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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, 1996 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
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: $1,763,580 based on the last sales
price of $2-5/8 per share on March 14, 1997 and 671,840 shares held by
non-affiliates.
The registrant had 1,895,322 shares of common stock, $.001 par value,
outstanding as of March 14, 1997.
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MARGO NURSERY FARMS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.............................................................1
ITEM 2. PROPERTIES...........................................................8
ITEM 3. LEGAL PROCEEDINGS....................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................................10
ITEM 6. SELECTED FINANCIAL DATA.............................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION..................................13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................20
ITEM 11. EXECUTIVE COMPENSATION..............................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.........................................................27
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.
PRINCIPAL OPERATIONS
During 1996 and 1995, the Company conducted operations in the Commonwealth
of Puerto Rico ("Puerto Rico") and South Florida. These operations are described
below.
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. (a Florida corporation), Margo Landscaping and Design, Inc., and
Rain Forest Products Group, Inc. (both 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 also receives a credit against a portion of federal income taxes
under Section 936 of the Internal Revenue Code. See "Income Taxes" herein.
Margo Landscaping and Design, Inc. ("Margo Landscaping"), provides
landscaping services to customers in Puerto Rico and the Caribbean, including
landscape design and landscaping. Margo Landscaping is 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 for
Puerto Rico and the Carribbean.
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 requested a tax exemption grant
from the Government of Puerto Rico for the 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 (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 operation, Margo Flora.
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 through December 31, 1996 and has not been profitable. See "FUTURE
OPERATIONS" herein.
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. Substantially all products
grown in South Florida are container grown. Most of these products start out in
small pots and are "stepped up" to larger pot sizes over time. The Puerto Rico
nursery operations produce 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
served by the Puerto Rico operation. The marketing efforts in South Florida
resumed during 1994.
The principal customers of the Company are wholesalers, mass merchandisers,
retailers, garden centers, hotels, landscapers, government projects and
commercial businesses located in Puerto Rico, the mainland United States and
throughout 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, Builders Square, Kmart and Pueblo/Xtra) the Company develops
promotional programs which include deliveries to customer outlets and special
pricing based on volume.
During 1996, 1995 and 1994, the Company's single largest customer (Builders
Square) for each of such years, accounted for approximately 27%, 28%, and 20% ,
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.
2
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, 1996, 1995
and 1994. The information is provided after the elimination of intercompany
transactions.
1996 1995 1994
-------- -------- --------
(Amounts in 000's)
SALES BY LOCATION:
South Florida $ 471 $ 446 $ 229
Puerto Rico:
Plants 3,192 3,093 2,892
Lawn and Garden products 1,429 940 271
Landscaping 1,017 455 287
-------- -------- --------
$ 6,109 $ 4,934 $ 3,679
======== ======== ========
OPERATING PROFIT (LOSS) BY LOCATION:
South Florida $ (95) $ (501) $ (460)
Puerto Rico 102 173 148
Netherlands -- (5) (4)
-------- -------- --------
$ 7 $ (333) $ (316)
======== ======== ========
IDENTIFIABLE ASSETS BY LOCATION:
South Florida $ 2,370 $ 8,803 $ 8,808
Puerto Rico 8,022 6,596 7,119
Netherlands 4 2 4
-------- -------- --------
$ 10,396 $ 15,401 $ 15,931
======== ======== ========
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. 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.
The South Florida operations are subject to significant competition due to
the large number of tropical foliage growers in the United States. Competition
in the United States is based on quality, price, availability and service.
3
SEASONALITY
The demand for plants in the United States is seasonal in nature, with
increased demand during spring and fall, and lower demand in summer and winter.
The demand in Puerto Rico and the Caribbean is less seasonal.
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, 1996, the Company (Puerto Rico and South Florida) had 165
full time employees, of which 145 were directly involved in nursery production
activities, and 20 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, flood, freezes and, to a lesser extent, plant disease and pests. In
1992, Hurricane Andrew destroyed substantially all of the Company's facilities
in South Florida. The Company believes that it currently maintains adequate
insurance coverage for its facilities and equipment. As of December 31, 1996,
the Company had been unable to obtain adequate crop insurance coverage at a
reasonable cost for its inventories. The Company intends to continue to seek to
obtain crop insurance coverage at reasonable rates. However, no assurance can be
given that the Company will be able to obtain such insurance coverage.
The Company believes it has taken reasonable precautions to protect its
plants and operations from natural hazards. In Puerto Rico, the Company's new
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.
4
INDUSTRY SEGMENTS
The Company is primarily engaged in one industry segment, the production
and marketing of tropical and flowering plants, and 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 its operations in Puerto Rico. The Company's Board of
Directors has concluded that these operations present attractive opportunities
for the future. The Board believes that the Company should continue to
capitalize its advantage as one of the largest, full service nurseries in the
region.
The Company has a history of good margins in Puerto Rico because of the
variety and quality of its inventory. The Company believes that it can increase
its sales and margins by investing in a larger and more sophisticated facility
and by increasing the size and variety of its inventory. Since 1993, the Company
has continued to improve and expand its growing facilities in Puerto Rico.
During January 1994, the Company leased approximately 27 more acres adjacent to
its nursery facilities in Vega Alta, Puerto Rico for additional production.
Effective January 1, 1997, the Company leased a 13 acre facility which
includes approximately 110,000 square feet of enclosed bench space for
production of orchids, bromeliads, anthuriums, poincettas 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.
During the second quarter of 1996, the Company entered into a contract with
the Commonwealth of Puerto Rico's Department of Transportation for approximately
$800,000 to provide palms, trees and other foliage for Puerto Rico Highway No.
3. At December 31, 1996, the Company had only delivered approximately $200,000,
with the remainder to be delivered during the first and second quarters of 1997.
At December 31, 1996, Margo Landscaping had sufficient landscaping projects
in the pipeline to maintain operations into the third quarter of 1997. 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. During 1997, Margo
Landscaping will also be engaged in the landscaping of a new cross taxiway at
Luis Munoz Marin International Airport in San Juan, for approximately $300,000.
During 1997, Margo Landscaping's division of lawn and garden products 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. During 1997, the Company plans to focus on the "outdoor living"
concept, which includes patio furniture, water fountains, etc.
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. During
1997, these products should also provide the Company with increased sales.
5
Management believes that the Company was successful during 1996 in
obtaining a greater share of the Puerto Rico market, which should help the
Company achieve profitable results of operations during 1997 and beyond.
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, the Company has
determined 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 1996, the Company recorded a
provision of $250,000 related to the excess of the carrying value over the fair
market value of the assets of Bay Farms.
