-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HffFWtxZEkJ45DWVLVu8vCuOQg/5NTgQr6RIT0UKN1+Y+NLiDzhaamRQwzOTmMgv Nda0Lus/PwxEmo2LQDlv9A== 0000950170-97-000987.txt : 19970815 0000950170-97-000987.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950170-97-000987 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARGO NURSERY FARMS INC CENTRAL INDEX KEY: 0000808493 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 592142653 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15336 FILM NUMBER: 97660973 BUSINESS ADDRESS: STREET 1: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 BUSINESS PHONE: 8098832570 MAIL ADDRESS: STREET 2: ROAD 690 KILOMETER 5 8 CITY: VEGA ALTA STATE: PR ZIP: 00692 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended JUNE 30, 1997 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15336 MARGO NURSERY FARMS, INC. A Florida Corporation - I.R.S. No. 59-2807561 Address of Principal Executive Offices: Road 690, Kilometer 5.8 Vega Alta, Puerto Rico 00692 Registrant's Telephone Number: (787) 883-2570 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. YES X NO __________ The registrant had 1,895,322 shares of common stock, $.001 par value, outstanding as of August 14, 1997. MARGO NURSERY FARMS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE SECOND QUARTER ENDED JUNE 30, 1997 TABLE OF CONTENTS PART I PAGE ---- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statement of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 12 PART II ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 2 FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "believes", "estimate", "project", or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, natural disasters, competitive and regulatory factors and legislative changes, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 3 MARGO NURSERY FARMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 ASSETS JUNE 30, DECEMBER 31, 1997 1996 (UNAUDITED) (AUDITED) ----------- --------- Current assets: Cash and equivalents $ 854,189 $ 946,490 Short term investments 500,000 1,004,000 Accounts receivable, net 1,197,634 1,007,947 Inventories 2,462,616 2,737,109 Prepaid expenses and other current assets 121,801 116,036 ----------- ----------- Total current assets 5,136,240 5,811,582 Property and equipment, net 3,705,193 3,864,646 Due from shareholder 273,652 273,652 Notes receivable 385,983 379,182 Other assets 57,192 67,149 ----------- ----------- Total assets $ 9,558,260 $10,396,211 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 153,863 $ 118,085 Notes payable 500,000 500,000 Accounts payable 567,614 630,572 Accrued expenses 418,894 425,634 Income tax payable - 23,492 ----------- ----------- Total current liabilities 1,640,371 1,697,783 Long-term debt 314,905 427,078 ----------- ----------- Total liabilities 1,955,276 2,124,861 ----------- ----------- Commitments and contingencies - - Shareholders' equity: Common stock, $.001 par value; 10,000,000 shares authorized; 1,915,122 shares issued, and 1,895,322 shares outstanding 1,915 1,915 Additional paid-in capital 4,637,706 4,637,706 Retained earnings 3,012,151 3,689,681 Treasury stock, 19,800 common shares, at cost (48,788) (48,788) Foreign currency translation loss - (9,164) ----------- ----------- Total shareholders' equity 7,602,984 8,271,350 ----------- ----------- Total liabilities and shareholders' equity $ 9,558,260 $10,396,211 =========== =========== See accompanying notes to consolidated financial statements. 4
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Periods ended June 30, 1997 and 1996 (Unaudited) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net sales $1,865,715 $1,742,806 $3,726,025 $3,138,932 Cost of sales 1,837,023 1,060,931 3,092,961 1,880,757 ---------- ---------- ---------- ---------- Gross profit 28,692 681,875 633,064 1,258,175 Selling, general and administrative expenses 734,539 523,618 1,299,911 1,025,168 ---------- ---------- ---------- ---------- Income (loss) from operations (705,847) 158,257 (666,847) 233,007 ---------- ---------- ---------- ---------- Other income (expense): Interest income 16,505 90,192 35,793 190,864 Interest expense (20,615) (70,497) (39,887) (167,715) Litigation expenses - (63,258) - (93,258) Litigation settlement - (302,884) - (302,884) Miscellaneous income (expense) (7,829) 24,553 (6,589) 31,008 ---------- ---------- ---------- ---------- (11,939) (321,894) (10,683) (341,985) ---------- ---------- ---------- ---------- Loss before provision for income tax (717,786) (163,637) (677,530) (108,978) Income tax provision - - - - ---------- ---------- ---------- ------- Net loss $ (717,786) $ (163,637) $ (677,530) $ (108,978) ========== ========== ========== ========== Net loss per common share $ (.38) $ (.09) $ (.36) $ (.06) ========== ========== ========== ========== Weighted average number of common shares 1,895,322 1,895,322 1,895,322 1,895,322 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 5
