduction and maintenance of plant material.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses (SG&A) for 1997
were approximately $2,604,000, compared to $2,130,000 in 1996, representing a
22% increase. These increases were again due to minimum wage increases,
(specifically in warehouse and shipping), increase in repairs and maintenance,
as well as professional fees incurred in connection with the Company's
reorganization. In addition to the above, certain costs associated with the
closing of the South Florida operation were expensed as SG&A.
SG&A for 1996 ($2,130,000) when compared to 1995 ($2,110,000) increased by
1%, represented by a mix of small variances.
SG&A for 1995 ($2,110,000) when compared to 1994 ($1,783,000) increased by
18%, and was directly related to increases in selling, warehousing and shipping
expenses as a result of a 34% increase in sales for 1995.
OTHER INCOME AND EXPENSE
Decreases in interest income, interest expense as well as litigation
expense (and related litigation settlement) for 1997, when compared to 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
17
<PAGE>
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 1997
principally reflect interest income and interest expense regarding the Company's
investments and debt other than those related to the settlement of litigation.
Interest income, interest expense and litigation expenses for 1995
represent actual income and expenses incurred in connection with investments,
debt and legal fees related to the litigation with the Company's former
principal lender in that year.
During 1997, the Company sold two tracts of land in South Florida at an
aggregate gain of $474,574, arising from the Company's decision to close its
South Florida operation.
During 1996, the Company recorded a provision of $250,000 related to the
impairment of the assets of the South Florida operations.
18
<PAGE>
FINANCIAL CONDITION
At December 31, 1997, the Company's financial condition continues
favorable, despite the reduction in shareholders' equity as a result of the net
loss of $751,000. The Company's current ratio continued strong at December 31,
1997 (4.55 to 1 in 1997 vs. 3.42 to 1 in 1996).
At December 31, 1997, the Company had cash of $1,230,000 and short term
investments of $500,000, compared to cash of $946,500 and short term investments
of $1,004,000 at December 31, 1996. The decrease in cash and short term
investments at December 31, 1997 is principally due to a cash outflow from
operations ($742,000), additions to property and equipment ($110,000) and
repayment of long term ($175,000) debt. These cash outflows were offset by the
proceeds from the sale of land in South Florida ($813,000).
As a result of decreases in accounts payable and accrued expenses at
December 31, 1997, the Company's debt to equity ratio improved to 19% when
compared to 26% at December 31, 1996.
Stockholders equity decreased at December 31, 1997 when compared to
December 31, 1996 due to the net loss incurred during the year. There were no
dividends declared nor issuances of capital stock during the year ended December
31, 1997.
INFLATION
The primary inflationary factors which may affect the Company's results of
operations and financial condition are the costs of labor and production
materials such as soil, pots, chemicals, fertilizer and plant cuttings. During
the last three years, the impact of inflation on the results of operations and
financial condition of the Company has been minimal due to the stability of wage
rates (except for the increase in minumium wage experienced during 1997) and the
availability of production materials from a wide variety of sources.
The Company does not anticipate that inflation will have a significant
effect on its future earnings or financial condition because increases caused by
inflation are ordinarily recovered through increases in prices.
YEAR 2000 ISSUE
The inability of computer hardware and software to recognize and properly
process data fields using a four-digit year to define the applicable year is
commonly referred to as the "Year 2000 Issue". As the year 2000 approaches,
computer systems using a two-digit year data field may be unable to accurately
process certain information.
The Company has completed a preliminary review of evaluating and analyzing
its current hardware and software programs and applications. Due to the nature
of the Company's operations, management as well as the Company's external
consultant both understand that year 2000 compliance will not pose significant
operational problems for its computer system.
While the Company has not initiated formal communications with its
suppliers, management also anticipates there will not be any major year 2000
compliance issues with them due to the nature of the Company's operations and
due to the fact that the Company does not order or communicate with its
suppliers using any computer based information system.
19
<PAGE>
The Company estimates that the total cost of being year 2000 compliant will
not exceed $75,000, and will be funded through operating cash flows. The Company
has planned commencing modifications to its computer system during the third
quarter of 1998 and anticipates being year 2000 compliant by late September
1999.
The costs of and completion date on which the Company believes it will be
year 2000 compliant are based on management's best estimates. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to the
Company's Consolidated Financial Statements and Schedules and the Auditors'
Report beginning on page F-1 of this Form 10-K. Supplementary data is not
required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company previously filed a Current Report on Form 8-K dated July 2,
1997, reporting a change in its independent accountants for the year ended
December 31, 1997, from the firm of Kaufman, Rossin & Co., P.A. to the firm of
Deloitte & Touche LLP.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of March 13, 1998. The background and
experience of these persons are summarized in the paragraphs following the
table.
NAME (AGE AT MARCH 13, 1998) POSITIONS WITH THE COMPANY
- - ---------------------------- --------------------------
Michael J. Spector (51) Chairman, President, Chief Executive Officer and
Director
Margaret D. Spector (46) Secretary and Director
Blas R. Ferraiuoli (53) Director
Frederick D. Moss (69) Director
Michael A. Rubin (55) Director
Guillermo Fradera (48) Vice President - Production
Alfonso Ortega (44) Vice President, Treasurer and Chief Financial
Officer
Rene Llerandi (38) Vice President - Marketing
Each director of the Company holds office until the next annual meeting of
shareholders and until his or her successor has been elected and qualified.
Officers serve at the discretion of the Board of Directors. All of the executive
officers of the Company except Margaret D. Spector devote their full time to the
operations of the Company.
BACKGROUND OF OFFICERS AND DIRECTORS
Set forth below is a summary of the background of each person who was an
officer or director of the Company as of March 13, 1998.
MR. SPECTOR currently serves as the Chairman of the Board, Chief Executive
Officer and President of the Company. He has held these positions since the
organization of the Company in 1981. His wife, Margaret D. Spector, is Secretary
and a director of the Company.
MRS. SPECTOR currently servers as the Secretary and as a director of the
Company. She has held these positions since the organization of the Company in
1981. Since July 1993, Mrs. Spector supervises the Company's lawn and garden
distribution business.
MR. FERRAIUOLI was elected a director of the Company in 1988 and continues
to hold that position. Since June 1994, he manages his own law firm in San Juan,
Puerto Rico. He was a partner in the law firm of Axtmayer, Adsuar, Muniz &
Goyco, San Juan, Puerto Rico from March 1994 to June 1994. Prior to March 1994,
he was a partner in the firm of Goldman Antonetti Cordova and Axtmayer. Mr.
Ferraiuoli practices civil, corporate and administrative law and has provided
services to the Company since 1987.
22
<PAGE>
MR. MOSS was elected a director of the Company in 1988 and continues to
hold that position. Since 1986, he has been an independent financial consultant
in New York City. He has also served as the Chairman of the Board of Trustees of
the Cincinnati Stock Exchange since 1989. Mr. Moss is a director of Summit High
Yield Fund (mutual fund) and the Summit Energy Market Fund (mutual fund).
MR. RUBIN was elected a director of the Company in 1995 and continues to
hold that position. Mr. Rubin is an attorney engaged in private practice. He has
been a partner in the law firm of Michael A. Rubin, P.A., Coral Gables, Florida,
for more than the past five years. Mr. Rubin provided legal services to the
Company during 1997.
MR. FRADERA currently serves as the Vice President of Production effective
October 1, 1997. Prior to October 1, 1997, he served as Vice President and
General Manager of the Company's South Florida operation. He held these
positions since December 1989. He joined the Company in 1984 and served as Vice
President for Corporate Development from 1987 to 1989.
MR. ORTEGA currently serves as the Vice President, Treasurer and Chief
Financial Officer of the Company. He has held this position since he joined the
Company in January 1993. From 1989 to January 1993, Mr. Ortega was an audit
manager for the accounting firm of Vila Del Corral & Company, San Juan, Puerto
Rico.
MR. LLERANDI currently serves as Vice President of Marketing. He has held
this position since April 1, 1993. He joined the Company in 1988 as Sales
Manager for Puerto Rico.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers to report their ownership of and
transactions in the Company's Common Stock to the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers.
Copies of these reports are also required to be supplied to the Company.
Specific dates for filing these reports have been established by the SEC, and
the Company is required to report in the annual report any failure of its
directors and executive officers to file by the relevant due date any of these
reports during the fiscal year ended December 31, 1997. Based solely on its
review of the copies of the report received by it, the Company believes that all
such filing requirements were satisfied, except that Michael J. Spector and
Margaret D. Spector filed two late reports relating to one transaction,
Frederick D. Moss filed three late reports related to two separate transactions
and J. Morton Davis filed two late reports related to his becoming a 10% holder.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation of the
Company's chief executive officer during each of the three years ended December
31, 1997, 1996 and 1995. No other executive officer of the Company earned more
than $100,000 during 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME OF INDIVIDUAL AND ----------------------------- OTHER ANNUAL
POSITION WITH THE COMPANY SALARY BONUS COMPENSATION
------------------------- ------ ----- ------------
<S> <C> <C> <C> <C>
Michael J. Spector 1997 $160,000 $ - $ 0
Chairman, President, Chief 1996 160,000 13,600 0
Executive Officer and Director 1995 160,000 13,600 0
</TABLE>
COMPENSATION OF DIRECTORS
The directors of the Company who are not employees of the Company are paid
a quarterly retainer fee of $1,000 and an additional $1,000 for each meeting of
the board (or committee thereof) attended, plus any travel and out-of -pocket
expenses incurred in connection with the performance of their duties. No
separate fees are paid for committee meetings attended on the same day as a
Board meeting. The directors of the Company who are employed by the Company do
not receive additional compensation for serving as directors. The Company also
provides directors liability insurance for its directors.
During 1996, Messrs. Ferraiuoli, Moss and Rubin received stock options to
acquire 2,500, 2,500 and 5,000 shares of Common Stock, respectively. Each option
has an exercise price of $31/8 and expires on August 9, 2006. No options were
granted to directors during 1997.
GRANT OF STOCK OPTIONS
No stock options were granted during the year ended December 31, 1997.
24
<PAGE>
OPTIONS EXERCISED DURING 1997 AND OPTION VALUES AT DECEMBER 31, 1997
The following table sets information on outstanding options held by the
Company's chief executive officer and their value at December 31, 1997. There
were no exercises of options during 1997. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at as of
December 29, 1997, the last day the common stock traded during 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 12/31/97 12/31/97(1)(2)
ACQUIRED VALUE ------------------------------ ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Spector(1) - - 19,500 18,000 $ - $ -
<FN>
- - ------------------
(1) Includes 7,500 options held by Margaret D. Spector, the wife of Michael J. Spector.