INCOME TAXES
As a Florida corporation, the Company is subject to federal income taxes on
its worldwide operations and Puerto Rico income taxes on its Puerto Rico
operation. For U.S. income tax purposes, the Company has elected the benefits of
Section 936 ("Section 936") of the Internal Revenue Code. 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.
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.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions of
Section 936. The amendments (the "OBRA Amendments"), which are 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.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"1996 Amendments") further amended Section 936 by eliminating the income credit
available thereunder subject to a ten year grandfather rule as well as moving
the economic activity credit to a new Section 30A of the Code, which also
expires in ten years. For additional information on the 1996 Amendments, refer
to Item 7 "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Repeal of Section 936."
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.
6
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 activity 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 has obtained a grant of tax
exemption from the Puerto Rico government under the Puerto Rico Tax Incentive
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.
7
ITEM 2. PROPERTIES
During 1996, 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 has 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 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, 1994, the lease agreement was amended to include an
additional 27 acres of land adjacent to the nursery facility for a five year
period at a monthly rental of $1,750. This amendment does not provide for
renewal nor purchase options for this tract of land.
During the years ended December 31, 1996 and 1995, 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 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 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.
SOUTH FLORIDA NURSERY FACILITY
The Company's original nursery farm is located on a 51 acre parcel,
approximately 20 miles southwest of downtown Miami. This facility, including the
land, is owned by the Company. On August 24, 1992, Hurricane Andrew destroyed
substantially all of the facilities at this farm. At the present time, the
Company has a new 3.9 acre saran house, a 20,000 square feet propagation house,
as well as 16 acres of sun growing area for production on an additional 20 acre
parcel of land located near its South Florida nursery farm which is also owned
by the Company.
8
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
Not applicable
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK
HOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Stock Market 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 1996 and 1995. The last reported sales price for the Common Stock on March
14, 1997 was $2-5/8 per share.
1996 1995
------------------ -------------------
QUARTER: HIGH LOW HIGH LOW
First $4-5/8 $2-5/8 $2-3/8 $2-1/4
Second 5 2-3/8 3 2-1/4
Third 4-1/4 3 4-3/4 2-3/4
Fourth 3-7/8 2-5/8 4 2-3/4
There were approximately 93 holders of record of the common stock as of
December 31, 1996. This amount includes custodians, brokers and other
institutions which hold the common stock as nominees for an undetermined number
of beneficial owners.
The Company did not pay any dividends on its common stock during 1996 or
1995. 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.
United States citizens who are non-residents of Puerto Rico may also make
such an election, and will not be subject to Puerto Rico tax on dividends if
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.
The Company recommends that shareholders consult their own tax advisors
regarding the above tax issues.
10
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.
11
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
Earnings Statement Data: 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Net Sales $ 6,108,865 $ 4,933,718 $ 3,679,367 $ 2,489,881 $ 2,150,373
Gross Profit 2,137,340 1,777,358 1,467,202 1,282,636 740,840
Selling, general and administrative expenses 2,130,114 2,110,380 1,782,840 1,735,929 2,687,395
Income (loss) from operations 7,226 (333,022) (315,638) (453,293) (1,946,555)
Loss before income tax provision
extraordinary item and cumulative effect on
prior years of accounting change (553,722) (386,334) (386,798) (420,280) (3,397,404)
Extraordinary item, net -- -- -- 4,358,147 19,090,748
Cumulative effect on prior years of applying
new method of accounting for income taxes -- -- -- 899,220 --
Net income (loss) (577,214) (396,334) (510,798) 4,949,887 15,678,344
Net income (loss) per common share $ (.30) $ (.21) $ (.27) $ 2.62 $ 9.28
Weighted average number of common shares
outstanding 1,895,322 1,895,322 1,895,322 1,892,572 1,685,617
Balance Sheet Data:
Working capital $ 4,113,799 $ 5,020,099 $ 5,580,916 $ 6,039,687 $13,615,074
Total assets 10,396,211 15,400,582 15,930,657 15,325,420 23,841,739
Long-term debt 427,078 354,707 372,424 5,293 139,528
Stockholders' equity 8,271,350 8,848,402 9,244,855 9,755,704 12,319,256
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
For the year ended December 31, 1996, the Company incurred a net loss of
approximately $577,000, compared to a net loss of $396,000 and $511,000 in 1995
and 1994, respectively. These amounts represent a loss per common share of $.30,
$.21 and $.27 for 1996, 1995 and 1994, respectively.
As discussed under "Item 1 - Natural Hazards", the Company's operations are
vulnerable to severe weather. 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 on the
Company's operations. The Company believes that it currently maintains adequate
insurance coverage for its facilities and equipment. As of December 31, 1996,
the Company had been unable to obtain adequate crop insurance coverage at a
reasonable cost for its inventories. The Company intends to continue to seek to
obtain crop insurance coverage at reasonable rates. However, no assurance can be
given that the Company will be successful in obtaining such coverage.
During September 1996, Hurricane Hortense struck Puerto Rico. Although
Hortense was not classified as a strong hurricane, the torrential rains caused
widespread flooding, slowing down the local economy during the months of
September and October 1996, and thus the Company's sales for the third quarter.
During September 1995, Hurricanes Luis and Marilyn affected Puerto Rico and
the Northeast Caribbean. Although Puerto Rico did not receive a direct strike
from either hurricane, tropical storm winds and gusts were experienced,
resulting in a loss of sales for half of the month of September, as well as
early October.
During 1994, the Company's operations were adversely affected by a drought
which affected Puerto Rico heavily during the second and third quarters. Sales
decreased significantly, thus increasing maintenance costs of plants, which were
reflected in increased cost of sales.
Notwithstanding the effects of hurricanes, the Company's sales have
continued to increase, principally as a result of increased sales of landscaping
services in 1996, and sales of lawn and garden products 1996 and 1995 to large
retail chains.
For the year ended December 31, 1996, the Company had income from
operations of approximately $7,000, compared to losses from operations of
$333,000 and $316,000 in 1995 and 1994, respectively. Despite the income from
operations in 1996, cost of sales for both 1996 and 1995 include significant
provisions for inventory valuation allowances for both Puerto Rico and South
Florida operations.
The Company's net loss for 1996 arises principally from the settlement of
litigation with the Company's former principal lender, and a provision for the
impairment of the assets of the South Florida operation and, therefore, is
non-operational in nature.
The Company's net loss for 1995 is the result a of significant operating
loss incurred in South Florida, and to a lesser extent, the hurricane activity
experienced during the third quarter of 1995.
The Company's net loss for 1994 was directly attributed to the severe
drought experienced in Puerto Rico and the Northeast Caribbean.
Based on existing competition and lack of profitability during the past
three years, the Company has determined to review the continued viability of
this operation with the goal of making a final determination during 1997 whether
this operation should be closed and the related assets disposed of.