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Six Months ended June 30, 1997 (Unaudited) COMMON COMMON ADDITIONAL CUMULATIVE STOCK STOCK PAID-IN RETAINED TREASURY TRANSLATION SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL --------- ------ ---------- ---------- -------- ----------- ---------- Balance at December 31, 1996 1,895,322 $1,915 $4,637,706 $3,689,681 ($48,788) ($9,164) $8,271,350 Realized loss on translation adjustment - - - - - 9,164 9,164 Net loss - (677,530) - - (677,530) --------- ------ ---------- ---------- -------- ------- ---------- Balance at June 30, 1997 1,895,322 $1,915 $4,637,706 $3,012,151 ($48,788) $ - $7,602,984 ========= ====== ========== ========== ======== ======= ==========
See accompanying notes to consolidated financial statements. 6 MARGO NURSERY FARMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months ended June 30, 1997 and 1996 (Unaudited) 1997 1996 ---------- ---------- Cash flows from operating activities: Net loss $ (677,530) $ (108,978) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 244,305 221,137 Increase in inventory valuation reserve 125,000 - Write-off of inventory 340,000 - Realized loss on translation adjustment 9,164 - Changes in assets and liabilities affecting cash flows from operating activities: Accounts receivable (189,687) (269,881) Inventories (190,507) (151,368) Prepaid expenses and other current assets (5,766) 48,057 Increase in due to shareholder, net - (373,677) Other assets 9,957 69,507 Accounts payable (62,958) (4,983) Accrued expenses (6,740) (1,374,534) Income tax payable (23,492) - ---------- ---------- Net cash used in operating activities (428,254) (1,944,720) ---------- ---------- Cash flows from investing activities: Decrease in short term investments 504,000 - Decrease in restricted cash - 6,732,597 Additions to property, plant and equipment (84,852) (300,971) Increase in notes receivable (6,800) (2,165) ---------- ---------- Net cash provided by financing activities 412,348 6,429,461 ---------- ---------- Cash flows used in financing activities: Repayment of long-term debt (76,395) (3,647,611) ---------- ---------- Net increase (decrease) in cash (92,301) 837,130 Cash and equivalents at beginning of year 946,490 785,490 ---------- ---------- Cash and equivalents at end of period $ 854,189 $1,622,620 ========== ========== See accompanying notes to consolidated financial statements. 7 MARGO NURSERY FARMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) NOTE 1 - BASIS OF PRESENTATION These interim consolidated financial statements include the financial statements of Margo Nursery Farms, Inc. and all of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim consolidated financial statements are unaudited, but include all adjustments that, in the opinion of management, are necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods covered. These statements have been prepared in accordance with the United States Securities and Exchange Commission's instructions to Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with generally accepted accounting principles. The preparation of interim financial statements relies on estimates. Therefore, the results of operations for the six months ended June 30, 1997 are not necessarily indicative of the operating results to be expected for the year ending December 31, 1997. These statements should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 1996. NOTE 2 - USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - INVENTORY VALUATION ALLOWANCE The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The inventory valuation allowance is an estimate which is established through charges to cost of goods sold. Management's judgement in determining the adequacy of the allowance is based on several factors which include, but are not limited to, costs of specific inventory items, sales histories of these items and management's judgement with respect to future marketability of the inventory. Based on the above, it is possible that the Company's estimate of the inventory valuation allowance could change in the near term. 8 Set forth below is the movement of the inventory valuation allowance for the six months ended June 30, 1997: DESCRIPTION AMOUNT ----------- ------ Beginning balance, January 1, 1997 $ 420,000 Charges (Puerto Rico operation) 125,000 Write downs (South Florida operation) (170,000) --------- Ending balance, June 