(2) Based on the last sales price of $1 3/4 per share on December 29, 1997 and
an exercise price of $3.16 and $3.44 for 16,000 and 3,500 exercisable
options, respectively, and an exercise price of $3.16 and $3.44 for 4,000
and 14,000 of unexercisable options, respectively, all options listed in
the above table were out-of-the-money as of December 31, 1997..
</FN>
</TABLE>
EMPLOYMENT CONTRACTS
The Company does not have any employment contracts with its executive
officers.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 13, 1998, the number of shares
of common stock of the Company owned beneficially by the following persons: (a)
each director of the Company; (b) all executive officers and directors of the
Company as a group; and (c) each person known to the Company who owns more than
5% of the outstanding common stock of the Company. Unless otherwise stated, all
shares are held with sole investment and voting power.
26
<PAGE>
<TABLE>
<CAPTION>
SECURITY OWNERSHIP AS OF MARCH 13, 1998
NAME
(POSITION WITH THE COMPANY) AMOUNT BENEFICIALLY OWNED(1) PERCENT OF CLASS(1)
- - --------------------------- ---------------------------- -------------------
<S> <C> <C>
Michael J. Spector 1,274,182(2) 66.6%
(Executive Officer and Director)
Margaret D. Spector 1,274,182(2) 66.6%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis 190,249(3) 10.1%
D.H. Blair Holdings, Inc.
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 1005
(Five Percent Shareholder)
Frederick D. Moss (Director) 13,000(4) (7)
Blas Ferraiuoli (Director) 8,500(4) (7)
Michael A. Rubin (Director) 4,000(5) (7)
All Executive Officers and 1,320,822(6) 68.3%
Directors as a Group
(8 persons)
<FN>
- - --------------------
(1) The percent of class held by each person includes the number of shares of
Common Stock the named person(s) has the right to acquire upon exercise of
stock options that are exercisable within 60 days of March 13, 1998 (except
in the case of Mr. and Mrs. Spector in which case all shares issuable upon
exercise of stock options are included whether or not exercisable within 60
days of March 13, 1998), but does not include shares of Common Stock
issuable upon exercise of stock options held by other persons.
(2) Includes 939,394 shares held directly by Mr. Spector and 297,288 shares
held by Mrs. Spector. Also includes stock options to acquire 30,000 and
7,500 shares held by Mr Spector and Mrs. Spector, respectively. The
Spectors share voting and investment power over the shares owned by each
other.
(3) This amount consists of 189,149 shares held in the name of D.H. Blair
Investment Banking Corp., a registered broker-dealer which is wholly-owned
by D.H. Blair Holdings, Inc., which in turn is wholly-owned by J. Morton
Davis and of 1,100 shares owned by Rosalind Davidowitz, the spouse of Mr.
Davis. This amount is based upon a Schedule 13G dated February 9, 1995, as
amended, filed with the Securities and Exchange Commission.
(4) Includes 4,500 shares issuable upon stock options exercisable on or within
60 days of March 13, 1998
(5) Includes 1,000 shares issuable upon stock option exercisable on or within
60 days of March 13, 1998
(6) Includes 37,500 shares issuable upon exercise of stock options granted to
Mr. and Mrs. Spector as described in footnote (1) above and 20,100 shares
issuable upon exercise of stock options granted to other officers and
directors that are exercisable on or within 60 days of March 13, 1998.
(7) Less than one percent.
</FN>
</TABLE>
27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMOUNT DUE FROM/TO PRINCIPAL SHAREHOLDER
In connection with the settlement of the Company's litigation with First
Union on May 29, 1996, the Company advanced $340,158 on behalf of Michael J.
Spector, which was the portion of the settlement that corresponded to claims
made by First Union against Mr. Spector in his individual capacity. This amount
was reduced by $66,506 that was due to the shareholder in connection with the
purchase of the residence described below under "Purchase of Residence." During
1997, the Company charged Mr. Spector for certain expenses paid on his behalf.
Accordingly, at December 31, 1997 and 1996, Mr. Spector owed the Company
$291,481 and $273,652, respectively. During March 1998, this receivable was
converted into a non-interest bearing note due on March 2001.
LEASE AND OPTION TO PURCHASE PUERTO RICO NURSERY FARM
Effective January 1, 1993, the Company and the Spectors entered into a
lease agreement with respect to the Puerto Rico nursery farm. The lease had an
initial term of five years and may be renewed for one additional term of five
years at the option of the Company. During the initial term of the lease, rent
was set at $19,000 per month. During the renewal term, the rent increases to the
greater of (x) $24,000 per month or (y) the original $19,000 per month adjusted
on the basis of the increase in the Wholesale Price Index ("WPI") published by
the United States Department of Labor, Bureau of Labor Statistics, from the WPI
which was in effect on January 1, 1993 to the WPI in effect on January 1, 1998.
Additionally, the Company must pay all taxes on the property, maintain certain
insurance coverages and otherwise maintain the property. The lease also contains
an option which permits the Company to purchase the property at its appraised
value at any time during the term of the lease. In consideration of the option,
the Company must pay the Spectors $1,000 per month. On January 1, 1998, the
Company exercised its renewal option at a monthly rental of $24,000.
Effective January 1, 1994, the lease agreement was amended to include an
additional 27-acre tract of land adjacent to the existing nursery facility for
$1,750 per month. The lease terms for this additional tract do not include
renewal of purchase options. Effective January 1, 1998, the Company and the
Spectors entered into an amendment to the lease agreement which grants the
Company th right to continue to lease the 27 acre parcel on a month to month
basis. Either party may terminate this portion of the lease upon 30 days prior
written notice. In connection with this amendment, the Spectors also agreed to
reimburse the Company, no later than March 1, 2001, the amortized value of the
leasehold improvements applicable to said parcel as of the date of termination.
See "Item 2 - Properties."
PURCHASE OF RESIDENCE
In August 1990, the Company agreed to lease a residence located in Puerto
Rico from a partnership whose partners include Michael J. Spector and Margaret
D. Spector. The lease had an initial term of five years and provided for
payments of $2,000 per month for the first year of the lease and $2,500 per
month each of the remaining four years. The Company also paid utilities, taxes,
insurance, maintenance and repairs on the residence. The Company utilizes the
residence to house employees, as well as off island customers.
28
<PAGE>
In January 1996, the Company purchased the residence from the partnership.
The purchase price, based on an independent appraisal prepared by a certified
appraiser, amounted to $220,800, including the assumption of the mortgage
referred to below. The property was subject to a 10% commercial loan with a
balance of
approximately $88,000, which was assumed by the Company. The Company believes
that the purchase price for the residence was comparable to that which the
Company would have obtained in an arm's length transaction with unaffiliated
parties.
CERTAIN OTHER RELATIONSHIPS
During 1997 the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
------ -----------
(a)(1) and FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(a)(2)
The information called for by this section of Item 14
is set forth in the Financial Statements and Auditor's
Report beginning on page F-1 of this Form 10-K. The index to
Financial Statements and Schedules is set forth on page F-2
of this Form 10-K.
(a)(3) EXHIBITS. The Exhibits set forth in the following Index of
the Exhibits are filed as a part of this report:
(2)(a) Agreement and Plan of Merger dated November 17, 1997 between
Margo Nursery Farms, Inc. and Margo Transition Corp., is
incorporated by reference to the Company's Form 8-K dated
December 31, 1997.
(2)(b) Articles of Merger of Margo Nursery Farms, Inc. into Margo
Transition Corp., dated December 15, 1997, is incorporated
by reference to the Company's Form 8-K dated December 31,
1997.
(2)(c) Certificate of Merger of Margo Nursery Farms, Inc., into
Margo Transition Corp., dated December 15, 1997 is
incorporated by reference to the Company's Form 8-K dated
December 31, 1997.
(3) Articles of Incorporation and By-Laws:
(a) Articles of Incorporation are incorporated by reference
to the Company's Form 8-K dated December 23, 1992.
(b) By-Laws as of January 1, 1998 are filed herewith.
(4) (a) Stock Benefits Plan is incorporated by reference from
the Company's Form 10-K filed April 14, 1989.
(b) Employee Stock Option Plan is incorporated by reference
from the Company's Registration Statement on Form S-18
filed December 23, 1986.
(c) Stock Purchase Plan is incorporated by reference from
the Company's Form 10-K filed April 14, 1989.
(10) Material Contracts
(a) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 filed April 15,1993:
(i) Lease Agreement dated January 1, 1993 between the
Company and the Spectors.
(b) Material contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed April 15, 1994:
(i) First Amendment to Lease Agreement dated January 1,
1994 between the Company and the Spectors.
(c) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994:
30
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
(i) Loan Commitment Agreement, dated December 15, 1994
between Puerto Rico Farm Credit ACA and the Company.
(d) Material Contracts incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.
(i) Wholesale Agreement, dated September 28, 1995,
between the Company and Monsanto Puerto Rico, division of
Searle & Co.
(e) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995, filed April 16, 1996:
(i) Deed of Sale, dated February 14, 1996, between S. &
P., S. E. and the Company.
(f) Material contract incorporated by reference from Form
8-K November 28, 1997
(i) Mortgage Note, dated November 28, 1997, in the
amount of $475,000
(g) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 31, 1997
(i) Lease and Purchase Agreement, dated October 31,
1996 among Cali Orchids, Inc. and the Company.
(ii) Stock Option Agreement, dated August 9, 1996, with
Fred Moss.
(iii) Stock Option Agreement, dated August 9, 1996,
with Blas Ferraiuoli.
(iv) Stock Option Agreement, dated August 9, 1996, with
Michael A. Rubin.
(v) Stock Option Agreement, dated July 9, 1993, with
Fred Moss.
(vi) Stock Option Agreement, dated July 9, 1993, with
Margaret D. Spector.
(vii) Stock Option Agreement, dated July 9, 1993, with
Blas Ferraiuoli.
(viii) Stock Option Agreement, dated August 9, 1996,
with Margaret D. Spector.
(h) Material Contracts filed with this Form 10-K
(i) Promissory note of Micheal J. Spector dated
as of March 1, 1998.