13
RESULTS OF OPERATIONS
SALES
Consolidated net sales for the year ended December 31, 1996 were
approximately $6,109,000, representing a 24% increase from sales of $4,934,000
in 1995. This increase in sales for 1996 is principally 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).
The increase in sales of 34% for 1995 when compared to 1994, was mainly due
to increased sales of lawn and garden products ($940,000 in 1995 versus $271,000
in 1994).
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,
---------------------------
1996 1995 1994
------ ------ ------
Net sales............................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 65.0 63.9 60.2
----- ----- -----
Gross profit......................................... 35.0 36.1 39.8
Selling, general and administrative expenses......... 34.9 42.7 48.4
----- ----- -----
Income (loss) from operations........................ .1 (6.6) (8.6)
Interest income (expense), net....................... (.2) .6 (.7)
Other expenses - net................................. (9.0) (1.8) (1.2)
Loss before income tax provision..................... (9.1) (7.8) (10.5)
Income tax provision................................. .3 .2 3.4
----- ----- ------
Net loss............................................. (9.4) (8.0) (13.9)
===== ===== ======
The table above reflects that consolidated gross profits as a percentage of
net sales were approximately 35%, 36%, and 40%, for the years ended December 31,
1996, 1995 and 1994, respectively.
14
Gross profit for 1996 (35%) was adversely affected by provisions regarding
to inventory valuation reserves amounting to $150,000 in Puerto Rico and
$102,000 in South Florida. The provision in Puerto Rico was required due to the
maintenance of plant material produced in connection with a contract with the
Commonwealth of Puerto Rico's Department of Transportation for $800,000, of
which only $200,000 had been delivered as of December 31, 1996. 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.
Additionally, from the commencement of the second quarter of 1994 through
the first quarter of 1995, Puerto Rico and the northeast Caribbean suffered a
severe drought. This drought reduced the Company's product turnover, causing
plants to absorb increased overhead costs and resulting in a corresponding
increase in the carrying costs of plants. The result was a significant reduction
in gross profit throughout 1994, as well as the first quarter and portion for
the second quarter of 1995.
Also, as previously mentioned, the Company's sales of lawn and garden
products increased significantly during 1996 and 1995. Sales of these products
result in a lower gross profit than plants, and thus will cause an overall
decrease in consolidated gross profits for those years when compared to 1994
(40%).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative (SG&A) expenses were
$2,130,000 for 1996, compared to $2,110,000 in 1995, or a 1% increase. This
increase is the net effect of increases in depreciation and administrative
personnel coupled with reductions in other SG&A expenses.
The increase in SG&A for 1995 when compared to 1994 resulted from increases
in selling, shipping and warehousing expenses.
As a result of increased sales for 1996, SG&A as a percentage of sales
decreased to 35% when compared to 43% for 1995 and 48% for 1994.
OTHER INCOME AND EXPENSE
Interest income and interest expense for 1996 decreased significantly when
compared to 1995. This decrease is principally due to the settlement of
litigation with the Company's former principal lender in May 1996 (refer to the
following paragraph). The decrease in interest income as well as interest
expense results from the application of restricted cash (formerly in escrow
accounts) used for the payment of principal and accrued interest on the
outstanding loans in connection with the settlement of the litigation described
below. Accordingly, results for 1996 reflect seven months less of interest
income related to restricted cash and interest expenses related to the loans
subject to litigation as compared to 1995.
On May 29, 1996, the Company (including all related entities) and Michael
J. Spector, the Chairman of the Board, Chief Executive Officer and the principal
stockholder of the Company entered into a Settlement Agreement with First Union
National Bank of Florida ("First Union"). The Settlement Agreement covered all
claims brought by First Union against the Company and related entities (the
"Margo Entities") related to a loan facility obtained by the Margo Entities from
Southeast Bank, N.A. in 1988 and later acquired by First Union. The Settlement
Agreement also settled all counterclaims brought by the Margo Entities against
First Union related to First Union's efforts to collect such loan.
The Settlement Agreement provided for a payment to First Union of
$5,625,000, of which $5,285,000 corresponded to the Company and $340,000
corresponded to Mr. Spector.
15
The Settlement Agreement resulted in a charge of $255,174 to other expenses
which was recognized in the second quarter of 1996, after the application of
existing reserves of approximately $5,030,000 (for outstanding principal and
interest) previously allocated to this matter.
Litigation expenses represent legal fees incurred regarding the litigation
and settlement with the Company's former principal lender. Litigation expenses
will vary from year to year depending on developments on each particular case
and time incurred by the Company's legal counsel. The decrease in litigation
expenses for 1996 when compared to 1995 and 1994 is due to the settlement of the
litigation with First Union.
The Company recorded a provision of $250,000 related to the excess of the
carrying value over the fair market value of the assets of the South Florida
operations.
For the year ended December 31, 1994, the Company wrote down the carrying
value of the note receivable resulting from the sale of Cariplant (a former
subsidiary of the Company) to Altec International, C. por A. by $680,962. This
write-down represented management's assessment regarding the note's collection
experience as well as the country (Dominican Republic) in which the debtor
operates.
The gain on insurance proceeds due to Hurricane Andrew for 1994 represents
the excess of funds received over the book values of assets destroyed as a
result of the storm.
16
FINANCIAL CONDITION
At December 31, 1996, the Company's financial condition continues
favorable, despite the reduction in shareholders' equity as a result of the net
loss of $577,000, the settlement of litigation and the provision for loss upon
the proposed closing of the South Florida operation. Notwithstanding a decrease
in working capital of $906,000 during 1996 ($4,114,000 in 1996 vs. $5,020,000 in
1995), the Company's current ratio continued strong at December 31, 1996 (3.42
to 1 in 1996 vs. 1.81 to 1 in 1995).
At December 31, 1996, the Company had cash of $946,000 and short term
investments of $1,004,000. The Company's inventories increased by $397,000 (net
of an increase in the valuation reserve of $232,000), resulting primarily from
reduced product turnover and a corresponding increase in the carrying costs of
plants. During 1996, the Company invested an additional $486,000 in equipment in
order to increase capacity as demand for the Company's products and services
continues to grow.
At December 31, 1996, the Company's overall decrease in assets of
$5,000,000 was principally due to the result of the settlement of litigation.
Nevertheless, the Company's debt to equity ratio improved (26% in 1996 vs. 74%
in 1995). At December 31, 1996, the Company believes it has adequate resources
to meet its current liquidity and capital requirements.
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 domestic
operations and financial condition of the Company has been minimal due to the
stability of wage rates 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.
REPEAL OF SECTION 936
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 Internal Revenue Code (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 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 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
17
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.