30, 1997 $ 375,000 ========= NOTE 3 - NOTES RECEIVABLE At December 31, 1993, the Company had a note receivable with an outstanding principal balance of $996,962, from the sale of Cariplant S.A. (a former Dominican Republic subsidiary) to Altec International, C. por A. ("Altec"), another Dominican Republic company. The note was originally due in 180 equal monthly installments of $9,638, including interest at 8%, through April 2008. The note is collateralized by the common stock and personal guarantee of the major shareholder of Cariplant. From the inception of the note in March 1993, the Company received several payments. However, Altec has been unable to comply with the terms of the note. Due to the unfavorable collection experience as well as the difficulties of operating in the Dominican Republic, in 1994 Company management wrote down the carrying amount of the note to $316,000, representing the estimated value of Cariplant's land and related improvements, including buildings, shadehouses, and fixed and installed equipment. The write-down, amounting to $680,962 was included as an other expense in the consolidated statements of operations for the year ended December 31, 1994. 9 On February 12, 1997, the Company obtained a second mortgage on Cariplant's property and equipment and entered into an agreement with Altec to modify the repayment terms of the unpaid principal balance of $996,962, with payments commencing in the year 2000. At June 30, 1997 and December 31, 1996, notes receivable included the following: DESCRIPTION 1997 1996 - ---------------------------------- -------- -------- Note receivable from Altec $301,621 $301,621 10% note, due October 1996, collateralized by real property 26,331 26,331 8% notes, due on demand, personally guaranteed by various Company personnel (no collections are expected in 1997) 58,031 51,230 -------- -------- $385,983 $379,182 ======== ======== NOTE 4 - PROPERTY AND EQUIPMENT At June 30, 1997 and December 31, 1996 property and equipment consisted of the following: DESCRIPTION 1997 1996 --------------------------------- ---------- ---------- Land and land improvements $ 859,380 $ 859,380 Buildings 448,968 448,968 Equipment and fixtures 1,498,319 1,445,545 Transportation equipment 747,179 728,831 Stock Plants 97,277 97,277 Leasehold improvements 1,858,756 1,845,026 ---------- ---------- 5,509,879 5,425,027 Less accumulated depreciation and amortization (1,804,686) (1,560,381) ---------- ---------- $3,705,193 $3,864,646 ========== ========== 10 NOTE 5 - NET INCOME PER COMMON SHARE Net income per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the relevant periods. NOTE 6 - SUPPLEMENTAL DISCLOSURES FOR THE CONSOLIDATED STATEMENTS OF CASH FLOWS a) NON-CASH INVESTING AND FINANCING ACTIVITIES During the six months ended June 30, 1996, the Company acquired a residence (previously leased by the Company) from a partnership, whose partners included among others, the Company's major shareholders. The purchase price of the residence, based on an appraisal prepared by an independent certified real estate appraiser, amounted to $220,800. Regarding the acquisition, the Company assumed a commercial loan amounting to $87,789, owed by the partnership, recorded an account payable to the Company's major shareholders amounting to $66,506, and applied $57,562 and $8,943 to the principal and interest, respectively, of a note receivable owed by a consultant to the Company (who was also a shareholder in the partnership). b) OTHER CASH FLOW TRANSACTIONS Other cash flow transactions for the six months ended June 30, 1997 and 1996, include interest payments amounting to approximately $40,500 and $1,474,447 (of which $1,411,296 represents the accrued interest regarding a settlement agreement with the Company's former principal lender) respectively. Income tax payments for the six months ended June 30, 1997 amounted to approximately $23,500. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Margo Nursery Farms, Inc. and its subsidiaries, (collectively, the "Company") are primarily engaged in the business of growing, distributing and installing tropical plants and trees. The Company is also engaged in the manufacturing and distribution of its own line ("Rain Forest") of planting media and aggregates, sales of lawn and garden products and also provides landscaping design and installation services. PRINCIPAL OPERATIONS: The Company's business is currently conducted at three locations, two in Puerto Rico and another in South Florida. These operations are described below: PUERTO RICO OPERATIONS The Company's principal operation in Puerto Rico is conducted at a 117 acre nursery farm in Vega Alta, Puerto Rico, approximately 