(ii) Second Amendment to lease Agreement dated as of
January 1, 1998, between the Company and the Spectors.
(21) List of Registrant's Subsidiaries (filed herewith)
(27) Financial Data Schedule (filed herewith)
(b) REPORTS ON FORM 8-K.
31
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
(i) Form 8-K dated September 30, 1997, reporting under
Item 2 "Acquisition or Disposition of Assets" the sale of
the Company's 54 acre farm in South Florida and under Item 5
"Other Events" the implementation of a possible
reorganization.
(ii) Form 8-K dated December 12, 1997, reporting under
Item 2 "Acquisition or Disposition of Assets" the sale of
the Company's 20 acre farm in South Florida.
(iii) Form 8-K dated December 31, 1997, reporting
under Item 5 the successful completion of the Company's
reincorporation as a Puerto Rico Corporation.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
Dated: March 30, 1998 By: /S/ MICHAEL J. SPECTOR
--------------------------------------------
Michael J. Spector, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Dated: March 30, 1998 By: /S/ MICHAEL J. SPECTOR
--------------------------------------------
Michael J. Spector, Chairman
of the Board and Chief Executive Officer
Dated: March 30, 1998 By: /S/ MARGARET D. SPECTOR
--------------------------------------------
Margaret D. Spector, Director
Dated: March 30, 1998 By: /S/ BLAS R. FERRAIUOLI
--------------------------------------------
Blas R. Ferraiuoli, Director
Dated: March 30, 1998 By: /S/ MICHAEL A. RUBIN
--------------------------------------------
Michael A. Rubin, Director
Dated: March 30, 1998 By: /S/ FREDERICK D. MOSS
--------------------------------------------
Frederick D. Moss, Director
Dated: March 30, 1998 By: /S/ ALFONSO A. ORTEGA PEREZ
--------------------------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
MARCH 20, 1998
F-1
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
MARCH 20, 1998
PAGE
---------------
Independent Auditors' Reports................................... F-3
Financial Statements
Consolidated Balance Sheets.................................. F-5
Consolidated Statements of Operations........................ F-6
Consolidated Statements of Shareholders' Equity.............. F-7
Consolidated Statements of Cash Flows........................ F-8
Notes to Consolidated Financial Statements................... F-9
SCHEDULES
Schedule II - Valuation and Qualifying Accounts.............. F-28
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-2
<PAGE>
[DELOITTE & TOUCH LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Margo Nursery Farms, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheet of Margo Nursery
Farms, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index as Schedule II for the year ended December 31, 1997. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statements schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also inlcudes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the financial position of Margo Nursery Farms, Inc. and
Subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, such 1997 financial statements
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- - -------------------------
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 20, 1998
Stamp No. 1483809
affixed to original
F-3
<PAGE>
[KAUFMAN ROSSIN CO. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Margo Nursery Farms, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheet of Margo Nursery
Farms, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Margo Nursery Farms,
Inc. and Subsidiaries as of December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
In connection with our audits of the consolidated financial statements referred
to above, we audited the consolidated financial statements schedule listed under
Item 14(a)(2) for the years ended December 31, 1996 and 1995. In our opinion,
this schedule presents fairly, in all material respects, the information stated
therein, when considered in relation to the consolidated financial statements as
a whole.
/s/ KAUFMAN, ROSSIN & C0.
-------------------------
KAUFMAN, ROSSIN & C0.
Miami, Florida
February 25, 1997
F-4
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
----------- ------------
Current Assets:
Cash and equivalents $ 1,230,250 $ 946,490
Short term investments 500,000 1,004,000
Accounts receivable, net 1,050,949 1,007,947
Inventories 2,438,128 2,737,109
Prepaid expenses 101,792 116,036
----------- -----------
Total current assets 5,321,119 5,811,582
Property and equipment, net 2,419,595 3,864,646
Due from shareholder 291,481 273,652
Notes receivable 860,982 379,182
Other assets 58,911 67,149
----------- -----------
Total assets $ 8,952,088 $10,396,211
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 117,694 $ 118,085
Notes payable 500,000 500,000
Accounts payable 388,318 630,572
Accrued expenses 163,213 425,634
Income taxes payable - 23,492
----------- -----------
Total current liabilities 1,169,225 1,697,783
Long-term debt 252,883 427,078
----------- -----------
Total liabilities 1,422,108 2,124,861
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 250,000
shares authorized, no shares issued - -
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 2,939,147 3,689,681
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss - (9,164)
----------- -----------
Total shareholders' equity 7,529,980 8,271,350
----------- -----------
Total liabilities and shareholders' equity $ 8,952,088 $10,396,211
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales $6,548,912 $6,108,865 $4,933,718
Cost of Sales 5,183,577 3,971,525 3,156,360
---------- ---------- ----------
Gross profit 1,365,335 2,137,340 1,777,358
Selling, general and administrative expenses 2,604,106 2,130,114 2,110,380
---------- ---------- ----------
Income (loss) from operations (1,238,771) 7,226 (333,022)
---------- ---------- ----------
Other income (expense):
Interest income 73,060 189,924 455,041
Interest expense (73,274) (206,316) (421,313)
Litigation expenses, net of legal fees
reimbursed of $112,000 in 1995 - (87,961) (130,229)
Gain on sale of land in South Florida 474,574 - -
Litigation settlement - (255,174) -
Provision for impairment of assets
of subsidiary - (250,000) -
Other income 13,877 48,579 43,189
---------- ---------- ----------
488,237 (560,948) (53,312)
---------- ---------- ----------
Loss before income tax provision (750,534) (553,722) (386,334)
Income tax provision - 23,492 10,000
---------- ---------- ----------
Net loss $ (750,534) $ (577,214) $ (396,334)
========== ========== ==========
Loss per common share - basic $ (.40) $ (.30) $ (.21)
========== ========== ==========
Weighted average common shares 1,895,322 1,895,322 1,895,322
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON COMMON ADDITIONAL CUMULATIVE
STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
--------- ------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,895,322 $ 1,915 $4,637,706 $4,663,229 $(48,788) $ (9,207) $ 9,244,855
Net loss - - - (396,334) - - (396,334)
Foreign currency translation loss - - - - - (119) (119)
--------- ------- ---------- ---------- -------- -------- -----------
Balance at December 31, 1995 1,895,322 1,915 4,637,706 4,266,895 (48,788) (9,326) 8,848,402
Net loss - - - (577,214) - - (577,214)
Foreign currency translation gain - - - - - 162 162
--------- ------- ---------- ---------- -------- -------- -----------
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 - - - (750,534) - - (750,534)
--------- ------- ---------- ---------- -------- -------- -----------
Balance at December 31, 1997 1,895,322 $ 1,915 $4,637,706 $2,939,147 $(48,788) $ - $ 7,529,980
========= ======= ========== ========== ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (750,534) $ (577,214) $ (396,334)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 491,634 467,261 339,491
Provision for inventory valuation reserve 420,000 252,000 250,000
Realized loss on translation adjustment 9,164 - -
Gain on sale of land in South Florida (474,574) - -
Provision for possible bad debts 37,515 4,000 6,786
Provision for impairment of assets of subsidiary - 250,000 -
Changes in assets and liabilities affecting cash
flows from operating activities:
Accounts receivable (80,517) (319,782) 31,160
Inventories (121,019) (648,736) (570,641)
Prepaid expenses 14,244 53,571 19,367
Advances from (to) shareholders (17,829) (106,786) 106,786
Other assets 8,238 74,525 (67,685)
Accounts payable (242,254) 258,547 116,740
Accrued expenses (12,421) (1,379,553) 359,276
Income taxes payable (23,492) 23,492 (14,829)
----------- ----------- -----------
Net cash provided by (used in) operating activities (741,845) (1,648,675) 180,117
----------- ----------- -----------
Cash flows from investing activities:
Decrease (increase) in restricted cash - 6,732,597 (356,750)
Decrease (increase) in short-term investments 504,000 (504,000) 210,359
Purchases of property and equipment (109,639) (497,308) (422,832)
Increase in due from shareholder - (340,158) -
Proceeds from sale of land in South Florida 812,630 - -
Increase in notes receivable (6,800) - (10,000)
Collection on notes receivable - 7,667 14,379
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,200,191 5,398,798 (564,844)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable - - 300,000
Repayment of notes payable - - (1,000,000)
Proceeds from long-term debt - 122,000 78,000
Repayments of long-term debt (174,586) (3,711,285) (79,595)
----------- ----------- -----------
Net cash used in financing activities (174,586) (3,589,285) (701,595)
----------- ----------- -----------
Net increase (decrease) in cash and equivalents 283,760 160,838 (1,086,322)
Effect of change in exchange rates on cash - 162 (119)
Cash and equivalents at beginning of year 946,490 785,490 1,871,931
----------- ----------- -----------
Cash and equivalents at end of year $ 1,230,250 $ 946,490 $ 785,490
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Margo Nursery Farms, Inc. and subsidiaries (collectively, the "Company") are
primarily engaged in the production and distribution of a wide range of tropical
plants for sale to interior and exterior landscapers, plant leasing companies,
wholesalers and retailers. The Company is also engaged in the manufacturing and
distribution of its own line ("Rain Forest") of planting media, sales and
distribution of lawn and garden products (chemicals, pesticides, fertilizers,
plastic and terracotta pottery, etc.), and provides landscaping design and
installation services.
The Company's primary facility is located in Vega Alta, Puerto Rico. From this
facility, the Company sells principally to customers in Puerto Rico and the
Caribbean.
Effective December 31, 1997, after obtaining shareholder approval, the Company
changed its jurisdiction of incorporation from Florida to the Commonwealth of
Puerto Rico. The reincorporation was accomplished by means of a merger of the
Florida corporation into a newly created Puerto Rico corporation, with the new
company being the surviving corporation of such merger. The new corporation then
changed its name to Margo Nursery Farms, Inc. Among the reasons for the
reorganization was the phase-out of Section 936 of the Internal Revenue Code of
1986, as amended, as well as the avoidance of further payment of taxes and
franchise fees to the State of Florida, where the Company no longer conducts
business.
Prior to the consummation of the above reincorporation, Margo Bay Farms, Inc. a
wholly-owned subsidiary operating in South Florida, was merged with and into its
parent company, Margo Nursery Farms, Inc. This merger was effective December 12,
1997, after the Company closed its South Florida operations due to its lack of
profitability, and sold the two nursery farms which comprised its operations.