The Company computes its credit under the economic activity method
contained in Section 30A. Because of the relatively labor intensive nature of
the Company's business, the Company believes that it will continue to derive
substantial benefit for the economic activety credit provided by Section 30A.
While it is not possible to determine the long-term effect on the economy of
Puerto Rico of the 1996 Amendments, the 1996 Amendments could have an adverse
effect in the general economic condition in Puerto Rico, the Company's
predominant service area.
18
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
Not applicable.
19
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 14, 1997. The background and
experience of these persons are summarized in the paragraphs following the
table.
NAME (AGE AT MARCH 14, 1997) POSITIONS WITH THE COMPANY
- ---------------------------- --------------------------
Michael J. Spector(50) Chairman, President, Chief Executive Officer and Director
Margaret D. Spector(45) Secretary and Director
Blas R. Ferraiuoli(52) Director
Frederick D. Moss(68) Director
Michael A. Rubin(54) Director
Guillermo Fradera(46) Vice President and General Manager of Miami Operations
Alfonso Ortega(43) Vice President, Treasurer and Chief Financial Officer
Rene Llerandi(37) Vice President - Marketing
Luis Torres(37) Vice President - Production
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 14, 1997.
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.
20
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).
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. FRADERA currently serves as the Vice President and General Manager of
the Company's Miami operations. He has 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.
MR. TORRES currently serves as Vice President of Production. He has held
this position since April 1, 1993. He joined the Company in 1990 as Production
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, 1996. 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,
Margaret D. Spector, Blas R. Ferraiuoli, Frederick D. Moss, Michael A. Rubin,
Guillermo Fradera, Alfonso Ortega, Rene Llerandi and Luis Torres filed one late
report each relating to the granting of stock options.
21
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, 1996, 1995 and 1994. No other executive officer of the Company earned more
than $100,000 during 1996.
ANNUAL COMPENSATION
NAME OF INDIVIDUAL AND --------------------- OTHER ANNUAL
POSITION WITH THE COMPANY SALARY BONUS COMPENSATION
------------------------- -------- ------- ------------
Michael J. Spector 1996 $160,000 $13,600 $ 0
Chairman, President, Chief 1995 160,000 13,600 0
Executive Officer and Director 1994 160,000 13,600 0
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 $3-1/8 and expires on August 9, 2006. For information
regarding stock options granted to Mr. and Mrs. Spector, see "Grant of Stock
Options" below.
GRANT OF STOCK OPTIONS
The following table sets forth certain information regarding the grant of
stock options made to Michael Spector during the year ended December 31, 1996.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM
-----------------------------
% OF TOTAL
# OF SHARES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE
NAME OPTIONS GRANTED(1) FISCAL YEAR ($/SHARE)(2) EXPIRATION DATE 5%($) 10%($)
---- ------------------ --------------- -------------- --------------- ------ -------
Michael J. Spector 17,500(3) 48% $3.44 8/9/2001 $9,641 $27,919
- -------------------
(1) Options become exercisable at the rate of 20 percent on the first, second,
third, fourth and fifth anniversary of the grant date.
(2) The exercise price is based on the average of the bid and ask prices for the
Company's Common Stock on August 9, 1996, the date of grant.
(3) Includes options to acquire 2,500 shares granted to Margaret D. Spector, the
wife of Michael J. Spector.
22
OPTIONS EXERCISED DURING 1996 AND OPTION VALUES AT DECEMBER 31, 1996
The following table sets information on outstanding options held by the
Company's chief executive officer and their value at December 31, 1996. There
were no exercises of options during 1996. Value is calculated as the difference
between the last sales price of the Common Stock and the exercise price at as of
December 31, 1996.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 12/31/96 12/31/96(1)(2)
ACQUIRED VALUE ------------------------------ ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael J. Spector(1) - - 12,000 25,500 $4,080 $3,770
- ------------------
(1) Includes 7,500 options held by to Margaret D. Spector, the wife of Michael
J. Spector.
(2) Based on the last sales price of $3-1/2 per share on December 31, 1996 and
an exercise price of $3.16 for all exercisable options and an exercise price
of $3.16 and $3.44 for 8,000 and 17,500 of unexercisable options,
respectively.
EMPLOYMENT CONTRACTS
The Company does not have any employment contracts with its executive
officers. However, during 1994, 1995 and the first half of 1996 the Company was
party to a consulting agreement with Douglas Pennock, who acted as the general
manager of the Company's Puerto Rico landscaping division. Under his consulting
agreement, Mr. Pennock received a weekly fee of $1,481 plus health insurance and
automobile expenses. Effective August 12, 1996, Mr. Pennock was officially named
general manager of the landscaping division with the same compensation and
benefits under his prior consulting agreement.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of March 14, 1997, 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.
SECURITY OWNERSHIP AS OF MARCH 14, 1997
NAME
(POSITION WITH THE COMPANY) AMOUNT BENEFICIALLY OWNED(1) PERCENT OF CLASS(1)
--------------------------- ---------------------------- -------------------
Michael J. Spector 1,260,982(2) 65.2%
(Executive Officer and Director)
Margaret D. Spector 1,260,982(2) 65.2%
Carr. 690, Km. 5.8
Vega Alta, Puerto Rico 00646
(Executive Officer and Director)
J. Morton Davis 189,149(3) 9.9%
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) 5,500(4) (6)
Blas Ferraiuoli (Director) 9,000(4) (6)
Michael A. Rubin (Director) 3,000 (6)
All Executive Officers and 1,302,122(5) 66.7%
Directors as a Group
(9 persons)
- --------------------
(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 14, 1997 (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 14, 1997), but does not include shares of Common Stock
issuable upon exercise of stock options held by other persons.
(2) Includes 937,194 shares held directly by Mr. Spector and 286,288 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. This amount is based upon a Schedule 13G dated February 9, 1995
filed with the Securities and Exchange Commission.
(4) Includes 3,000 shares issuable upon stock options exercisable on or within
60 days of March 14, 1997.
(5) Includes 37,500 shares issuable upon exercise of stock options granted to
Mr. and Mrs. Spector as described in footnote (1) above and to other
officers and directors that are exercisable on or within 60 days of March
14, 1997.
(5) Less than one percent.
24
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."
Accordingly, at December 31, 1996, Mr. Spector owed the Company $273,652. The
Company is not currently charging Mr. Spector interest on the amounts owed to
the Company.
As of December 31, 1995, the Company owed its principal shareholder,
approximately $107,000 arising principally from lease payments for the Puerto
Rico nursery farm. This balance was paid during 1996.
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 has 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.
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 a
five-year period. The rent for this additional tract is $1,750 per month. This
lease terms for this additional tract do not include renewal or purchase
options. 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, including employees traveling from Miami, as well
as off island customers.
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.