25 miles west of San Juan. This farm is leased from Michael J. Spector and Margaret D. Spector, who are directors, officers and principal shareholders of the Company. On October 31, 1996, the Company entered into an agreement with Cali Orchids, Inc. ("Cali"), a Puerto Rico based grower of orchids, bromeliads, anthuriums, poincettias and ornamental foliage, to purchase certain assets of Cali, including its live goods inventory and inventory of pots, peat, soil, chemical and fertilizers. The purchase price was approximately $190,000 and the transaction was closed on January 1, 1997. The agreement also provided for the leasing of Cali's facilities (13 acres) and equipment for a five year term (subject to two additional five year renewals) and the hiring of Cali's President as a general manager for the Company's new location. The Company's operations in Puerto Rico include Margo Nursery Farms, Inc. (a Florida corporation), Margo Landscaping and Design, Inc., Margo Garden Products, Inc., and Rain Forest Products Group, Inc. (all Puerto Rico corporations). Margo Nursery Farms, Inc., which operates under the trade name of Margo Farms del Caribe, is engaged in the production and distribution of tropical and flowering plants. Its products are primarily utilized for the interior and exterior landscaping of office buildings, shopping malls, hotels and other commercial sites, as well as private residences. The Company produces various types of palms, flowering and ornamental plants, trees, shrubs, bedding plants and ground covers. Its customers include wholesalers, retailers, chain stores and landscapers primarily located in Puerto Rico and the Caribbean. As a bona fide agricultural enterprise, the Company enjoys a 90% tax exemption 12 under Puerto Rico law from income derived from its nursery business in Puerto Rico. The Company also receives a credit under Section 936 of the Internal Revenue Code against a portion of federal income taxes payable from its operations in Puerto Rico. Prior to April 1, 1997, Margo Landscaping and Design, Inc. ("Margo Landscaping"), provided landscaping services to customers in Puerto Rico and the Caribbean. Margo Landscaping was also engaged in sales of lawn and garden products, including plastic and terracotta pottery, planting media (soil, peat moss, etc.) and mulch. Margo Landscaping is a wholesaler for Monsanto Corporation's Solaris Group which includes the Ortho, Roundup and Greensweep product lines (chemicals and pesticides). It is also the exclusive distributor of Sunniland Corporation's fertilizer and pesticide products, as well as Milorganite for Puerto Rico and the Caribbean. Effective April 1, 1997, the Company reorganized its landscaping and hard goods business. Pursuant to the reorganization, the landscaping business previously conducted by Margo Landscaping was transferred to a new subsidiary that changed its name to "Margo Landscaping and Design, Inc." and Margo Landscaping changed its name to "Margo Garden Products, Inc." and will henceforth conduct the Company's hard good business. The reorganization was directed at separating those activities (landscaping) that are entitled to certain beneficial tax treatments under the Puerto Rico Agricultural Incentives Act from those (sale of hard goods) that are not entitled to such benefits. Rain Forest Products Group, Inc. ("Rain Forest") commenced operations in April 1996. It is engaged in the manufacturing of potting soils, mulch, professional growing mixes, river rock and gravels. Rain Forest's products are marketed by Margo Landscaping. The Company has been granted a tax exemption grant from the Government of Puerto Rico for the operations of Rain Forest. The grant includes a 90% tax exemption from income and property taxes and a 60% exemption from municipal taxes for a period of 15 years, commencing January 1, 1997. SOUTH FLORIDA OPERATIONS The South Florida operation is conducted through Margo Bay Farms, Inc.("Bay Farms") at a 71 acre nursery farm located approximately 20 miles south of Miami, Florida. In August 1992, substantially all of the Company's facilities in South Florida were destroyed by Hurricane Andrew. During 1993 and 1994, the Company rebuilt a portion of its facilities. Approximately 20 acres are currently in production. Bay Farms resumed sales during 1994. However, due to the significant competition in South Florida, it has not been able to achieve adequate sales levels and profitability through June 30, 1997. See "FUTURE OPERATIONS" herein. 