Prior to April 1, 1997, Margo Landscaping & Design, Inc. ("Margo Landscaping")
provided landscaping services to customers in Puerto Rico and the Caribbean.
Margo Landscaping was also engaged in sales and distribution of lawn and garden
products ("hard goods"). Effective April 1, 1997, the Company reorganized its
landscaping as well as its 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 &
Design, Inc., and Margo Landscaping changed its name to Margo Garden Products,
Inc. and will henceforth conduct the Company's hard goods business. The
reorganization was thus
F-9
<PAGE>
directed at separating the landscaping activities from the sales and
distribution of hard goods. As a result of the matters mentioned above, all
companies in the corporate group are now Puerto Rico corporations.
(a) PRINCIPLES OF CONSOLIDATION
For the year ended December 31, 1997 the consolidated financial statements
include the financial statements of Margo Nursery Farms, Inc. and its
wholly-owned subsidiaries, Margo Landscaping and Design, Inc., Margo Garden
Products, Inc., Rain Forest Products Group, Inc. and Margo Bay Farms, Inc. For
the years ended December 31, 1996 and 1995, these consolidated financial
statements also include the financial statements of Tropiflower, Inc. and Margo
Imports, B.V. (a Netherlands company), both former subsidiaries of Margo Bay
Farms, Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. At December 31, 1997, cash and cash equivalents
include $500,000 invested in a certificate of deposit bearing interest at 5.65%.
At December 31, 1996, cash and equivalents include $253,802 invested in a
certificate of deposit bearing interest at 4.40%.
(c) INVENTORIES
Inventory of plant material includes the cost of seeds, cuttings, pots, soil,
chemicals, fertilizer, direct labor and an allocation of overhead costs such as
depreciation and rent, among others. Inventories of plants are stated at the
lower of cost (first-in, first-out) or market. Inventories of lawn and garden
products are stated at the lower of average cost or market.
(d) PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION
Property and equipment are carried at acquisition cost. Depreciation and
amortization are provided over the estimated useful lives of the respective
assets on a straight-line basis. Such useful lives range from four to twenty
years.
The Company considers depreciation of certain facilities, equipment and stock
plants as a direct cost of production of inventory. As inventory is sold, such
cost is charged to cost of sales.
F-10
<PAGE>
(e) FOREIGN CURRENCY TRANSLATION
Assets and liabilities outside the United States and Puerto Rico are translated
to U.S. Dollars using exchange rates at the balance sheet date. Revenues and
expenses are translated at the average rates of exchange during the applicable
period. Effects of translation adjustments are deferred and included as a
separate component of shareholders' equity.
(f) REVENUE RECOGNITION
The Company recognizes sales of foliage and lawn and garden products upon
shipment from its facilities to customers.
(g) INCOME TAXES
The Company follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires the use of the liability method in accounting
for income taxes. Deferred income taxes are recognized for the
future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets
and liabilities.
Investment tax credits are recorded under the flow-through method.
Prior to the reincorporation, the Company was a Florida Corporation and,
therefore, is required to file a final federal corporate income tax return for
the taxable year ended December 31, 1997. However, the Company has elected to be
treated as a possessions corporation under Section 936 of the Internal Revenue
Code, and accordingly, will receive a credit of federal income tax payable for
operations in Puerto Rico. During 1993, the Internal Revenue Code was amended to
reduce the benefits available under Section 936. During 1996, the Internal
Revenue Code was further amended and Section 936 was repealed subject to a
ten-year grandfather rule. During the ten-year grandfather period the credit is
limited to certain caps based on the taxpayer's Puerto Rico income over a base
period ending in October 1995. These changes were effective for taxable years
commencing after December 31, 1993. For the years ended December 31, 1997, 1996
and 1995, there were no tax effects arising as a result of these changes. Margo
Bay Farms, Inc., also a former Florida corporation, will file a final federal
income tax return for the year ended December 1997.
The Agricultural Tax Incentives Act of the Commonwealth of Puerto Rico ("Act.
No. 225" of December 1, 1995, as amended) provides the Company with a 90% tax
exemption for income derived from "bonafide" agricultural business, including
sales of nursery plants within Puerto Rico and outside Puerto Rico, as well as a
100% exemption from property, municipal and excise taxes. The Act became
efective for taxable years commencing on or after December 1, 1995.
F-11
<PAGE>
Prior to the enactment of the Agricultural Tax Incentives Act, Margo Nursery
Farms, Inc. had been granted a 90% exemption from property taxes and from income
derived from its export sales, and a 60% exemption from volume of business tax
related to export sales, under the Puerto Rico Industrial Incentives Act of
1987. The exemption is for a period of 15 years commencing on July 6, 1987. Due
to the benefits of Act. No. 225, the Company is in process of relinquishing this
grant.
(h) LOSS PER COMMON SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS"). It replaces the
presentation of primary EPS with basic EPS, and requires dual presentation of
basic and diluted EPS on the face of the statement of operations. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Loss per share amounts for each of the years presented have been computed in
accordance with the provisions of "SFAS 128". Dilutive loss per share has not
been presented as the effect of considering outstanding stock options is
antidilutive.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts included in the consolidated financial statements for cash and cash
equivalents, short-term investments, accounts receivable, due from shareholder,
notes payable, accounts payable and accrued expenses reflect their fair value
due to the short-term maturity of these instruments. The fair values of the
Company's other financial instruments are discussed in Notes 5 and 9.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of property and equipment is evaluated periodically for
recoverability when considered in relation to the expected future undiscounted
cash flows of the underlying business over the estimated remaining useful life
of the asset.
(k) ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans pursuant to the
provisions of Accounting Principles Board Opinion 25 and related
interpretations, which generally require that compensation cost be recognized to
the extent the market price of the related stock exceeds the exercise price at
the measurement date. However, Statement of Financial Accounting Standards No.
123
F-12
<PAGE>
("SFAS 123"), Accounting for Stock-Based Compensation, provides an alternative
method for measuring compensation cost by measuring the fair value of the option
at the award date. Although the compensation cost measurement criteria is not
required to be adopted, SFAS 123 requires disclosure of pro forma information
regarding the effects of the application of its compensation cost measurement
criteria and of other information.
(l) RECLASSIFICATIONS
Certain reclassifications were made to the 1996 financial statements to conform
with the presentation used for 1997.
(m) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 allowance for doubtful accounts is an amount that management believes will
be adequate to absorb possible losses on existing accounts receivable that may
become uncollectible based on evaluations of collectibility and prior credit
experience. Because on uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the existing accounts
receivable and related allowance may change in the near term.
The inventory valuation allowance is also 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 reasonably possible the Company's estimate
of the inventory valuation allowance will change in the near term. The valuation
allowance at December 31, 1997 and 1996 was $300,000 and $420,000, respectively.
Set forth below is the movement of the inventory valuation allowance for the
years ended December 31, 1997 and 1996:
DESCRIPTION 1997 1996
----------------- -------- --------
Beginning balance $420,000 $350,000
Provisions 420,000 252,000
Write downs (540,000) (182,000)
-------- --------
Ending balance $300,000 $420,000
======== ========
F-13
<PAGE>
The Company has recorded a deferred tax asset of approximately $114,000 which is
offset by a valuation allowance. Realization of the deferred tax asset is
dependent on generating sufficient taxable income in the future. The amount of
the deferred tax asset considered realizable could change in the near term if
estimates of future taxable income are increased.
NOTE 2 - INVENTORY
At December 31, 1997 and 1996, inventory comprised the following:
DESCRIPTION 1997 1996
- - ----------------------------- ---------- ----------
Plant material $2,152,249 $2,595,721
Lawn and garden products 359,112 385,689
Raw material and supplies 226,767 175,699
---------- ----------
2,738,128 3,157,109
Less valuation allowance (300,000) (420,000)
---------- ----------
$2,438,128 $2,737,109
========== ==========
NOTE 3 - ACCOUNTS RECEIVABLE
At December 31, 1997 and 1996, accounts receivable comprised the following:
DESCRIPTION 1997 1996
- - ------------------------------- ---------- ----------
Trade receivables $1,010,653 $ 977,914
Government reimbursement 70,336 36,283
Accrued interest 11,149 19,509
Employee advances 28,011 19,584
Other accounts receivable 6,800 33,657
---------- ----------
1,126,949 1,086,947
Less allowance for doubtful
accounts (76,000) (79,000)
---------- ----------
$1,050,949 $1,007,947
========== ==========
NOTE 4 - SHORT TERM INVESTMENTS
At December 31, 1997 and 1996, short term investments consisted of certificates
of deposit bearing interest between 5.35% and 4.80%, respectively, of which
$500,000 were pledged as collateral for notes payable (refer to Note 8).
F-14
<PAGE>
NOTE 5 - NOTES RECEIVABLE
At December 31, 1993, the Company had a note receivable with an outstanding
principal balance of $996,962, arising 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 through December 1995. 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.
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 of
principal and interest commencing in the year 2000. Payment of interest on the
note was waived through January 1, 2000.
At December 31, 1997 and 1996, notes receivable comprised the following:
DESCRIPTION 1997 1996
------------- -------- --------
Note receivable from Altec $301,621 $301,621
8% mortgage note, collateralized by
land in South Florida, with interest
payments due monthly and principal
due in balloon payment on November
28, 2000 (refer to Note 16(a)) 475,000 -
10% note, collateralized by real
property 26,331 26,331
8% notes, due on demand, personally
guaranteed by present and former
Company personnel. 58,030 51,230
-------- --------
$860,982 $379,182
======== ========
F-15
<PAGE>
Amounts reflected in the balance sheet for notes receivable reflect their
current fair values based on market interest rates for comparable risks,
maturities and collateral. With respect to the Altec note, management believes
it is not practicable to estimate its fair value because of the difference
between the face value of the note and its carrying amount, deferral of
principal and interest payments until the year 2000 and other factors.
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, property and equipment comprised the following:
1997 1996
--------- ----------
Land and land improvements $ - $ 859,380
Buildings 224,327 448,968
Equipment and fixtures 1,504,103 1,445,545
Transportation equipment 747,180 728,831
Stock plants - 97,277
Leasehold improvements 1,860,754 1,845,026
---------- ----------
4,336,364 5,425,027
Less accumulated depreciation and
amortization (1,916,769) (1,560,381)
---------- ----------
$2,419,595 $3,864,646
========== ==========
During the years ended December 31, 1997, 1996, and 1995, depreciation expense
charged to production was approximately $258,000, $287,000, and $201,500,
respectively.