25
CERTAIN OTHER RELATIONSHIPS
During 1996 the Company engaged Blas Ferraiuoli and Michael A. Rubin, each
a director of the Company, to render legal services on behalf of the Company.
26
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:
(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 are incorporated by reference from the
Company's Form 8-K dated December 23, 1992.
(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, 1991 filed April 15, 1992.
(i) Consulting Agreement dated December 9, 1991 by and
between the Company and Douglas W. Pennock.
(b) Material contracts incorporated by reference from the
Company's Form 8-K dated December 23, 1992:
(i) Agreement and Plan of Merger dated December 21,
1992 between Margo Nursery Farms, Inc., Margo Farms Del
Caribe, Inc. and Margo Bay Farms, Inc.
(ii) Articles of Merger dated December 21,1992.
(c) 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.
(ii) Stock Purchase Agreement dated March 29, 1993
between the Company, Altec Inter national, C. por A., Byron
J. Smalley, et al.
(iii) Disposal Agreement dated December 31, 1992
between the Company and Altec International C. por. A.
27
EXHIBIT
NUMBER
NUMBER DESCRIPTION
------ -----------
(iv) Collateral Pledge and Security Agreement dated
December 7, 1992 between Del Caribe and Michael J. Spector.
(d) 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.
(ii) Supplemental Disposal Agreement between The DuPont
Company and Margo Farms Del Caribe, Inc. dated November 2,
1993.
(e) Material Contracts incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994:
(i) Loan Commitment Agreement, dated December 15, 1994
between Puerto Rico Farm Credit ACA and the Company.
(f) 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.
(g) 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.
(h) Material Contracts filed with this Form 10-K
(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
Blas Ferraiuoli.
(vii) Stock Option Agreement, dated July 9, 1993, with
Margaret D. Spector.
(viii) Stock Option Agreement, dated, August 9, 1996,
with Margaret D. Spector.
(21) List of Registrant's Subsidiaries.
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K.
Not applicable.
28
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 27, 1997 By: /s/ MICHAEL J. SPECTOR, PRESIDENT
----------------------------------
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 th registrant
and in the capacities indicated and on the dates indicated.
Dated: March 27, 1997 By: /s/ MICHAEL J. SPECTOR
----------------------------
Michael J. Spector, Chairman
of the Board and Chief Executive Officer
Dated: March 27, 1997 By: /s/ MARGARET D. SPECTOR
-----------------------------
Margaret D. Spector, Director
Dated: March 27, 1997 By: /s/ BLAS R. FERRAIUOLI
---------------------------
Blas R. Ferraiuoli, Director
Dated: March 27, 1997 By: /s/ MICHAEL A. RUBIN
-------------------------
Michael A. Rubin, Director
Dated: March 27, 1997 By: /s/ FREDERICK D. MOSS
--------------------------
Frederick D. Moss, Director
Dated: March 27, 1997 By: /s/ ALFONSO A. ORTEGA PEREZ
--------------------------------
Alfonso A. Ortega Perez,
Vice President, Treasurer,
Principal Financial and
Accounting Officer
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
FEBRUARY 25, 1997
F-1
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FEBRUARY 25, 1997
PAGE
----
Independent Auditors' Report......................................... F-3
Financial Statements
Consolidated Balance Sheets....................................... F-4
Consolidated Statements of Operations............................. F-5
Consolidated Statements of Shareholders' Equity................... F-7
Consolidated Statements of Cash Flows............................. F-8
Notes to Consolidated Financial Statements........................ F-8
SCHEDULES
Schedule II - Valuation and Qualifying Accounts................... F-26
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
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Margo Nursery Farms, Inc.
Vega Alta, Puerto Rico
We have audited the accompanying consolidated balance sheets of Margo Nursery
Farms, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996, 1995 and 1994. 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, and the results of their
operations and their cash flows for the years ended December 31, 1996,1995 and
1994 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 statement schedule listed under
Item 14(a)(2). In our opinion, this schedule presents fairly, in all material
respects, the information stated therein, when considered in relation to the
consolidated financial statements taken as a whole.
KAUFMAN, ROSSIN & CO.
--------------------
KAUFMAN, ROSSIN & CO.
Miami, Florida
February 25, 1997
F-3
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
------
1996 1995
------------ ------------
Current Assets:
Cash and equivalents $ 946,490 $ 785,490
Short term investments 1,004,000 500,000
Restricted cash -- 6,732,597
Accounts receivable, net of allowance for
doubtful accounts of $79,000 and
$136,100 in 1996 and 1995 1,007,947 692,165
Inventories 2,737,109 2,340,373
Prepaid expenses 116,036 166,947
------------ ------------
Total current assets 5,811,582 11,217,572
Property and equipment, net 3,864,646 3,587,982
Due from shareholder 273,652 --
Notes receivable 379,182 444,411
Other assets 67,149 150,617
------------ ------------
Total assets $ 10,396,211 $ 15,400,582
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 118,085 $ 3,663,475
Notes payable 500,000 500,000
Accounts payable 630,572 372,025
Accrued expenses 425,634 1,555,187
Due to shareholder -- 106,786
Income taxes payable 23,492 --
------------ ------------
Total current liabilities 1,697,783 6,197,473
Long-term debt 427,078 354,707
------------ ------------
Total liabilities 2,124,861 6,552,180
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; 10,000,000
shares authorized, 1,915,122 shares issued,
and 1,895,322 shares outstanding 1,915 1,915
Additional paid-in capital 4,637,706 4,637,706
Retained earnings 3,689,681 4,266,895
Treasury stock, 19,800 common shares, at cost (48,788) (48,788)
Foreign currency translation loss (9,164) (9,326)
------------ ------------
Total shareholders' equity 8,271,350 8,848,402
------------ ------------
Total liabilities and shareholders' equity $ 10,396,211 $ 15,400,582
============ ============
See accompanying notes to consolidated financial statements
F-4
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
1996 1995 1994
----------- ----------- -----------
Net Sales $ 6,108,865 $ 4,933,718 $ 3,679,367
Cost of Sales 3,971,525 3,156,360 2,212,165
----------- ----------- -----------
Gross profit 2,137,340 1,777,358 1,467,202
Selling, general and administrative expenses 2,130,114 2,110,380 1,782,840
----------- ----------- -----------
Income (loss) from operations 7,226 (333,022) (315,638)
----------- ----------- -----------
Other income (expense):
Interest income 189,924 455,041 364,044
Interest expense (206,316) (421,313) (389,785)
Litigation expenses, net of legal fees
reimbursed of $112,000 and $110,948 in
1995 and 1994 (87,961) (130,229) (400,939)
Litigation settlement (255,174) -- --
Provision for impairment of assets
of subsidiary (250,000) -- --
Write-down of note receivable -- -- (680,962)
Other income 48,579 43,189 139,433
Gain relating to Hurricane Andrew after