13 EUROPEAN OPERATIONS In 1991, the Company formed Margo Imports, B.V., a Netherlands corporation, to market the Company's products in Europe. In March 1993, the Company discontinued the operations of Margo Imports in connection with the sale of Cariplant, S.A., a former subsidiary, but kept Margo Imports active for possible future sales to Europe. Effective January 1, 1997, the Company closed Margo Imports. FUTURE OPERATIONS: The Company will continue to concentrate its economic and managerial resources in expanding its operations in Puerto Rico. The Company's Board of Directors has concluded that these operations present attractive opportunities for the future. The Board believes that the Company should continue to capitalize its advantage as one of the largest, full service nurseries in the region. Historically, the Company has obtained better margins in Puerto Rico because of the variety and quality of its inventory. The Company believes that it can continue to increase its sales and margins by investing in more sophisticated facilities and by controlling the size and variety of its inventory. Effective January 1, 1997, the Company leased a 13 acre facility in the town of Barranquitas, Puerto Rico, which includes approximately 110,000 square feet of enclosed bench space for production of orchids, bromeliads, anthuriums, poincettias and other ornamental and flowering plants. The Company believes that the lease of this additional space will allow it to supply its customers with a more complete product mix, thus increasing the Company's sales. At June 30, 1997, Margo Landscaping had sufficient landscaping projects in the pipeline to maintain operations through early 1998. Among the landscaping projects that were in process is a contract with a local construction company to landscape a new U.S. Coast Guard Housing Project located in Bayamon, Puerto Rico for approximately $645,000. The sale of hard goods through Margo Garden Products, Inc. will continue representing an increasing proportion of the Company's overall sales. The distribution of the Solaris product line (a Puerto Rico division of the Monsanto Company), Sunniland Corporation's fertilizer and pesticides products, together with Italian terracotta and plastic pottery, and all planting media related products (bagged potting soil, peat moss, cypress mulch, etc) should continue to provide increased sales. During late 1996 and early 1997, the Company became a distributor of additional product lines which will complement its lawn and garden products in order to provide a more complete mix of products to mass merchandisers, retail chains, garden centers, supermarkets and landscapers. 14 Rain Forest is presently engaged in the manufacturing and distribution of potting soils, professional growing mixes, peat moss, mulch and aggregates under its trade name of Rain Forest, throughout Puerto Rico and the Caribbean. These products should also provide the Company with increased sales during 1997. The Company's South Florida operations through Bay Farms have continued to incur operating losses since resuming sales in 1994. It has not been able to obtain adequate sales levels sufficient to make the operation feasible due to the strong competition in South Florida. Based on the foregoing, at December 31, 1996 the Company's Board of Directors requested management to review the continued viability of this operation with the goal of making a final determination during 1997 whether this operation should be closed and the related assets disposed of. During 1997, after a review of past and present performance of the South Florida operation, and in view of the strong competition, the Company has determined to recommend to the Board the closing of operations on or before September 30, 1997. In connection with such determination, the Company has taken a charge of approximately $340,000 to cost of sales during the second quarter of 1997, thereby writting down the carring value of the South Florida inventory to approximately $77,000. See "Results of Operations for the Six Months and Second Quarters ended June 30, 1997 and 1996 - Gross Profits" herein. RESULTS OF OPERATIONS FOR THE SIX MONTHS AND SECOND QUARTERS ENDED JUNE 30, 1997 AND 1996 During the first six months of 1997, the Company incurred a net loss of approximately $678,000, or $.36 per share, compared to net loss of $109,000, or $.06 for the same period in 1996. For the quarter ended June 30, 1997, the Company incurred a net loss of approximately $718,000, or $0.38 per share, compared to a net loss of $164,000 for the same period in 1996, or $0.09 per share. The increase in net losses for the six months, as well as the quarter ended June 30, 1997, when compared to the same periods in 1996, is principally due to a significant decrease in gross profit, as discussed below. SALES The Company's consolidated net sales for the first six months of 1997 were approximately $3,726,000, compared to $3,139,000 for the same period in 1996, or an increase of 19%. The increase in sales for 1997 when compared to 1996, is principally due to a significant increase in sales of landscaping services, which increased by 150% ($977,000 in 1997 vs. $391,000 in 1996). 