NOTE 7 - DUE FROM/TO SHAREHOLDER
At December 31, 1997 and 1996, amounts due from shareholder principally arose
from the settlement of litigation with the Company's former principal lender
(refer to Notes 12 and 16(a)). During March 1998, this receivable was converted
into a non-interest bearing note due on March 2001.
NOTE 8 - NOTES PAYABLE
At December 31, 1997 and 1996, the Company had short-term borrowings of $500,000
with a commercial bank in Puerto Rico collateralized by a certificate of
deposit. The notes bear interest at 1% over the rate earned by a $500,000
certificate of deposit (6.35% and 6.75% at December 31, 1997 and 1996, respec
tively).
F-16
<PAGE>
NOTE 9 - LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt comprised the following:
DESCRIPTION 1997 1996
- - ------------------------------------- ------ -----
Five-year term loans, variable
interest rate, 8.50% and 8.25% at
December 31, 1997 and 1996,
respectively, payable in quarterly
installments of $39,930, including
interest, through October 2001.
The loans are collateralized by
transportation and farm equipment $ 316,997 $ 444,535
8.50% automobile loan, payable in
monthly installments of $636,
including interest, through
March 2001. This loan was paid in
full in October 1997 - 27,163
9.75% commercial loan, payable in
monthly installments of $2,000,
including interest, through
July 2000, collateralized by real
estate property 53,580 73,465
---------- ----------
370,577 545,163
Less current portion (117,694) (118,085)
---------- ----------
Long-term debt $ 252,883 $ 427,078
========== ==========
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of long-term debt approximates the
recorded amounts.
The annual aggregate maturities of long-term debt and other financing
obligations are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
1998 $117,694
1999 161,243
2000 67,240
2001 24,400
--------
$370,577
F-17
<PAGE>
NOTE 10 - ACCRUED EXPENSES
At December 31, 1997 and 1996, accrued expenses comprised the following:
1997 1996
---------- ----------
Payroll and payroll taxes $ 97,570 $ 111,984
Professional fees 65,643 63,650
Provision for impairment of
assets of subsidiary - 250,000
---------- ----------
$ 163,213 $ 425,634
========== ==========
NOTE 11 - INCOME TAXES
The Company provides for income taxes using the applicable statutory tax rates
in the related jurisdictions where it operates. The provision for income taxes,
as reflected in the accompanying statements of operations for 1997, 1996 and
1995, does not bear a normal relationship to results of operations due to
several items, such as the 90% tax exemption and unutilized net loss
carryforwards.
F-18
<PAGE>
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consisted of the following:
1997 1996 1995
------- -------- ------
Current:
Puerto Rico $ - $ - $10,000
United States - 23,492 -
Deferred:
United States - - -
------ ------- -------
$ - $23,492 $10,000
====== ======= =======
Set forth below are explanations for the differences between the income tax
provision and the amount computed by applying the federal statutory income tax
rate of 34% to loss before income tax provision:
F-19
<PAGE>
1997 1996 1995
--------- --------- ---------
Income tax benefit computed
by applying federal rate $(255,181) $(188,265) $(131,354)
(Increase) decrease in income
tax benefit resulting from:
Tax-exempt income - (17,170) (17,000)
Puerto Rico tax exemption 141,706 (67,563) (62,813)
Effect of Florida and Puerto
Rico taxes (benefits) (11,807) (10,022) (14,184)
Increase (decrease) in
valuation allowance (469,100) 338,697 158,132
Federal tax attributes lost
as a result of reorganization,
including net operating
loss carryforwards 580,960 - -
Unutilized losses (untaxed
income) of foreign
subsidiaries - (4,094) 1,517
Permanent differences - - 70,758
Other differences 13,422 (28,091) 4,944
--------- --------- ---------
$ - $ 23,492 $ 10,000
========= ========= =========
Deferred income taxes were recognized in the consolidated balance sheet at
December 31, 1997 and 1996 due to the tax effect of temporary differences and
loss carryforwards as follows:
1997 1996
-------- ------
DEFERRED TAX ASSETS:
Excess book over tax depreciation $ - $ 30,016
Net operating loss carryforwards 97,470 731,920
Valuation allowances for inventory and
accounts receivable 16,920 -
Contribution carryover - 376
Alternative minimum tax credit carryover - 18,576
-------- --------
114,390 780,888
-------- --------
F-20
<PAGE>
1997 1996
-------- --------
DEFERRED TAX LIABILITIES:
Accrual to cash adjustments - 197,398
-------- --------
Gross deferred tax asset 114,390 583,490
Less: Valuation allowance (114,390) (583,490)
-------- --------
Net deferred tax asset $ - $ -
======== ========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On May 29, 1996, the Company (including all related entities) and Michael J.
Spector, President and the principal stockholder of the Company entered into a
Settlement Agreement with First Union National Bank of Florida ("the Bank"). The
Settlement Agreement covered all claims brought by the Bank against the Company
and related entities and settled all counterclaims brought by the the Company
against the Bank. The Company had also guaranteed $400,000 of personal loans
made to its major shareholder by the Bank, with an outstanding principal balance
of $230,000 at the time of the settlement. The Settlement Agreement provided for
a payment to the Bank of $5,625,000, of which $5,285,000 corresponded to the
Company and $340,000 corresponded to Mr. Spector. The settlement payment made by
the Company resulted in a charge of $255,174 to other expenses for the year
ended December 31, 1996.
The Company is a party to various legal actions arising in the ordinary course
of business. In the opinion of management, the disposition of these matters will
not have a material adverse effect on the financial condition of the Company.
NOTE 13 - SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
The articles of incorporation of the Company authorize the issuance of 250,000
shares of one cent ($0.01) par value series preferred stock, and the Board of
Directors is authorized to amend the articles of incorporation from time to time
to divide the preferred stock into series and to determine the number of shares
of each series and the relative rights, preferences and limitations of each such
series.
F-21
<PAGE>
(b) TREASURY STOCK
At December 31, 1997, the Company had 19,800 common shares in treasury at a cost
of $48,788, which were acquired during 1988.
As previously discussed in Note 1, effective December 31, 1997, the Company
reincorporated its parent company from a Florida to a Puerto Rico corporation.
On February 27, 1998, the Company purchased 20,000 shares of common stock at a
cost of $47,500 in connection with the payment of shares to shareholders who
exercised their statutory dissenter's rights regarding the reincorporation.
NOTE 14 - LEASE AND OPTION AGREEMENTS
(a) PROPERTY IN VEGA ALTA, PUERTO RICO
The primary Puerto Rico facility is leased from Michael J. Spector and Margaret
D. Spector ("the Spectors"), who are officers, directors and major shareholders
of the Company.
Effective January 1, 1993, the Company entered into a lease agreement with its
major shareholders for an initial five year period at a monthly rental of
$19,000. In addition, the lessors have released the Company from responsibility
for any claims arising from the Company's use of a defective fungicide in its
operations at the nursery facility. The Company has an option to renew this
lease for an additional five year period at the greater of $24,000 per month, or
the original $19,000 per month adjusted on the basis of the increase in the
Wholesale Price Index ("WPI") published by the United States Department of
Labor, Bureau of Labor Statistics, from the WPI which was in effect on January
1, 1993 to the WPI in effect on January 1, 1998. On January 1, 1998, the Company
exercised its option to renew the lease agreement with the Spectors at a monthly
rental of $24,000.
Under the above lease agreement, the Company has the option to purchase the
nursery facility at any time during the term of the lease, based on the
property's appraised value. The Company pays $1,000 per month for this purchase
option.
Effective January 1, 1994, the Company amended the lease agreement with its
major shareholders to include an additional 27 acres of land adjacent to the
nursery facility at a monthly rental of $1,750. This amendment did not provide
for renewal nor purchase options towards the addtional 27 acres of land.
Effective January 1, 1998, the Company and the Spectors entered into an
amendment to the lease agreement which grants the Company the right to continue
to lease the 27 acre parcel on a month to month basis. Either party may
terminate this portion of the lease upon 30 days prior written notice. In
connection with the lease amendment, the Spectors also agreed to reimburse the
Company the unamortized value of the leasehold improvements applicable to said
parcel as of the date of termination.
F-22
<PAGE>
Total rental payments amounted to approximately $249,000 in 1997, 1996 and 1995.
(b) PROPERTY IN CERRO GORDO, PUERTO RICO
In August 1990, the Company entered into an agreement to lease a residence from
a partnership whose partners include the Company's major shareholders. The lease
agreement called for monthly lease payments of $2,000 during the first year of
the five year term and $2,500 for each of the remaining four years. In addition,
the Company was responsible for payment of utilities, property taxes, insurance,
maintenance, repairs and administration of the resi dence. During the year ended
December 31, 1995, the Company incurred rental and other expenses related to
this property of approximately $41,000.
In February 1996, the Company purchased the residence from the partnership. The
purchase price, based on the appraised value of the property, amounted to
$220,800. The property was subject to a 10% commercial loan with a balance of
approximately $88,000, which was assumed by the Company.
(c) PROPERTY IN BARRANQUITAS, PUERTO RICO
Effective January 1, 1997, the Company entered into a lease agreement with Cali
Orchids, Inc., to lease a 13 acre nursery facility located in the town of
Barranquitas, Puerto Rico. The lease has an initial term of five years and may
be renewed for two additional five-year terms at the Company's option. During
the first year of the initial five-year term of the lease, monthly payments
amount to $4,500. During the remaining four years of the initial term of the
lease, monthly payments amount to $5,000. During the first and second renewal
terms, monthly payments increase to $6,000 and $7,000, respectively. The lease
agreement does not provide for any purchase option.
Total rental payments amounted to $54,000 for the year ended December 31, 1997.
F-23
<PAGE>
(d) AGGREGATE LEASE OBLIGATIONS AND EXPENSES
The Company's obligations under the above operating lease agreements, assuming
the Company exercises its renewal option on the Vega Alta and Barranquitas,
Puerto Rico properties, are as follows:
YEAR ENDING MINIMUM
DECEMBER 31, LEASE PAYMENTS
------------ --------------
1998 $ 369,000
1999 348,000
2000 348,000
2001 348,000
2002 360,000
Thereafter 708,000
----------
$2,481,000
==========
Total rental expense under all operating lease agreements amounted to
approximately $303,000, $249,000, and $279,000, for the years ended December 31,
1997, 1996, and 1995, respectively.