insurance proceeds -- -- 897,049
----------- ----------- -----------
(560,948) (53,312) (71,160)
----------- ----------- -----------
Loss before income tax provision (553,722) (386,334) (386,798)
Income tax provision 23,492 10,000 124,000
----------- ----------- -----------
Net loss $ (577,214) $ (396,334) $ (510,798)
=========== =========== ===========
Loss per common share $ (.30) $ (.21) $ (.27)
=========== =========== ===========
Weighted average common shares 1,895,322 1,895,322 1,895,322
See accompanying notes to consolidated financial statements
F-5
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN
SHARES AMOUNT CAPITAL
----------- ----------- -----------
Balance at December 31, 1993 1,895,322 $ 1,915 $ 4,637,706
Net loss -- -- --
Foreign currency translation loss -- -- --
----------- ----------- -----------
Balance at December 31, 1994 1,895,322 1,915 4,637,706
Net loss -- -- --
Foreign currency translation loss -- -- --
----------- ----------- -----------
Balance at December 31, 1995 1,895,322 1,915 4,637,706
Net Loss -- -- --
Foreign currency translation gain -- -- --
----------- ----------- -----------
1,895,322 $ 1,915 $ 4,637,706
=========== =========== ===========
(RESTUBBED TABLE CONTINUED)
CUMULATIVE
RETAINED TREASURY TRANSLATION
EARNINGS STOCK ADJUSTMENT TOTAL
----------- ----------- ----------- -----------
Balance at December 31, 1993 $ 5,174,027 $ (48,788) $ (9,156) $ 9,755,704
Net loss (510,798) -- -- (510,798)
Foreign currency translation loss -- -- (51) (51)
----------- ----------- ----------- -----------
Balance at December 31, 1994 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 4,266,895 (48,788) (9,326) 8,848,402
Net Loss (577,214) -- -- (577,214)
Foreign currency translation gain 162 162
----------- ----------- ----------- -----------
$ 3,689,681 $ (48,788) $ (9,164) $ 8,271,350
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-6
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (577,214) $ (396,334) $ (510,798)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 467,261 339,491 280,731
Write-down of note receivable -- -- 680,962
Provision for inventory valuation reserve 70,000 250,000 --
Provision for possible bad debts 4,000 6,786 --
Gain relating to Hurricane Andrew after
insurance proceeds -- -- (897,049)
Provision for impairment of assets of
subsidiary 250,000 -- --
Changes in assets and liabilities affecting cash
flows from operating activities:
Accounts receivable (319,782) 31,160 (319,533)
Inventories (466,736) (570,641) (856,368)
Prepaid expenses 53,571 19,367 (116,422)
Advances from (to) shareholders (106,786) 106,786 88,267
Other assets 74,525 (67,685) (24,945)
Deferred income taxes, net -- -- 104,100
Accounts payable 258,547 116,740 19,077
Accrued expenses (1,379,553) 359,276 275,336
Income taxes payable 23,492 (14,829) (10,117)
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,648,675) 180,117 (1,286,759)
----------- ----------- -----------
Cash flows from investing activities:
Decrease (increase) in restricted cash 6,732,597 (356,750) (291,261)
Decrease (increase) in short-term investments (504,000) 210,359 6,222
Purchases of property and equipment (497,308) (422,832) (964,718)
Increase in due from shareholder (340,158) -- --
Proceeds on insurance claims from Hurricane Andrew -- -- 897,049
Increase in notes receivable -- (10,000) (75,000)
Collection on notes receivable 7,667 14,379 51,817
----------- ----------- -----------
Net cash provided by (used in) investing activities 5,398,798 (564,844) (375,891)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable -- 300,000 910,000
Repayment of notes payable -- (1,000,000) (410,000)
Proceeds from long-term debt 122,000 78,000 422,000
Repayments of long-term debt (3,711,285) (79,595) (2,464)
----------- ----------- -----------
Net cash provided by (used in) financing activities
activities (3,589,285) (701,595) 919,536
----------- ----------- -----------
Net increase (decrease) in cash and equivalents 160,838 (1,086,322) (743,114)
Effect of change in exchange rates on cash 162 (119) (51)
Cash and equivalents at beginning of year 785,490 1,871,931 2,615,096
----------- ----------- -----------
Cash and equivalents at end of year $ 946,490 $ 785,490 $ 1,871,931
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-7
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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. The Company uses its South Florida facility to sell primarily to
customers in Florida.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Margo
Nursery Farms, Inc. and its wholly-owned sub sidiaries, Margo Landscaping and
Design, Inc., Rain Forest Products Group, Inc., Margo Bay Farms, Inc.,
Tropiflower, Inc., and Margo Imports, B.V. (a Netherlands company). All
significant intercom pany accounts and transactions have been eliminated in
consolida tion.
(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, 1996, cash and equivalents include
$253,802 invested in a certificate of deposit bearing interest at 4.40%.
The Company, from time to time, maintains cash and equivalents at financial
institutions in excess of federally insured limits.
(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.
F-8
(d) PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZA TION
Property and equipment are carried at acquisition cost. Deprecia tion 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.
(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.
As a Florida corporation, Margo Nursery Farms, Inc. is required to file a
federal corporate income tax return. However, it has elected to be treated as a
possessions corporation under Section 936 of the Internal Revenue Code, and
accordingly, receives 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 eriod ending in
October 1995. These changes were effective for taxable years commencing after
December 31, 1993. For the years ended December 31, 1996, 1995 and 1994, there
were no tax effects arising as a result of these changes. Margo Bay Farms,
F-9
Inc., also a Florida corporation, is required to file a federal income tax
return.
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 in 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.
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.
(h) LOSS PER COMMON SHARE
Net loss per common share was computed by dividing net loss by the weighted
average number of shares outstanding. For the years ended December 31, 1996,
1995 and 1994 there were 1,895,322 shares outstanding.
For 1996, 1995, and 1994, outstanding stock options were not considered in the
calculation of weighted average number of common shares outstanding, as their
effect would have been antidilutive.
(i) 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 inventory valuation allowance is an estimate which is estab lished 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, 1996 and 1995 was $420,000 and $350,000, respectively.
F-10
The Company has recorded a deferred tax asset of approximately $583,000 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 - HURRICANE ANDREW
On August 24, 1992, Hurricane Andrew destroyed almost all of the Company's
facilities in South Florida. These facilities included the Company's principal
executive offices, warehouses, shadehouses and shipping area. Additionally,
almost all of the Company's inventory located at this facility was damaged or
destroyed.