15 Consolidated net sales for the second quarter of 1997 were approximately $1,866,000, compared to $1,743,000 for the same period in 1996, or an increae of 7%. The increase in sales for the second quarter of 1997 when compared to the same period in 1996 is also due to increased sales of landscaping services, which increased by 97% ($470,000 in 1997 vs. $239,000 in 1996). GROSS PROFITS The Company's gross profit for the first six months of 1997 was 17%, compared to 40% for the same period in 1996, or a decrease of 23%. Gross profit for the second quarter of 1997 was 2%, compared to 39% for the same period in 1996, or a decrease of 37%. The overall decrease in gross profit experienced by the Company during the first six months as well as the second quarter of 1997, when compared to the same periods in 1996, is principally due to significant charges to cost of sales, recorded during the second quarter of 1997, including the anticipated closing of the South Florida operation. Regarding the South Florida operation, during the second quarter of 1997, the Company charged approximately $340,000 to cost of sales (in addition to $170,000 which had been previously included in the inventory valuation reserve at December 31, 1996) representing a substantial write down of inventory at this location. The write down of this inventory resulted from the Company's review of the continued viability of the operation, which included overproduction of plant material with substantial storage and maintenance costs. Inventory balance at the South Florida operation, at June 30, 1997, after the write down, amounted to approximately $77,000. Inventory on hand at the Company's South Florida location will be sold and or disposed of at substantially reduced sales prices, in order to close this operation on or before September 30, 1997. Charges to cost of sales also include an increase in the Puerto Rico inventory valuation reserve of $125,000, resulting from increased storage and maintenance costs of remaining plant material incurred in connection with various sales contracts, as well as delays in the commencement of certain landscaping projects. In addition to the fact that plant material with increased storage and maintenance costs result in significant lower gross profit when sold, the remaining plant material on hand requires additional monthly provisions to the inventory valuation reserve, which further reduces gross profit as the provisions are charged to cost of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, General, and Adminitrative Expenses ("SG&A") were approximately $1,300,000 and $1,025,000 for the first six months of 1997 and 1996 respectively. This represented a 27% increase in dollar terms and a 2.2% increase over 1996 as a percentage of sales. The increase in SG&A for the first six months of 1997 when compared to the same period in 1996 is due principally to higher 16 payroll costs, increases in repairs and maintenance of landscaping equipment as well as an accrual for legal and other professional services recorded during the second quarter of 1997, in connection with the proposed reorganization of the Company. SG&A for the second quarter of 1997 was approximately $735,000 compared to $524,000 for the same period in 1996. This represented a 40% increase in dollar terms and a 9.4% increase over 1996 as a percentage of sales. This sharp increase in SG&A for the second quarter of 1997 is due to the increases previously mentioned for the first six months of 1997. OTHER INCOME AND EXPENSES Decreases in interest income, interest expense as well as litigation expense (and related litigation settlement) for the first six months and second quarter ended June 30, 1997, when compared to the same periods in 1996, are due to the settlement of litigation with the Company's former principal lender in May 1996. Decreases in interest income as well as interest expense result from the application of restricted cash (in escrow through May 1996) used for the payment of principal and interest on the outstanding loans, subject of the litigation. Accordingly, other income and expenses for the first six months of 1997 principally reflect interest income and interest expense regarding the Company's investments and debt other than those related to the settlement of litigation. FINANCIAL CONDITION The Company's financial condition