NOTE 15 - STOCK BENEFITS PLAN
In June 1988, the Company adopted a stock benefits plan (the "Plan") to replace
the Company's existing employee stock option plan. Under the terms of the Plan,
the Company's Board of Direc tors, through a committee, can award up to 300,000
shares of common stock to eligible employees through combinations of stock
options, stock appreciation rights, restricted stock awards, and stock purchase
rights. As of December 31, 1991, the Company had es tablished a stock option
plan and a stock purchase plan as described below:
(a) EMPLOYEE STOCK OPTION PLAN
The Company has an employee stock option plan ("the Plan") under which certain
employees may be granted options to purchase shares of common stock generally at
100% of fair market value at the time of the grant, except that options granted
to persons owning 10% or more of the outstanding common stock carry an exercise
price equal to 110% of the fair market value at the date of grant. Options
generally vest over a period of five years, become exercisable one year from the
date of grant and expire ten years after the date of grant. The status of the
stock option plan as of December 31, 1995, 1996 and 1997, and changes during the
years ended on those dates, are as follows:
F-24
<PAGE>
PRICE PER SHARE
------------------------
WEIGHTED
AVERAGE
DESCRIPTION SHARES RANGE PRICE
- - ------------------------------ ------- -------------- --------
Outstanding, January 1, 1995 67,250 $2.00 to $3.16 $2.93
Granted - - -
Exercised - - -
------- -------------- -----
Outstanding, December 31, 1995 67,250 2.00 to 3.16 2.93
Granted 46,500 3.13 to 3.44 3.25
Exercised - - -
------- -------------- -----
Outstanding, December 31, 1996 113,750 2.00 to 3.44 3.06
Granted - - -
Exercised - - -
Forfeited 27,500 2.00 to 3.13 2.88
------- -------------- -----
Outstanding, December 31, 1997 86,250 $2.00 to $3.44 $3.12
======= ============== =====
The following table summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE
- - ----------- ----------- ----------- -------- ----------- --------
$ 2.00 1,250 0.6 $2.00 1,250 $2.00
2.88- 3.16 43,500 5.5 3.01 34,800 3.01
3.13- 3.44 41,500 8.6 3.26 8,300 3.26
- - ----------- ------ --- ----- ------ -----
$2.00-$3.44 86,250 6.9 $3.12 44,350 $3.03
=========== ====== === ===== ====== =====
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in measuring stock based
compensation, including options. Accordingly, no compensation expense has been
recognized for options granted under the Plan. Had compensation expense been
determined based upon the fair value at the grant date for awards under the Plan
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and net loss per share, on a pro forma basis, would not have
significantly changed from those reported.
F-25
<PAGE>
b) EMPLOYEE STOCK PURCHASE PLAN
During the year ended December 31, 1988, the Company established an employee
stock purchase plan. At December 31, 1997, no employees had subscribed to
purchase any shares of the Company's common stock.
NOTE 16 - SUPPLEMENTAL DISCLOSURES FOR THE STATEMENTS OF CASH FLOWS
(a) NON-CASH INVESTING ACTIVITIES
During the year ended December 31, 1997, the Company wrote off stock plants with
a cost of $97,277 and a book value of $72,951. 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.
During 1997, the Company sold two properties at its South Florida location with
a cost of $1,088,594 and a book value of $990,105. Included in the determination
of the $474,574 gain on the sale of the property sold were $177,049 representing
the remaining balance of the accrual made at December 31, 1996 for the possible
impairment of assets at the Company's South Florida location. In connection with
the sale of one of the properties, the Company received a $475,000 mortgage note
from the buyer as part of the sales price.
During the year ended December 31, 1996, the Company acquired a residence
(previously leased by the Company) from a partnership. 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 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 Company employee.
During 1996, the Company acquired a vehicle with a cost of $28,477 (including a
7 year maintenance contract of $2,660) by assuming a loan for the same amount.
(c) OTHER CASH FLOW TRANSACTIONS
During the years ended December 31, 1997, 1996 and 1995, the Company made
interest payments of approximately $75,500, $1,513,000, and $110,900,
respectively, and made income tax payments of $23,500 during the year ended
December 31, 1997.
F-26
<PAGE>
NOTE 17 - MAJOR CUSTOMERS
During 1997, 1996 and 1995 the Company's single largest customer accounted for
approximately 24% ($1,540,000) 27% ($1,621,000), and 28% ($1,391,000),
respectively, of the Company's net sales.
NOTE 18 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded a $250,000 provision for
impairment of assets for its South Florida operation (Margo Bay Farms, Inc.).
During the fourth quarter of 1995, the Company recorded a valuation reserve for
inventory amounting to $218,750.
NOTE 19 - DISPOSAL OF MARGO IMPORTS, B.V. AND MARGO BAY FARMS, INC.
In 1991, the Company formed Margo Imports, B. V., a Netherlands corporation, to
market Company products in Europe. In March 1993, the Company discontinued these
operations in connection with the sale of Cariplant, S.A. (refer to Note 5).
Effective January 1, 1997, the Company disposed of Margo Imports, B. V.
recording the accumulated deficit in Margo Bay Farms, Inc., owner of all its
outstanding common stock.
Regarding the Company's South Florida operation (Margo Bay Farms, Inc.), due to
the strong competition, inadequate sales levels and lack of profitability, the
Company determined to review the continued viability of the operation during
1997, with the goal of making a final determination whether this operation
should be closed and the related assets disposed of. Due to the strong
competition, inadequate sales levels and lack of profitability, on August 15,
1997, the Company's Board of Directors determined to close this operation
effective September 30, 1997 and dispose of all related assets. On September 29
and November 28, 1997, the Company sold two nursery farms (a 54 acre and a 20
acre tract) which comprised the Company's South Florida operation. The sale of
these two properties resulted in a gain of $474,574. On December 12, 1997, Margo
Bay Farms, Inc. was merged with and into its parent company, Margo Nursery
Farms, Inc., prior to the reincorporation of the parent company.
The South Florida operation which closed effective September 30, 1997, accounted
for net sales of approximately $478,000, $471,000 and $446,000 and incurred net
loss of $27,000, $708,000 and $605,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
F-27
<PAGE>
NOTE 20 - SIGNIFICANT CONCENTRATION OF RISK
As discussed in Note 1, the Company's operations are principally concentrated in
Puerto Rico. The Company's operations are vulnerable to severe weather, such as
hurricanes, floods, storms and, to a lesser extent, plant disease and pests. The
Company believes that it currently maintains adequate insurance coverage for its
facilities and equipment. As of December 31, 1997, the Company had been unable
to obtain adequate crop and business interruption insurance coverage at a
reasonable cost. The Company intends to continue to seek to obtain crop and
business interrup tion insurance coverage at reasonable rates. However, no
assurance can be given that the Company will be able to obtain such insurance
coverages.
The Company believes it has taken reasonable precautions to protect its plants
and operations from natural hazards. The Company's newer facilities are being
constructed with fabricated steel in an attempt to reduce the damage from any
future storms. Each of the Company's operations currently has access to a
plentiful water supply and facilities for the protection of many of their
weather-sensitive plants.
Accounts receivable are due from customers resident in Puerto Rico.
Concentration of credit risk with respect to accounts receivable is mitigated by
monitoring the operations and financial strength of the Company's customers.
Certain short-term certificates of deposit are placed with local financial
institutions. Such credit risk is mitigated by depositing the funds with high
credit quality financial institutions and limiting the amount of credit exposure
in any financial institution.
F-28
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------------------ --------- ------------------------- ---------- -----------
BALANCE CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 79,000 $ 37,515 $ - $ (40,515) $ 76,000
Allowance for inventory valuation $ 420,000 $420,000 - (540,000) 300,000
--------- -------- -------- --------- --------
$ 499,000 $457,515 $ - $(580,515) $376,000
========= ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful account $ 136,100 $ 4,000 $ - $ (61,100) $ 79,000
Allowance for inventory valuation $ 350,000 $252,000 - (182,000) 420,000
--------- -------- -------- --------- --------
$ 486,100 $256,000 $ - $(243,100) $499,000
========= ======== ======== ========= ========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts $ 136,100 $ 6,786 $ - $ (6,786) $136,100
Allowance for inventory valuation $ 100,000 $250,000 - $ - 350,000
--------- -------- -------- --------- --------
$ 236,100 $256,786 $ - $ (6,786) $486,100
========= ======== ======== ========= ========
</TABLE>
F-29
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- - ------- -----------
3(b) By-Laws as of January 1, 1998
10h(i) Promissory note of Michael J. Spector dated as of March 1, 1998
10h(ii) Second Amendment to lease Agreement dated as of January 1, 1998,
between the Company and the Spectors
21 List of Registrant's Subsidiaries
27 Financial Data Schedule
EXHIBIT 3(B)
BY-LAWS
OF
MARGO NURSERY FARMS, INC.
(FORMERLY MARGO TRANSITION, INC.)
ARTICLE I. MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the Stockholders of
this corporation shall be held at the time and place designated by the Board of
Directors of the corporation. The annual meeting shall be held within four
months after the close of the corporation's fiscal year. The annual meeting of
Stockholders for any year shall be held no later than thirteen months after the
last preceding annual meeting of Stockholders. Business transacted at the annual
meeting shall include the election of Directors of the Corporation.
SECTION 2. SPECIAL MEETINGS. Special meetings of the Stockholders shall
be held when directed by the President or the Board of Directors, or when
requested in writing by the holders of not less than ten percent of all the
shares entitled to vote at the meeting. A meeting requested by Stockholders
shall be called for a date not less than ten nor more than sixty days after the
request is made. The call for the meeting shall be issued by the Secretary,
unless the President, Board of Directors, or Stockholders requesting the meeting
shall designate another person to do so.
SECTION 3. PLACE. Meetings of Stockholders may be held within
or without the Commonwealth of Puerto Rico.