For the year ended December 31, 1994, as a result of the damages caused by the
storm, the Company recorded the following gain:
DESCRIPTION AMOUNT
----------- -------
Proceeds from insurance claims $908,820
Less: Clean-up, relocation and
other expenses (11,771)
--------
Net gain $897,049
========
NOTE 3 - RESTRICTED CASH
During 1991, the Company's former principal lender commenced litigation against
the Company due to the Company's non-compliance with several covenants under a
modified loan agreement (refer to Note 12). In connection with the settlement of
a tort claim in 1992, the Company was required to place $4,000,000 of the settle
ment proceeds in an escrow account. In connection with the settlement of the
Company's insurance claims arising from Hurricane Andrew, the Company was
required to deposit $1,970,435 (less court costs of $19,677) with the court. At
December 31, 1995 these amounts were as follows:
F-11
DESCRIPTION AMOUNT
----------- ----------
Proceeds from the settlement of
tort claim, including accumu-
lated interest of $544,795 $4,544,795
Insurance proceeds as a result
of Hurricane Andrew, accumu-
lated including accumulated
interest of $237,044 2,187,802
----------
$6,732,597
==========
In 1996, $5,625,000 of restricted cash was paid to the Company's former
principal lender in connection with a litigation settlement (refer to Note 12).
NOTE 4 - SHORT TERM INVESTMENTS
At December 31, 1996 and 1995, short term investments consisted of certificates
of deposit bearing interest between 4.80% and 5.75%, of which $500,000 were
pledged as collateral for notes payable (refer to Note 8).
At December 31, 1996, the carrying value of these short term investments
approximates fair value due to the relatively short period of time between the
origination of the instruments and their expected realization.
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 accompanying consolidated statements of
operations for the year ended December 31, 1994.
F-12
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 December 31, 1996 and 1995, notes receivable included the following:
DESCRIPTION 1996 1995
------------- -------- --------
Note receivable from Altec $301,621 $301,621
10% note, collateralized by real
property 26,331 23,918
8% notes, due on demand, personally
guaranteed by various Company
personnel, (no collections are expected in
1997) 51,230 118,872
-------- --------
$379,182 $444,411
======== ========
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 1996 and 1995, property and equipment consisted of the
following:
1996 1995
--------- ----------
Land and land improvements $ 859,380 $ 859,380
Buildings 448,968 219,404
Equipment and fixtures 1,445,545 1,187,716
Transportation equipment 728,831 571,736
Stock plants 97,277 97,277
Leasehold improvements 1,845,026 1,675,605
Construction in progress - 81,068
---------- ---------
5,425,027 4,692,186
Less accumulated depreciation and
amortization (1,560,381) (1,104,204)
---------- ----------
$3,864,646 $3,587,982
========== ==========
During the years ended December 31, 1996, 1995, and 1994, depreciation expense
charged to production was approximately $287,000, $201,500, and $197,000,
respectively.
F-13
NOTE 7 - DUE FROM/TO SHAREHOLDER
At December 31, 1996, amount due from shareholder principally arose from the
settlement of litigation with the Company's former principal lender (refer to
Note 12). This receivable is non-interest bearing and has no specific due date.
At December 31, 1995, amount due to shareholder principally represents lease
payments owed to the Company's principal shareholder arising from the lease
agreement for the use of the Company's facilities in Puerto Rico (refer to Note
14).
NOTE 8 - NOTES PAYABLE
At December 31, 1996 and 1995, 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 (6.75% at December 31, 1996).
At December 31, 1996, the carrying value of these notes payable approximates
fair value due to the relatively short period of time between the origination
of the instruments and their maturities.
F-14
NOTE 9 - LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt consisted of the following:
DESCRIPTION 1996 1995
- ------------------------------------- ---------- ----------
Term loans (refer to Note 12) $ - $3,592,240
Five-year term loans, variable
interest rate, 8.25% at December 31,
1996, payable in quarterly install-
ments of $40,203, including inter-
est, through October 2001. The
loans are collateralized by trans-
portation and farm equipment 444,535 423,546
8.50% automobile loan, payable in
monthly installments of $636,
including interest, through
March 2001 27,163 -
9.75% commercial loan, payable in
monthly installments of $2,000,
including interest, through
July 2000, collateralized by real
estate property 73,465 -
Capital lease obligation, collateral-
ized by equipment, payable in month-
ly installments of $318 (including
interest at 16%)through August 1996 - 2,396
---------- ----------
545,163 4,018,182
Less current portion (118,085) (3,663,475)
---------- ----------
Long-term debt $ 427,078 $ 354,707
========== ==========
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of long-term debt and notes payable
approxmates the recorded amounts.
F-15
The annual aggregate maturities of long-term debt and other financing
obligations are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
1997 $118,085
1998 159,534
1999 171,377
2000 68,229
2001 27,938
--------
$545,163
NOTE 10 - ACCRUED EXPENSES
At December 31, 1996 and 1995, accrued expenses consisted of the following:
1996 1995
---------- ----------
Payroll and payroll taxes $ 111,984 $ 59,326
Professional fees 63,650 102,149
Provision for impairment of assets
of subsidiary 250,000 -
Interest (refer to Note 12) - 1,306,732
3232
Other - 86,980
---------- ----------
$ 425,634 $1,555,187
========== ==========
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 1996, 1995 and
1994, does not bear a normal relationship to results of operations due to
several items, such as a 90% tax exemption (Puerto Rico), unutilized net loss
carryforwards and the credit available to the Company under Section 936 of the
Internal Revenue Code.
F-16
Income tax expense for the years ended December 31, 1996, 1995 and 1994
consisted of the following:
1996 1995 1994
------- -------- ---------
Current:
Puerto Rico $ - $ 10,000 $ 20,000
United States 23,492 - -
Deferred:
United States - - 104,000
------- -------- ---------
$23,492 $ 10,000 $ 124,000
======= ======== =========
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, extraordinary item and
cumulative effect on prior years of accounting change:
1996 1995 1994
---------- ---------- ----------
Income Tax benefit computed
by applying federal rate $(188,265) $(131,354) $(131,511)
(Increase) decrease in in-
come tax benefit resulting
from:
Tax-exempt income (17,170) (17,000) (22,114)
Puerto Rico tax exemption (67,563) (62,813) (107,484)
Effect of Florida and Puerto
Rico taxes (benefits) (10,022) (14,184) 14,112
(4)
Adjustment of prior year
valuation allowance - - 30,561
Increase in valuation allow-
ance 338,697 158,132 33,614
Unutilized losses (untaxed
income) of foreign subsi-
diaries (4,094) 1,517 1,400
Permanent differences 70,758 291,708
Other differences (28,091) 4,944 13,714
--------- --------- ---------
$ 23,492 $ 10,000 $ 124,000
========= ========= =========
F-17
Deferred income taxes were recognized in the consolidated balance sheet at
December 31, 1996 and 1995 due to the tax effect of temporary differences and
loss carryforwards as follows:
1996 1995
-------- --------
DEFERRED TAX ASSETS:
Excess book over tax depreciation $ 30,016 $ 20,401
Accrual to cash adjustments - 180,277
Net operating loss carryforwards 731,920 121,721
Contribution carryover 376 376
Alternative minimum tax credit carryover 18,576 65,211
-------- --------
780,888 387,986
-------- --------
DEFERRED TAX LIABILITIES:
Accrual to cash adjustments 197,398 -
Insurance recoveries deferred for tax - 143,193
-------- --------
197,398 143,193
-------- --------
Gross deferred tax asset 583,490 244,793
Less: Valuation allowance (583,490) (244,793)
-------- --------
Net deferred tax asset $ - $ -
======== ========
At December 31, 1996, Margo Bay Farms, Inc. and Margo Landscaping
and Design, Inc. had net operating loss carryforwards of
approximately $421,000 available to offset future taxable income,
if any, through December 31, 2003, and December 31, 2011,
respectively.