at June 30, 1997 remains comparable with that of December 31, 1996. The Company's current ratio continues strong with a ratio of 3.1 to 1 at June 30, 1997, and 3.4 to 1 at December 31, 1996. At June 30, 1997 the Company had cash of $854,000 and short term investments of $500,000, compared to cash of $946,000 and short terms investments of $1,004,000 at December 31, 1996. The decrease in cash and short term investments at June 30, 1997 is principally due to a cash outflow from operations of approximately $428,000, additions to property plant and equipment of $85,000 and repayment of long term debt of $76,000. Except for a small decrease in accounts payable and long term debt, the Company's liabilities at June 30, 1997 remain comparable to those at December 31, 1996. The Company's debt to equity ratio as of both balance sheet dates remains at 26%, despite the Company's loss for the six months ended June 30, 1997. Stockholders equity at June 30, 1997 decreased due to the net loss incurred during the first six months of 1997. There were no dividends declared nor issurance of capital stock. 17 CURRENT LIQUIDITY AND CAPITAL RESOURCES The Company is presently current on all its obligations. Excess funds have been invested in short-term bank instruments. The Company believes it has adequate resources to meet its anticipated liquidity and capital requirements. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the opinion of the Company's management, the pending or threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition of the Company. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Not applicable. ITEM 5. OTHER INFORMATION The Company is currently considering a corporate reorganization to accomplish two goals: (i) creating a holding company form of organizational structure and (ii) reincorporating from a Florida corporation to a Puerto Rico corporation. The reincorporation would be accomplished by the merger of the Company into an indirect wholly-owned subsidiary incorporated under the laws of the Commonwealth of Puerto Rico. A holding company structure generally would allow for and accommodate future growth from internal operations, acquisitions or joint ventures, broaden the alternative for future financing and provides for greater administrative and operational flexibility and tax planning. The reincorporation as a Puerto Rico corporation is consistent with the fact that the Company's principal executive offices and principal operations are located in Puerto Rico. Reincorporation as a Puerto Rico corporation could also eliminate possible double taxation for the Company as a result of the recent amendments to Section 936 of the Internal Revenue Code. 19 If the proposed reorganization is effected, each share of Common Stock of the Company will be deemed to be exchanged for one share of the Common Stock of the new holding company that will have identical rights and limitations, except that the new holding company will be a Puerto Rico corporation rather than a Florida corporation. Under the Florida Business Corporation Act, stockholder approval for the reorganization is not required, and, therefore, will not be sought and appraisal rights will not be available to stockholders. The proposed reorganization is subject to the approval of the Board of Directors of the Company. If approved, the reorganization is scheduled to become effective on or about September 30, 1997. If effected, the Company will file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the effective date of the reorganization. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY). (b) REPORTS ON FORM 8-K. The Company filed the following Reports on Form 8-K during the quarter ended June 30, 1997: (i) Form 8-K dated July 2, 1997, reporting under Item 4, a change in Registrant's Certifying Accountant. 20 SIGNATURES Pursuant to the requirements section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARGO NURSERY FARMS, INC. Date: AUGUST 14, 1997 BY: /s/ MICHAEL J. SPECTOR ---------------------------------------- Michael J. Spector, President and Chief Executive Officer Date: AUGUST 14, 1997 BY: /s/ ALFONSO ORTEGA ---------------------------------------- Alfonso Ortega Vice President, Treasurer, Principal Financial and Accounting Officer 21 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule (for SEC use only). EX-27 2 FINANCIAL DATA SCHEDULE
5 1 6-MOS DEC-31-1997 JUN-30-1997 854,189 0 1,276,634 (79,000) 2,462,616 5,136,240 5,509,879 (1,804,686) 9,558,260 1,640,371 314,905 0 0 1,915 7,601,069 9,558,260 3,726,025 3,761,818 3,092,961 4,399,461 0 0 39,887 (677,530) 0 0 0 0 0 (677,530) (0.36) (0.36)
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