SECTION 4. NOTICE. Written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called shall be delivered not
<PAGE>
2
less than ten nor more than sixty days before the meeting, either personally or
by first class mail, by or at the direction of the President, the Secretary, or
the Officer or persons calling the meeting to each Stockholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered to the Stockholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
SECTION 5. NOTICE OF ADJOURNED MEETINGS. When a meeting is adjourned to
another time or place, it shall not be necessary to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted on the
original date of the meeting. If, however, after the adjournment the Board of
Directors fixes a new record date for the adjourned meeting, or if the meeting
is adjourned for a period longer than 30 days, a notice of the adjourned meeting
shall be given as provided in this section to each Stockholder of record on the
new record date entitled to vote at such meeting.
SECTION 6. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. For the
purpose of determining Stockholders entitled to notice of or to vote at any
meeting a Stockholders entitled to notice of or to vote at any meeting of
Stockholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of Stockholders for any other
purpose, the Board of Directors may provide that the stock transfer books shall
be closed for a state period but not to exceed, in any case, sixty days. If the
stock transfer books shall be closed for the purpose of determining Stockholders
entitled to notice of or to vote at a meeting of Stockholders, such books shall
be closed for at least ten days immediately preceding such meeting.
<PAGE>
3
In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any determination of Stockholders,
such date in any case to be not more than sixty days and, in case of a meeting,
or a written consent to action by, the Stockholders, not less than ten days
prior to the date on which the particular action requiring such determination of
Stockholders is to be taken.
If the stock transfer books are not closed and no record date is fixed
for the determination of Stockholders entitled to receive payment of a dividend,
the date on which the resolution of the Board of Directors declaring such
dividend is adopted shall be the record date for such determination of
Stockholders.
When a determination of Stockholders entitled to vote at any meeting of
Stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date for the adjourned meeting.
SECTION 7. VOTING RECORD. The Officers or agent having charge of the
stock transfer books for shares of the corporation shall make, at least ten days
before each meeting of Stockholders, a complete list of the Stockholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number and class and series, if any, of shares held by each. The list,
for a period of ten days prior to such meeting, shall be kept on file either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at a place
where the meeting is to be held, and any Stockholder shall be entitled to
inspect the list at any time during the usual business hours. The list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any Stockholder at any time during the meeting.
<PAGE>
4
If the requirements of this section have not been substantially
complied with, the meeting on demand of any Stockholder in person or by proxy,
shall be adjourned until the requirements are complied with. If no such demand
is made, failure to comply with the requirements of this section shall not
affect the validity of any action taken at such meeting.
SECTION 8. STOCKHOLDER QUORUM AND VOTING. A majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of Stockholders. When a specified item of business is required to
be voted on by a class or series of stock, a majority of the shares of such
class or series shall constitute a quorum for the transaction of such item of
business by that class or series.
If a quorum is present, the affirmative vote of the majority of the
shares represented at the meeting and entitled to vote on the subject matter
shall be the act of the Stockholders unless otherwise provided by law.
SECTION 9. VOTING OF SHARES. Each outstanding share, regardless
of class, shall be entitled to one vote on each matter submitted to
a vote at a meeting of Stockholders.
Treasury shares, shares of stock of this corporation owned by another
corporation the majority of the voting stock of which is owned or controlled by
this corporation, and shares of stock of this corporation held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
A Stockholder may vote either in person or by proxy executed in writing
by the Stockholder or his duly authorized attorney-in-fact.
<PAGE>
5
At each election for Directors every Stockholder entitled to vote at
such election shall have the right to vote, in person or by proxy, the number of
shares owned by him for as many persons as there are Directors to be elected at
that time and for whose election he has a right to vote.
Shares standing in the name of another corporation, domestic or
foreign, may be voted by the Officer, agent, or proxy designated by the By-Laws
of the corporate Stockholder; or, in the absence of any applicable By-Law, by
such person as the Board of Directors of the corporate Stockholder may
designate. Proof of such designation may be made by presentation of a certified
copy of the By-Laws or other instrument of the corporate Stockholder. In the
absence of any such designation, or in case of conflicting designation by the
corporate Stockholder, the Chairman of the Board, President, any Vice President,
Secretary and Treasurer of the corporate Stockholder shall be presumed to
possess, in that order, authority to vote such shares.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such Shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority so to do
be contained in an appropriate order of the court by which such receiver was
appointed.
A Stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of
<PAGE>
6
the pledgee, and thereafter the pledgee or his nominee shall be entitled to vote
the shares so transferred.
On and after the date on which a written notice of redemption of
redeemable shares has been mailed to the holders thereof and a sum sufficient to
redeem such shares has been deposited with a bank or trust company with
irrevocable instruction and authority to pay the redemption price to the holders
thereof upon surrender of certificates therefor, such shares shall not be
entitled to vote on any matter and shall not be deemed to be outstanding shares.
SECTION 10. PROXIES. Every Stockholder entitled to vote at a meeting of
Stockholders or to express consent or dissent without a meeting or a
Stockholders' duly authorized attorney-in-fact may authorize another person or
persons to act for him by proxy.
Every proxy must be signed by the Stockholder or his attorney-in-fact.
No proxy shall be valid after the expiration of eleven months from the date
thereof unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the Stockholder executing it, except as otherwise provided by
law.
The authority of the holder of a proxy to act shall not be revoked by
the incompetence or death of the Stockholder who executed the proxy unless,
before the authority is exercised, written notice of an adjudication of such
incompetence or of such death is received by the corporate Officer responsible
for maintaining the list of Stockholders.
If a proxy for the same shares confers authority upon two or more
persons and does not otherwise provide, a majority of them present at the
meeting, or if only one is present then that one, may exercise all the powers
conferred by the proxy; but if the proxy holders present at the meeting are
equally divided as to the right
<PAGE>
7
and manner of voting in any particular case, the voting of such shares shall be
prorated.
If a proxy expressly provides, any proxy holder may appoint in writing
a substitute to act in his place.
SECTION 11. VOTING TRUSTS. Any number of Stockholders of this
corporation may create a voting trust for the purpose of conferring upon a
trustees the right to vote or otherwise represent their shares, as provided by
law. Where the counterpart of a voting trust agreement and the copy of the
record of the holders of voting trust certificates has been deposited with the
corporation as provided by law, such documents shall be subject to the same
right of examination by a Stockholder of the corporation, in person or by agent
or attorney, as are the books and records of the corporation, and such
counterpart and such copy of such record shall be subject to examination by any
holder of record of voting trust certificates either in person or by agent or
attorney, at any reasonable time for any proper purpose.
SECTION 12. STOCKHOLDERS' AGREEMENTS. Two or more Stockholders, of this
corporation may enter an agreement providing for the exercise of voting rights
in the manner provided in the agreement or relating to any phase of the affairs
of the corporation as provided by law. Nothing therein shall impair the right of
this corporation to treat the Stockholders of record as entitled to vote the
shares standing in their names.
SECTION 13. ACTION BY STOCKHOLDERS WITHOUT A MEETING. Any action
required by law, these By-Laws, or the Articles of Incorporation of this
corporation to be taken at any annual or special meeting of Stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such Stockholders, may be taken without a meeting, without prior notice and
without a vote,
<PAGE>
8
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. If any class
of shares is entitled to vote thereon as a class, such written consent shall be
required of the holders of a majority of the shares of each class of shares
entitled to vote as a class thereon and of the total shares entitled to vote
thereon.
Within ten days after obtaining such authorization by written consent,
notice shall be given to those Stockholders who have not consented in writing.
The notice shall fairly summarize the material features of the authorized action
and, if the action be a merger or consolidation for which dissenters' rights are
provided under this act, the notice shall contain a clear statement of the right
of Stockholders dissenting therefrom to be paid the fair value of their shares
upon compliance with further provisions of this act regarding the rights of
dissenting Stockholders; notwithstanding the foregoing, the provisions contained
herein shall not be interpreted as a release from duties imposed by law on the
Corporation in connection with the right of dissenting Stockholders in mergers
or consolidations.
ARTICLE II. DIRECTORS
SECTION 1. FUNCTION. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of a
corporation shall be managed under the direction of, the Board of
Directors.
SECTION 2. QUALIFICATION. Directors need not be residents of
the Commonwealth of Puerto Rico or Stockholders of this corporation.
<PAGE>
9
SECTION 3. COMPENSATION. The Board of Directors shall have
authority to fix the compensation of Directors.
SECTION 4. DUTIES OF DIRECTORS. A Director shall perform his duties as
a Director, including his duties as a member of any committee of the Board upon
which he may serve, in good faith, in a manner he reasonably believes to be in
the best interests of the corporation, and with such care as an ordinarily
prudent person in a like position would use under similar circumstances.
In performing his duties, a Director shall be entitled to rely on
information, opinions, reports or statements, including financial statements and
other financial data, in each case prepared or presented by:
(a) one or more Officers or employees of the corporation whom
the Director reasonably believes to be reliable and competent in the matters
presented,
(b) counsel, public accountants or other persons as to matters
which the Director reasonably believes to be within such person's professional
or expert competence, or
(c) a committee of the Board upon which he does not serve,
duly designated in accordance with a resolution adopted by the Board of
Directors, a provision of the Articles of Incorporation or the By-Laws, as to
matters within its designated authority, which committee the Director reasonably
believes to merit confidence.
A Director shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause such reliance
described above to be unwarranted.
<PAGE>
10
A person who performs his duties in compliance with this section shall
have no liability by reason of being or having been a Director of the
corporation.
SECTION 5. PRESUMPTION OF ASSENT. A Director of the corporation who is
present at a meeting of its Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
votes against such action or abstains from voting in respect thereto because of
an asserted conflict of interest.
SECTION 6. NUMBER. This corporation shall have five (5) Director. The
number of Directors may be increased or decreased from time to time by amendment
to these By-Laws, but no decrease shall have the effect of shortening the terms
of any incumbent Director.
SECTION 7. ELECTION AND TERM. Each person named in the Certificate of
Incorporation as a member of the initial Board of Directors shall hold office
until the first annual meeting of Stockholders, and until his successor shall
have been elected and qualified or until his earlier resignation, removal from
office or death.
At the first annual meeting of Stockholders and at each annual meeting
thereafter the Stockholders shall elect Directors to hold office until the next
succeeding annual meeting. Each Director shall hold office for the term for
which he is elected and until his successor shall have been elected and
qualified or until his earlier resignation, removal from office or death.
SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
Directors, may be filled by the affirmative vote
<PAGE>
11
of a majority of the remaining Directors though less than a quorum of the Board
of Directors. A Director elected to fill a vacancy shall hold office only until
the next election of Directors by the Stockholders.