In addition, at December 31, 1996, Bay Farms had alternative minimum tax credit
carryforwards of $18,576.
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.
At December 31, 1995, the outstanding balance of the loans payable to the Bank
amounted to $3,592,240 and accrued interest amounted to approximately
$1,307,000.
F-18
The Company had also guaranteed $400,000 of personal loans made to its major
shareholder by the Bank, with an outstanding balance of $230,000.
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
The Company is authorized to issue 250,000 shares of preferred stock, par value
$.01 per share, in one or more series to be established from time to time by the
Company's Board of Directors.
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, 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.
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.
F-19
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 for a five year period at a monthly rental of $1,750. This
amendment does not provide for renewal nor purchase options towards the
additional 27 acres of land.
Total rental payments amounted to approximately $249,000 in 1996, 1995 and 1994.
(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 residence. During the years
ended December 31, 1995 and 1994, the Company incurred rental and other expenses
related to this property of approximately $41,000 and $40,000, respectively.
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 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.
F-20
(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
------------ --------------
1997 $ 309,000
1998 369,000
1999 348,000
2000 348,000
2001 348,000
Thereafter 1,068,000
----------
$2,790,000
==========
Total rental expense under all operating lease agreements amounted to
approximately $249,000, $279,000, and $279,000, for the years ended December 31,
1996, 1995, and 1994, 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 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, 1996, is as follows:
F-21
UNEXPIRED SHARES
UNDER OPTION AT OPTION PRICE
YEAR OF GRANT 12/31/96 PER SHARE
------------- ---------------- -------------
1988 2,750 $2.00 - $2.20
1993 64,500 $2.88 - $3.16
1996 46,500 $3.13 - $3.44
-------
113,750
=======
At December 31, 1996, options to purchase 41,450 shares of common stock were
vested and exercisable.
b) EMPLOYEE STOCK PURCHASE PLAN
During the year ended December 31, 1988, the Company established an employee
stock purchase plan. At December 31, 1996, 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, 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.
During 1994, the Company transferred certain inventory used as stock plants
amounting to $97,277, to fixed assets.
(b) NON-CASH FINANCING ACTIVITIES
During 1994, the Company recorded a $680,962 write-down of a note receivable
related to the sale of a subsidiary.
F-22
(c) OTHER CASH FLOW TRANSACTIONS
During the years ended December 31, 1996, 1995 and 1994, the Company made
interest payments of approximately $1,513,000, $110,900, and $75,200,
respectively, and made income tax payments of $25,000 during the year ended
December 31, 1994.
NOTE 17 - MAJOR CUSTOMERS
During 1996, 1995 and 1994 the Company's single largest customer for each of
such years, accounted for approximately 27% ($1,621,000) 28% ($1,391,000), and
20% ($740,000), respectively, of the Company's net sales.
This customer accounts for approximately 19%, 15% and 20% of trade accounts
receivable at December 31, 1996, 1995 and 1994, respectively.
NOTE 18 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded a $250,000
provision for impairment of assets of 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.
During the fourth quarter of 1994, the Company recorded a $680,962 write-down of
a note receivable related to the sale of a subsidiary.
NOTE 19 - DISPOSAL OF MARGO IMPORTS, B.V. AND POSSIBLE DISPOSAL OF
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 has 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. During 1996,
the Company recorded a provision of $250,000 related to the excess of the
carrying value over the fair market value of the assets of Margo Bay Farms, Inc.
F-23
NOTE 20 - DOMESTIC AND FOREIGN OPERATIONS
The schedule below presents information about the Company's operations in
different geographic areas. Domestic operations include those of Puerto Rico and
South Florida. Foreign operations include those of Margo Imports (Europe).
Income from operations is determined as net sales less cost of sales and
selling, general and administrative expenses. In computing income from
operations, provision for income taxes, interest expense and other income are
not added or deducted. No allocation of general corporate expenses has been made
to foreign operations.
Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area less investments in other geographic areas.
F-24
NOTE 20 (CONTINUED)
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
YEARS ENDED DECEMBER 31, 1996 AND 1995
DOMESTIC EUROPE ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
1996
--------------------------------------------------------------------
Total net sales to local unaffiliated
customers $ 6,108,865 $ - $ - $ 6,108,865
=========== =========== =========== ===========
Income from operations $ 7,226 $ - $ - $ 7,226
=========== =========== =========== ===========
Identifiable assets at December 31, 1996 $10,392,344 $ 3,867 $ - $10,396,211
=========== =========== =========== ===========
1995
---------------------------------------------------------------------
Total net sales to local unaffiliated
customers $ 4,933,718 $ - $ - $ 4,933,718
=========== =========== =========== ===========
Loss from operations $ (328,524) $ (4,498) $ - $ (333,022)
=========== =========== =========== ===========
Identifiable assets at December 31, 1995 $15,397,977 $ 2,605 $ - $15,400,582
=========== =========== =========== ===========
F-25
SCHEDULE I
MARGO NURSERY FARMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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
----------- ---------- ---------- ---------- ---------- -----------
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 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 account $ 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
========= ======== ======== ========= ========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts $ 136,100 $ - $ - $ - $136,100
Allowance for inventory valuation $ 100,000 $ - - $ - 100,000
--------- -------- -------- --------- --------
$ 236,100 $ - $ - $ - $236,100
========= ======== ======== ========= ========
F-26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10 (h) Material Contracts filed with this Form 10-K
(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
Ferriuoli.
(viii) Stock Option Agreement, dated August 9, 1996, with
Margaret D. Spector.
(21) List of Registrant's Subsidiaries.
(27) Financial Data Schedule