SECTION 9. REMOVAL OF DIRECTORS. At a meeting of Stockholders called
expressly for that purpose, any Director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of Directors.
SECTION 10. QUORUM AND VOTING. A majority of the number of Directors
fixed by these By-Laws shall constitute a quorum for the transaction of
business. The act of the majority of the Directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
SECTION 11. DIRECTOR CONFLICTS OF INTEREST. No contract or other
transaction between this corporation and one or more of its Directors or any
other corporation, firm, association or entity in which one or more of the
Directors are Directors or Officers or are financially interested, shall be
either void or voidable because of such relationship or interest or because such
Director or Directors are present at the meeting of the Board of Directors or a
committee thereof which authorizes, approves or ratifies such contract or
transaction or because his or their votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or known to the Board of
Directors or committee and, the board or committee in good faith authorizes,
approves or ratifies the contract or transaction
<PAGE>
12
by a vote or consent sufficient for the purpose without counting the votes or
consents of such interested Directors; or
(b) The material facts of such relationship or interest are
disclosed or known to the Stockholders entitled to vote and they authorize,
approve or ratify in good faith such contract or transaction by vote or written
consent; or
(c) The contract or transaction is fair and reasonable as to
the corporation at the time it is authorized by the Board, a committee or the
Stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
SECTION 12. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may designate
from among its members an executive committee and one or more other committees
each of which, to the extent provided in such resolution shall have and may
exercise all the authority of the Board of Directors, except that no committee
shall have the authority to:
(a) approve or recommend to Stockholders actions or proposals
required by law to be approved by Stockholders,
(b) designate candidates for the office of Director, for
purposes of proxy solicitation or otherwise,
(c) fill vacancies on the Board of Directors or any committee
thereof,
<PAGE>
13
(d) amend the By-Laws,
(e) authorize or approve the reacquisition of shares unless
pursuant to a general formula or method specified by the Board of Directors, or
(f) authorize or approve the issuance or sale of, or any
contract to issue or sell, shares or designate the terms of a series of a class
of shares, except that the Board of Directors, having acted regarding general
authorization for the issuance or sale of share, and, in the case of a series,
the designation thereof, may, pursuant to a general formula or method specified
by the Board of Directors, by resolution or by adoption of a stock option or
other plan, authorize a committee to fix the terms upon which such shares may be
issued or sold, including, without limitation, the price, the rate or manner of
payment of dividends, provisions for redemption, sinking fund, conversion,
voting or preferential rights, and provisions for other features of a class of
shares, or a series of a class of shares, with full power in such committee to
adopt any final resolution setting forth all the terms thereof and to authorize
the statement of the terms of a series for filing with the Department of State.
The Board of Directors, by resolution adopted in accordance with this
section, may designate one or more Directors as alternate members of any such
committee, who may act in the place and stead of any absent member or members at
any meeting of such committee.
SECTION 13. PLACE OF MEETINGS. Regular and special meetings
by the Board of Directors may be held within or without the
Commonwealth of Puerto Rico.
SECTION 14. TIME, NOTICE AND CALL OF MEETINGS. Regular meetings of the
Board of Directors shall be held without notice immediately following the annual
meeting of Stockholders. Written notice of the
<PAGE>
14
time and place of special meetings of the Board of Directors shall be given to
each Director by either personal delivery, telegram, telex or cable at least two
days before the meeting or by notice mailed to the Director at least five days
before the meeting.
Notice of a meeting of the Board of Directors need not be given to any
Director who signs a waiver of notice either before or after the meeting.
Attendance of a Director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all objections to the place of the meeting,
the time of the meeting, or the manner which it has been called or convened,
except when a Director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called or
convened.
Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
A majority of the Directors present, whether or not a quorum exists,
may adjourn any meeting of the Board of Directors to another time and place.
Notice of any such adjourned meeting shall be given to the Directors who were
not present at the time of the adjournment and, unless the time and place of the
adjourned meeting are announced at the time of the adjournment, to the other
Directors.
Meetings of the Board of Directors may be called by the Chairman of the
Board, by the President of the corporation, or by any two Directors.
Members of the Board of Directors may participate in a meeting of such
Board by means of a conference telephone or similar communications equipment by
means of which all persons participating
<PAGE>
15
in the meeting can hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
SECTION 15. ACTION WITHOUT A MEETING. Any action required to be taken
at a meeting of the Directors of a corporation, or any action which may be taken
at a meeting of the Directors or a committee thereof, may be taken without a
meeting if a consent in writing, setting forth the action so to be taken, signed
by all of the Directors, or all the members of the committee, as the case may
be, is filed in the minutes of the proceedings of the Board or of the committee.
Such consent shall have the same effect as a unanimous vote.
PROMISSORY NOTE
$285,538.00 March 1, 1998
FOR VALUE RECEIVED, the undersigned (the "Maker"), hereby promises to
pay to the order of Margo Nursery Farms, Inc.(the "Company"), at its principal
executive offices located at Road 690, Kilometer 5.8, Vega Alta, Puerto Rico,
the principal sum of TWO HUNDRED EIGHTY-FIVE THOUSAND FIVE HUNDRED THIRTY-EIGHT
DOLLARS ($285,538) in one single installment, due and payable on March 1, 2001
(the "Maturity Date").
The unpaid principal amount of this Note shall not bear interest
through the Maturity Date. Anything herein to the contrary notwithstanding, any
overdue principal under this Note after its Maturity Date shall bear interest at
a fluctuating annual rate of interest equal to one percent (1%) over and above
the rate of interest publicly announced by Citibank, N.A. in New York, New York
from time to time as Citibank's base rate (the "Base Rate"), each change in such
fluctuating rate to take effect immediately with the corresponding change in the
Base Rate.
The Maker hereby waives presentment, protest, demand and notice of
non-payment.
The Maker hereby agrees to pay the reasonable costs and expenses,
including attorney's fees and expenses, incurred by the holder of this Note in
the event that the holder shall take recourse of judicial proceedings for the
collection of any amount due hereunder.
The Maker acknowledges receipt of a true and exact copy of this Note.
EXECUTED, in Vega Alta, Puerto Rico, as of the date first set forth
above.
/s/ Michael J. Spector
---------------------------
Michael J. Spector
SECOND AMENDMENT TO LEASE AGREEMENT
SECOND AMENDMENT TO LEASE AGREEMENT entered into as of the 1st
day of January 1998, by and between Michael J. Spector and Margaret
D. Spector (hereinafter referred to collectively as the "Lessors")
and Margo Nursery Farms, Inc. (the "Company") a Puerto Rico
corporation.
WHEREAS, the Lessors and the Company entered into a Lease Agreement
dated as of January 1, 1993 (the "Lease Agreement") pursuant to which the
Lessors leased to the Company 90 cuerdas of property (the "Original Demised
Premises") located in Vega Alta, Puerto Rico, in which the Company currently
operates a nursery farms;
WHEREAS, the Lease Agreement was amended by a First Amendment to Lease
Agreement dated as of January 1, 1994, pursuant to which the Lessors agreed to
lease to the Company an additional 20 acre parcel of land (the "Additional
Demised Premises") also for use as part of the Company's nursery farm business;
WHEREAS, the Company has exercised its option to renew the lease of the
Original Demised Premises for an additional five year period.
WHEREAS, the term of the lease for the Additional Demised Premises was
not subject to a renewal option and expired on December 31, 1997;
WHEREAS, the parties have agreed to continue the lease arrangement for
the Additional Demised Premises on a month-to-month basis as well as certain
other amendments to the Lease Agreement;
<PAGE>
2
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Section 2 of the Lease Agreement, as amended, is hereby amended to
read in its entirety as follows:
"Term: The Property is leased for a five (5) year term (as
such term may be extended pursuant to Section 4 hereof, hereinafter
referred to as the "Term"), commencing on January 1, 1993 and ending on
December 31, 1997. Notwithstanding the election of the Lessee to
exercise its option to renew the term of this Lease as it relates to
the Demised Premises for an additional five year term ending on
December 31, 2002, the term of this Lease with respect to the
Additional Demised Premises is extended on a month-to-month basis at a
monthly rental of $1,750 per month; provided, however, that either
party may terminate the lease for the Additional Demised Premises by
giving the other party thirty (30) days' prior notice of its intention
to terminate the lease.
2. Section 7 of the Lease Agreement, as amended, is hereby amended by
adding a new subparagraph (d) to read in its entirety as follows:
"(d) Anything herein to the contrary notwithstanding, upon
the termination of this Lease Agreement with respect to the
Additional Demised Premises, the Lessor shall be obligated
to the Leasee the book value of the Lessee's leasehold
improvements on the Additional Demised Premises
<PAGE>
as of the date of such termination". The Lessor shall have
until March 1, 2001, to pay such amount and no interest will
accrue on such amount pending payment.
3. Except as specifically amended hereby, the Lease Agreement shall
remain in full force and effect. This Second Amendment to Lease Agreement does
not constitute a waiver or modification of the rights or obligations of any
party except as explicitly set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment To Lease Agreement as of the date first above written.
LESSOR:
/s/ Michael J. Spector
---------------------------
Michael J. Spector
/s/ Margaret D. Spector
---------------------------
Margaret D. Spector
LESSEE:
Margo Nursery Farms, Inc.
By: /s/ Alfonso Ortega
-----------------------
Name: Alfonso Ortega
Title: Vice President &
Chief Financial Officer
EXHIBIT 21
LIST OF REGISTRANT'S SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
- - ---- -----------------------------
Margo Landscaping and Design, Inc. Puerto Rico
Margo Garden Products, Inc. Puerto Rico
Rain Forest Products Group, Inc. Puerto Rico
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,730,250
<SECURITIES> 0
<RECEIVABLES> 1,126,949
<ALLOWANCES> (76,000)
<INVENTORY> 2,438,128
<CURRENT-ASSETS> 5,321,119
<PP&E> 4,336,364
<DEPRECIATION> (1,916,769)
<TOTAL-ASSETS> 8,952,088
<CURRENT-LIABILITIES> 1,169,225
<BONDS> 252,883
0
0
<COMMON> 1,915
<OTHER-SE> 7,528,065
<TOTAL-LIABILITY-AND-EQUITY> 7,529,980
<SALES> 6,548,912
<TOTAL-REVENUES> 7,110,423
<CGS> 5,183,577
<TOTAL-COSTS> 7,787,683
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,274
<INCOME-PRETAX> (750,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (750,534)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
